1997
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
XX ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-368-2
CHEVRON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-0890210 575 Market Street, San Francisco,
California 94105
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(State or other (I.R.S. Employer (Address of principal
jurisdiction of Identification Number) executive offices) (Zip Code)
incorporation or
organization)
Registrant's telephone number, including area code (415) 894-7700
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(Former name or former address, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common stock par value $1.50 per share New York Stock Exchange, Inc.
Preferred stock purchase rights Chicago Stock Exchange
Pacific Exchange
Securities guaranteed by Chevron Corporation:
Chevron Capital U.S.A. Inc.
Sinking fund debentures: 9-3/4%, due 2017 New York Stock Exchange, Inc.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. XX
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Aggregate market value of the voting stock held by
nonaffiliates of the Registrant
As of February 28, 1998 - $52,681,000,000
Number of Shares of Common Stock outstanding as of
February 28, 1998 -653,402,530
DOCUMENTS INCORPORATED BY REFERENCE
(To The Extent Indicated Herein)
Notice of Annual Meeting and Proxy Statement, to be filed pursuant to Rule 14a-
6(b) under the Securities Exchange Act of 1934, as amended, in connection with
the Company's 1998 Annual Meeting of Stockholders (in Part III)
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TABLE OF CONTENTS
Item Page No.
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PART I
1. Business 1
(a) General Development of Business 1
(b) Industry Segment and Geographic Area Information 6
(c) Description of Business and Properties 7
Capital and Exploratory Expenditures 7
Petroleum - Exploration 9
Petroleum - Oil and Natural Gas Production 13
Production Levels 14
Development Activities 15
Petroleum - Natural Gas Liquids and NGC Corporation 20
Petroleum - Reserves and Contract Obligations 22
Petroleum - Refining 22
Petroleum - Refined Products Marketing 23
Petroleum - Transportation 25
Chemicals 26
Coal and Other Minerals 27
Research and Environmental Protection 28
2. Properties 30
3. Legal Proceedings 30
4. Submission of Matters to a Vote of Security Holders 31
Executive Officers of the Registrant 31
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters 33
6. Selected Financial Data 33
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 33
8. Financial Statements 33
8. Supplementary Data - Quarterly Results 33
- Oil and Gas Producing Activities 33
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 33
PART III
10. Directors and Executive Officers of the Registrant 33
11. Executive Compensation 33
12. Security Ownership of Certain Beneficial Owners and Management 34
13. Certain Relationships and Related Transactions 34
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 34
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
Summary Description of Chevron
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Chevron Corporation (1) , a Delaware corporation, provides administrative,
financial and management support for, and manages its investments in, U.S. and
foreign subsidiaries and affiliates which engage in fully integrated petroleum
operations, chemicals operations and coal mining. The company operates in the
United States and approximately 90 other countries. Petroleum operations
consist of exploring for, developing and producing crude oil and natural gas;
refining crude oil into finished petroleum products; marketing crude oil,
natural gas and the many products derived from petroleum; and transporting
crude oil, natural gas and petroleum products by pipelines, marine vessels,
motor equipment and rail car. Chemicals operations include the manufacture and
marketing of a wide range of chemicals for industrial uses.
In this report, exploration and production of crude oil, natural gas liquids
and natural gas may be referred to as "E&P" or "upstream" activities.
Refining, marketing and transportation may be referred to as "RM&T" or
"downstream" activities.
A list of the company's major subsidiaries is presented on page E-2 of this
Annual Report on Form 10-K. As of December 31, 1997, Chevron had 39,362
employees, 74 percent of whom were employed in U.S. operations.
CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE
PURPOSE OF "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This annual report on Form 10-K 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 statements. 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 aromatics, olefins and additives products; 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 liability resulting from pending
or future litigation. In addition, such statements could be affected by
general domestic and international economic and political conditions.
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(1) Incorporated in Delaware in 1926 as Standard Oil Company of California, the
company adopted the name Chevron Corporation in 1984. As used in this report,
the term "Chevron" and such terms as "the company," "the corporation," "our,"
"we," and "us" may refer to Chevron Corporation, one or more of its
consolidated subsidiaries, or to all of them taken as a whole,
but unless the context clearly indicates otherwise, should not be read to
include "affiliates" of Chevron i.e. those companies accounted for by the
equity method (generally owned approximately 50 percent or less).
As used in this report, the term "Caltex" may refer to the Caltex Group of
companies, any one company of the group, any of their consolidated
subsidiaries, or to all of them taken as a whole and also includes the
"affiliates" of Caltex.
All of these terms are used for convenience only, and are not intended as a
precise description of any of the separate companies, each of which manages its
own affairs.
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Overview of Petroleum Industry
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Petroleum industry operations and profitability are influenced by a large
number of factors, over some of which individual oil and gas companies have
little control. Governmental attitudes and policies, particularly in the areas
of taxation, energy and the environment, have a significant impact on petroleum
activities, regulating where and how companies conduct their operations and
formulate their products and, in some cases, limiting their profits directly.
Prices for crude oil and natural gas, petroleum products and petrochemicals are
usually determined by supply and demand for these commodities. OPEC member
countries are the world's swing producers of crude oil and their production
levels are the primary driver in determining worldwide supply. Demand for crude
oil and its products and natural gas is largely driven by the health of local,
national and worldwide economies, although weather patterns and taxation
relative to other energy sources also play a significant part. Natural gas is
generally produced and consumed on a country or regional basis.
Current Operating Environment
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The spot price for West Texas Intermediate (WTI), an industry benchmark light
crude oil, averaged $25.17 per barrel in January 1997, as a result of strong
heating fuel demand due to cold winter weather and low inventories. In
February 1997, crude oil prices began to trend downwards as the winter weather
turned mild and inventories began to build. Prices ranged from $19-$21 per
barrel during most of the year until December 1997, when a number of factors
began to exert downward pressure. Lower expected economic growth in Asia as a
result of the region's financial crises, coupled with warm winters in the
United States, Europe and Japan, reduced forecast demand. At the same time,
crude oil supplies had increased both from OPEC and non-OPEC sources, resulting
in an oversupplied world market. This has continued into the early months of
1998, causing crude oil prices to remain at relatively depressed levels. The
spot WTI price reached a year-to-date low of $13.23 per barrel on March 17,
1998. Inventories remain at high levels.
In January 1997, cold winter weather together with concerns about tight
supplies supported high U.S. prices for natural gas, with the benchmark Henry
Hub Louisiana spot price averaging $3.47 per thousand cubic feet (MCF). Demand
and prices for natural gas declined by over 25 percent during February 1997 as
the winter weather turned mild in late January and concerns about availability
dissipated. Prices fell by more than another 25 percent to an average of $1.88
per MCF in March. Until late summer, natural gas prices ranged from $2.00 -
$2.20 per MCF. Prices then began to trend upwards until December 1997, as a
result of a combination of factors, including concerns that the industry had
not been able to sufficiently increase productive capacity to satisfy demand,
lost production due to normal field declines, and the seasonal trend towards
the end of the year in anticipation of colder weather. Prices have since
trended downwards into 1998, mainly as a result of the mild winter weather in
the United States. Spot natural gas prices averaged $2.57 per MCF in 1997
compared with $2.76 per MCF in 1996.
The company's average realization from U.S. crude oil production decreased to
$17.68 per barrel in 1997 from $18.80 in 1996, while average liquids
realizations from international liftings, including equity affiliates,
decreased $1.51 per barrel to $17.97. Although industry average spot prices
declined in 1997 from 1996, the company's average U.S. natural gas realizations
from production increased by $0.14 per MCF in 1997 to $2.42 per MCF due to the
timing of sales during the year.
For the first two months of 1998, average natural gas realizations for the
company's U.S. operations were $2.06 per MCF compared with $3.34 for the same
period in 1997. During this period, the company's posted price for WTI ranged
from $17.00 per barrel to $14.50, with an average of $15.72 representing a 32
percent decline from the 1996 period. On March 20, 1998, the company's posted
price for WTI was $13.50 per barrel.
The following table compares the high, low and average Chevron posted prices
for WTI for each of the quarters during 1997 and for the full years of 1997,
1996, and 1995:
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West Texas Intermediate Crude Oil
Chevron Posted Prices
(Dollars per Barrel)
1997
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1st Q 2nd Q 3rd Q 4th Q Year 1996 1995
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High 25.75 21.25 20.50 22.00 25.75 25.50 19.50
Low 19.25 17.75 18.25 16.75 16.75 16.50 16.00
Average 22.02 19.17 19.00 19.24 19.85 21.00 17.40
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In 1997, Chevron's refining and marketing operations in the United States
experienced increased demand for refined products and improved sales margins
over 1996. Chevron's refined product sales volumes in the United States
increased by about 6 percent to 1.2 million barrels per day. Although the
company's average sales price per barrel of refined product in the United
States was $28.93 per barrel in 1997, a decrease of $1.01 per barrel from 1996,
margins improved significantly due to lower crude oil feedstock costs and
operating expenses. Margins began narrowing in early 1998, despite continuing
low crude oil prices, as competitive pressures forced refined products prices
down and planned shutdowns at two refineries led to increased maintenance
costs.
The chemicals industry entered a cyclical downturn in the latter half of 1995,
which persisted throughout 1996 and 1997. Earnings from the company's
chemicals operations in 1997, excluding special items, were nearly flat with
those of 1996. Earnings for 1997 benefited from strong sales volumes and
reduced depreciation expense, as a result of a reassessment and extension of
the useful lives of certain assets. These benefits were offset by lower
industry prices, higher feedstock and fuel costs, and expenses related to
maintenance and expansion activities during the year. Sales volumes were strong
for most of 1997. While margins improved for benzene and ethylene, industry
overcapacity led to depressed margins for styrene, paraxylene and polystyrene.
Sales and other operating revenues from the company's chemicals operations,
including sales to other Chevron companies, totaled $3.633 billion, an increase
of $92 million from the $3.541 billion in 1996.
Chevron Strategic Direction
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The company is following certain strategies to improve its financial
performance and to support its mission to create superior value for its
stockholders, customers and employees. The company periodically reviews and
modifies these "strategic intents" to reflect Chevron's current operating
environment. In 1998, the company added a new strategic intent to accelerate
growth in earnings from the Caspian Sea region, which is discussed below. The
nine "strategic intents" for 1998 are:
Build a committed team to accomplish the corporate mission.
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The company believes that the success of the other eight strategic intents is
strongly linked to the level of commitment and dedication that Chevron
employees bring to their jobs. Employees are guided by "The Chevron Way,"
a statement of the company's Mission and Vision and other key principles -
Committed Team Values, Total Quality Management, Protecting People and the
Environment and Vision Metrics - that establish a standard of excellence for
each employee. The company has also made efforts to measure employees'
attitudes about the company and diagnose areas of employee concerns over the
past five years by the use of the Worldwide Employee Survey. As a result, many
processes, including leadership training, diversity training, upward
feedback and job selection, have been developed or revamped to address those
concerns. A new employee survey is underway in 1998 to measure the
company's progress in this area.
The company is also fostering employee commitment by sharing its financial
success. In January 1995, the company announced a program called "Chevron
Success Sharing" that provides eligible employees with a percentage of their
annual salary as a cash bonus if the company achieves certain financial
goals. The maximum payout under the program is currently eight percent of
the employee's salary. For 1997, payouts ranged from
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three to seven percent. As an extra enticement to achieve 1994 through 1998
financial targets, the company awarded 150 special performance stock options
to each eligible employee on the payroll as of January 31, 1996. The grant
price was set at $51-7/8 and the options were to become exercisable, after a
six-month holding period, on the business day after the stock price closed at
$75 or higher for three consecutive days or, if Chevron ranked number one in
total shareholder return versus its five major U.S. competitors for the period
1994 through 1998. The options became exercisable in June 1997 after
Chevron's stock closed above $75 per share for three consecutive days. In
February 1998, the company awarded options that varied from 100 to 300
shares of stock, dependent on salary or job grade, to most U.S. dollar
payroll employees. The options have a 10 year life and vest in February
2000, or in February 1999 if the company is number one in shareholder return
among its competitor group for the years 1994 through 1998. Similar
programs are also being provided for Chevron employees in other countries.
Accelerate exploration and production growth in international areas.
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The company continues to believe that its most promising area of financial and
operational growth is in its international E&P activities. Between 1990 and
1997, total capital and exploratory (C&E) expenditures for E&P activities
grew by 57 percent. During this time period, international expenditures
grew by 74 percent while U.S. expenditures grew by 40 percent, with all of
the U.S. growth occurring in 1997. The 1998 C&E program provides $4.0
billion for E&P investments with about 63 percent targeted for international
projects. As a measure of its success in growing its international upstream
business, the company's year-end 1997 international net proved reserves of
crude oil, natural gas liquids and natural gas have more than doubled since
1990, even though international production has increased more than 50
percent during this same time period.
Accelerate the growth of our Caspian area earnings by cooperatively applying
the skills and talents of all Chevron organizations to develop
infrastructure, new markets and regional business opportunities.
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Chevron is expanding its operations and pursuing a wide range of other
opportunities in the Caspian Sea region, as the company believes that this area
holds tremendous potential for long-term growth. In January 1998, the company
formed a senior-level cross-organizational team to identify the most
promising opportunities to complement current exploration and production
operations in this region. The team will be focusing on exploration and
production, refining, marketing, supply, transportation, and community
development. Also, in February 1998, Chevron announced that it had entered
into a cooperative agreement in the Caspian region with The Royal Dutch
Shell Group. The agreement establishes a framework for Chevron and Shell to
jointly identify, develop, and share equally in new projects in the areas of
exploration, production, transportation and sale of crude oil, gas liquids
and natural gas. Chevron has established itself as one of the pre-eminent
international oil companies operating in the Caspian region by its early
involvement in the Tengiz project in Kazakhstan through the Tengizchevroil
(TCO) joint venture, established in 1993 with the Republic of Kazakhstan.
In May 1997, Chevron acquired a 15 percent ownership interest in the
restructured Caspian Pipeline Consortium, formed to build a crude oil
pipeline from the Tengiz oil field to the Russian Black Sea coast. In
Kazakhstan, Chevron is building an office complex in Atyrau, has opened a
service station in Almaty, and has plans for additional stations. Elsewhere
in the Caspian region, the company has established regional offices in Baku,
Azerbaijan, and Tiblisi, Georgia.
Generate cash from North American exploration and production operations,
while maintaining value through sustained production levels.
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The company has several projects under way, mainly major deepwater developments
in the Gulf of Mexico, that are intended to slow the decline in the company's
North American oil and gas production. In the next ten years, the company seeks
to add more than 2 billion barrels of reserves from Gulf of Mexico deepwater
projects. The company also continues to invest in mature producing areas
for modest growth, steady production, and cash flow. C&E expenditures for
U.S. upstream projects in 1997 increased 42 percent from 1996, as a result
of lease acquisitions in the Gulf of Mexico and Alaska, accelerated drilling
activity in the Gulf of Mexico, and continued drilling activity in the mid-
continent area of the United States. As a measure of its success in
sustaining U.S. exploration and production operations, U.S. oil and gas
reserve net additions, excluding property sales and acquisitions, replaced
net production for the first time since 1984. Also, 1997 liquids production
levels increased slightly from 1996. The company believes that attractive
growth opportunities exist within its current portfolio of assets, and, if
other attractive opportunities arise, acquisitions and exchanges may be
considered. In 1997, the company generated cash proceeds of
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Approximately $450 million from the sale of non-core U.S. assets and may sell
additional properties over the next three years, mainly in the Gulf of Mexico
and Texas.
Achieve top financial performance in U.S. refining and marketing.
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Over the past few years, the company has focused its attention on efficiently
utilizing its refining portfolio after selling refineries in Port Arthur,
Texas and Philadelphia, Pennsylvania, and spending over $1 billion on its
two California refineries in order to produce state-mandated cleaner-burning
fuels and to increase their efficiency and reliability. In 1997, the company
continued the improving trend in earnings and reliable operations
established in 1996. Operating earnings in 1997 more than doubled when
compared with 1996, based on increased refined products sales volumes,
improved refining reliability, and a decline in crude oil feedstock costs
and operating expenses. With the West Coast refinery upgrades complete, the
company has shifted the majority of its investment spending to marketing
projects aimed at meeting customers' needs and improving the company's
competitive market position. The company is expanding its service station
network to capture gasoline volume growth. In addition to fuels volume
growth, the company is stressing growth in convenience store goods and other
services. Chevron plans to increase the number of company-operated
convenience stores by 20 percent, while increasing the average store size by
30 percent during the 1998 - 2000 period. The Chevron-McDonald's alliance
in 12 western and southwestern states continues to grow. Additional sites
that combine Chevron service stations with McDonald's restaurants are
planned through 1999 to complement the approximately 75 sites currently
operating under the alliance.
Caltex should achieve superior competitive financial performance, while
selectively growing in attractive markets.
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Chevron's 50 percent-owned international downstream affiliate, Caltex
Petroleum Corporation, operates in about 60 countries in the Middle East,
Africa, and the Asia-Pacific region. The past year was one of economic turmoil
and currency devaluations in the Asia-Pacific region. Demand growth for crude
oil and petroleum products in the Caltex operating area is expected to slow as
a result. Caltex has responded by increasing its focus on managing costs and
investments. The company continues to believe that economic growth in the
Pacific Rim will nonetheless surpass that of most other regions. Caltex, as
a leading competitor in these areas, has made significant capital
investments to expand and upgrade its refining capacity and will continue to
implement a program, which began in 1996, to enhance the Caltex brand with a
service station re-imaging program.
In 1997, Caltex sold its 40 percent interest in a refinery in Bahrain, after
ceding its throughput rights in April 1996. In a separate agreement, Caltex
agreed to integrate the operations of its 64 percent-owned Star Petroleum
Refinery Company Ltd. facility in Thailand with a nearby Shell refinery. To
increase its market share in Thailand, Caltex acquired 47 service station
sites from British Petroleum. In Australia, a Caltex affiliate acquired
Pioneer International's 50 percent ownership share of Australian Petroleum
Pty Ltd., thereby becoming the leading refiner and marketer in the country.
Improve competitive financial performance in chemicals while developing and
implementing attractive opportunities for growth.
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Financial results for the company's chemicals operations continue to reflect
the cyclical downturn in the chemicals industry. However, the company has
undertaken several major projects to lower its unit cost structure and position
its operations to benefit from the next industry upturn. The company has
expanded facilities at several U.S. plants, and has plans for further
expansions over the next three years which will increase overall U.S. product
capacity by 25 percent. The company is also expanding its international
operations to take advantage of the expected growth in global demand for
petrochemicals. Construction has begun on a fuel and lube oil additives plant
in Singapore, and a benzene and cyclohexane facility in Saudi Arabia. The
company has planned, and continues to evaluate, international projects in
Venezuela, China and Thailand.
Be selective in other businesses.
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During 1997, Chevron operated three units that are outside the corporation's
core focus and are managed for cash flow, profitability, and growth when
attractive opportunities exist. These units were Chevron Canada Limited (CCL),
The Pittsburg & Midway Coal Mining Co. (P&M), and Gulf Oil Great
Britain (GOGB). CCL's primary operations are the refining and marketing of
petroleum products in British Columbia, Canada, while P&M is the operator of
the company's coal interests.
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In December 1997, following the termination of earlier merger discussions
with Elf Oil UK Ltd. and Murco Petroleum Ltd., the company completed the
sale of GOGB's marketing assets to Shell UK Ltd., divested its equity
interest in the Pembroke Cracking Company, and discontinued processing at
its refinery in Milford Haven, Wales. The company will close the refinery
and sell its remaining U.K. downstream assets. In 1997, the company
recorded an additional after-tax provision of $72 million, including amounts
for severance, environmental and shutdown costs, the majority of which are
expected to be incurred during 1998. The company had previously recorded a
$200 million after-tax impairment provision in 1996. These transactions
substantially complete the company's withdrawal from the refining and
marketing business in the United Kingdom.
Focus on reducing costs across all activities.
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Operating expenses, adjusted for special items, decreased about $400 million
in 1997 from 1996. A portion of this decrease was due to the merger in August
1996 of the company's natural gas liquids gathering, processing, and marketing
operations with NGC. The remaining decrease between years is attributable to
lower fuel, transportation and marketing costs, which were partially offset by
costs of the start-up and expansion of chemicals facilities. Lower costs
combined with higher liquids production and product sales volumes to push
per-barrel operating expenses down to $5.68 in 1997 from $6.10 in 1996.
Since 1991, the company has realized a significant reduction in its
operating costs. Although a portion of the cost reduction is related to
divested and restructured operations, the company believes it has achieved a
significant permanent reduction in the company's ongoing cost structure.
The company expects to realize savings in operating expenses through the
1997 and planned 1998 reorganizations of its North American exploration and
production, research, shipping, information technology, corporate human
resources and finance activities. A corporate wide "breakthrough"
initiative aimed at reducing corporate energy costs has resulted in
substantial savings since 1991. The company is currently undertaking a
project, to be completed in 1998, to standardize its worldwide computing
infrastructure, which is expected to reduce information technology costs.
Additional savings have been realized in operating expenses and the cost of
capital projects since 1994 from an initiative focusing on reducing the
costs for goods and services by working more efficiently with fewer
suppliers. Other initiatives that have resulted in significant savings
include a uniform project management process that is used to evaluate and
administer large capital projects, and the improved management of inventory
to enhance cash flow.
In addition to following the above strategic intents, Chevron and its
affiliates continue to review and analyze their operations and may close, sell,
exchange, acquire or restructure assets to achieve operational or strategic
benefits to improve competitiveness and profitability.
(b) Industry Segment and Geographic Area Information
The company's largest business is its integrated petroleum operations. Other
operations include chemicals and coal mining. The petroleum activities of the
company are widely distributed geographically, with major operations in the
United States, Canada, Nigeria, Angola, Australia, the United Kingdom, Republic
of Congo, and Indonesia. The company's Caltex affiliate, through its
subsidiaries and affiliates, conducts exploration and production and geothermal
operations in Indonesia and refining and marketing activities in Asia, Africa,
the Middle East, Australia and New Zealand, with major operations in Korea,
Japan, Australia, Thailand, the Philippines, Singapore and South Africa. The
company's TCO affiliate conducts production activities in Kazakhstan. The
company expects to expand its operations in the Caspian Sea area of Central
Asia by developing infrastructure, new crude oil and natural gas markets, and
other business opportunities.
The company's chemicals operations are concentrated in the United States, but
also include manufacturing facilities in France, Japan and Brazil. Chemicals
manufacturing facilities are under construction in Singapore and Saudi Arabia,
with potential opportunities for construction of facilities in Thailand and
China. The company's coal operations are concentrated in the United States but
also include interests in mining operations located in Venezuela.
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Tabulations setting forth 1995 to 1997 identifiable assets, operating income
and sales and other operating revenues for the company's three industry
segments, by United States and International geographic areas, may be found in
Note 10 to the Consolidated Financial Statements beginning on page FS-22 of
this Annual Report on Form 10-K. In addition, similar comparative data for the
company's property, plant and equipment is contained in Note 13 on page FS-25.
(c) Description of Business and Properties
The petroleum industry is highly competitive in the United States and
throughout most of the world. This industry also competes with other industries
in supplying the energy needs of various types of consumers. To succeed in its
competitive environment, the company must identify and manage significant risks
in its various activities.
The company's worldwide operations can be affected significantly by changing
economic, regulatory and political environments in the various countries,
including the United States, in which it operates. Environmental regulations
and government policies concerning economic development, energy and taxation
may have a significant effect on the company's operations. The company
evaluates the economic and political risk of initiating, maintaining or
expanding operations in any geographical area. The company closely monitors
political events worldwide and the possible threat these may pose to its
activities, particularly the company's oil and gas exploration and production
operations, and the safety of the company's employees.
The company attempts to avoid unnecessary involvement in partisan politics in
the communities in which it operates but participates in the political process
to safeguard its assets and to ensure that the community benefits from its
operations and remains receptive to its continued presence.
The company utilizes various derivative instruments to manage its exposure to
price risk stemming from its international integrated petroleum activities.
All these instruments are commonly used in oil and gas trading activities and,
except for certain long-term natural gas swaps, are of a short-term duration.
The company enters into forward exchange contracts as a hedge against some of
its foreign currency exposures. Interest rate swaps are entered into as part of
the company's overall strategy to manage the interest rate risk on its debt.
All commodity and financial derivative instruments used by the company are
relatively straightforward and involve little complexity. Their impact on the
company's results of operations has not been material.
Capital and Exploratory Expenditures
Chevron's capital and exploratory expenditures during 1997 and 1996 are
summarized in the following table:
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Capital and Exploratory Expenditures
(Millions of Dollars)
1997 1996
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Exploration and Production $2,968 $2,778
Refining, Marketing and Transportation 572 486
Chemicals 662 495
Coal and Other Minerals 90 28
All Other 75 70
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Total Consolidated Companies 4,367 3,857
Equity in Affiliates 1,174 983
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Total Including Affiliates $5,541 $4,840
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Total consolidated companies' C&E expenditures in 1997 were $4.367 billion
compared with $3.857 billion in 1996. Higher U.S. exploration and production
expenditures were incurred as a result of lease acquisitions and
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accelerated drilling activity in the Gulf of Mexico and continued drilling
activity in the mid-continent area of the United States, reflecting the
company's efforts to slow U.S. production declines. This increase was
slightly offset by a decrease in international exploration and production
expenditures between years. Lower expenditures in 1997 for the Hibernia
Project offshore Newfoundland more than offset increases between years in
other international areas including Venezuela and Angola. Refining, marketing
and transportation expenditures increased between years driven by the increased
focus on the U.S. marketing network. Chemicals incurred higher expenditures in
1997 primarily for the expansion of certain U.S. chemicals facilities, the
commencement of construction of a new additives manufacturing facility in
Singapore and initial costs for the construction of a benzene and cyclohexane
manufacturing facility in Saudi Arabia. Coal and other minerals expenditures
increased between years as the company's Pittsburg and Midway Coal Mining Co.
made two business acquisitions during 1997.
Consolidated companies' exploration and production C&E expenditures were 68
percent and 72 percent of the company's total consolidated companies'
expenditures in 1997 and 1996, respectively. Major international exploration
and production expenditures in 1997 included exploration and development
drilling offshore Angola and Congo; development activities associated with the
Britannia Field in the U.K. North Sea, the Hibernia Project offshore
Newfoundland, and the Escravos Gas Project in Nigeria; and the acquisition of
proved reserves in Venezuela. Major U.S. exploration and production
expenditures included lease acquisitions and deepwater exploration and
development activities, such as the Genesis and Norphlet trend projects in the
Gulf of Mexico, and other projects in Texas, California, and Wyoming.
Consolidated companies' refining, marketing and transportation outlays focused
on the expansion of Chevron's service station network, including the expansion
and enhancement of the company's service station convenience stores and the
continued implementation of the company's alliance with McDonald's at selected
service stations in the western and southwestern United States.
The company's share of C&E expenditures by its affiliates was $1.174 billion in
1997, an increase of 19 percent from $983 million in 1996. The company's Caltex
affiliate accounted for nearly 60 percent of affiliates' expenditures, although
at lower levels than in 1996 when Caltex completed several major projects. In
1997, Caltex also curtailed C&E expenditures as a result of the Asian financial
crisis. The decrease in Caltex expenditures in 1997 was more than offset by
increases from continued development activities at the Tengiz field in
Kazakhstan, and from the company's NGC affiliate's acquisition of Destec Energy
Inc. and continued expansion of the Venice, Louisiana, gas gathering
facilities.
The company's 1998 C&E expenditures, including its share of equity affiliates'
expenditures, are expected to increase 14 percent over 1997 amounts to a record
$6.3 billion. Consolidated companies' expenditures are planned to increase by
14 percent to $5.0 billion and the company's share of equity affiliates'
expenditures is expected to increase by 11 percent to $1.3 billion.
Worldwide exploration and production C&E expenditures in 1998, including the
company's share of equity affiliates' expenditures, are expected to total $4.0
billion, of which approximately 63 percent, or about $2.5 billion will be for
international projects. Major planned international projects include
construction of the Caspian Pipeline, the continued development of the Tengiz
Field, development projects for Area A and Block 14 in Angola, development of
the Moho Field offshore Congo and the third phase of the Hibernia Field
development offshore Newfoundland. In the United States, major exploration and
production expenditures include various development projects in the Gulf of
Mexico, including the deepwater Genesis and Gemini developments, the Norphlet
trend, and exploration and evaluation of other Gulf of Mexico prospects.
Worldwide refining, marketing and transportation C&E expenditures in 1998,
including the company's share of equity affiliates' expenditures, are estimated
at $1.1 billion, of which $600 million is planned for projects in the United
States. The company will concentrate the majority of its U.S. expenditures on
retail marketing projects aimed at meeting consumers' needs and improving the
company's market position. The company plans to continue its programs to
upgrade convenience stores, install fast-pay card readers and install multi-
product dispensers (to dispense cash, event tickets etc.) at service stations.
International refining, marketing and transportation expenditures in 1998
include the continuation of a major program by the company's Caltex affiliate
to improve its retail marketing image and operations in the Asia-Pacific
region.
-8-
<PAGE>
Worldwide chemicals C&E expenditures in 1998, including the company's share of
equity affiliates' expenditures, are estimated at about $830 million, of which
approximately 56 percent will be for international projects. Major
international projects include the construction of a petrochemicals complex in
Saudi Arabia by Chevron and its partner, and the completion of the Singapore
additives facility. In the United States, 1998 projects include paraxylene and
ethylene plant expansions at Pascagoula, Mississippi, and a polyethylene
debottlenecking project at the company's Orange, Texas, facility.
The actual C&E expenditures for 1998 will depend on various conditions
affecting the company's operations, including crude oil and natural gas prices
and changing economic conditions in the various countries in which it operates,
and may differ significantly from the company's forecast. The company has the
ability to modify its C&E expenditures in the event the lower crude oil price
environment becomes more severe or prolonged.
Petroleum - Exploration
The following table summarizes the company's net interests in productive and
dry exploratory wells completed in each of the last three years and the number
of exploratory wells drilling at December 31, 1997. "Exploratory wells" include
delineation wells, which are wells drilled to find a new reservoir in a field
previously found to be productive of oil or gas in another reservoir or to
extend a known reservoir beyond the proved area. "Wells drilling" include wells
temporarily suspended.
- -----------------------------------------------------------------------------
Exploratory Well Activity
Wells Drilling Net Wells Completed (1)
---------------------------------------
At 12/31/97 1997 1996 1995
-------------- ----------- ----------- -----------
Gross (2) Net (2) Prod. Dry Prod. Dry Prod. Dry
----- ----- ----- --- ----- --- ----- ---
United States 83 68 56 31 120 25 101 24
----- ----- ----- --- ----- --- ----- ---
Africa 12 4 5 1 3 2 3 4
Other International 29 8 12 6 32 22 22 27
----- ----- ----- --- ----- --- ----- ---
Total
International 41 12 17 7 35 24 25 31
----- ----- ----- --- ----- --- ----- ---
Total Consolidated
Companies 124 80 73 38 155 49 126 55
Equity
in Affiliates 8 3 3 - - 1 1 -
----- ----- ----- --- ----- --- ----- ---
Total Including
Affiliates 132 83 76 38 155 50 127 55
===== ===== ===== === ===== === ===== ===
(1) Indicates the number of wells completed during the year regardless of when
drilling was initiated. Completion refers to the installation of permanent
equipment for the production of oil or gas or, in the case of a dry well,
the reporting of abandonment to the appropriate agency.
(2) Gross wells include the total number of wells in which the company has an
interest. Net wells are the sum of the company's fractional interests in gross
wells.
- ------------------------------------------------------------------------------
At December 31, 1997, the company owned or had under lease or similar
agreements undeveloped and developed oil and gas properties located throughout
the world. Undeveloped acreage includes undeveloped proved acreage. The
geographical distribution of the company's acreage is shown in the next table.
-9-
<PAGE>
- -----------------------------------------------------------------------------
Acreage (1) At December 31, 1997
(Thousands of Acres)
Developed
Undeveloped Developed and Undeveloped
-------------- ------------- ---------------
Gross Net Gross Net Gross Net
------ ------ ----- ----- ------ ------
United States 6,024 4,028 5,684 2,493 11,708 6,521
------ ------ ----- ----- ------ ------
Canada 18,481 9,732 1,420 632 19,901 10,364
Africa 22,692 16,856 163 62 22,855 16,918
Asia 31,610 17,454 54 19 31,664 17,473
Europe 1,887 793 81 21 1,968 814
Other International 15,957 5,275 76 20 16,033 5,295
------ ------ ----- ----- ------ ------
Total International 90,627 50,110 1,794 754 92,421 50,864
------ ------ ----- ----- ------ ------
Total Consolidated
Companies 96,651 54,138 7,478 3,247 104,129 57,385
Equity in Affiliates 3,181 1,543 254 125 3,435 1,668
------ ------ ----- ----- ------ ------
Total
Including Affiliates 99,832 55,681 7,732 3,372 107,564 59,053
====== ====== ===== ===== ======= ======
(1)Gross acreage includes the total number of acres in all tracts in which the
company has an interest.
Net acreage is the sum of the company's fractional interests in gross
acreage.
- -----------------------------------------------------------------------------
The company had $224 million of suspended exploratory wells included in
properties, plant and equipment at year-end 1997. The wells are suspended
pending a final determination of the commercial potential of the related oil
and gas fields. The ultimate disposition of these well costs is dependent on
the results of future drilling activity and development decisions.
During 1997, the company incurred expenditures for oil and gas exploration in
the United States and about 30 other countries. The company's 1997 exploratory
expenditures, including affiliated companies' expenditures but excluding
unproved property acquisitions, were $798 million compared with $806 million in
1996. U.S. expenditures represented approximately 45 percent of the
consolidated companies' worldwide exploration expenditures, compared with 53
percent in 1996. Significant activities in Chevron's exploration program during
1997 include the following: (numbers of wells are on a "gross" basis)
United States:
Exploratory expenditures, excluding unproved property
acquisitions, were $360 million in 1997, compared with $425 million spent in
1996. In addition, the company incurred costs of $101 million for unproved
property acquisitions in 1997, compared with $62 million in 1996. Exploration
efforts were concentrated in the Gulf of Mexico and several onshore basins in
Texas and Alaska, where the potential for large discoveries has been
demonstrated. Chevron participated in 17 exploratory wildcat wells, which
resulted in four discoveries in the Gulf of Mexico. Continuing Chevron's focus
in the eastern North Slope of Alaska, Chevron and BP Exploration, Alaska,
announced an agreement in February 1998, aligning their respective leasehold
interests in the Point Thomson area east of Prudhoe Bay. The alignment area
encompasses the Point Thomson Unit, the Flaxman and Point Thomson
discoveries, and the Sourdough discovery, which was announced in 1997.
Additional technical work is planned to determine the extent and economic
viability of the Sourdough discovery. Chevron holds a 44 percent interest in
the two companies' joint lease holdings in the area, and BP holds the remaining
56 percent. In the March and August 1997 Gulf of Mexico Lease Sales, Chevron
successfully bid, alone and with partners, for the rights to 139 leases, 134 of
which were in deep water, boosting Chevron's deepwater lease inventory to 362
leases. The company also acquired interests in 18 new tracts, covering 17
thousand net acres on Alaska's eastern North Slope, in the November 1997 State
of Alaska Lease Sale 86.
-10-
<PAGE>
Africa:
In Africa, the company spent $147 million during 1997 on exploratory
efforts, excluding the acquisition of unproved properties, compared with $122
million in 1996. The increase between years was driven by higher 1997 well
expenditures in Angola, where total exploration expenditures were $72 million
in 1997 compared with $34 million in 1996.
In Angola, the company is the operator of two concessions off the coast of
Angola's Cabinda exclave. Block 0 is a 2,100 square mile concession adjacent to
the Cabinda coastline and is divided into three areas: Area A, which began
production in late 1960, includes 19 major fields (15 currently producing) in
two major areas, Malongo and Takula; Area B, which began production in late
1994 with six major fields, includes the Kokongo, Nemba and Lomba fields; and
Area C, which began first production in 1997, includes the Ndola and Sanha
fields. Chevron has a 39.2 percent interest in the Block 0 concession. The
1997 exploration and appraisal well program in Area A consisted of seven wells
targeting open water prospects and delineation of existing fields. Five
appraisal wells were drilled in the Lifua and Banzala fields. The Lifua
appraisal well extended this discovery approximately one mile to the north.
The four Banzala wells yielded results that are currently being evaluated. In
Area B, one exploration well was drilled and resulted in a discovery of light
oil. In Area C, two appraisal wells were drilled. The first well discovered
oil but its development is deemed not economic at this time, while the second
well produced encouraging results. The second Angolan concession, Block 14,
was acquired in 1995 and Chevron's interest is 31 percent. Block 14 is a 1,560
square mile concession located in waters due west of Areas B and C. Three
exploration wells were drilled in Block 14 during 1997 resulting in three
discoveries, including two major commercial finds. The Kuito Field is
characterized as a giant field with recoverable reserves greater than 500
million barrels of crude oil. Three appraisal wells drilled on the Kuito Field
in 1997 helped refine the geologic model and the calculation of reserves. The
second commercial discovery occurred in November 1997 and is also a significant
find. The Block 14 program planned for 1998 includes drilling three
exploratory wells, which will increase the evaluation of the block, two
appraisal wells to follow up on the discoveries, and the acquisition of new 3-D
seismic data over the Kuito Field.
In Nigeria, the company's operations are managed by three subsidiaries. Chevron
Nigeria Limited (CNL) operates and holds a 40 percent interest in concessions
totaling approximately 2.2 million acres in the onshore swamp and near offshore
regions of the Niger Delta. Chevron Oil Company Nigeria Limited (COCNL) holds a
20 percent interest in six concessions covering about 600 thousand acres, with
six offshore oil fields operated by a partner. Chevron Petroleum Nigeria
Limited (CPNL) oversees and manages new venture projects in Nigeria. CPNL has a
30 percent interest in two deepwater Niger Delta blocks and three inland Benue
Basin blocks, and an additional sole interest in six other Benue Basin blocks.
CNL drilled only one exploration well in 1997 as funding from its partner, the
Nigerian National Petroleum Company, was restricted during the year. CPNL
exploration activities included the initiation of geological studies and a 2-D
seismic program in the six Chevron operated Benue Trough blocks. In the
partner-operated deep offshore blocks, CPNL participated in the drilling of two
exploration wells. One well was suspended after encountering oil and gas
zones; the other well was plugged and abandoned.
Offshore Republic of Congo, the company has a 29.25 percent interest in the
partner-operated Marine VII license, which includes the Kitina and Sounda
developments, and a 30 percent interest in the Haute Mer license, which is
operated by a partner and includes the Nkossa Field. In 1997, a second
appraisal well began on the Moho Field in the Haute Mer license and resulted in
the new Moho Marine No. 3 discovery when it struck oil in a new oil-bearing
section. Facilities design work is ongoing on Moho, with an intent to
accelerate early production from the field. A 3-D seismic survey was shot over
the outer part of the Haute Mer license in 1997 and is expected to identify
several more exploration prospects. The second of two test wells drilled in
1997 led to a potentially commercial crude oil discovery in the Haute Mer
deepwater area, which tested at 8,520 barrels of oil per day, and has been
named Bilondo Marine No. 1. At least three exploration wells are currently
planned for 1998. Processing of seismic data acquired in 1996 from the Marine
IV license, located offshore northern Congo and operated by Chevron with an 85
percent interest, was completed in 1997, and interpretation is ongoing. One
exploration well is planned for 1998.
In Democratic Republic of Congo (formerly Zaire), the company has a 50 percent
interest in, and is the operator of, a 390 square mile offshore concession. A
3-D seismic program was started in late 1997 and continued into 1998,
-11-
<PAGE>
after which approximately 95 percent of the concession will be covered with 3-D
seismic data. No exploration wells were drilled in 1997, but one exploration
well is planned for 1998.
Other International including affiliated companies:
Exploration expenditures, excluding unproved property acquisitions, outside the
United States and Africa, were $291 million in 1997, an increase of $32 million
from the 1996 amount of $259 million. In addition, unproved properties of $23
million were acquired in 1997 compared with $43 million in 1996.
In Europe, Chevron has interests in about 40 blocks in the United Kingdom and
Ireland. Blocks are located in the U.K. North Sea, west of Shetland Islands,
offshore Wales, and in Liverpool Bay. In Ireland, the company has acreage in
the Porcupine Basin. In 1997, Chevron continued with its strategy of
establishing an enhanced Britannia area equity position. The company increased
its interests in its core Alba/Britannia area by acquiring a 35 percent
interest in the Alder discovery in Block 15/29a, following a swap with Texaco
for Chevron's interests in the West Guillemot discovery. Chevron also
purchased a 17.25 percent interest in Block 15/24a, increasing the company's
interest in the block to 26.84 percent. The company drilled two exploration
wells in the West of Shetland Islands blocks, both of which were dry, and
completed 3-D seismic data acquisition over two blocks in the central North
Sea. In Ireland, the company carried out extensive exploration work on two
licenses in the Porcupine Basin. One license was retained for further
exploration work that will require the drilling of at least one well by the end
of 2001, while the other license was dropped. In 1998, a major 3-D seismic
survey will be undertaken over the Chevron-operated Porcupine License 5/95.
In Canada, exploration efforts in 1997 were concentrated in the western part of
the country in two core areas that the company is optimistic will provide good
opportunities for long term growth and value. These areas include the Liard
Basin in northeast British Columbia, and an area west of Kaybob in north
central Alberta. Drilling commenced in the Liard area in December 1997. The
company also sought additional growth opportunities in the offshore areas of
eastern Canada, including entering into a strategic alliance with Mobil Oil
Canada to explore and develop within a 29-million-acre area in the Grand Banks
area, offshore Newfoundland.
In Azerbaijan, Chevron signed an agreement in August 1997 to explore the 160
square mile Absheron Block in the Caspian Sea, about 60 miles off the
Azerbaijan coast, in water depths of about 1,600 feet. Chevron's equity share
is 30 percent. In the initial three-year work program, operated by Chevron, a
3-D seismic survey will be conducted in 1998, and two exploration wells are
expected to begin drilling in late 1999. Chevron is currently working with the
Azerbaijan State Oil Company and other operators in the region to develop
options to secure semi-submersible rigs necessary for completion of the work
program.
In Indonesia, Chevron's interests are managed by its 50 percent owned P.T.
Caltex Pacific Indonesia (CPI) and Amoseas Indonesia (AI) affiliates. CPI
holds interests in nine oil and gas production sharing contracts, while AI is
now focused solely on geothermal power generation and has an interest in one
geothermal production sharing contract. Within the central Sumatra contract
areas, an aggressive multi-year 3-D seismic acquisition effort continued to
evaluate oil and gas potential in the under-explored areas between current
producing fields. CPI is currently negotiating with Pertamina, the national
oil company, for a 20-year extension of the Coastal Plains block in Central
Sumatra, currently set to expire in 2001, while AI is pursuing several new
geothermal areas in Sumatra.
In Australia, Chevron's primary interests are in two non-operated joint
ventures. The company has a 16.7 percent interest in the North West Shelf
(NWS) Project and 25 to 50 percent interests in permits operated by West
Australian Petroleum Pty. Ltd. (WAPET), including a 25 percent interest in one
Carnarvon Basin block acquired in 1997, adjacent to the
Gorgon/Chrysaor/Dionysus gas fields. The NWS Project is currently engaged in
an exploration drilling program assessing prospects identified from the East
Dampier 3-D seismic survey. Separate from NWS and outside the WAPET-operated
area, Chevron holds a 25 percent interest in four blocks in the Browse Basin
area and a 17.25 percent interest in an additional Carnarvon Basin block. Two
of the Browse Basin blocks were acquired in 1997, and are adjacent to a
discovery made in 1997 in the Cornea Block. A 770-square-mile 3-D seismic
program over the Cornea discovery was completed in 1997, with an appraisal
drilling program proceeding into 1998.
-12-
<PAGE>
In Papua New Guinea, Chevron is operator for the Kutubu, Moran, and Gobe
projects. Chevron holds a 19.38 percent interest in the Kutubu and Moran
development and surrounding Petroleum Development License (PDL)-2, and a 15
percent interest in the Gobe development. Chevron, as operator, also holds a
35.5 percent interest in the Petroleum Prospecting License (PPL)-101. During
1997, Chevron and its partners continued evaluating the 1996 Moran Central
crude oil discovery in the PDL-2 area, with the drilling of a second well from
the same location as the discovery well. Construction of a flowline from Moran
to existing infrastructure in the producing Kutubu area fields began in late
1997 to transfer production from extended well tests on two Moran wells.
Production start-up occurred in January 1998, at a rate of 10,000 barrels per
day, with full production anticipated in 2000. Seismic data acquired in the
Moran area during 1997 continues to be evaluated. At year-end 1997, an
exploration well was drilling on the Nomad prospect in PPL-101. Seismic data
acquired over the Gobe area in 1997 continues to be evaluated with additional
seismic acquisitions planned for 1998.
In China, Chevron signed a production-sharing contract with China National
Petroleum Corporation (CNPC), effective August 1, 1997, to explore for crude
oil in the 700 square-mile Zhanhuadong block in the Shengli Field Complex in
China's Shandong Province. The Shengli field is China's second-largest oil
field. Chevron will explore the deeper pre-Tertiary geologic zones which lie
beneath the existing production. This contract represents Chevron's first
onshore exploration contract in China and requires that two wells be drilled
before the end of July 2000. Exploration well HZ/32-5-1 in the Block 16/08
contract, which discovered crude oil in 1996, was successfully appraised during
1997. The production will be tied back to producing field HZ/26-1. A 3-D
seismic survey recorded in early 1996 was interpreted in early 1997 and
identified exploration targets in Block 16/08 and adjacent Block 16/19. The
first prospect drilled resulted in the discovery of the new field HZ/26-2, with
three geologic zones testing at a combined rate of 7,566 barrels of crude oil
per day. During 1997, 3-D seismic acquisition was completed in Block 02/31, as
was a 2-D seismic survey in Block 06/17. Drilling in Blocks 06/17 and 02/31 is
currently scheduled for 1998. A 3-D seismic survey completed in Block 63/15
during 1997 will lead to one well planned for early 1998 in this natural-gas
prone area.
In Bahrain, the company signed an agreement in February 1998 to explore for oil
in three offshore areas designated as Blocks 1, 2 and 3. Under the agreement,
Chevron is operator with a 100 percent interest and is expected to begin 2-D
and 3-D seismic surveys in 1998 with exploratory drilling planned to begin in
2000.
Exploration activities occurred in other areas during 1997. In Qatar, where in
April 1996 the company obtained a 60 percent interest in and was appointed
operator for Block 1NW, evaluation of a 3-D seismic survey of 360 square miles
in the Block began in 1997. A seismic acquisition program is in progress to
evaluate potential in the Galeron Block of Colombia, which is in the Llanos
foothills south of the area where the recent trend of discoveries at Florena,
Pauto Sur and Volcanera fields are located. At year-end 1997, Chevron and the
Colombian state oil company Ecopetrol were finalizing an exploration contract
for the Rio Guape Block, located to the south and on trend with the Chichimene
Field. The company continued evaluating the results of 320 miles of seismic
data acquired in 1996 in Exploration Block 52 in Peru, where it has a 100
percent interest, and which is adjacent to the Camisea gas-condensate field.
Petroleum - Oil and Natural Gas Production
The following table summarizes the company's and its affiliates' 1997 net
production of crude oil, natural gas liquids and natural gas.
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<PAGE>
- -----------------------------------------------------------------------
1997 Net Production (1) Of Crude Oil And
Natural Gas Liquids And Natural Gas
Crude Oil & Natural Gas
Natural Gas Liquids (thousands of
(barrels per day) cubic feet per day)
------------------- ------------------
United States
-California 115,500 135,900
-Gulf of Mexico 115,900 901,700
-Texas 62,300 371,300
-Colorado 11,400 900
-Wyoming 9,000 165,500
-New Mexico 11,500 60,700
-Louisiana 4,500 66,100
-Other States 13,200 146,700
---------- ---------
Total United States 343,300 1,848,800
---------- ---------
Africa 311,300 6,900
United Kingdom (North Sea) 54,700 22,000
Canada 46,600 215,600
Australia 37,500 214,900
Indonesia 17,400 -
Papua New Guinea 14,500 -
China 12,900 -
Colombia 12,900 -
Netherlands - 2,400
---------- ---------
Total International 507,800 461,800
---------- ---------
Total Consolidated Companies 851,100 2,310,600
Equity in Affiliates 223,300 114,700
---------- ---------
Total Including Affiliates 1,074,400 2,425,300
========== =========
(1) Net production excludes royalty interests owned by others.
- -----------------------------------------------------------------------
Production Levels:
In 1997, worldwide net crude oil and natural gas liquids production, including
that of affiliates, increased for the fifth year in a row. Production rose in
1997 by three percent to a record 1,074,400 barrels per day, compared with
1,043,500 barrels per day in 1996. International net liquids production,
including affiliates, increased by about four percent to 731,100 barrels per
day in 1997, the eighth consecutive year of production increases. This
increase was due primarily to higher production in Congo and Nigeria, where
development drilling continued in new and existing fields, and in Kazakhstan,
where the company's share of production at the Tengiz Field increased as the
plant expansion project progressed and new markets were added. These
production increases were partially offset by production declines in the United
Kingdom and Papua New Guinea due primarily to normal field declines and
dispositions of producing properties. The decline in the United Kingdom
included the absence of production from four mature producing oil fields in the
United Kingdom sector of the North Sea that were sold in October 1996. In
Papua New Guinea production continues to be constrained because of gas re-
injection capacity.
Net production of natural gas, including affiliates, decreased one percent to
2.4 billion cubic feet per day in 1997 from about 2.5 billion cubic feet per
day in 1996. The decrease was primarily due to lower production in the United
States, which decreased approximately 26 million cubic feet per day, reflecting
normal field declines and property
-14-
<PAGE>
sales, and smaller production decreases in Canada, the United Kingdom and
Indonesia. These decreases were partially offset by new production in Nigeria,
as the Escravos Natural Gas Project began operation in 1997, and by a small
production increase in Australia. The company expects development of the
Norphlet trend in the U.S. Gulf of Mexico, the expansion of the Escravos Gas
Project in Nigeria, and the continued expansion and development of its
Australian projects, to mitigate further natural gas production declines in
its portfolio.
Data about the company's average sales price per unit of oil and gas produced,
as well as the average production cost per unit for 1997, 1996 and 1995 are
reported in Table III on pages FS-34 and FS-35 of this Annual Report on Form
10-K. The following table summarizes the company's and its affiliates' gross
and net productive wells at year-end 1997.
- ----------------------------------------------------------------------------
Productive Oil And Gas Wells At December 31, 1997
Productive(1) Productive(1)
Oil Wells Gas Wells
------------------- -----------------
Gross(2) Net(2) Gross(2) Net(2)
------- ------ ------ -------
United States 24,165 13,085 4,032 1,991
------- ------ ------ -------
Canada 1,403 1,039 392 221
Africa 1,081 407 9 3
United Kingdom (North Sea) 103 9 - -
Other International 1,192 420 46 11
------- ------ ------ ------
Total International 3,779 1,875 447 235
------- ------ ------ ------
Total Consolidated Companies 27,944 14,960 4,479 2,226
Equity in Affiliates 5,434 2,715 50 25
------- ------ ------ ------
Total Including Affiliates 33,378 17,675 4,529 2,251
======= ====== ====== ======
Multiple completion wells
included above: 688 398 281 189
(1) Includes wells producing or capable of producing and injection wells
temporarily functioning as producing wells. Wells that produce both oil and gas
are classified as oil wells.
(2) Gross wells include the total number of wells in which the company
has an interest. Net wells are the sum of the company's fractional interests in
gross wells.
- ----------------------------------------------------------------------------
Development Activities:
The company's development expenditures, including those of affiliated companies
but excluding proved property acquisitions, were $2,219 million in 1997 and
$1,835 million in 1996. The increase between years resulted from higher 1997
expenditures in the United States and by TCO. In addition, $84 million was
spent in 1997 on proved property acquisitions, compared with $15 million in
1996. The increase occurred primarily in Venezuela.
The table below summarizes the company's net interest in productive and dry
development wells completed in each of the past three years and the status of
the company's development wells drilling at December 31, 1997. (A "development
well" is a well drilled within the proved area of an oil or gas reservoir to
the depth of a stratigraphic horizon known to be productive. "Wells drilling"
include wells temporarily suspended.)
-15-
<PAGE>
- -------------------------------------------------------------------------------
Development Well Activity
Wells Drilling Net Wells Completed (1)
----------------------------------------
At 12/31/97 1997 1996 1995
------------ ---- --- ----- --- ---- ----
Gross(2) Net(2) Prod. Dry Prod. Dry Prod. Dry
----- ---- ---- --- ---- --- ---- ---
United States 305 228 617 6 485 8 281 6
----- ---- ---- --- ---- --- ---- ---
Africa 22 7 22 1 21 1 20 1
Other International 27 8 67 - 49 4 28 2
----- ---- ---- --- ---- --- ---- ---
Total International 49 15 89 1 70 5 48 3
----- ---- ---- --- ---- --- ---- ---
Total
Consolidated Companies 354 243 706 7 555 13 329 9
Equity in Affiliates 21 10 150 - 262 - 135 -
----- ---- ---- --- ---- --- ---- ---
Total
Including Affiliates 375 253 856 7 817 13 464 9
===== ==== ==== === ==== === ==== ===
(1)Indicates the number of wells completed during the year regardless of when
drilling was initiated. Completion refers to the installation of permanent
equipment for the production of oil or gas or, in the case of a dry well, the
reporting of abandonment to the appropriate agency.
(2)Gross wells include the total number of wells in which the company has an
interest. Net wells are the sum of the company's fractional interests in gross
wells.
- -------------------------------------------------------------------------------
Significant 1997 development activities include the following: (Production
volumes are gross unless otherwise stated.)
United States:
Chevron's U.S. development expenditures were $918 million in 1997, an increase
of $315 million from $603 million in 1996. Expenditures for proved reserve
acquisitions amounted to $3 million in 1997 compared with $5 million in 1996.
Additions to proved reserves during 1997 from extensions, discoveries and
improved recovery, before revisions, were 196 million barrels of crude oil and
natural gas liquids and 581 billion cubic feet of natural gas.
U.S. operations replaced 120 percent of net liquids and gas production in 1997,
excluding property sales and purchases, the highest U.S. replacement rate since
1984. The U.S. reserve additions resulted primarily from discoveries and
extensions in the Gulf of Mexico, and improved recovery and extension projects
in California.
In the Gulf of Mexico, significant development activities in 1997 included the
continued work on the hull fabrication and the construction of the topsides and
decks for the Genesis project, Chevron's first deepwater operation in the Gulf
of Mexico, located in 2,600 feet of water. Chevron is the unit operator with a
57 percent working interest. The two spar hull sections to be used in the
offshore construction had arrived in Corpus Christi, Texas from Finland, by
March 1998. The project execution plan anticipates initial production in late
1998, with total peak production expected to reach 55,000 barrels of oil per
day and 72 million cubic feet of gas per day by 2000.
Chevron has a 40 percent interest in the Gemini deepwater development in the
Gulf of Mexico, where water depth ranges from 3,000 to 4,300 feet. The
discovery well, located on Mississippi Canyon block 292, was spudded in 1995.
The company and its partner will drill two development wells, complete one
existing exploratory well and build processing facilities on an existing host
platform and pipelines. Initial production from the project is expected in
1999, with peak production rates anticipated to reach 150 - 200 million cubic
feet of gas per day and 2,000 - 3,000 barrels of condensate per day.
Phase I of the development of the Norphlet trend, which stretches some 80 miles
from the Destin Dome area (offshore Florida) to the Mobile Block 861 area
(offshore Mississippi), was completed in 1996. Chevron's net
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<PAGE>
production in the Mobile area during 1997 averaged 95 million cubic feet of gas
per day from seven wells, double the average net production in 1996. Phase II
of the company's development plans in the Norphlet trend includes participation
in three development wells (two as operator) and one operated exploration well
in 1998. Continued development work over the next two years is expected to
increase net production to around 180 million cubic feet of gas per day by
2000. In August 1997, the Minerals Management Service (MMS), U.S. Department
of the Interior, deemed Chevron's filing of a Development and Production Plan
(DPP) for Destin Dome to be complete. The MMS, in conjunction with other
federal and state agencies, is in the process of preparing an Environmental
Impact Statement, which is expected to be completed by late 1999, and is
required prior to approving the DPP. Assuming that all regulatory approvals
are obtained by late 1999, the company expects initial production from Destin
Dome by late 2001.
In the Vermilion 214 Field, where Chevron has a 100 percent interest, the
installation of a production platform and a facilities upgrade were completed.
In addition, five previously drilled delineation wells were tied back and
completed as of October 1997. Current production is six thousand barrels of
crude oil and 40 million cubic feet of gas per day. Additional development
drilling of seven wells is planned for the 1998 - 1999 period. Three of the
seven wells should be on production by mid-1998. The company is currently
evaluating further development in the field beyond 1999.
The use of 3-D seismic technology has led to successful development programs at
certain mature fields in the Gulf of Mexico. At Eugene Island 238, 22 of 25
prospects drilled to date have been successful and at the end of 1997 accounted
for the majority of the field's total daily production. Thirteen wells found
gas and nine wells found oil. At South Marsh Island 66, ten of eleven wells
drilled since 1995 have been successful, and have produced 41 billion cubic
feet of gas and 218 thousand barrels of condensate through year-end 1997.
Offshore California, the company has established a strategy to exit its
operations, either through selling its interests, or implementing abandonment
as soon as operations reach their economic limit and an abandonment
infrastructure is in place.
Onshore California, Chevron continued to expand its employment of enhanced
recovery methods using thermal operations to increase both the production rate
and the amount of oil ultimately recoverable from fields in California's San
Joaquin Valley, with efforts focused on the Cymric and Coalinga fields. This
multi-year project began in 1995, and net production from thermal operations
currently accounts for over 19 percent of Chevron's daily U.S. liquids
production.
Other development activities took place in the United States during 1997. The
drilling of 25 new wells in the Laredo area of Texas increased proved gas
reserves by a combined 66 billion cubic feet. The interstate pipeline
debottlenecking at the Waltman field in Wyoming, which commenced in November
1997, is expected to eliminate the curtailment of high pressure wells and allow
production start-up of low pressure wells that have been shut-in for more than
two years.
Africa:
Development expenditures in Africa were $461 million in 1997, compared
with $465 million in 1996. Higher 1997 expenditures in Nigeria were more than
offset by decreases between years in Angola, Congo, and the Democratic Republic
of Congo. Expenditures for proved reserve acquisitions amounted to $6 million
in 1997 compared with $1 million in 1996. Additions to proved reserves from
extensions, discoveries and improved recovery, before revisions, were 228
million barrels of crude oil and natural gas liquids, of which 164 million
barrels were in Angola. The additions to proved reserves arose primarily from
new discoveries and improved recovery projects in Angola and Nigeria.
In Nigeria, total gross production from 30 CNL-operated fields, where Chevron
has a 40 percent equity interest, averaged 423,000 barrels of oil per day, an
increase of about 22,000 barrels per day from 1996. This increase was
primarily due to a substantial workover program and the addition of the Ewan
Field, which began production in early 1997 and reached production levels of
more than 13,000 barrels of oil per day. Production from non-operated fields,
where Chevron has a 20 percent equity interest, averaged approximately 72,000
barrels of oil per day in 1997, an increase of 2,000 barrels per day from 1996.
Engineering and construction work continued on the
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development of the CNL-operated Dibi, Ewan, Gbokoda and Opolo fields. The
Opolo Field began production in March 1998 at a rate of 20,000 barrels per day.
The Dibi and Gbokoda fields are scheduled to begin production in 1998 with
combined production from the four fields expected to exceed 200,000 barrels
of oil per day by 2001. These development projects are part of CNL's plans
to achieve a gross production level of more than 600,000 barrels of oil per
day by 2001. Phase One of the Escravos Gas Project was completed and
commissioned during 1997. This project provides a commercial outlet for LPG
derived from natural gas produced with the company's crude oil operations.
The facility processes 175 million cubic feet per day of gas previously flared
at the Okan and Mefa fields, yielding about 8,000 barrels a day of natural gas
liquids and 2,000 barrels a day of condensate for export, and 100 million cubic
feet per day of dry gas, which is sold to the Nigerian Gas Corporation.
Engineering and construction is currently underway for Phase Two of the
Escravos Gas Project, which is scheduled to begin operation in late 1999 and
will process an additional 100 to 120 million cubic feet of gas per day.
In Angola, several waterflood projects, aimed at increasing production in the
Area A fields, are in the early stages of development. Additionally, 14
development wells were drilled in Area A in 1997. Areas B and C continue to be
the primary focus of major development activities in the Block 0 concession.
In Area B, pre-drilling of 11 development wells in the southern part of the
Nemba Field was completed during 1997. Construction of platforms and facilities
for further development of the Lomba Field and the southern portion of the
Nemba Field is currently in progress. Platform installation and start of
production from both of these projects is scheduled for 1998. Production from
the 11 southern Nemba wells will be combined with the currently producing three
Nemba wells on the new Nemba platform. Drilling on the Lomba field will start
in early 1998. Additional development in the northern area of the Nemba Field
is underway, with platform and facilities design and construction to begin in
1998. First oil production from the North Nemba Project is planned for early
2000. In Area C, installation of the first two platforms for the Ndola and
Sanha fields was completed in 1997, with combined production from both fields
currently at 30,000 barrels per day representing the company's first production
from Area C. The Kuito Field in Block 14, discovered and appraised during
1997, will be developed using a phased approach, with drilling of the wells for
the first phase commencing in 1998. First phase oil production is expected in
early 1999 and is anticipated to be 50,000 barrels per day. Chevron's interest
in the Kuito Field is 31 percent.
Offshore Republic of Congo, construction, installation, and hookup of the
Kitina platform and onshore facilities were completed, and first oil production
was achieved in December 1997. Peak production of 45,000 barrels per day is
expected by the end of 1998. Plans are to use the Kitina facilities to handle
additional production from the Kitina South and Sounda satellite fields
starting in late 1998.
In Democratic Republic of Congo, three well workovers were performed at Tshiala
and Motoba fields to optimize production, and one water injection well was
spudded at Motoba Field to provide pressure support to a producing reservoir.
Other International including affiliated companies:
Development expenditures in 1997, outside the United States and Africa, were
$840 million compared with $767 million in 1996. The increase was largely due
to higher expenditures by the company's affiliates TCO in Kazakhstan and CPI in
Indonesia, which were $102 million and $36 million higher in 1997 and 1996,
respectively. Expenditures for proved reserve acquisitions amounted to $75
million in 1997, compared with $9 million in 1996 with an increase of $75
million between years in Venezuela for the LL-652 Field slightly offset by a
decrease in Canada. Additions to proved reserves from extensions, discoveries
and improved recoveries were 52 million barrels of crude oil and natural gas
liquids and 20 billion cubic feet of natural gas.
In Europe, production from the Chevron-operated North Sea Alba Field, located
130 miles northeast of Aberdeen, averaged 91,000 barrels of oil per day. In
February 1998, Chevron's equity interest in Alba was reduced from 33.17 percent
to 21.17 percent following an asset exchange with Statoil in Norway. Chevron
acquired a 7.56 percent interest in Statoil's Draugen Field in the Norwegian
North Sea and an interest in five exploration blocks offshore Norway as part of
the exchange. The concept work and detailed design and procurement was
completed on the gross fluids upgrade component of the Alba Phase II
development. A subsea water injection well was commenced and a four mile
pipeline connecting the platform to the water injection well was installed.
Also in 1997, new water treatment facilities,
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necessary to handle the increased volume of water associated with higher
crude oil production levels, were installed. Completion of the gross fluids
upgrade is expected during early 1998. The development of the North Sea
Britannia gas field, which lies underneath the Alba Field, and in which
Chevron has a 30.2 percent equity interest, continued with the installation
and beginning of hook-up and commissioning of the jacket and platform topsides.
The project remains on target for gas production in August 1998. Peak
production is expected to be approximately 740 million cubic feet of gas and
60,000 barrels of liquids per day. Seventy-five percent of the estimated
deliverable gas is currently under long-term contracts. The owners of the
Alba and Britannia fields also reached an agreement to share gas resources.
A pipeline will be laid between Alba and the adjacent Britannia platform to
allow Alba to sell excess gas to Britannia, and conversely purchase gas from
Britannia when insufficient gas is produced to run the Alba platform
facilities. This arrangement is expected to reduce the amount of gas flared
from the Alba platform. In addition to ongoing geologic and reservoir studies,
two additional appraisal wells were drilled in 1997 in the Clair Field, located
40 miles west of the Shetland Islands, in which Chevron has a 19.42 percent
equity interest. The current work program is focused on achieving first oil
production during 2001 from the first phase of development and targets 250
million barrels of recoverable oil in a core part of the field.
In Canada, the company aggressively pursued development of the 650 million
barrel Hibernia project offshore Newfoundland and continues to concentrate its
other development efforts in western Canada, where operating efficiencies and
lower operating costs can be realized using existing infrastructure. The
Hibernia development, in which Chevron has a 26.9 percent interest, began
producing oil in November 1997. The sale and lifting of the first 850,000
barrel tanker cargo occurred in December. At year-end 1997, two wells were
producing approximately 60,000 barrels per day with a third well being drilled.
Production is anticipated to reach design capacity of 150,000 barrels per day
in 1999. The company's capitalized investment (including capitalized interest)
in this project was $1.3 billion at year-end 1997. In western Canada,
completion of the Chinchaga gas plant expansion in northwestern Alberta doubled
processing capacity to 120 million cubic feet per day, enabling the company to
handle increased production from the area and to capture additional revenue
through the processing of third party volumes. Successful horizontal drilling
in mature fields such as Virden, Princess, and Mitsue, along with development
drilling programs in central Alberta, helped maintain the company's net
production volumes of crude oil and natural gas in the region.
In Indonesia, the Duri Steamflood Project, begun in 1985 to assist the
difficult production process for the relatively heavy, waxy Duri crude, is
being completed in 13 stages (Areas 1-13) with eight areas currently on
production. Total Duri production averaged over 284,000 barrels per day in
1997. A waterflood project involving 21 fields in Central Sumatra continued in
1997, as the installation of the fourth area in the Minas pattern waterflood
project started and the approval of a fifth area for pattern waterflood
development was received. Construction of the Light Oil Steamflood pilot at
Minas began in 1997, with first steam injection targeted for early 1999.
Chevron's Amoseas Indonesia (AI) affiliate in Indonesia is now focused on
geothermal power generation and operates the Darajat geothermal contract in
central Java. Steam from the Darajat geothermal field, located 115 miles
southeast of Jakarta, was produced and sold to the national power company, PLN,
for electricity generation in the PLN-owned Darajat I power plant, for the
third full year. Construction of the first expansion phase Darajat II 70
megawatts power plant, to be owned and operated by AI and its Indonesian
partner, is on schedule for completion in late 1998. Reserves for a third
power plant were proved with the successful 1997 drilling program. AI
continues drilling for additional reserves.
In Kazakhstan, TCO's average liquids production was 155,000 barrels per day for
the year, an increase of 43,000 barrels per day over the average for 1996. In
1997, TCO began an extensive plant expansion program to increase production
capacity at the Tengiz Field to approximately 185,000 barrels per day in 1998
by modifying existing facilities, and 240,000 barrels per day by 2000 by the
construction of new facilities. In April 1997, Chevron completed the sale of
10 percent of its 50 percent interest in TCO to LUKARCO, an affiliate of
LUKoil, a Russian oil company, and Arco, thereby reducing Chevron's ownership
to 45 percent. In May 1997, Chevron acquired a 15 percent ownership interest
in the restructured Caspian Pipeline Consortium, formed to build a crude oil
pipeline from the Tengiz oil field to the Russian Black Sea coast. In March
1998, Chevron and Caspian TransCo entered into an agreement with the Republic
of Georgia to build a new section of pipeline and to reconstruct an existing
section, which together will link Ali Bairamly in Azerbaijan with Georgia's
Black Sea port of Batumi. The new link will allow TCO to significantly
increase the amount of crude oil it can transport by pipeline through
Azerbaijan
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<PAGE>
and Georgia. TCO continues to move oil by pipeline, barge, and rail car
to destinations in the former Soviet Union and Europe, and in 1997 signed
an agreement with Sinochem, a Chinese state oil trader, to make a test shipment
of crude oil from the Tengiz Field to China.
In Australia, debottlenecking plans are in the evaluation stage to improve the
onshore fractionation capacity of NWS condensate to increase liquefied
petroleum gas production to 10 million barrels per year, and to increase
Wanaea/Cossack crude oil production to over 100,000 barrels per day. The NWS
participants are currently negotiating a Letter of Intent (LOI) with Japanese
buyers to double the volume of LNG deliveries from the NWS project starting in
2003. The expansion is expected to cost approximately $5 billion (total
project) with start-up by 2003 based on the expected signing of the LOI in
1998. WAPET development activities included the completion of a 23 well infill
drilling program on Barrow Island, which stabilized oil production and added
oil reserves. Evaluations by the partners continued regarding options for the
commercial development of the Gorgon and Chrysaor gas fields as liquefied
natural gas and domestic gas projects.
In Papua New Guinea (PNG), Chevron (with an average 15 percent interest) and
its partners commenced construction of production facilities for the Gobe Area
fields in 1997. First oil production from Gobe occurred in March 1998 with
peak production of 50,000 barrels per day expected in mid-1998. An active
infill development drilling program designed to accelerate production and
develop new oil reserves for the Kutubu Area fields, where Chevron has a 19.38
percent interest, continued in 1997. Three horizontal sidetracks of existing
wells and one new well resulted in an increase in proved reserves of 6 million
barrels. This essentially completes the development drilling of Kutubu.
During 1997, Chevron continued to pursue the PNG to Queensland, Australia, Gas
Pipeline Project. This project plans to allow commercialization of PNG natural
gas reserves and the recovery of substantial quantities of LPG's. In March
1998, Chevron filed an environmental impact assessment study for the proposed
pipeline for public review. A decision on the viability of this project is
expected in 1998.
In Venezuela, Chevron and Maraven S.A. formed an alliance in late 1995 to
further develop the Boscan oil field. In July 1996, Chevron became responsible
for the operations, production and development of this field under an operating
services agreement, whereby Chevron receives operating expense reimbursement
and capital recovery, plus interest and an incentive fee. At year-end 1997,
Boscan production was about 90,000 barrels per day with plans to increase
production to 115,000 barrels per day by the end of 1998. In addition, the
alliance calls for the supply of Venezuelan crude oil to Chevron refineries in
the United States through several independent supply arrangements. Because of
specific contract provisions in the Boscan Field Operating Services Agreement,
production and reserves for this field are not included in the company's
reported production and reserve quantities. In 1997, a consortium consisting
of Chevron, Statoil, Arco, and Phillips, with Chevron as operator, successfully
bid to operate the LL-652 field located in the northeast section of Lake
Maracaibo. The LL-652 oil field, one of the largest offered by Petroleos de
Venezuela, S.A. (PDVSA) in the Third Bid Round, is estimated to contain
recoverable reserves exceeding 500 million barrels. The 20-year agreement
between the consortium and PDVSA calls for takeover of the field no later than
May 1998, upon approval of the development plan. Through an extensive drilling
program, installation of offshore platforms for gas handling, and a large-scale
waterflood to repressure the reservoir, it is expected to increase total
production from a baseline of 10,000 barrels per day to 115,000 barrels per day
by 2006. Chevron's 30 percent interest is likely to be reduced to 27 percent
once EPIC, a Venezuelan state-sponsored mutual fund, exercises its option to
participate as a 10 percent partner in LL-652. In 1997, Chevron recorded 49
million barrels of proved reserves for LL-652.
In Colombia, the Castilla and Chichemene fields, where Chevron holds 50 percent
interests, were producing 34,000 barrels of oil per day at year-end 1997. Both
fields are located in the Llanos Basin. During 1997, one development well at
each field was drilled and brought to production.
Petroleum - Natural Gas Liquids and NGC Corporation
The company sells natural gas liquids from its producing operations under a
variety of contractual arrangements. In the United States, the majority of
sales are to the company's NGC affiliate. On September 1, 1996, Chevron merged
its natural gas liquids gathering, processing and marketing operations,
conducted by its Warren Petroleum Company division, and its U.S. natural gas
marketing activities, conducted by Chevron U.S.A. Production
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Company, with NGC, and assumed a 28 percent equity interest in NGC. Outside
the United States, significant sales take place in the company's Canadian
upstream operations and lower levels of sales in upstream operations in Africa,
Australia and Europe. In 1997, U.S. sales volumes, including the company's
share of NGC sales, comprised about 75 percent of the company's total worldwide
natural gas liquids sales volume.
NGC is one of the leading processors and marketers of natural gas liquids in
North America with production of 140,000 barrels per day and sales of more than
400,000 barrels per day. Also NGC is the second largest marketer of natural
gas in North America with sales of 8 billion cubic feet per day, and is the
second largest electric power marketer in the United States. NGC and Chevron
have entered into long-term strategic alliances whereby NGC purchases
substantially all natural gas and natural gas liquids produced by Chevron in
the United Sates, excluding Alaska, and supplies natural gas and natural gas
liquids feedstocks to Chevron's U.S. refineries and chemicals plants. Through
its "Energy Store" concept, NGC offers multi-commodity energy products and
services that provide natural gas, NGL's, electricity and crude oil. NGC
maintains an asset base that includes interests in approximately 15,000 miles
of natural gas gathering and transmission pipelines, 19 power generation
facilities, approximately 50 gas processing plants currently operating, three
NGL fractionation facilities, 60 million barrels of NGL storage capacity, three
NGL import/export marine terminals, ten other NGL terminals and approximately
2,100 miles of NGL pipelines.
Chevron's total third-party natural gas liquids sales volumes over the last
three years are reported in the following table:
- ---------------------------------------------------------------
Natural Gas Liquids Sales Volumes
(Thousands of barrels per day)
1997 1996 1995
---- ---- ----
United States - Warren - 139 203
United States - Other 64 25 10
---- ---- ----
Total United States 64 164 213
Canada 30 27 40
Other International 13 9 7
---- ---- ----
Total Consolidated Companies 107 200 260
---- ---- ----
Equity in NGC Affiliate 68 23 -
---- ---- ----
Total including Affiliate 175 223 260
==== ==== ====
- ---------------------------------------------------------------
In 1997, Venice Energy Services Company (VESCO), a partnership between Chevron
and Warren Petroleum, a subsidiary of NGC, was further expanded by the addition
of Koch Energy Services Company and an affiliate of Shell Midstream
Enterprises, as partners. VESCO owns and operates the Venice, Louisiana
natural gas facilities, located approximately 75 miles southeast of New
Orleans, which include an offshore gas-gathering system, a gas-processing
plant, a gas-liquids fractionation facility, an underground gas-liquids storage
facility and a multi-barge, gas-liquids terminal. Koch contributed a cryogenic
gas processing plant in exchange for an ownership interest in the partnership.
Shell dedicated natural gas production from three Gulf of Mexico fields and
certain future developments in the offshore Mississippi Canyon area for
processing at the Venice facilities in exchange for an ownership interest in
the partnership. The partnership has doubled the gas gathering capacity of the
Venice complex to 800 million cubic feet per day. The cryogenic plant
contributed by Koch increased gas processing capacity at Venice from 1.0
billion to 1.3 billion cubic feet per day. Under terms of the partnership,
Chevron operates the offshore facilities and remains one of the major producer-
suppliers to the Venice complex. Warren operates the onshore facilities and
has commercial responsibility for the partnership. The Venice facilities are
well positioned to take advantage of anticipated growth opportunities resulting
from increased production of liquids- rich gas from deepwater projects in the
Gulf of Mexico. There are plans for further plant expansion by year-end 1999
to accommodate the expected future needs of Shell and other producers in the
region.
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Petroleum - Reserves and Contract Obligations
Table IV on pages FS-35 and FS-36 of this Annual Report on Form 10-K sets forth
the company's net proved oil and gas reserves, by geographic area, as of
December 31, 1997, 1996, and 1995. During 1997, the company filed estimates of
oil and gas reserves with the Department of Energy, Energy Information Agency.
Those estimates were consistent with the reserve data reported on page FS-36 of
this Annual Report on Form 10-K.
The company sells gas from its producing operations under a variety of
contractual arrangements. Most contracts generally commit the company to sell
quantities based on production from specified properties but certain gas sales
contracts specify delivery of fixed and determinable quantities. In the United
States, the company is obligated to sell substantially all of the natural gas
produced and owned or controlled by the company in the lower 48 states to NGC.
Chevron has retained a few long-term natural gas supply contracts, but the
volumes associated with these agreements are not material. Outside the United
States, the company is contractually committed to deliver approximately 550
billion cubic feet of natural gas through 2020 in Australia, 46 billion cubic
feet of natural gas through 2000 in the United Kingdom, and approximately 3
billion cubic feet of natural gas through 1999 in Canada. The company believes
it can satisfy these contracts from quantities available from production of the
company's proved developed Australian, U.K. and Canadian natural gas reserves.
Petroleum - Refining
The daily refinery inputs over the last three years for the company's and its
Caltex affiliate's refineries are shown in the following table:
Petroleum Refineries: Locations, Capacities And Inputs
(Inputs and Capacities are in Thousands of Barrels Per Day)
December 31, 1997
-----------------
Operable Refinery Inputs
--------------------
Locations Number Capacity 1997 1996 1995
- --------------------------- ------ -------- ----- ---- -----
Pascagoula, Mississippi 1 295 312 313 282
El Segundo, California 1 260 203 223 221
Richmond, California 1 225 220 220 202
El Paso,(1) Texas 1 65 60 60 58
Honolulu, Hawaii 1 54 53 54 55
Salt Lake City, Utah 1 45 41 40 41
Other(2) 3 102 44 41 66
----- -------- ----- ---- -----
Total United States 9 1,046 933 951 925
----- -------- ----- ---- -----
Burnaby, B.C., Canada 1 50 48 48 47
Milford Haven, Wales,(3) United Kingdom - - 101 117 100
----- -------- ----- ----- -----
Total International 1 50 149 165 147
----- -------- ----- ----- -----
Total Consolidated Companies 10 1,096 1,082 1,116 1,072
Equity in Caltex Affiliate
Various Locations 13 452 416 372 451
----- -------- ----- ----- -----
Total Including Affiliate 23 1,548 1,498 1,488 1,523
===== ======== ===== ===== =====
(1) Capacity and input amounts for El Paso represent Chevron's share.
(2) Refineries in Perth Amboy, New Jersey; Portland, Oregon; and Richmond
Beach, Washington, which are primarily asphalt plants.
Inputs include Port Arthur, Texas (sold in 1995).
(3) Ceased processing operations December, 1997.
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<PAGE>
Based on refinery statistics published in the December 22, 1997, issue of The
Oil and Gas Journal, Chevron had the third largest U.S. refining capacity and
ranked among the top ten in worldwide refining capacity including its share of
affiliate's refining capacity. At year-end 1997, the company owned and
operated nine refineries in the United States and one in Canada. In December
1997, the company ceased processing operations at, and will shut down, its
115,000 barrel-per-day refinery located near Milford Haven, Wales. The company
also divested its 50 percent equity interest in the Pembroke Cracking Co.,
which operates a 90,000 barrel-per-day catalytic cracking facility at Texaco's
refinery in Pembroke, Wales. At year-end 1997, the company's 50 percent owned
Caltex Petroleum Corporation affiliate owned or had interests in 13 operating
refineries: Japan (2), Australia (2), Thailand (2), Korea, the Philippines, New
Zealand, Singapore, Pakistan, Kenya and South Africa. In April 1997, Caltex
sold its 40 percent interest in a refinery in Bahrain, having ceded its
throughput rights to 107,000 barrels per day of capacity at the refinery in
April 1996. Also in April 1996, Caltex sold its 50 percent interest in Nippon
Petroleum Refining Company, Limited, which included two refineries in Japan, to
its partner, Nippon Oil Company, Limited. Caltex's share of refining capacity
for these two refineries totaled 255,000 barrels per day at year-end 1995.
Distillation operating capacity utilization, adjusted for sales and closures,
in 1997 averaged 89 percent in the United States (including asphalt plants) and
91 percent worldwide (including affiliate), compared with 91 percent in the
United States and 90 percent worldwide in 1996. Chevron's capacity utilization
at its U.S. fuels refineries averaged 94 percent in 1997 and 97 percent in
1996. Chevron's capacity utilization of its U.S. cracking and coking
facilities, which are the primary facilities used to convert heavier products
to gasoline and other light products, averaged 80 percent in 1997, down from 82
percent in 1996. The company processed imported and domestic crude oil in its
U.S. refining operations. Imported crude oil accounted for about 53 percent of
Chevron's U.S. refinery inputs in 1997.
Petroleum - Refined Products Marketing
Product Sales:
The company and its Caltex Petroleum Corporation affiliate market petroleum
products throughout much of the world. The principal trademarks for identifying
these products are "Chevron," "Gulf" (principally in the United Kingdom prior
to the December 1997 disposition of that business) and "Caltex." Worldwide
refined products sales volumes, including the company's share of affiliate's
sales, increased to 2,079,000 barrels per day in 1997, slightly higher than the
2,066,000 barrels per day in 1996. The company's U.S. sales volumes of refined
products during 1997 increased about six percent from 1996 to 1,193,000 barrels
per day, equivalent to approximately seven percent of total U.S. consumption.
The company's share of affiliate's sales during 1997 decreased about three
percent from 1996 to 577,000 barrels per day and were about 12 percent lower
than 1995 sales volumes. These decreases were primarily due to lower Caltex
sales volumes after Caltex's sale of its 50 percent interest in Nippon
Petroleum Refining Company, Limited in April 1996. The following table shows
the company's and its affiliate's refined product sales volumes, excluding
intercompany sales, over the past three years.
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- -------------------------------------------------------------------
Refined Products Sales Volumes
(Thousands of Barrels Per Day)
1997 1996 1995
----- ----- -----
United States
Gasolines 591 556 552
Jet Fuel 249 255 241
Gas Oils and Kerosene 204 186 196
Residual Fuel Oil 60 39 38
Other Petroleum Products (1) 89 86 90
----- ----- -----
Total United States 1,193 1,122 1,117
International
United Kingdom 103 110 97
Canada 61 60 58
Other International 145 180 157
----- ----- -----
Total International 309 350 312
----- ----- -----
Total Consolidated Companies 1,502 1,472 1,429
Equity in Affiliate 577 594 657
----- ----- -----
Total Including Affiliate 2,079 2,066 2,086
===== ===== =====
(1)Principally naphtha, lubes, asphalt and coke.
- -------------------------------------------------------------------
The company's Canadian sales volumes consist of refined product sales in
British Columbia and Alberta by the company's Chevron Canada Limited
subsidiary. In the United Kingdom, the reported sales volumes represented a
full range of products by the company's Gulf Oil (Great Britain) Ltd.
subsidiary until the sale of its retail marketing assets to Shell in December
1997. The 1997 volumes reported for "Other International" relate to
international sales of aviation and marine fuels, lubricants, gas oils and
other refined products, primarily in Latin America, Asia and Europe. The
equity in affiliate's sales in 1997 consists of the company's interest in
Caltex Petroleum Corporation, which maintains an interest in about 7,900
service stations (of which 4,600 are branded Caltex) operating in approximately
60 countries including the Philippines, Thailand, New Zealand, South Africa
and, through Caltex affiliates, in Australia, Japan and Korea.
Retail Outlets:
In the United States, the company supplies, directly or through jobbers, more
than 7,700 motor vehicle retail outlets, of which more than 1,700
are company-owned or -leased motor vehicle service stations, and more than 500
aircraft and marine retail outlets. The company's gasoline market area is
concentrated in the southern, southwestern and western states. According to
the Lundberg Share of Market Report, Chevron ranks among the top three gasoline
marketers in 14 states, and is the top marketer of aviation fuel in the western
United States.
In 1997, Chevron continued to implement an alliance with McDonald's to develop
a network of retail sites that combine Chevron service stations and convenience
stores with McDonald's restaurants in 12 western and southwestern states. As of
year-end 1997, the two companies operated 75 sites together in these states.
Convenience store sales continue to be an area of growth and opportunity for
the company. Key programs were added in 1997 to accelerate profit growth
including the installation of automated teller machines, which in time, will
dispense a variety of products such as event tickets, in addition to cash, at
approximately 430 service stations.
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The company expanded its "FastPay" system, increasing the total number of
service stations with the system to about 4,100 nationwide. This automated
system allows credit card customers to pay at the pump with credit approvals
processed in about five seconds using satellite data transmission.
During 1997, the company continued to expand and institute programs intended to
build positive brand recognition and reputation for quality products and
service in the United States. Training programs, emphasizing a customer focus
at company service stations, were expanded. A new station performance review
program, designed to improve service and image throughout the retail network,
was introduced.
Internationally, the company's branded products are sold in 187 stations (all
owned or leased) in British Columbia, Canada, and were sold in approximately
450 stations (about 190 owned or leased) in the United Kingdom prior to the
company's exit from that business in December 1997. The company also has an
interest in one service station in Kazakhstan and another is currently under
construction.
Petroleum - Transportation
Tankers: Chevron's controlled seagoing fleet at December 31, 1997, is
summarized in the following table. All controlled tankers were utilized in
1997. In addition, at any given time, the company has 25 to 35 vessels under
charter on a term or voyage basis.
- -----------------------------------------------------------------------------
Controlled Tankers At December 31, 1997
U.S. Flag Foreign Flag
---------------------------- ----------------------------
Cargo Capacity Cargo Capacity
Number (Millions of Barrels) Number (Millions of Barrels)
------ ------------------- ----- -------------------
Owned 3 1.0 20 19.5
Bareboat Charter 2 0.5 9 12.5
Time-Charter - - 5 2.3
-- --- -- ----
Total 5 1.5 34 34.3
== === == ====
- -----------------------------------------------------------------------------
Federal law requires that cargo transported between U.S. ports be carried in
ships built and registered in the United States, owned and operated by U.S.
entities and manned by U.S. crews. At year-end 1997, the company's U.S. flag
fleet was engaged primarily in transporting crude oil from Alaska and
California terminals to refineries on the West Coast and Hawaii, refined
products between the Gulf Coast and East Coast, and refined products from
California refineries to terminals on the West Coast, Alaska and Hawaii.
At year-end 1997, two of the company's controlled international flag vessels
was being used for floating storage. The remaining international flag vessels
were engaged primarily in transporting crude oil from the Middle East,
Indonesia, Mexico and West Africa to ports in the United States, Europe, the
United Kingdom, and Asia. Refined products also were transported by tanker
worldwide.
In addition to the tanker fleet summarized in the table above, the company owns
a one-sixth undivided interest in each of six LNG ships that are bareboat
chartered to the Australian North West Shelf Project. These ships, along with
two time-chartered LNG vessels, primarily transport LNG from Australia to
various Japanese gas and electric utilities. The company also has a 40.4
percent interest in one tanker with a capacity of 850,000 barrels used to
transport crude oil from the Hibernia Field offshore Newfoundland.
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During 1997, the company acquired four domestic tankers with about two million
barrels of capacity that were previously leased by the company under bareboat
charters. Agreements were reached in 1997 to sell two of these vessels. One
sale was completed in 1997, and the second sale will be completed in mid-1998.
In December 1996 and June 1997, the company reached agreements to lease, under
bareboat charters, and operate four new 308,500 deadweight ton, double-hull
tankers. The tankers will be built in Korea with deliveries of three tankers
scheduled for 1999 and one scheduled for 2000. These additions will bring to
16 the number of double-hull tankers controlled by Chevron. In July 1997, the
company began operation of a liquid petroleum gas floating storage tanker
offshore Nigeria. The tanker stores, prior to its export, up to 30,000 metric
tons of LPG per month produced from the Escravos Gas Project.
Page 29 of this Annual Report on Form 10-K contains a discussion of the effects
of the Federal Oil Pollution Act on the company's shipping operations.
Pipelines:
Chevron owns and operates an extensive system of crude oil, refined
products, chemicals, natural gas liquids and natural gas pipelines in the
United States. The company also has direct or indirect interests in other U.S.
and international pipelines. The company's ownership interests in pipelines are
summarized in the following table:
- -----------------------------------------------------------------------
Pipeline Mileage At December 31, 1997
Wholly Partially
Owned Owned(1) Total
------ -------- ------
United States:
Crude oil(2) 3,773 366 4,139
Natural gas 477 138 615
Petroleum products 2,074 2,624 4,698
------ -------- ------
Total United States 6,324 3,128 9,452
------ -------- ------
International:
Crude oil - 1,009 1,009
Natural gas - 265 265
Petroleum products - 104 104
------ -------- ------
Total International - 1,378 1,378
------ -------- ------
Worldwide 6,324 4,506 10,830
====== ======== ======
(1)Reflects equity interest in lines.
(2)Includes gathering lines related to the transportation function.
Excludes gathering lines related to the U.S. production function.
- -----------------------------------------------------------------------
Chemicals
The company's chemicals operations manufacture and market commodity chemical
products for industrial use and chemical additives for fuels and lubricants. At
year-end 1997, Chevron Chemical Company owned and operated 15 U.S.
manufacturing facilities in nine states, owned manufacturing facilities in
Brazil and France, and owned a majority interest in a manufacturing facility in
Japan. The principal U.S. plants are located at Cedar Bayou, Orange and Port
Arthur, Texas; St. James and Belle Chasse, Louisiana; Marietta, Ohio;
Pascagoula, Mississippi; and Richmond, California.
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The following table shows, by chemicals division, 1997 revenues and the number
of owned or majority owned chemicals manufacturing facilities and combined
operating capacities as of December 31, 1997.
- -------------------------------------------------------------------------------
Chemicals Operations
Manufacturing 1997
Facilities Annual Revenue(1)
--------------------
Division U.S. International Capacity ($Millions)
- ------------------ ---- ------------- ------------------ ---------
U.S. Chemicals 13 - 14,691 million lbs. $2,636
Oronite Additives 2 3 197 million gals. 766
Other - - N/A 118
-- -- ------
Total 15 3 $3,520
== == ======
(1)Excludes intercompany sales.
- -------------------------------------------------------------------------------
During 1997, the company completed major expansion and de-bottleneck projects
to increase ethylene and polystyrene production capacities at the Port Arthur,
Texas and the Marietta, Ohio plants. Planned expansions, expected to be
completed in 1998 and 1999, will increase paraxylene and polyethylene
production capacities at the company's Pascagoula, Mississippi, and Orange,
Texas facilities, respectively.
In 1997, Chevron continued with plans to construct manufacturing facilities and
expand its chemicals business outside the United States. In Saudi Arabia, the
company and its joint venture partner, the Saudi Industrial Venture Capital
Group, broke ground on a petrochemicals complex expected to produce annually
approximately 480,000 tons of benzene, using the company's proprietary Aromax
technology, and 220,000 tons of cyclohexane. Construction of this facility is
scheduled to be completed in 1999. Construction also began on a fuel and lube
oil additives manufacturing facility in Singapore, which will have an annual
capacity of approximately 100,000 metric tons of additives. Additionally,
Chevron signed a memorandum of understanding with a subsidiary of Petroleos de
Venezuela, S.A. to study the feasibility of an integrated aromatics project in
Venezuela. The company also has plans to construct a polystyrene plant in
China which will represent the company's entry into the chemicals business in
that country. Engineering work is complete and groundbreaking is expected in
1998. In November 1997, Chevron completed the sale of its 10.65 percent
interest in the Octel Group, a U.K.-based manufacturer and marketer of leaded
fuel additives.
Coal and Other Minerals
Coal:
The company's wholly-owned coal mining and marketing subsidiary, The
Pittsburg and Midway Coal Mining Co. (P&M), owned and operated three surface
and two underground mines at year-end 1997. Two of the mines are located in
New Mexico and one each in Wyoming, Alabama and Kentucky. All of the mines
produce steam coal used primarily for electric power generation. P&M's
strategy is to focus on regional markets in the United States, capitalizing on
major utility growth markets in the southwest and southeast. P&M also has a 33
percent interest in the Black Beauty Coal Company, whose principal operations
are in Indiana and Illinois. In 1997, P&M acquired the Skull Point Mine in
Wyoming, adjacent to its Kemmerer, Wyoming, facility, which it combined with
its existing operations. P&M also acquired a 29.8 percent interest in Inter-
American Coal Holding N.V., which has interests in mining operations in
Venezuela. The company also formed two partnerships in Montana in the North
Powder River Basin, which is the largest remaining undeveloped compliance coal
area in the United States.
Sales of coal from P&M's wholly-owned mines and from its interest in the Black
Beauty Coal Company were 19.6 million tons in 1997, an increase of 22 percent
from 1996 sales of 16.0 million tons. About 56 percent of 1997 sales came from
two mines, the McKinley Mine in New Mexico and the Kemmerer Mine in Wyoming.
The increase in
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sales volumes between years arose primarily at the Black Beauty Coal Company
stemming from new sales contracts and mine developments, at the McKinley
Mine as electricity markets improved in the southwest United States, and at
the Kemmerer Mine, stemming from supply agreements included with the 1997
acquisition of the Skull Point Mine. The average selling price for coal from
mines owned and operated by P&M was $23.43 per ton in 1997 compared with $24.48
per ton in 1996. Sales and other operating revenues were $359 million and
$329 million in 1997 and 1996, respectively. The decrease in average
selling price between years was primarily due to incentive pricing offered on
the higher sales volumes in 1997. In 1996, the company also recovered
liquidated damages from customers who did not purchase their minimum contract
tonnage obligations. At year-end 1997, P&M controlled approximately 509
million tons of developed and undeveloped coal reserves, including significant
reserves of environmentally desirable low-sulfur coal.
Demand growth for coal in the United States remains largely dependent on the
demand for electric power, which in turn depends on regional and national
economic conditions and on competition from other fuel sources. In 1997, the
electric utility industry consumed over 80 percent of all coal produced in the
United States. Approximately 85 percent of P&M's coal sales are made to
electric utilities, of which, about 50 percent are under long-term contracts.
Generally, these contracts contain index-adjusted pricing provisions and
minimum-take requirements that have helped mitigate the effects on P&M's
results from short-term fluctuations in coal prices and consumption levels.
Research and Environmental Protection
Research:
The company's principal research laboratories are at Richmond and La
Habra, California. The Richmond facility engages in research on new and
improved refinery processes, develops petroleum and chemicals products, and
provides technical services for the company and its customers. The La Habra
facility conducts research and provides technical support in geology,
geophysics and other exploration sciences, as well as oil production methods
such as hydraulics, assisted recovery programs and drilling, including offshore
drilling. Employees in subsidiaries engaged primarily in research activities at
year-end 1997 numbered more than 1,100, with approximately 500 additional
employees working on research activities in the company's other operating
units.
Chevron's research and development expenses were $179 million, $182 million and
$185 million for the years 1997, 1996 and 1995, respectively.
Licenses under the company's patents are generally made available to others in
the petroleum and chemicals industries. For example, in 1997 the company
licensed 170,000 barrels a day of its hydroprocessing technology, which
produces high-quality lubricant base oils and cleaner burning fuels. However,
the company's business is not dependent upon licensing patents.
Environmental Protection:
One of Chevron's goals is to be recognized worldwide for environmental
excellence, and commitment to the environment remains an integral part of the
company's business philosophy. In 1992, Chevron established a systematic
approach for improving health, safety and environmental performance. The
program is called "Protecting People and the Environment" and applies to
operations worldwide. It emphasizes continuous improvement for significant
long-term gains. The program defines 10 categories of performance, which are
supported by 102 specific management practices to be integrated into local
management systems. By year-end 1997, nearly all Chevron operations met their
"Protecting People and the Environment" program goals by fully implementing the
102 management practices. In 1997, the company published a report called
"Protecting People and the Environment - A Report on Chevron's Practices and
Performance," which summarizes the company's health, environmental and safety
practices and performance. Chevron's previous corporate health, safety and
environmental report was published in 1994.
The company's oil and gas exploration activities, along with those of many
other petroleum companies, have been hampered by drilling moratoria, imposed
because of environmental concerns, in areas where the company has leasehold
interests. Difficulties in obtaining necessary permits can delay or restrict
oil and gas development projects. While events such as these can impact current
and future earnings, either directly or through lost opportunities, the company
does not believe they will have a material effect on the company's consolidated
financial position, its
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liquidity, or its competitive position relative to other U.S. or international
petroleum concerns. The situation has, however, been a factor, among others,
in the shift of the company's exploration efforts to areas outside of the
United States.
As of January 1, 1995, the Clean Air Act Amendments of 1990 require that only
reformulated gasoline (RFG) may be sold in the nine worst ozone areas in the
United States but other areas have voluntarily opted into the RFG requirement.
In addition, the California Air Resources Board required a more stringent
reformulated gasoline be sold statewide in all service stations beginning on
June 1, 1996. Since 1991, the company has spent about $1.7 billion in capital
expenditures on air quality projects at its U.S. refining facilities, primarily
in order to comply with federal and state clean air regulations and to provide
consumers with fuels that reduce air pollution and air toxicity.
The Federal Oil Pollution Act of 1990 (OPA) created federal authority to direct
private responses to oil spills, to improve preparedness and response
capabilities, and to impose monetary damages on those who spill for all
damages, including environmental restoration and loss of use of the resources
during restoration. Under OPA, owners or operators of vessels operating in U.S.
waters or transferring cargo in waters within the U.S. Exclusive Economic Zone
are required to possess a Certificate of Financial Responsibility for each of
these vessels. The Certificate is issued by the U.S. Coast Guard after the
owner or operator has demonstrated the ability to meet Coast Guard guidelines
for financial responsibility in the case of an oil spill. OPA also requires the
scheduled phase-out, by year-end 2014, of all single hull tankers trading to
U.S. ports or transferring cargo in waters within the U.S. Exclusive Economic
Zone, which has and will continue to result in the utilization of more costly
double-hull tankers. A separate single hull phase-out schedule under the
International Maritime Organization's Regulation 13 is leading to the
utilization of more costly double-hull tankers in all other parts of the world.
Chevron has been actively involved in the Marine Preservation Association, a
non-profit organization that funds the Marine Spill Response Corporation
(MSRC). MSRC owns the largest inventory of oil spill response equipment in the
nation and operates five strategically located U.S. coastal regional centers.
In addition, the company is a member of many oil-spill response cooperatives in
areas in which it operates around the world.
Chevron expects increased environmental-related regulations in the countries
where it has operations. In the United States, the company expects the
enactment of additional federal and state regulations addressing the issue of
waste management and disposal and effluent emission limitations for offshore
oil and gas operations. While the costs of operating in an environmentally
responsible manner and complying with existing and anticipated environmental
legislation and regulations, including loss contingencies for prior operations,
are expected to be significant, the company anticipates that these costs will
not have a material impact on its consolidated financial position, its
liquidity, or its competitive position in the industry.
In 1997, the company's U.S. capitalized environmental expenditures were $177
million, representing approximately seven percent of the company's total
consolidated U.S. capital and exploratory expenditures. The company's U.S.
capitalized environmental expenditures were $157 million and $607 million in
1996 and 1995, respectively. These environmental expenditures include capital
outlays to retrofit existing facilities, as well as those associated with new
facilities. The expenditures are predominantly in the petroleum segment and
relate mostly to air and water quality projects and activities at the company's
refineries, oil and gas producing facilities and marketing facilities. For
1998, the company estimates that U.S. capital expenditures for environmental
control facilities will be approximately $193 million. The actual expenditures
for 1998 will depend on various conditions affecting the company's operations
and may differ significantly from the company's forecast. The company is
committed to protecting the environment wherever it operates, including strict
compliance with all governmental regulations. The future annual capital costs
of fulfilling this commitment are uncertain, but are expected to remain close
to the estimated 1998 levels.
Under provisions of the Superfund law, Chevron has been designated as a
potentially responsible party (PRP) for remediation of a portion of 282
hazardous waste sites. Since remediation costs will vary from site to site as
well as the company's share of responsibility for each site, the number of
sites in which the company has been identified as a PRP should not be used as a
relevant measure of total liability. At year-end 1997, the company's
environmental remediation reserve related to Superfund sites amounted to $43
million. Forecasted expenditures for the largest of these sites, located in
California, amounts to approximately 18 percent of the reserve.
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The company's 1997 environmental expenditures, remediation provisions and year-
end environmental reserves are discussed on pages FS-3 and FS-4 of this Annual
Report on Form 10-K. These pages also contain additional discussion of the
company's liabilities and exposure under the Superfund law and additional
discussion of the effects of the Clean Air Act Amendments of 1990.
Item 2. Properties
The location and character of the company's oil, natural gas and coal
properties and its refining, marketing, transportation and chemicals facilities
are described above under Item 1. Business and Properties. Information in
response to the Securities Exchange Act Industry Guide No. 2 ("Disclosure of
Oil and Gas Operations") is also contained in Item 1 and in Tables I through VI
on pages FS-32 to FS-37 of this Annual Report on Form 10-K. Note 13,
"Properties, Plant and Equipment," to the company's financial statements
contained on page FS-25 of this Annual Report on Form 10-K presents information
on the company's gross and net properties, plant and equipment, and related
additions and depreciation expense, by geographic area and industry segment for
1997, 1996 and 1995.
Item 3. Legal Proceedings
A. Cities Service Co. v. The Gulf Oil Corporation
Oklahoma State District Court for the District of Tulsa.
This is an action by Cities Service Company (now OXY USA Inc. as successor in
interest) against Gulf Oil Corporation (now Chevron U.S.A. Inc.) and GOC
Acquisition Corporation ("Gulf") alleging breach of contract, malicious breach
of contract, and fraud arising out of a terminated merger agreement. The
complaint was originally filed in August 1982 in Oklahoma State Court. Trial
commenced April 15, 1996.
On July 18, 1996, the jury returned a verdict for Gulf on Cities' fraud and
malicious breach of contract claims. On Cities' breach of contract claim, the
court directed verdicts that (1) Gulf had breached the contract, (2) Cities was
entitled to recover certain attorneys' fees related to the Gulf/Cities merger,
and (3) Cities was entitled to recover the cost of a settlement with and
repurchase of the stock from Mesa Petroleum Corporation if the jury found that
the settlement and repurchase were done in reliance on the merger agreement
with Gulf. In its verdict, the jury found against Gulf on the reliance issue.
Accordingly, on July 19, 1996, the court entered a judgment of $742,206,906
against Gulf, which included $512,585,506 in prejudgment interest awarded by
the court, which interest continues to accrue at 9.55 percent per year. No
motions for relief from the judgment were filed in the trial court. On July 31,
1996, the court approved Gulf's supersedeas bond, thus staying enforcement of
the judgment during pendency of Gulf's appeal.
On August 14, 1996, Gulf appealed from the judgment. On December 31, 1996, the
Oklahoma Supreme Court granted the parties' motion to retain the appeal for
decision, rather than having it transferred to the Oklahoma Court of Appeals.
Gulf filed its opening brief on March 12, 1997; Cities filed its answering
brief on June 23, 1997 and Gulf filed its reply brief on August 4, 1997.
B. Rangely Field Spills.
In 1997 the United States Environmental Protection Agency ("EPA") and the
Department of Justice indicated an intent to bring a civil action against the
company seeking penalties under the Clean Water Act with respect to spills that
have occurred at the company's operations at the Rangely Field, Colorado. The
company intends to dispute that such operations have in fact resulted in
liability under the Clean Water Act, as asserted by EPA.
C. Richmond Refinery Multimedia Inspection.
In 1993, EPA conducted a multimedia inspection of the Chevron Products Company
Richmond, California Refinery, which focused on compliance related to various
areas, including the Clean Water Act, the Clean Air Act, the Resource
Conservation and Recovery Act and the Comprehensive Environmental Response
Compensation and Liability Act. While certain aspects of the multimedia
investigation have been closed, EPA has referred potential Clean Water Act
violations of the refinery's NPDES permit to the Department of Justice for
civil litigation.
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The violations alleged involve 11 excursions of the NPDES permit's toxicity
limit and numerous alleged violations of the by-pass prohibition contained in
the permit. The company has strenuously contested the allegations relating to
violations of the by-pass prohibitions, but does not contest the toxicity
excursion allegations, which occurred over a five-year period. No litigation
has been instituted thus far, and settlement discussions are taking place.
Other previously reported legal proceedings have been settled or the issues
resolved so as not to merit further reporting.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of 1997 to a vote of security
holders through the solicitation of proxies or otherwise.
Executive Officers of the Registrant at March 1, 1998
Name and Age Executive Office Held Major Area of
Responsibility
- ------------------- -------------------------------- -----------------
K. T. Derr 61 Chairman of the Board since 1989 Chief Executive
Officer
Director since 1981
Executive Committee Member
since 1986
J. N. Sullivan 60 Vice-Chairman of the Board Worldwide
since 1989 Refining, Marketing
Director since 1988 and Transportation
Executive Committee Member Activities,
since 1986 Chemicals, Real
Estate, Environmental,
Human Resources, Coal,
Administrative
Services, Aircraft
Services
H. D. Hinman 57 Vice-President and General Law
Counsel since 1993
Executive Committee Member
since 1993
M. R. Klitten 53 Vice-President and Chief Finance
Financial Officer since 1989
Executive Committee Member
since 1989
R. H. Matzke 61 Vice-President since 1990 Overseas Exploration
Director since 1997 and Production
President of Chevron Overseas
Petroleum Inc. since 1989
Executive Committee Member
since 1993
D. J. O'Reilly 51 Vice-President since 1991 U.S. Refining,
President of Chevron Products Marketing,
Company since 1994 Logistics and Trading
Executive Committee Member
since 1994
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J. E. Peppercorn 60 Vice-President since 1990 Chemicals
President of Chevron Chemical
Company since 1989
Executive Committee Member
since 1993
P.J. Robertson 51 Vice-President since 1994 North American
President of Chevron U.S.A. Exploration and
Production Company since 1997 Production, Natural
Executive Committee Member Gas Liquids
since 1997
The Executive Officers of the Corporation consist of the Chairman of the Board,
the Vice-Chairman of the Board, and such other officers of the Corporation who
are either Directors or members of the Executive Committee, or are chief
executive officers of principal business units. Except as noted below, all of
the Corporation's Executive Officers have held one or more of such positions
for more than five years.
H. D. Hinman - Partner, Law Firm of Pillsbury Madison & Sutro - 1973
- Vice-President and General Counsel, Chevron Corporation - 1993
D. J. O'Reilly - Vice-President for Strategic Planning and Quality, Chevron
Corporation - 1991
- Vice-President, Chevron Corporation and
President, Chevron U.S.A. Products Company - 1994
P.J. Robertson - President of Warren Petroleum Company - 1991
- Vice-President for Strategic Planning and Quality, Chevron
Corporation -1994
- Executive Vice-President of Chevron U.S.A. Production
Company - 1996
- Vice-President, Chevron Corporation and
President of Chevron U.S.A. Production Company - 1997
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information on Chevron's common stock market prices, dividends, principal
exchanges on which the stock is traded and number of stockholders of record is
contained in the Quarterly Results and Stock Market Data tabulations, on page
FS-31 of this Annual Report on Form 10-K.
Item 6. Selected Financial Data
The selected financial data for years 1993 through 1997 are presented on page
FS-38 of this Annual Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The index to Financial Statements, Supplementary Data and Management's
Discussion and Analysis of Financial Condition and Results of Operations is
presented on page FS-1 of this Annual Report on Form 10-K.
Item 8. Financial Statements and Supplementary Data
The index to Financial Statements, Supplementary Data and Management's
Discussion and Analysis of Financial Condition and Results of Operations is
presented on page FS-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information on Directors appearing under the heading "Nominees For
Directors" in the Notice of Annual Meeting of Stockholders and Proxy Statement,
to be filed pursuant to Rule 14a-6(b) under the Securities Exchange Act of
1934, as amended, in connection with the Company's 1998 Annual Meeting of
Stockholders, is incorporated herein by reference in this Annual Report on Form
10-K. See Executive Officers of the Registrant on pages 31 and 32 of this
Annual Report on Form 10-K for information about executive officers of the
company.
The information contained under the heading "Compliance with Section 16 of the
Exchange Act" in the Notice of Annual Meeting of Stockholders and Proxy
Statement to be filed pursuant to Rule 14a-6(b) under the Securities Exchange
Act of 1934, as amended, in connection with the Company's 1998 Annual Meeting
of Stockholders, is incorporated herein by reference in this Annual Report on
Form 10-K. Chevron believes all filing requirements were complied with during
1997.
Item 11. Executive Compensation
The information appearing under the heading "Executive Compensation," including
the subheadings "Management Compensation Committee Report on Executive
Compensation," "Summary Compensation Table," "Option Grants in Last Fiscal
Year," "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option Value," "Long-Term Incentive Plan-1997 Performance Units Awards Table,"
"Pension Plan Table" and "Performance Graph," in the Notice of Annual Meeting
of Stockholders and Proxy Statement, to be filed pursuant to Rule 14a-6(b)
under the Securities Exchange Act of 1934, as amended, in connection with the
Company's 1998 Annual Meeting of Stockholders, is incorporated herein by
reference in this Annual Report on Form 10-K.
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Item 12. Security Ownership of Certain Beneficial Owners and Management
The information appearing under the heading "Stock Ownership of Directors and
Executive Officers" in the Notice of Annual Meeting of Stockholders and Proxy
Statement, to be filed pursuant to Rule 14a-6(b) under the Securities Exchange
Act of 1934, as amended, in connection with the Company's 1998 Annual Meeting
of Stockholders, is incorporated herein by reference in this Annual Report on
Form 10-K.
Item 13. Certain Relationships and Related Transactions
There were no relationships or related transactions requiring disclosure under
Item 404 of Regulation S-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements: Page (s)
--------
Report of Independent Accountants FS-14
Consolidated Statement of Income
for the three years ended December 31, 1997 FS-14
Consolidated Balance Sheet at December 31,
1997 and 1996 FS-15
Consolidated Statement of Cash Flows
for the three years ended December 31, 1997 FS-16
Consolidated Statement of Stockholders' Equity
for the three years ended December 31, 1997 FS-17
Notes to Consolidated Financial Statements FS-18 to FS-31
(2) Financial Statement Schedules:
Caltex Group of Companies Combined
Financial Statements C-1 to C-24
The Combined Financial Statements of the Caltex Group of Companies are
filed as part of this report. All schedules are omitted because they
are not applicable or the required information is included in the
combined financial statements or notes thereto.
(3) Exhibits:
The Exhibit Index on pages 37 and 38 of this Annual Report on Form 10-K
lists the exhibits that are filed as part of this report.
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(b) Reports on Form 8-K:
(1) A Current Report on Form 8-K, dated December 22, 1997, was filed
by the company on December 22, 1997. In this report Chevron
included a press release issued by Caltex Petroleum Corporation, a
50 percent owned affiliate, on December 19, 1997, announcing that it
elected to change the functional currency for its Korean and
Japanese operations to the U.S. dollar, effective October 1, 1997.
(2) A Current Report on Form 8-K, dated January 29, 1998, was filed by
the company on January 29, 1998. In this report Chevron announced its
preliminary, unaudited earnings for the year ended December 31, 1997.
(3) A Current Report on Form 8-K, dated February 3, 1998, was filed by
the company on February 3, 1998. In this report Chevron announced its
revised, preliminary, unaudited earnings for the year ended December
31, 1997.
-35-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 25th day of March
1998.
Chevron Corporation
By KENNETH T. DERR*
-----------------------
Kenneth T. Derr,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 25th day of March 1998.
Principal Executive Officers (And Directors) Directors
KENNETH T. DERR* SAMUEL H. ARMACOST*
- --------------------- -------------------
Kenneth T. Derr, Chairman of the Board Samuel H. Armacost
JAMES N. SULLIVAN* SAM GINN *
- --------------------- ----------
James N. Sullivan, Vice-Chairman of the Board Sam Ginn
CARLA A. HILLS *
----------------
Carla A. Hills
J. BENNETT JOHNSTON*
--------------------
J. Bennett Johnston
RICHARD H. MATZKE*
------------------
Principal Financial Officer Richard H. Matzke
MARTIN R. KLITTEN* CHARLES M. PIGOTT*
- --------------------- ------------------
Martin R. Klitten, Vice-President Charles M. Pigott
and Chief Financial Officer
CONDOLEEZZA RICE*
-----------------
Principal Accounting Officer Condoleezza Rice
STEPHEN J. CROWE* FRANK A. SHRONTZ*
- -------------------- -----------------
Stephen J. Crowe, Comptroller Frank A. Shrontz
CHANG-LIN TIEN *
----------------
Chang-Lin Tien
GEORGE H. WEYERHAEUSER*
-----------------------
George H. Weyerhaeuser
*By: /s/ LYDIA I. BEEBE JOHN A. YOUNG*
- --------------------------- --------------
Lydia I. Beebe, Attorney-in-Fact John A. Young
-36-
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- ----------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of Chevron Corporation,
dated August 2, 1994, filed as Exhibit 3.1 to Chevron Corporation's
Quarterly Report on Form 10-Q for the quarter and six month period
ended June 30, 1994, and incorporated herein by reference.
3.2 By-Laws of Chevron Corporation, as amended July 27, 1994, including
provisions giving attorneys-in-fact authority to sign on behalf of
officers of the corporation, filed as Exhibit 3.2 to Chevron
Corporation's Quarterly Report on Form 10-Q for the quarter and six
month period ended June 30, 1994, and incorporated herein by
reference.
4.1 Rights Agreement dated as of November 22, 1988, between Chevron
Corporation and Manufacturers Hanover Trust Company of California, as
Rights Agent, filed as Exhibit 4.0 to Chevron Corporation's Current
Report on Form 8-K dated November 22, 1988, and incorporated herein by
reference.
4.2 Amendment No. 1 dated as of December 7, 1989, to Rights Agreement
dated as of November 22, 1988, between Chevron Corporation and
Manufacturers Hanover Trust Company of California, as Rights Agent,
filed as Exhibit 4.0 to Chevron Corporation's Current Report on Form
8-K dated December 7, 1989, and incorporated herein by reference.
Pursuant to the Instructions to Exhibits, certain instruments defining
the rights of holders of long-term debt securities of the corporation
and its consolidated subsidiaries are not filed because the total
amount of securities authorized under any such instrument does not
exceed 10 percent of the total assets of the corporation and its
subsidiaries on a consolidated basis. A copy of such instrument will
be furnished to the Commission upon request.
10.1 Management Incentive Plan of Chevron Corporation, as amended and
restated effective October 30, 1996, filed as Appendix B to Chevron
Corporation's Notice of Annual Meeting of Stockholders and Proxy
Statement dated March 21, 1997, and incorporated herein by reference.
10.2 Chevron Corporation Excess Benefit Plan, amended and restated as of
July 1, 1996, filed as Exhibit 10 to Chevron Corporation's Report on
Form 10-Q for the quarterly period ended March 31, 1997, and
incorporated herein by reference.
10.3 Supplemental Pension Plan of Gulf Oil Corporation, amended as of June
30, 1986, filed as Exhibit 10.4 to Chevron Corporation's Annual Report
on Form 10-K for 1986 and incorporated herein by reference.
10.4 Chevron Restricted Stock Plan for Non-Employee Directors, as amended
and restated effective April 30, 1997, filed as Appendix A to Chevron
Corporation's Notice of Annual Meeting of Stockholders and Proxy
Statement dated March 21, 1997, and incorporated herein by reference.
10.5 Chevron Corporation Long-Term Incentive Plan, as amended and restated
effective October 30, 1996, filed as Appendix C to Chevron
Corporation's Notice of Annual Meeting of Stockholders and Proxy
Statement dated March 21, 1997, and incorporated herein by reference.
10.6 Chevron Corporation Salary Deferral Plan for Management Employees,
effective January 1, 1997, filed as Exhibit 10 to Chevron
Corporation's Report on Form 10-Q for the quarterly period ended June
30, 1997, and incorporated herein by reference.
-37-
<PAGE>
EXHIBIT INDEX
(continued)
Exhibit
No. Description
- ------- ---------------------------------------------------------------------
12.1 Computation of Ratio of Earnings to Fixed Charges (page E-1).
21.1 Subsidiaries of Chevron Corporation (page E-2).
23.1 Consent of Price Waterhouse LLP (page E-3).
23.2 Consent of KPMG Peat Marwick LLP (page E-4).
24.1 Powers of Attorney for directors and certain officers of Chevron
to Corporation, authorizing the signing
24.15 of the Annual Report on Form 10-K on their behalf.
27.1 Financial Data Schedule
99.1 Definitions of Selected Financial Terms (page E-5).
Copies of above exhibits not contained herein are available, at a fee of $2 per
document, to any security holder upon written request to the Secretary's
Department, Chevron Corporation, 575 Market Street, San Francisco, California
94105.
-38-
<PAGE>
INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page(s)
Management's Discussion and Analysis FS-2 to FS-13
Report of Management FS-13
Consolidated Income Statement FS-14
Report of Independent Accountants FS-14
Consolidated Balance Sheet FS-15
Consolidated Statement of Cash Flows FS-16
Consolidated Statement of Stockholders' Equity FS-17
Notes to Consolidated Financial Statements FS-18 to FS-31
Quarterly Results and Stock Market Data FS-31
Supplemental Information on Oil and Gas Producing Activities FS-32 to FS-37
Five-Year Financial Summary FS-38
FS-1
<PAGE>
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
<TABLE>
<CAPTION>
Millions of dollars,
except per-share amounts 1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Sales and
Other Operating Revenues $ 40,583 $ 42,782 $ 36,310
Net Income $ 3,256 $ 2,607 $ 930
Special Credits (Charges)
Included in Net Income $ 76 $ (44) $ (1,032)
Per Share:
Earnings - basic $ 4.97 $ 3.99 $ 1.43
- diluted $ 4.95 $ 3.98 $ 1.43
Dividends $ 2.28 $ 2.08 $ 1.925
Return On:
Average Capital Employed 15.0% 12.7% 5.3%
Average Stockholders' Equity 19.7% 17.4% 6.4%
</TABLE>
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 benefited $76 million from special items in 1997 and was
reduced by net special charges of $44 million in 1996 and $373 million in
1995.In addition, the adoption of a new accounting standard in 1995 reduced net
income $659 million. After excluding these items, operating 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 capital employed, excluding special 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 pressure 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 producing 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 currently at high levels.
Lower crude oil prices in 1998 may lead to lower revenues and earnings than
experienced in 1997, particularly in the company's exploration and production
(upstream) operations. However, further production increases are expected in
1998 from new developments in West Africa and offshore eastern Canada, where
the Hibernia oil field began production in November 1997, and from continued
expansion of production from the Tengiz Field in Kazakhstan. The company has
evaluated its capital spending programs under conservative price assumptions
and, at the present time, expects to fully fund its planned $6.3 billion 1998
capital and exploratory expenditure program. However, should this low price
environment become more severe and prolonged, the company has the ability to
modify its planned expenditures accordingly.
In the international refining, marketing and transportation (downstream)
segment, 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 currency costs of crude oil. In certain Asian countries,
refined products prices are subject to government-prescribed increases
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 projects 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 completed the sale of
10 percent of its 50 percent interest in the Tengizchevroil (TCO) joint venture
to LUKARCO, a joint venture between the Russian oil company LUKoil and Arco.
The
FS-2
<PAGE>
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 percent 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 in 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 April 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 adjacent to the
company's major areas of production, which are the company's first finds in
that country's deep water. Chevron 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, with 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 development
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, furthering 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.
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 Marietta, Ohio, plants.
Chevron sold its marketing interests in the United Kingdom, including its
retail network of 450 stations and its lubricants 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 refinery located near Milford Haven,
Wales, and will sell its other remaining assets, thereby completing the
company's withdrawal 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 computer systems and applications
will function properly beyond 1999. Many of the company's information systems
and software 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 suppliers, 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 certainty 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 reason 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 company'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 worldwide environmental spending in 1997 was
about $893 mil-
FS-3
<PAGE>
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
pollutants from ongoing operations. The total amount also includes spending
charged against reserves established in prior years for environmental cleanup
programs, but not noncash provisions 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 previously contaminated sites.
In addition to the costs for environmental protection associated 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 regulations 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 remedial 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 previously recorded
reserves were adequate.
During 1997, the company recorded $57 million of before-tax provisions
($35 million after tax) for environmental remediation efforts, including
Superfund sites. Actual expenditures charged against these provisions and other
previously established reserves amounted to $205 million in 1997. At year-end
1997, the company's environmental remediation reserves were $987 million,
including $43 million related to Superfund sites.
Under provisions of the Superfund law, the Environmental Protection Agency
(EPA)has designated Chevron a potentially 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 determine a range of reasonably possible exposures.
The Superfund law provides for joint and several liability. Any future actions
by the EPA and other regulatory agencies to require Chevron to assume other
responsible parties' costs at designated hazardous waste sites are not
expected to have a material effect on the company's consolidated financial
position or liquidity.
It is likely the company will continue to incur additional charges beyond those
reserved for environmental remediation relating to past operations.
These future costs are 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 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 position or liquidity. Also, the
company does not believe its obligations to make such expenditures have had or
will have any significant impact on the company's competitive position relative
to other domestic or international petroleum or chemicals concerns. Although
environmental compliance costs are substantial, the company has no reason to
believe they vary significantly 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 regulations, 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 requirements. Over the five-year period 1991-
1995, Chevron spent about $1.8 billion on capital projects to comply with air
quality 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, abandonment 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 billion and is included in accumulated
depreciation, depletion and amortization in the company's Consolidated Balance
Sheet.
For the company's other ongoing operating assets, such as refineries, no
provisions are made for exit or cleanup costs that may be required when such
assets reach the end of their useful lives unless a decision to sell or
otherwise abandon the facility has been made.
OTHER CONTINGENCIES. The company is a defendant in a lawsuit that Oxy U.S.A.
brought in its capacity as successor in interest to Cities Service Company. The
lawsuit claims damages resulting from the allegedly improper termination of a
tender offer to purchase Cities' stock in 1982 made by Gulf
FS-4
<PAGE>
Oil Corporation acquired, by Chevron in 1984. A trial with respect to the
claims ended in July 1996 with a judgment against the company of $742
million, including interest that continues to accrue at a rate of 9.55 percent
per year while the appeal is pending. The company has filed an appeal with the
Oklahoma Supreme Court and posted a bond for 1.5 times the amount of the
judgment. Although 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.
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
California during certain months of the year. The first two phases of the trial
were concluded in October and November 1997, with the jury upholding the
validity of the patent and assessing 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 currently under
submission. While the ultimate outcome of this matter cannot be determined with
certainty, the company believes Unocal's patent is invalid and any unfavorable
rulings should be reversed upon appeal. However, should the jury's findings and
Unocal's position ultimately be upheld, the company's exposure with respect
to future reformulated gasoline sales would depend on the availability of
alternate formulations 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 Service (IRS) for $292 million in excise taxes, $140 million
in penalties and $1.6 billion 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.
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 severance tax payments based on posted prices. These
lawsuits and other contingent liabilities are discussed in the notes to
the accompanying consolidated financial statements. The company 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 integrated petroleum activities. All these
instruments are commonly 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 instruments is intended to
hedge a physical transaction; hence gains and losses arising from these
instruments offset, and are recognized concurrently with, gains and losses from
the underlying 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 various 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 calculation method is also
required. The adoption of SFAS No. 129 required no additional disclosures since
the company previously 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 Postretirement Benefits" that revised disclosure requirements
for pension and other postretirement benefits. It does not affect the
measurement of the expense of the company's pension and other postretirement
benefits.
FS-5
<PAGE>
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 company'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.
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------
Millions of dollars 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Asset Write-Offs and Revaluations $ (86) $ (337) $ (304)
Initial Implementation of SFAS No. 121 - - (659)
Asset Dispositions 183 391 7
Prior-Year Tax Adjustments 152 52 (22)
Environmental Remediation Provisions (35) (54) (90)
Restructurings and Reorganizations (60) (14) (50)
LIFO Inventory Gains (Losses) 5 (4) 2
Other (83) (78) 84
- -----------------------------------------------------------------------------
Total Special Items $ 76 $ (44) $(1,032)
- -----------------------------------------------------------------------------
</TABLE>
Asset write-offs and revaluations in 1997 included $68 million of impairment
write-downs of U.S. oil and gas properties, $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 provision 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 additional amounts for environmental
remediation, and $40 million for other asset write-offs. In 1995, asset write-
offs of $304 million were recognized in connection with the company'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 Long-Lived Assets to be Disposed Of." The adoption of this standard
required noncash charges amounting to $659 million 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 international oil and gas properties, including the
sale of 10 percent 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 dispositions 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, Indonesia
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 re-evaluation 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 estimated 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 programs. Charges in 1995 were $50 million,
including $12 million related to restructurings at Chevron's Caltex affiliate,
and consisted primarily of employee severance provisions in connection 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-In, 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 million barrels at year-end 1996
and 93 million barrels at year-end 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 company's employee performance stock option program.
Earnings were reduced a net $78 million in 1996, consisting primarily of
litigation matters that were offset partially by a $12 million refund of
federal lease costs. In 1995, other special items benefited earnings a net
$84 million, when a gain of $86 mil-
FS-6
<PAGE>
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 partially 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, which
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 and lower operating expenses.
International refining, marketing and transportation earnings 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 operating
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 production 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. operations 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. These factors were mitigated partially by increased refined
products sales volumes and higher natural gas prices. Revenues improved in 1996
compared with 1995 primarily because of higher prices and sales volumes for
crude oil and natural gas and higher prices for refined products, partially
offset by lower refined products sales volumes and chemicals prices. Purchased
crude oil and products costs were 11 percent lower in 1997 compared with 1996
because of lower crude oil, refined products and chemicals feedstock prices.
Sharply higher crude oil, natural gas and refined products prices accounted
for the 27 percent increase in purchased crude oil and products costs in
1996 compared with 1995.
Other income amounted to $679 million in 1997, $344 million in 1996 and $219
million in 1995 and in all years included net gains resulting from the
disposition of assets, which caused other income to fluctuate from year to
year.
Operating, selling and administrative expenses, excluding the effects of
special items, declined 6 percent in 1997 to $6,549 million from $6,947 million
in 1996. The reduction in operational expenses in 1997 was due to lower fuel,
transportation and marketing costs, partially offset by the cost of the start-
up and expansion of chemicals facilities. Operational expenses increased
slightly in 1996 compared with 1995, largely because higher fuel and
transportation costs and accruals for performance-based employee compensation
costs more than offset continued reductions in other expenses. Operating
expenses in 1995 were affected adversely by scheduled and unscheduled refinery
shutdowns and maintenance.
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------
Millions of dollars 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Reported Operating Expenses $ 5,280 $ 6,007 $ 5,974
Reported Selling, General and
Administrative Expenses 1,533 1,377 1,384
- ------------------------------------------------------------------------------
Total Operational Expenses 6,813 7,384 7,358
Eliminate Special Charges
Before Tax (264) (437) (514)
- ------------------------------------------------------------------------------
Adjusted Ongoing
Operational Expenses $ 6,549 $ 6,947 $ 6,844
- ------------------------------------------------------------------------------
</TABLE>
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 properties.
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 million 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 countries and a favorable
swing in prior-year tax adjustments. These effects were offset partially by a
decrease in the proportion of equity earnings recorded on an after-tax basis.
Foreign currency effects increased net income $246 million in 1997 and
decreased net income $26 million and $15 million in 1996 and 1995,
respectively, and include the company's share of affiliates' foreign currency
effects. The foreign currency gains for 1997 primarily occurred in Australia
and in the Asian operating areas of Caltex, where the 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 local currency losses
from U.S. dollar-
FS-7
<PAGE>
denominated liabilities. The loss on foreign currency effects
in 1996 resulted from fluctuations in the value of the United Kingdom and
Australian currencies relative to the U.S. dollar, and in 1995, the loss was
related to fluctuations in the value of the Canadian and Nigerian currencies.
Effective October 1, 1997, Caltex management changed the functional currency
for its Korean and Japanese equity affiliates from their local currencies to
the U.S. dollar, based on significantly changed economic facts and
circumstances. Previously, the Korean petroleum industry operated in a
regulated environment with domestic prices determined by a specific Korean won-
based return on equity. During 1997, the pricing of petroleum products was
moving toward a market-based return. This trend was accelerated in the
fourth quarter 1997 by the severe devaluation of the won, which resulted in
higher local currency costs for U.S. dollar-based crude oil and raw materials.
In addition, during this period, Caltex's Korean affiliate significantly
increased its U.S. dollar-based export sales, moving from a net importer of
refined products to a net exporter in 1997.
Japan also has experienced evolving deregulation in its petroleum industry.
While not as material as the Korean operations, 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 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 currency 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
functional 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. 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.
<TABLE>
<CAPTION>
RESULTS BY MAJOR OPERATING AREAS
Millions of dollars 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Exploration and Production
United States $ 1,001 $ 1,087 $ 72
International 1,252 1,211 690
- -----------------------------------------------------------------------------
Total Exploration and Production 2,253 2,298 762
Refining, Marketing and Transportation
United States 601 193 (104)
International 298 226 345
- -----------------------------------------------------------------------------
Total Refining, Marketing
and Transportation 899 419 241
- -----------------------------------------------------------------------------
Total Petroleum 3,152 2,717 1,003
Chemicals 228 200 484
Coal and Other Minerals 48 46 (18)
Corporate and Other (172) (356) (539)
- -----------------------------------------------------------------------------
Net Income $ 3,256 $ 2,607 $ 930
- -----------------------------------------------------------------------------
SPECIAL ITEMS BY MAJOR OPERATING AREAS
Millions of dollars 1997 1996 1995
- -----------------------------------------------------------------------------
Exploration and Production
United States $ 29 $ (22) $ (480)
International 55 69 (121)
- ------------------------------------------------------------------------------
Total Exploration and Production 84 47 (601)
Refining, Marketing and Transportation
United States (61) (97) (179)
International (69) 59 62
- -----------------------------------------------------------------------------
Total Refining, Marketing
and Transportation (130) (38) (117)
- ------------------------------------------------------------------------------
Total Petroleum (46) 9 (718)
Chemicals 4 (28) (40)
Coal and Other Minerals (2) (2) (65)
Corporate and Other 120 (23) (209)
- ------------------------------------------------------------------------------
Total Special Items
Included in Net Income $ 76 $ (44) $ (1,032)
- ------------------------------------------------------------------------------
</TABLE>
U.S. exploration and production earnings, excluding special items, declined
12 percent from record earnings in 1996 but were up 76 percent from 1995
levels. The earnings decline in 1997, relative to 1996, was a result of lower
crude oil prices, lower natural gas production and higher exploration expenses.
Earnings 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 barrels 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 billion
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 production volumes.
The company's average crude oil realizations of $17.68 per barrel were $1.12
lower than the $18.80 averaged for 1996 but $2.34 more than the $15.34 per
barrel averaged in 1995. Realizations remained steady at $15.00 to $16.00 per
barrel during 1995. In 1996, Chevron's crude oil realizations 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 until December 1997, when they dropped to $15.66 per barrel,
and have continued to decline in early 1998.
FS-8
<PAGE>
<TABLE>
<CAPTION>
U.S. Exploration and Production
Millions of dollars 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings, Excluding Special Items $ 972 $ 1,109 $ 552
- -----------------------------------------------------------------------------
Asset Write-Offs and Revaluations (68) (19) (7)
Initial Implementation of SFAS No. 121 - - (490)
Asset Dispositions 190 17 (2)
Environmental Remediation Provisions (6) (10) (8)
Restructurings and Reorganizations (60) 1 -
Other (27) (11) 27
- -----------------------------------------------------------------------------
Total Special Items 29 (22) (480)
- -----------------------------------------------------------------------------
Reported Earnings $ 1,001 $ 1,087 $ 72
- -----------------------------------------------------------------------------
</TABLE>
The company's average natural gas prices were $2.42 per thousand cubic feet
in 1997, up 14 cents from $2.28 in 1996 and up 91 cents from the 1995 average
of $1.51. Steady demand and low inventories caused by tight supplies 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 compared
with 1996, primarily as a result of higher impairment write-offs, but declined
44 percent from 1995 levels when the implementation of SFAS No. 121 first
required significant asset write-offs.
International exploration and production had record earnings for the second
consecutive year. The strong earnings in 1997 primarily reflected higher crude
oil sales volumes, which more than offset the decline in crude prices. In
1996, higher crude oil and natural gas sales volumes and higher crude oil prices
accounted for the 41 percent increase in operating earnings compared with 1995.
<TABLE>
<CAPTION>
International Exploration and Production
Millions of dollars 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings, Excluding Special Items $ 1,197 $ 1,142 $ 811
- -----------------------------------------------------------------------------
Asset Write-Offs and Revaluations - (17) -
Initial Implementation of SFAS No. 121 - - (81)
Asset Dispositions 50 91 -
Prior-Year Tax Adjustments 10 - (22)
Restructurings and Reorganizations - (5) (10)
LIFO Inventory Losses - - (1)
Other (5) - (7)
- -----------------------------------------------------------------------------
Total Special Items 55 69 (121)
- -----------------------------------------------------------------------------
Reported Earnings $ 1,252 $ 1,211 $ 690
- -----------------------------------------------------------------------------
</TABLE>
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
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 offsetting these declines was initial
natural gas production in Nigeria, where the Escravos Natural Gas Project began
operation in 1997. Net natural gas production volumes in 1996 were up 3 percent
from 1995 levels.
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 $1.73 in 1996 and 1995, respectively.
<TABLE>
<CAPTION>
SELECTED OPERATING DATA
1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. EXPLORATION AND PRODUCTION
Net Crude Oil and Natural Gas
Liquids Production (MBPD) 343 341 350
Net Natural Gas
Production (MMCFPD) 1,849 1,875 1,868
Natural Gas Sales (MMCFPD) (1) 3,389 3,588 2,815
Natural Gas Liquids Sales (MBPD) (1) 132 187 213
Revenues from Net Production
Crude Oil ($/Bbl) $ 17.68 $ 18.80 $ 15.34
Natural Gas ($/MCF) $ 2.42 $ 2.28 $ 1.51
INTERNATIONAL
EXPLORATION AND PRODUCTION (1)
Net Crude Oil and Natural Gas
Liquids Production (MBPD) 731 702 651
Net Natural Gas
Production (MMCFPD) 576 584 565
Natural Gas Sales (MMCFPD) 1,141 778 564
Natural Gas Liquids Sales (MBPD) 43 36 47
Revenues from Liftings
Liquids ($/Bbl) $ 17.97 $ 19.48 $ 16.10
Natural Gas ($/MCF) $ 2.10 $ 1.86 $ 1.73
Other Produced Volumes (MBPD) (2) 82 79 -
U.S. REFINING AND MARKETING
Gasoline Sales (MBPD) 591 556 552
Other Refined Products Sales (MBPD) 602 566 565
Refinery Input (MBPD) 933 951 925
Average Refined Products
Sales Price ($/Bbl) $ 28.93 $ 29.94 $ 26.19
INTERNATIONAL REFINING AND MARKETING (1)
Refined Products Sales (MBPD) 886 944 969
Refinery Input (MBPD) 565 537 598
CHEMICALS SALES AND OTHER OPERATING REVENUES (3)
United States $ 3,045 $ 2,936 $ 3,332
International 588 605 621
- -----------------------------------------------------------------------------
Worldwide $ 3,633 $ 3,541 $ 3,953
- -----------------------------------------------------------------------------
<FN>
MBPD = Thousands of barrels per day; MMCFPD - Millions of cubic feet per day;
Bbl = Barrel; MCF = Thousandsof cubic feet.
(1) Includes equity in affiliates.
(2) Total field production under Boscan operating service agreement in
Venezuela beginning July 1, 1996.
(3) Millions of dollars. Includes sales to other Chevron companies.
</FN>
</TABLE>
FS-9
<PAGE>
Earnings included net foreign currency gains of $77 million for 1997 and losses
of $27 million in 1996. These earnings 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 Canadian and Nigerian currencies.
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 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
manufacturing cost of the California-mandated cleaner-burning gasolines. Market
conditions 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 million 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.
<TABLE>
<CAPTION>
U.S. Refining and Marketing
Millions of dollars 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings, Excluding Special Items $ 662 $ 290 $ 75
- -----------------------------------------------------------------------------
Asset Write-Offs and Revaluations - (48) (112)
Asset Dispositions (18) 4 -
Environmental Remediation Provisions (12) (29) (62)
Restructurings and Reorganizations - (1) (7)
LIFO Inventory Gains - 2 2
Other (31) (25) -
- -----------------------------------------------------------------------------
Total Special Items (61) (97) (179)
- -----------------------------------------------------------------------------
Reported Earnings (Loss) $ 601 $ 193 $ (104)
- -----------------------------------------------------------------------------
</TABLE>
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 attributable 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 Caltex's currency gains were
inventory valuation losses associated with the recent decline in crude oil
prices combined with higher provisions for the noncollectibility of receivables
in Asia, together totaling about $50 million. Chevron's share of Caltex
earnings in 1997 also included $5 million of favorable LIFO adjustments. Caltex
experienced foreign currency losses of $24 million in 1996 and gains of $26
million in 1995. Also in 1996, Caltex earnings benefited $2 million from
favorable adjustments to the carrying value of its petroleum inventories to
reflect market values and included special gains of $279 million related to the
sale of its interest in two Japanese refineries and $2 million of favorable
LIFO adjustments. Caltex earnings in 1995 benefited $13 million in inventory
adjustments and included net special gains of $81 million, primarily related to
a land sale by a Caltex affiliate in Japan.
Results in all three years reflect generally weak industry conditions that have
held down product prices and sales margins 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 day in 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 currency effects resulted
in gains of $169 million and $19 million in 1997 and 1995, respectively, and
losses of $17 million in 1996.
<TABLE>
<CAPTION>
International Refining and Marketing
Millions of dollars 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings, Excluding Special Items $ 367 $ 167 $ 283
- -----------------------------------------------------------------------------
Asset Write-Offs and Revaluations - (200) (1)
Asset Dispositions (72) 279 -
Environmental Remediation Provisions - (15) -
Restructurings and Reorganizations - 1 (17)
LIFO Inventory Gains (Losses) 6 (6) -
Other (3) - 80
- -----------------------------------------------------------------------------
Total Special Items (69) 59 62
- -----------------------------------------------------------------------------
Reported Earnings $ 298 $ 226 $ 345
- -----------------------------------------------------------------------------
</TABLE>
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-
FS-10
<PAGE>
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.
<TABLE>
<CAPTION>
Chemicals
Millions of dollars 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings, Excluding Special Items $ 224 $ 228 $ 524
- -----------------------------------------------------------------------------
Asset Write-Offs and Revaluations (10) (12) (14)
Initial Implementation of SFAS No. 121 - - (13)
Asset Dispositions 33 - 9
Environmental Remediation Provisions (9) - (20)
Restructurings and Reorganizations - - (3)
LIFO Inventory (Losses) Gains (1) - 1
Other (9) (16) -
- -----------------------------------------------------------------------------
Total Special Items 4 (28) (40)
- -----------------------------------------------------------------------------
Reported Earnings $ 228 $ 200 $ 484
- -----------------------------------------------------------------------------
</TABLE>
Coal and other minerals earnings, excluding special items, were about flat
at $50 million, compared with $48 million 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 low-cost hydroelectric power in
the western United States, resulting 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 million tons in 1995. The
increase in sales is primarily due to increased demand and low customer
inventories.
<TABLE>
<CAPTION>
Coal and Other Minerals
Millions of dollars 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings, Excluding Special Items $ 50 $ 48 $ 47
- -----------------------------------------------------------------------------
Initial Implementation of SFAS No. 121 - - (63)
Restructurings and Reorganizations - (2) (2)
Other (2) - -
- -----------------------------------------------------------------------------
Total Special Items (2) (2) (65)
- -----------------------------------------------------------------------------
Reported Earnings $ 48 $ 46 $ (18)
- -----------------------------------------------------------------------------
</TABLE>
Corporate and other activities include interest expense, interest income on
cash and marketable securities, real estate and insurance operations, and
corporate center costs. Corporate 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.
<TABLE>
<CAPTION>
Corporate and Other
Millions of dollars 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Charges, Excluding Special Items $ (292) $ (333) $ (330)
- -----------------------------------------------------------------------------
Asset Write-Offs and Revaluations (8) (41) (170)
Initial Implementation of SFAS No. 121 - - (12)
Environmental Remediation Provisions (8) - -
Prior-Year Tax Adjustments 142 52 -
Restructurings and Reorganizations - (8) (11)
Other (6) (26) (16)
- ------------------------------------------------------------------------------
Total Special Items 120 (23) (209)
- ------------------------------------------------------------------------------
Reported Charges $ (172) $ (356) $ (539)
- ------------------------------------------------------------------------------
</TABLE>
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 operations declined from 1996 due to lower distributions
from equity affiliates and increased working capital and other operating
requirements. Distributions from the company's Caltex affiliate were high in
1996 because of its sale of refinery interests. In 1997, cash from operations
and proceeds from asset sales were sufficient to fund the company's capital
expenditures, dividend payments to stockholders and stock repurchases 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 short-term debt, consisting primarily of commercial paper and
current portion of long-term debt, totaled $4.362 billion at December 31,
1997. Of the total short-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 company has
the intent and the ability, as evidenced by committed credit arrangements, to
refinance them on along-term basis. The company's practice has been to
continually refinance its commercial paper, maintaining levels it believes to
be appropriate.
Significant debt transactions in 1997 included the scheduled first quarter
maturity of $138 million of Swiss franc-denominated 4.625 percent debt and the
third quarter early redemption of $142 million of 9.75 percent debentures
originally due in 2017. The Employee Stock Ownership Plan also retired in
January 1997, as scheduled, $50 million of 7.28 percent debt related to the
Employee Stock Ownership Plan.
On December 31, 1997, Chevron had $4.050 billion in committed credit facilities
with various major banks. These 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-
FS-11
<PAGE>
end 1997. In addition, Chevron and one of its subsidiaries each have
existing "shelf" registrations on file with the Securities 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 commercial
paper is rated R-1 (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 company's opinion, affect its liquidity. Current assets in all years
include inventories 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 year-end 1997, approximately $600 million of
commercial paper, after excluding $2.725 billion reclassified to long-term
debt, is classified as a current liability although it is likely to remain
outstanding indefinitely.
<TABLE>
<CAPTION>
Financial Ratios
1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current Ratio 1.0 0.9 0.8
Interest Coverage Ratio 14.3 10.9 4.1
Total Debt/Total Debt Plus Equity 25.8% 30.0% 36.7%
</TABLE>
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 significantly 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 capital and exploratory expenditures for 1997 totaled $5.541 billion,
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.
Expenditures for exploration and production accounted for 64 percent 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
exploration and production expenditures in 1997, down from 61 percent in 1996
and 68 percent in 1995, reflecting the company's efforts to slow the decline
in its U.S. production while continuing its focus on growth of international
exploration and production 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. Several long-term development projects
in the Gulf of Mexico account for a major portion of the projected $1.5 billion
to be spent in U.S. exploration and production.
Refining, marketing and transportation expenditures are estimated at about
$1.1billion, 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 company's Caltex affiliate is upgrading its retail
marketing system. The company plans to invest $830 million in the worldwide
chemicals business.
FS-12
<PAGE>
<TABLE>
<CAPTION>
Capital and Exploratory Expenditures
1997 1996 1995
-------------------------- -------------------------- --------------------------
Inter- Inter- Inter-
Millions of dollars U.S. national Total U.S. national Total U.S. national Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exploration and Production $ 1,659 $ 1,903 $ 3,562 $ 1,168 $ 1,854 $ 3,022 $ 879 $ 1,835 $ 2,714
Refining, Marketing
and Transportation 520 602 1,122 429 781 1,210 892 839 1,731
Chemicals 470 194 664 377 120 497 172 32 204
Coal and Other Minerals 65 53 118 31 10 41 40 1 41
All Other 75 - 75 70 - 70 110 - 110
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 2,789 $ 2,752 $ 5,541 $ 2,075 $ 2,765 $ 4,840 $ 2,093 $ 2,707 $ 4,800
- -----------------------------------------------------------------------------------------------------------------------------------
Total, Excluding
Equity Affiliates $ 2,487 $ 1,880 $ 4,367 $ 2,037 $ 1,820 $ 3,857 $ 2,080 $ 1,808 $ 3,888
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FORWARD-LOOKING 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 statements.
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 aromatics, 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 liability resulting
from pending or future litigation. In addition, such statements could be
affected by general domestic and international 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
financial 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 provide reasonable assurance that
assets are safeguarded, transactions are properly recorded and executed in
accordance with management's authorization, and the books and records
accurately reflect the disposition of assets. The system of internal controls
includes appropriate 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 internal controls, its financial statements and the nature, extent
and results of the audit effort. Both the internal auditors and the independent
accountants have free and direct access to the Audit Committee without the
presence of management.
/s/Kenneth T. Derr /s/Martin R. Klitten /s/Stephen J. Crowe
Chairman of the Board Vice President Comptroller
and Chief Executive Officer and Chief Financial
Officer
February 20, 1998
FS-13
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
Year ended December 31
-------------------------------------------------------
Millions of dollars, except per-share amounts 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Sales and other operating revenues (1) $ 40,583 $ 42,782 $ 36,310
Income from equity affiliates 688 767 553
Other income 679 344 219
- ------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 41,950 43,893 37,082
- ------------------------------------------------------------------------------------------------------------------
COSTS AND OTHER DEDUCTIONS
Purchased crude oil and products 20,223 22,826 18,033
Operating expenses 5,280 6,007 5,974
Selling, general and administrative expenses 1,533 1,377 1,384
Exploration expenses 493 455 372
Depreciation, depletion and amortization 2,300 2,216 3,381
Taxes other than on income (1) 6,307 5,908 5,748
Interest and debt expense 312 364 401
- ------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND OTHER DEDUCTIONS 36,448 39,153 35,293
- ------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 5,502 4,740 1,789
Income Tax Expense 2,246 2,133 859
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,256 $ 2,607 $ 930
- ------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE OF COMMON STOCK - BASIC $4.97 $3.99 $1.43
- DILUTED $4.95 $3.98 $1.43
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 654,990,921 652,769,250 652,083,804
- ------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes consumer excise taxes. $5,574 $5,202 $4,988
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
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 Standards No. 121.
/s/ Price Waterhouse LLP
San Francisco, California February 20, 1998
FS-14
<PAGE>
<TABLE>
<CAPTION
CONSOLIDATED BALANCE SHEET
At December 31
-------------------------
Millions of dollars 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,015 $ 892
Marketable securities 655 745
Accounts and notes receivable
(less allowance: 1997 - $32; 1996 - $71) 3,374 4,035
Inventories:
Crude oil and petroleum products 539 669
Chemicals 547 507
Materials, supplies and other 292 255
-------------------------
1,378 1,431
Prepaid expenses and other current assets 584 839
- ------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 7,006 7,942
Long-term receivables 471 261
Investments and advances 4,496 4,463
Properties, plant and equipment, at cost 49,233 46,936
Less: accumulated depreciation,
depletion and amortization 26,562 25,440
-------------------------
22,671 21,496
Deferred charges and other assets 829 692
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 35,473 $ 34,854
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt $ 1,637 $ 2,706
Accounts payable 2,735 3,502
Accrued liabilities 1,450 1,420
Federal and other taxes on income 732 745
Other taxes payable 392 534
- ------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 6,946 8,907
Long-term debt 4,139 3,650
Capital lease obligations 292 338
Deferred credits and
other noncurrent obligations 1,745 1,858
Noncurrent deferred income taxes 3,215 2,851
Reserves for employee benefit plans 1,664 1,627
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 18,001 19,231
- ------------------------------------------------------------------------------
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) 1,069 1,069
Capital in excess of par value 2,022 1,874
Deferred compensation (750) (800)
Currency translation adjustment and other (77) 96
Retained earnings 17,185 15,408
Treasury stock, at cost (1997 - 56,555,871 shares;
1996 - 59,401,015 shares) (1,977) (2,024)
- ------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 17,472 15,623
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 35,473 $ 34,854
==============================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
FS-15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31
-----------------------------------
Millions of dollars 1997 1996* 1995*
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,256 $ 2,607 $ 930
Adjustments
Depreciation, depletion and amortization 2,300 2,216 3,381
Dry hole expense related to prior years' expenditures 31 55 19
Distributions (less than) greater than income from equity affiliates (353) 83 (129)
Net before-tax (gains) losses on asset retirements and sales (344) 207 164
Net foreign exchange (gains) losses (69) (10) 47
Deferred income tax provision 622 359 (258)
Net (increase) decrease in operating working capital (1) (288) 641 40
Other (572) (388) (137)
- -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES (2) 4,583 5,770 4,057
- -------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (3,899) (3,424) (3,529)
Proceeds from asset sales 1,235 778 581
Net sales of marketable securities (3) 101 44 144
- -------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (2,563) (2,602) (2,804)
- -------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net repayments of short-term obligations (163) (1,179) (227)
Proceeds from issuance of long-term debt 26 95 536
Repayments of long-term debt and other financing obligations (421) (476) (103)
Cash dividends paid (1,493) (1,358) (1,255)
Net sales of treasury shares 173 23 14
- -------------------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (1,878) (2,895) (1,035)
- -------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS (19) (2) (10)
=============================================================================================================
NET CHANGE IN CASH AND CASH EQUIVALENTS 123 271 208
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 892 621 413
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT YEAR-END $ 1,015 $ 892 $ 621
=============================================================================================================
<FN>
*Certain amounts were reclassified to conform with the 1997 presentation.
See accompanying notes to consolidated financial statements.
(1) The "Net (increase) decrease in operating working capital"
is composed of the following:
Decrease (increase) in accounts and notes receivable $ 439 $ 30 $ (62)
(Increase) decrease in inventories (11) 60 (162)
Decrease (increase) in prepaid expenses and other current assets 59 15 (148)
(Decrease) increase in accounts payable and accrued liabilities (685) 369 428
(Decrease) increase in income and other taxes payable (90) 167 (16)
- -------------------------------------------------------------------------------------------------------------
Net (increase) decrease in operating working capital $ (288) $ 641 $ 40
=============================================================================================================
(2)"Net cash provided by operating activities" includes the following
cash payments for interest and income taxes:
Interest paid on debt (net of capitalized interest) $ 318 $ 361 $ 373
Income taxes paid $ 1,706 $ 1,595 $ 1,176
=============================================================================================================
(3)"Net sales of marketable securities" consists of the
following gross amounts:
Marketable securities purchased $ (2,724) $ (3,443) $ (2,759)
Marketable securities sold 2,825 3,487 2,903
- -------------------------------------------------------------------------------------------------------------
Net sales of marketable securities $ 101 $ 44 $ 144
- -------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>
FS-16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Number of shares Millions of dollars
------------------ ---------------------------------------------------------------
Currency
Common Common Capital in Deferred Translation
Stock Stock in Common Excess of Com- Adjustment Retained Treasury
Issued Treasury Stock Par Value pensation and Other Earnings Stock
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1995 712,487,068 (60,736,435) $1,069 $1,858 $(900) $175 $14,457 $(2,063)
Net income - - - - - - 930 -
Cash dividends -
$1.925 per share - - - - - - (1,255) -
Tax benefit from dividends
paid on unallocated
ESOP shares - - - - - - 14 -
Market value adjustments
on investments - - - - - 23 - -
Foreign currency
translation adjustment - - - - - (28) - -
Pension plan
minimum liability - - - - - 4 - -
Reduction of ESOP debt - - - - 50 - - -
Purchase of treasury shares - (83,028) - - - - - (4)
Reissuance of treasury shares - 659,406 - 5 - - - 20
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1995 712,487,068 (60,160,057) $1,069 $1,863 $(850) $174 $14,146 $(2,047)
Net income - - - - - - 2,607 -
Cash dividends -
$2.08 per share - - - - - - (1,358) -
Tax benefit from dividends
paid on unallocated
ESOP shares - - - - - - 13 -
Market value adjustments
on investments - - - - - (20) - -
Foreign currency
translation adjustment - - - - - (54) - -
Pension plan
minimum liability - - - - - (4) - -
Reduction of ESOP debt - - - - 50 - - -
Purchase of treasury shares - (69,278) - - - - - (4)
Reissuance of treasury shares - 828,320 - 11 - - - 27
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1996 712,487,068 (59,401,015) $1,069 $1,874 $(800) $ 96 $15,408 $(2,024)
Net income - - - - - - 3,256 -
Cash dividends -
$2.28 per share - - - - - - (1,493) -
Tax benefit from dividends
paid on unallocated
ESOP shares - - - - - - 14 -
Market value adjustments
on investments - - - - - (4) - -
Foreign currency
translation adjustment - - - - - (173) - -
Pension plan
minimum liability - - - - - 4 - -
Reduction of ESOP debt - - - - 50 - - -
Share repurchase program - (1,199,300) - - - - - (92)
Other purchases of treasury shares - (55,722) - - - - - (3)
Reissuance of treasury shares - 4,100,166 - 148 - - - 142
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1997 712,487,068 (56,555,871) $1,069 $2,022 $(750) $(77) $17,185 $(1,977)
================================================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
FS-17
<PAGE>
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 integrated 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; transporting 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 estimates 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
companies 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 unamortized 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 qualifying hedges of firm commitments or anticipated transactions
also are deferred and are recognized in income or as adjustments of carrying
amounts when the underlying hedged transaction occurs. Cash flows associated
with these derivatives are reported with the underlying hedged transaction's
cash flows. If, subsequent to being hedged, underlying transactions 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."
Short-Term Investments
All short-term investments are classified as available for sale and are in
highly liquid debt securities. Those investments that are part of the
company's cash management portfolio with original maturities of three months
or less are reported as cash equivalents. The balance of the short-term
investments is reported as "Marketable securities."
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, supplies 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 recovery
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 properties, 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 mineral 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 determined 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 international 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.
FS-18
<PAGE>
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 generation are capitalized.
Liabilities related to future remediation costs are recorded when
environmental assessments and/or cleanups are probable 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 Canadian marketing facilities, the
accrual is based on the probability 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 the cleanup obligation.
The company records the gross amount of its liability based on its best
estimate of future costs using currently available 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 currency 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
transactions are currently 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 currency 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 interpretations 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 transactions, 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:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Asset write-offs and revaluations
Asset impairments $ (68) $ (68) $ -
U.K. refining and marketing - (200) -
Real estate development assets - (29) (168)
New accounting standard (SFAS No. 121) - - (659)
Adjustment of fixed assets records - - (94)
Refining assets - - (38)
Other (18) (40) (4)
------- ------- -------
(86) (337) (963)
- ----------------------------------------------------------------------------
Asset dispositions, net
Oil and gas properties 240 80 6
U.K. refining and marketing exit (72) - -
Sale of chemicals affiliate 33 - -
Caltex sale of two refineries - 279 -
NGC merger - 32 -
Other (18) - 1
------- ------- -------
183 391 7
- ----------------------------------------------------------------------------
Environmental remediation provisions (35) (54) (90)
- ----------------------------------------------------------------------------
Prior-year tax adjustments 152 52 (22)
- ----------------------------------------------------------------------------
Restructurings and reorganizations
NGC (54) - -
Work-force reductions (6) (14) (38)
Caltex - - (12)
------- ------- -------
(60) (14) (50)
- ----------------------------------------------------------------------------
LIFO inventory gains (losses) 5 (4) 2
- ----------------------------------------------------------------------------
Other, net
Performance stock options (66) - -
Litigation and regulatory issues (24) (90) (23)
Federal lease cost refund - 12 27
Caltex gain related to land sale - - 86
Miscellaneous, net 7 - (6)
------- ------- -------
(83) (78) 84
- ----------------------------------------------------------------------------
Total special items, after tax $ 76 $ (44) $ (1,032)
============================================================================
</TABLE>
Other financial information is as follows:
<TABLE>
<CAPTION
Year ended December 31
------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Total financing interest and debt costs $411 $472 $543
Less: capitalized interest 99 108 142
---- ---- ----
Interest and debt expense 312 364 401
Research and development expense 179 182 185
Foreign currency gains (losses) (1) $246 $(26) $(15)
============================================================================
<FN>
(1) Includes $177, $(28) and $25 in 1997, 1996 and 1995, respectively for the
company's share of affiliates' foreign currency gains (losses)
</FN>
</TABLE>
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 ACCOUNTING 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
FS-19
<PAGE>
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 amounting 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 non cash 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 Consolidated 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 acquisition 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
aggregate in relation to the company's financial position.
The major components of "Capital expenditures," and the reconciliation of this
amount to the capital and exploratory expenditures, excluding equity in
affiliates, presented in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," are presented below:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Additions to properties,
plant and equipment (1) $ 3,840 $ 3,250 $ 3,611
Additions to investments 153 195 44
Payments for other liabilities
and assets, net (94) (21) (126)
- ---------------------------------------------------------------------------
Capital expenditures 3,899 3,424 3,529
Expensed exploration expenditures 462 400 354
Payments of long-term debt
and other financing obligations 6 33 5
- ---------------------------------------------------------------------------
Capital and exploratory expenditures,
excluding equity affiliates $ 4,367 $ 3,857 $ 3,888
===========================================================================
<FN>
(1)Excludes noncash capital lease additions of $282 in 1995.
</FN>
</TABLE>
Certain amounts of cash flows in 1996 and 1995 have been reclassified to
conform to the 1997 presentation.
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 earnings of equity
affiliates.
In 1988, the company declared a dividend distribution 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 common
stock or commences a tender or exchange offer that would result in acquiring
10 percent or more of the outstanding shares of common stock, either event
occurring 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 prior 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
company'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 repurchase program for up to
$2 billion of the company's 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 contracts traded on the New York Mercantile
Exchange and the International Petroleum Exchange and of natural gas swap
contracts entered into principally with major financial institutions. The
futures contracts hedge anticipated crude oil purchases and sales and product
sales, generally forecast to occur within a 60-to 90-day period. Natural gas
swaps are used primarily to hedge firmly committed sales, and the terms of the
swap contracts held at year-end 1997 have an average remaining maturity of 51
months. Gains and losses on these derivative 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
currently in income and were not material in 1997 or 1996.
The company enters into forward exchange contracts, generally with terms of
90 days or less, as a hedge against
FS-20
<PAGE>
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-
rate 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 December 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 investment 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 company's broad customer base worldwide.
As a consequence, concentrations of credit risk are limited. The company
routinely 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 totaling $(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 commercial paper are the primary instruments held.
Cash equivalents 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. Forward 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, consisting primarily of the company's U.S. integrated
petroleum operations (excluding most of the domestic pipeline operations). 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 conducted 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 information for
Chevron U.S.A. Inc. and its consolidated subsidiaries is presented below:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------
1997 1996 1995 (1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and other operating revenues $ 28,130 $ 29,726 $ 24,392
Total costs and other deductions 26,354 28,331 25,177
Net income (loss) 1,484 1,042 (384)
======================================================================================
<FN>
(1)1995 Net income (loss) includes $(490) for the company's adoption of
SFAS No. 121.
</FN>
</TABLE>
<TABLE>
<CAPTION>
At December 31
---------------------
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 2,854 $ 3,126
Other assets 13,867 13,209
Current liabilities 3,282 4,035
Other liabilities 4,966 5,300
Net equity 8,473 7,000
======================================================================================
</TABLE>
NOTE 8. LITIGATION
The company is a defendant in numerous lawsuits, including, along with other
oil companies, actions challenging oil and gas royalty and severance tax
payments 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 financial 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 termination 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 judgment against the company
of $742, including interest that
FS-21
<PAGE>
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 TRANSPORT 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 transportation services to other Chevron
companies. Chevron Corporation 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 subsidiaries 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 statements 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.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and other operating revenues $ 591 $ 512 $ 462
Total costs and other deductions 557 564 477
Net income (loss) 28 11 (23)
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
At December 31
-------------------
1997 1996 (1)
- -------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 243 $ 99
Other assets 897 1,593
Current liabilities 666 617
Other liabilities 311 356
Net equity 163 719
===============================================================================
<FN>
(1) Certain amounts in 1996 have been reclassified to conform to 1997 presentation
</FN>
</TABLE>
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:
<TABLE>
<CAPTION>
At December 31
---------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
United States
Petroleum $ 13,957 $ 14,226 $ 14,521
Chemicals 2,828 2,475 2,115
Coal and Other Minerals 483 477 503
--------- --------- ---------
Total United States 17,268 17,178 17,139
- ---------------------------------------------------------------------------------------
International
Petroleum 13,562 13,893 13,392
Chemicals 690 514 409
Coal and Other Minerals 54 34 28
--------- --------- ---------
Total International 14,306 14,441 13,829
- ---------------------------------------------------------------------------------------
TOTAL IDENTIFIABLE ASSETS 31,574 31,619 30,968
Corporate and Other 3,899 3,235 3,362
- ---------------------------------------------------------------------------------------
TOTAL ASSETS $ 35,473 $ 34,854 $ 34,330
=======================================================================================
</TABLE>
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.
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING INCOME
United States
Petroleum $ 2,507 $ 1,922 $ (64)
Chemicals 216 219 689
Coal and Other Minerals 49 58 (42)
-------- -------- --------
Total United States 2,772 2,199 583
- ---------------------------------------------------------------------------------------
International
Petroleum 3,042 3,099 2,074
Chemicals 146 80 96
Coal and Other Minerals 10 6 3
-------- -------- --------
Total International 3,198 3,185 2,173
- ---------------------------------------------------------------------------------------
TOTAL OPERATING INCOME 5,970 5,384 2,756
Corporate and Other (468) (644) (967)
Income Tax Expense (2,246) (2,133) (859)
- ---------------------------------------------------------------------------------------
NET INCOME $ 3,256 $ 2,607 $ 930
=======================================================================================
</TABLE>
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
Petroleum - $127. Corporate and Other included other write-downs of $19.
Sales and other operating revenues for the petroleum segments 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
FS-22
<PAGE>
of products between segments and geographic areas are generally at estimated
market prices. Transfers between geographic areas are presented as memo items
below the table.
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES AND OTHER
OPERATING REVENUES
United States
Petroleum-Refined products $ 12,586 $ 12,295 $ 10,677
-Crude oil 4,527 4,836 3,850
-Natural gas 1,978 2,741 1,604
-Natural gas liquids 344 992 1,130
-Other 612 683 717
-Excise taxes 3,386 3,231 2,999
-Intersegment 340 587 676
----------- --------- ---------
Total Petroleum 23,773 25,365 21,653
----------- --------- ---------
Chemicals-Products 2,933 2,831 3,157
-Intersegment 112 105 175
----------- --------- ---------
Total Chemicals 3,045 2,936 3,332
----------- --------- ---------
Coal and Other Minerals 359 329 350
----------- --------- ---------
Total United States 27,177 28,630 25,335
- ---------------------------------------------------------------------------------------
International
Petroleum-Refined products 2,998 3,490 2,794
-Crude oil 6,770 7,561 5,526
-Natural gas 590 558 415
-Natural gas liquids 209 175 155
-Other 497 501 429
-Excise taxes 2,188 1,959 1,977
-Intersegment 1 3 -
----------- --------- ---------
Total Petroleum 13,253 14,247 11,296
----------- --------- ---------
Chemicals-Products 587 591 600
-Excise taxes - 12 12
-Intersegment 2 2 9
----------- --------- ---------
Total Chemicals 589 605 621
----------- --------- ---------
Coal and Other Minerals 10 11 7
----------- --------- ---------
Total International 13,852 14,863 11,924
- ---------------------------------------------------------------------------------------
Intersegment sales elimination (455) (697) (860)
- ---------------------------------------------------------------------------------------
Corporate and Other 9 (14) (89)
- ---------------------------------------------------------------------------------------
TOTAL SALES AND OTHER
OPERATING REVENUES $ 40,583 $ 42,782 $ 36,310
=======================================================================================
Memo: Intergeographic Sales
United States $ 510 $ 695 $ 565
International 1,187 1,319 1,077
- ---------------------------------------------------------------------------------------
</TABLE>
Equity in earnings of affiliated companies has been associated with the
segments in which the affiliates operate. Sales to the Caltex Group and NGC
Corporation are included in the "International Petroleum" and "United States
Petroleum" segments, 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:
<TABLE>
<CAPTION>
At December 31
---------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Petroleum
Exploration and Production $ 5 $ 6
Refining, Marketing and Transportation 756 806
------- --------
761 812
Less: accumulated amortization 371 389
------- --------
Net capitalized leased assets $ 390 $ 423
================================================================================
</TABLE>
At December 31, 1997, the future minimum lease payments under operating and
capital leases are as follows:
<TABLE>
<CAPTION>
At December 31
-------------------------
Operating Capital
Year Leases Leases
- -------------------------------------------------------------------
<S> <C> <C>
1998 $ 140 $ 139
1999 120 70
2000 101 63
2001 94 59
2002 86 54
Thereafter 233 740
- -------------------------------------------------------------------
Total $ 774 1,125
- ----------------------------------------------------
Less: amounts representing interest
and executory costs (525)
- ------------------------------------------------------------------
Net present values 600
Less: capital lease obligations
included in short-term debt (308)
- ------------------------------------------------------------------
Long-term capital lease obligations $ 292
==================================================================
Future sublease rental income $ 18 $ -
==================================================================
</TABLE>
Rental expenses incurred for operating leases during 1997, 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------
1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $ 443 $ 438 $ 403
Contingent rentals 5 6 9
------- ------ ------
Total 448 444 412
Less: sublease rental income 5 15 14
------- ------ ------
Net rental expense $ 443 $ 429 $ 398
=========================================================================
</TABLE>
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 P.T. Caltex Pacific Indonesia (CPI), an
exploration and production company operating 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 affiliates are collectively called the
Caltex Group.
Tengizchevroil (TCO) is a joint venture formed to develop the Tengiz
and Korolev oil fields over a 40-year period. In April 1997, Chevron sold
10 percent of its interest in TCO to
FS-23
<PAGE>
an affiliate of LUKoil, a Russian oil company, and Arco. The sale reduces
Chevron's ownership to 45 percent. The investment in TCO at December 31, 1997
and 1996, included a deferred 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 production 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 products 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:
<TABLE>
<CAPTION>
At December 31
--------------------
1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Equity Method Affiliates
Caltex Group
Exploration and Production $ 438 $ 449
Refining, Marketing and Transportation 1,863 1,815
- ---------------------------------------------------------------------------------
Total Caltex Group 2,301 2,264
Tengizchevroil 1,255 1,240
NGC Corporation 385 416
Other affiliates 347 364
- ---------------------------------------------------------------------------------
4,288 4,284
Other, at or below cost 208 179
- ---------------------------------------------------------------------------------
Total investments and advances $ 4,496 $ 4,463
=================================================================================
</TABLE>
Equity in earnings of companies accounted for by the equity method, together
with dividends and similar distributions received from equity method
companies for the years 1997, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------------
Equity in Earnings Dividends
---------------------- ----------------------
1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Caltex
Exploration
and Production $ 171 $ 188 $ 156
Refining, Marketing
and Transportation 252 408 294
- -------------------------------------------------------------------
Total Caltex Group 423 596 450 $ 207 $ 735 $ 305
Tengizchevroil 169 110 1 - - -
NGC Corporation (35) 19 - 2 1 -
Other 131 42 102 96 92 116
- ---------------------------------------------------------------------------------------------
Total $ 688 $ 767 $ 553 $ 305 $ 828 $ 421
=============================================================================================
</TABLE>
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 significantly changed economic facts
and circumstances, primarily changing regulatory environments in those
countries. Caltex's earnings in 1997 include significant foreign currency
gains, 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 Balance 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.
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales to Caltex Group $ 1,335 $ 1,708 $ 1,330
Sales to NGC Corporation 1,822 676 -
Sales to other affiliates 8 18 10
- ---------------------------------------------------------------------------------
Total sales to affiliates $ 3,165 $ 2,402 $ 1,340
=================================================================================
Purchases from Caltex Group $ 932 $ 1,022 $ 934
Purchases from NGC Corporation 854 269 -
Purchases from other affiliates 16 41 40
- ---------------------------------------------------------------------------------
Total purchases from affiliates $ 1,802 $ 1,332 $ 974
=================================================================================
</TABLE>
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.
<TABLE>
<CAPTION>
Caltex Group Other Affiliates Chevron's Share
------------------------------------------------------------------------------------------
Year ended December 31 1997 1996 1995 1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and other operating revenues $ 17,920 $ 16,895 $ 15,067 $ 16,574 $ 6,356 $ 2,594 $ 13,827 $ 10,218 $ 8,549
Total costs and other deductions 17,147 15,991 14,256 15,770 5,829 2,194 13,118 9,573 7,804
Net income 846 1,193 899 556 404 315 688 767 553
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Caltex Group Other Affiliates Chevron's Share
------------------------------------------------------------------------------------------
At December 31 1997 1996 1995 1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets $ 2,521 $ 2,681 $ 2,323 $ 3,232 $ 3,286 $ 877 $ 2,289 $ 2,284 $ 1,527
Other assets 7,193 6,714 7,794 6,713 6,088 3,888 5,971 5,524 5,414
Current liabilities 2,991 2,999 3,223 2,565 2,064 413 2,232 2,076 1,863
Other liabilities 2,131 2,140 1,935 5,448 5,034 3,341 1,740 1,448 1,154
Net equity 4,592 4,256 4,959 1,932 2,276 1,011 4,288 4,284 3,924
================================================================================================================================
</TABLE>
FS-24
<PAGE>
NOTE 13. PROPERTIES,PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
At December 31 Year ended December 31
------------------------------------------------- --------------------------------------------
Gross Investment at Cost Net Investment Additions at Cost(1) Depreciation Expense
------------------------ ----------------------- -------------------- ----------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States
Petroleum
Exploration and Production $18,104 $17,742 $18,209 $ 5,052 $ 4,849 $ 5,010 $1,166 $ 974 $ 776 $ 887 $ 785 $1,577
Refining and Marketing (2) 11,378 11,186 11,136 6,186 6,295 6,520 538 415 887 464 472 564
Chemicals 3,039 2,587 2,075 1,931 1,552 1,233 470 376 168 92 138 162
Coal and Other Minerals 833 819 857 341 345 359 35 17 33 38 36 135
- ---------------------------------------------------------------------------------------------------------------------------
Total United States 33,354 32,334 32,277 13,510 13,041 13,122 2,209 1,782 1,864 1,481 1,431 2,438
- ---------------------------------------------------------------------------------------------------------------------------
International
Petroleum
Exploration and Production 11,696 10,484 10,951 6,639 5,998 5,463 1,285 1,221 1,421 634 581 712
Refining and Marketing 2,063 2,259 2,459 1,210 1,387 1,674 57 70 335 111 115 116
Chemicals 549 393 354 309 163 146 157 37 26 12 24 24
Coal and Other Minerals 55 32 22 53 28 19 26 10 - 1 1 1
- ---------------------------------------------------------------------------------------------------------------------------
Total International 14,363 13,168 13,786 8,211 7,576 7,302 1,525 1,338 1,782 758 721 853
- ---------------------------------------------------------------------------------------------------------------------------
Corporate and Other (3) 1,516 1,434 1,968 950 879 1,272 74 76 203 61 64 90
- ---------------------------------------------------------------------------------------------------------------------------
Total $49,233 $46,936 $48,031 $22,671 $21,496 $21,696 $3,808 $3,196 $3,849 $2,300 $2,216 $3,381
===========================================================================================================================
<FN>
(1) Net of dry hole expense related to prior years' expenditures of $31, $55 and $19 in 1997, 1996 and 1995, respectively.
(2) Includes transportation.
(3) Includes primarily real estate and management information systems.
</FN>
</TABLE>
Expenses for maintenance and repairs were $738, $626 and $833 in 1997, 1996 and
1995, respectively.
NOTE 14. TAXES
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------
1997 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Taxes other than on income
United States
Excise taxes on products
and merchandise $ 3,386 $ 3,231 $ 2,999
Property and other
miscellaneous taxes 274 274 341
Payroll taxes 123 123 127
Taxes on production 118 121 105
- ---------------------------------------------------------------------
Total United States 3,901 3,749 3,572
- ---------------------------------------------------------------------
International
Excise taxes on products
and merchandise 2,188 1,971 1,989
Property and other
miscellaneous taxes 185 157 146
Payroll taxes 23 26 30
Taxes on production 10 5 11
- ---------------------------------------------------------------------
Total International 2,406 2,159 2,176
- ---------------------------------------------------------------------
Total taxes other than on income $ 6,307 $ 5,908 $ 5,748
=====================================================================
</TABLE>
U.S. federal income tax expense was reduced by $93, $77 and $68 in 1997, 1996
and 1995, respectively, for low-income 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) benefits 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
expected loss from exiting the real estate development business.
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------
1997 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Taxes on income
U.S. federal
Current $ 369 $ 360 $ 152
Deferred 357 165 (289)
State and local 81 59 29
- ---------------------------------------------------------------------
Total United States 807 584 (108)
- ---------------------------------------------------------------------
International
Current 1,174 1,356 937
Deferred 265 193 14
Deferred - Adjustment for enacted
changes in tax laws/rates - - 16
- ---------------------------------------------------------------------
Total International 1,439 1,549 967
- ---------------------------------------------------------------------
Total taxes on income $ 2,246 $ 2,133 $ 859
=====================================================================
</TABLE>
The company's effective income tax rate varied from the U.S. statutory
federal income tax rate because of the following:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Effect of income taxes from international
operations in excess of taxes at the
U.S. statutory rate 9.6 16.8 26.2
State and local taxes on income, net
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) (3.1)
- ----------------------------------------------------------------------------
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%
============================================================================
</TABLE>
FS-25
<PAGE>
The company records its deferred taxes on a tax jurisdiction 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:
<TABLE>
<CAPTION>
At December 31
---------------------
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Prepaid expenses and other current assets $ (13) $ (136)
Deferred charges and other assets (181) (163)
Federal and other taxes on income 79 3
Noncurrent deferred income taxes 3,215 2,851
- -----------------------------------------------------------------------
Total deferred income taxes, net $ 3,100 $ 2,555
=======================================================================
</TABLE>
The reported deferred tax balances are composed of the following deferred
tax liabilities (assets):
<TABLE>
<CAPTION>
At December 31
--------------------
1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Properties, plant and equipment $ 4,724 $ 4,534
Inventory 151 193
Miscellaneous 200 195
- ----------------------------------------------------------------------
Deferred tax liabilities 5,075 4,922
- ----------------------------------------------------------------------
Abandonment/environmental reserves (872) (1,052)
Employee benefits (596) (561)
AMT/other tax credits (362) (586)
Other accrued liabilities (202) (332)
Miscellaneous (382) (523)
- -----------------------------------------------------------------------
Deferred tax assets (2,414) (3,054)
- -----------------------------------------------------------------------
Deferred tax assets valuation allowance 439 687
- ----------------------------------------------------------------------
Total deferred taxes, net $ 3,100 $ 2,555
======================================================================
</TABLE>
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 adjustment to income tax expense for the effects of
consolidation.
Undistributed earnings of international consolidated subsidiaries and
affiliates for which no deferred income tax provision 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 remittance of such earnings.
On remittance, certain countries impose 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
approximately $196 would be payable upon remittance of these earnings.
NOTE 15. SHORT-TERM DEBT
Redeemable long-term obligations 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 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.
<TABLE>
<CAPTION>
At December 31
--------------------
1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Commercial paper (1) $ 3,352 $ 3,583
Current maturities of long-term debt 303 269
Current maturities of long-term capital leases 35 36
Redeemable long-term obligations
Long-term debt 304 315
Capital leases 273 274
Notes payable 95 29
- ----------------------------------------------------------------------
Subtotal (2) 4,362 4,506
Reclassified to long-term debt (2,725) (1,800)
- ----------------------------------------------------------------------
Total short-term debt $ 1,637 $ 2,706
======================================================================
<FN>
(1) Weighted average interest rates at December 31, 1997 and 1996, were
6.1% and 5.9%, respectively, including the effect of interest rate swaps.
(2) Weighted average interest rates at December 31, 1997 and 1996, were 6.0%
and 5.6%, respectively, including the effect of interest rate swaps.
</FN>
</TABLE>
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
borrowings 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.
<TABLE>
<CAPTION>
At December 31
--------------------
1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
8.11% amortizing notes due 2004 (1) $ 750 $ 750
7.45% notes due 2004 349 349
7.61% amortizing bank loans due 2003 200 225
5.6% notes due 1998 190 190
6.92% bank loans due 2005 51 51
9.75% sinking-fund debentures due 2017 38 180
4.625% 200 million Swiss franc issue due 1997 (2) - 149
7.28% notes due 1997 (1) - 50
Other foreign currency obligations (4.1%) (3) 85 88
Other long-term debt (7.0%) (3) 54 87
- ----------------------------------------------------------------------
Total including debt due within one year 1,717 2,119
Debt due within one year (303) (269)
Reclassified from short-term debt 2,725 1,800
- ----------------------------------------------------------------------
Total long-term debt $ 4,139 $ 3,650
======================================================================
<FN>
(1) Guarantee of ESOP debt.
(2) Interest rate swaps effectively changed the fixed interest rate to a
floating rate, which was 2.24% at year-end 1996.
(3) Less than $50 million individually; weighted average interest rates
at December 31, 1997.
</FN>
</TABLE>
FS-26
<PAGE>
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
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, 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
December31, 1997, is as follows: 1998-$303, 1999-$121, 2000-$124, 2001-$137
and 2002-$148.
NOTE 17. EMPLOYEE BENEFIT PLANS
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 primarily
on years of service and on average career earnings or the highest consecutive
three years' average earnings. The company'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:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Cost of benefits earned during
the year $ 106 $ 104 $ 99
Interest cost on projected benefit
obligations 274 271 273
Actual return on plan assets (697) (503) (728)
Net amortization and deferral 304 129 342
- ---------------------------------------------------------------------------
Net pension (credit) expense $ (13) $ 1 $ (14)
===========================================================================
</TABLE>
Settlement 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:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Assumed discount rates 7.3% 7.7%
Assumed rates for compensation increases 5.2% 5.2%
Expected return on plan assets 9.1% 9.1%
============================================================
</TABLE>
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 combined plans at December 31, 1997 and 1996, was as
follows:
<TABLE>
<CAPTION>
Plans with
Plans with Assets Accumulated
in Excess of Benefits
Accumulated in Excess of
Benefits Plan Assets
-----------------------------------------
At December 31 1997 1996 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligations $ (3,145) $ (2,932) $ (250) $ (231)
- -----------------------------------------------------------------------------------
Accumulated benefit obligations $ (3,294) $ (3,072) $ (258) $ (237)
===================================================================================
Projected benefit obligations $ (3,768) $ (3,515) $ (301) $ (270)
Plan assets at fair values 4,448 4,156 6 7
- -----------------------------------------------------------------------------------
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 $ (275) $ (243)
===================================================================================
</TABLE>
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 company 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 Emerging 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 compensation 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 earnings-per-share computations.
FS-27
<PAGE>
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. Compensation 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:
<TABLE>
<CAPTION>
Thousands 1997 1996
- -------------------------------------------------------
<S> <C> <C>
Allocated shares 9,287 7,805
Unallocated shares 15,929 17,682
Total ESOP shares 25,216 25,487
=======================================================
</TABLE>
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 subsidiaries who hold positions of
significant responsibility. The MIP is an annual cash incentive plan that
links awards to performance results of the prior year. The cash awards may be
deferred by conversion to stock units or, beginning with awards deferred in
1996, stock units or other investment fund alternatives. 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
management 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 financial
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, respectively. There were no expenses accrued for the program
in 1995.
Other Benefit Plans
In addition to providing pension benefits, 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.
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
Consolidated Balance Sheet as follows:
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
---------------------------------------------------------------
Health Life Total Health Life Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
APBO
Retirees $ (495) $ (356) $ (851) $ (456) $ (327) $ (783)
Fully eligible
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 (879) (483) (1,362) (790) (446) (1,236)
Unrecognized
net (gain) loss (140) 16 (124) (226) (4) (230)
- -------------------------------------------------------------------------------------
Accrued
postretirement
benefit costs $ (1,019) $ (467) $ (1,486) $ (1,016) $ (450) $ (1,466)
=====================================================================================
</TABLE>
The company's net postretirement benefits expense was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------------
Health Life Total Health Life Total Health Life Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cost of benefits
earned during
the year $14 $ 3 $17 $16 $ 3 $ 19 $15 $ 3 $ 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 $66 $36 $102 $73 $31 $104
=================================================================================================
</TABLE>
For measurement purposes, separate health care cost-trend 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 benefit 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
FS-28
<PAGE>
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
methodology 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:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Net Income As reported $3,256 $2,607 $930
Pro forma $3,302 $2,610 $925
Earnings per share As reported - basic $4.97 $3.99 $1.43
- diluted $4.95 $3.98 $1.43
Pro forma - basic $5.04 $3.99 $1.42
- diluted $5.02 $3.98 $1.42
=====================================================================
</TABLE>
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 LTIP 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 of January 1 of such year.
A summary of the status of stock options awarded under the company's LTIP,
excluding awards granted with terms similar to the broad-based employee stock
options, for 1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
Weighted-
Average
Options Exercise
(000s) Price
- -------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1994 5,842 $39.08
=========================================================================
Granted 1,826 48.15
Exercised (498) 37.09
Forfeited (83) 47.77
- -------------------------------------------------------------------------
Outstanding at December 31, 1995 7,087 $41.46
=========================================================================
Granted 952 66.00
Exercised (698) 38.91
Forfeited (64) 49.45
- -------------------------------------------------------------------------
Outstanding at December 31, 1996 7,277 $44.84
=========================================================================
Granted 1,800 80.78
Exercised (710) 38.66
Forfeited (98) 71.54
- -------------------------------------------------------------------------
Outstanding at December 31, 1997 8,269 $52.88
=========================================================================
Exercisable at December 31
1995 5,336 $39.26
1996 6,330 $41.68
1997 6,504 $45.31
=========================================================================
</TABLE>
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 17.3 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:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (000s) Life (Years) Price (000s) Price
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$31 to $41 1,565 3.87 $34.67 1,565 $34.67
41 to 51 4,067 6.63 44.97 4,067 44.97
51 to 61 23 8.34 56.91 23 56.91
61 to 71 855 8.83 66.25 849 66.25
71 to 81 1,759 9.82 80.82 - -
- ------------------------------------------------------------------------------
$31 to $81 8,269 7.02 $52.88 6,504 $45.31
==============================================================================
</TABLE>
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 outstanding
option shares to 2,214,950 at year-end 1997. Unexercised 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 assumptions: 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
FS-29
<PAGE>
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 approximately 4 million shares were awarded at an exercise price of
$76.3125 per share. 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 LTIP and Broad-based Employee Stock Option Program (See
Note 18. Stock Options). For purposes of comparability, all prior-period
earnings-per-share data have been restated to conform with SFAS No. 128. The
following table sets forth the computation of basic and diluted EPS:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------------------
Net Shares Per-Share Net Shares Per-Share Net Shares Per-Share
Income (millions) Amount Income (millions) Amount Income (millions) Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income $ 3,256 $ 2,607 $ 930
Weighted average common
shares outstanding 655.0 652.8 652.1
Dividend equivalents paid
on Chevron stock units 2 3 3
Deferred awards held as
Chevron stock units 1.3 1.4 1.4
- ----------------------------------------------------------------------------------------------------------------------------
BASIC EPS 3,258 656.3 $ 4.97 2,610 654.2 $ 3.99 933 653.5 $1.43
Dilutive effects of
stock options 2.1 1.2 .6
- ----------------------------------------------------------------------------------------------------------------------------
DILUTED EPS $ 3,258 658.4 $ 4.95 $ 2,610 655.4 $ 3.98 $ 933 654.1 $1.43
============================================================================================================================
</TABLE>
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 COMMITMENTS
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's 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 billion 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 liquidity 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.
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-
$207; 2002-$176; 2003 and after-$752. Total 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 including, 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 provided for known
environmental obligations that 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
FS-30
<PAGE>
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 exploration and
production, can be affected by changing economic, regulatory and political
environments in the various countries, 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 Kingdom, 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.
<TABLE>
<CAPTION>
QUARTERLY RESULTS AND STOCK MARKET DATA
Unaudited
1997 1996
--------------------------------- ----------------------------------
Millions of dollars,
except per-share amounts 4TH Q 3RD Q 2ND Q 1ST Q 4TH Q 3RD Q 2ND Q 1ST Q
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Sales and other operating revenues (1) $ 9,712 $10,130 $ 9,947 $10,794 $11,265 $10,846 $10,514 $10,157
Income from equity affiliates 153 164 193 178 81 104 446 136
Other income 390 34 134 121 165 99 37 43
- -------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 10,255 10,328 10,274 11,093 11,511 11,049 10,997 10,336
- -------------------------------------------------------------------------------------------------------------
COSTS AND OTHER DEDUCTIONS
Purchased crude oil and products,
operating and other expenses 6,603 6,792 6,623 7,511 8,288 7,654 7,516 7,207
Depreciation, depletion
and amortization 657 548 549 546 603 558 524 531
Taxes other than on income (1) 1,512 1,670 1,630 1,495 1,550 1,493 1,452 1,413
Interest and debt expense 85 69 76 82 90 93 85 96
- -------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND OTHER DEDUCTIONS 8,857 9,079 8,878 9,634 10,531 9,798 9,577 9,247
- -------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 1,398 1,249 1,396 1,459 980 1,251 1,420 1,089
INCOME TAX EXPENSE 523 522 573 628 516 596 548 473
- -------------------------------------------------------------------------------------------------------------
NET INCOME (2) $ 875 $ 727 $ 823 $ 831 $ 464 $ 655 $ 872 $ 616
- -------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE - BASIC $1.33 $1.11 $1.26 $1.27 $0.71 $1.00 $1.34 $0.94
- DILUTED $1.33 $1.10 $1.25 $1.27 $0.71 $1.00 $1.33 $0.94
- -------------------------------------------------------------------------------------------------------------
DIVIDENDS PAID PER SHARE $0.58 $0.58 $0.58 $0.54 $0.54 $0.54 $0.50 $0.50
- -------------------------------------------------------------------------------------------------------------
COMMON STOCK PRICE RANGE - HIGH $88 7/8 $89 3/16 $77 1/4 $72 5/8 $68 3/8 $63 3/8 $62 1/8 $58 7/8
- LOW $71 1/2 $73 1/2 $61 3/4 $63 1/2 $60 1/4 $55 7/8 $54 1/2 $51
<FN>
(1) Includes consumer
excise taxes of $ 1,326 $ 1,487 $ 1,447 $ 1,314 $ 1,357 $ 1,324 $ 1,277 $ 1,244
(2) Special credits (charges)
included in Net Income $ 68 $ (5) $ (14) $ 27 $ (221) $ 5 $ 172 $ -
The company's common stock is listed on the New 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.
</FN>
</TABLE>
FS-31
<PAGE>
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
Unaudited
In accordance with Statement of Financial Accounting Standards No. 69,
"Disclosures About Oil and Gas Producing Activities" (SFAS No. 69), this
section provides supplemental information on oil and gas exploration and
producing 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 measure 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 Democratic
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 P.T. 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>
<CAPTION>
TABLE I - COSTS INCURRED IN EXPLORATION, PROPERTY ACQUISITIONS AND DEVELOPMENT (1)
Consolidated Companies Affiliated Companies
-------------------------------- --------------------
Millions of dollars U.S. Africa Other Total CPI TCO Worldwide
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Exploration
Wells $ 278 $ 99 $ 149 $ 526 $ 2 $ - $ 528
Geological and geophysical 39 31 59 129 16 - 145
Rentals and other 43 17 65 125 - - 125
- ---------------------------------------------------------------------------------------------------
Total exploration 360 147 273 780 18 - 798
- ---------------------------------------------------------------------------------------------------
Property acquisitions (2)
Proved (3) 3 6 75 84 - - 84
Unproved 101 - 23 124 - - 124
- ---------------------------------------------------------------------------------------------------
Total property acquisitions 104 6 98 208 - - 208
- ---------------------------------------------------------------------------------------------------
Development 918 461 529 1,908 159 152 2,219
- ---------------------------------------------------------------------------------------------------
TOTAL COSTS INCURRED $ 1,382 $ 614 $ 900 $ 2,896 $ 177 $ 152 $ 3,225
===================================================================================================
YEAR ENDED DECEMBER 31, 1996
Exploration
Wells $ 357 $ 75 $ 126 $ 558 $ 1 $ - $ 559
Geological and geophysical 16 37 70 123 8 - 131
Rentals and other 52 10 54 116 - - 116
- ---------------------------------------------------------------------------------------------------
Total exploration 425 122 250 797 9 - 806
- ---------------------------------------------------------------------------------------------------
Property acquisitions (2)
Proved (3) 5 1 9 15 - - 15
Unproved 62 2 43 107 - - 107
- ---------------------------------------------------------------------------------------------------
Total property acquisitions 67 3 52 122 - - 122
- ---------------------------------------------------------------------------------------------------
Development 603 465 594 1,662 123 50 1,835
- ---------------------------------------------------------------------------------------------------
TOTAL COSTS INCURRED $ 1,095 $ 590 $ 896 $ 2,581 $ 132 $ 50 $ 2,763
===================================================================================================
YEAR ENDED DECEMBER 31, 1995
Exploration
Wells $ 256 $ 63 $ 141 $ 460 $ 1 $ - $ 461
Geological and geophysical 9 29 37 75 9 - 84
Rentals and other 47 11 64 122 - - 122
- ---------------------------------------------------------------------------------------------------
Total exploration 312 103 242 657 10 - 667
- ---------------------------------------------------------------------------------------------------
Property acquisitions (2)
Proved (3) 21 56 - 77 - - 77
Unproved 31 8 12 51 - - 51
- ---------------------------------------------------------------------------------------------------
Total property acquisitions 52 64 12 128 - - 128
- ---------------------------------------------------------------------------------------------------
Development 453 640 568 1,661 97 7 1,765
- ---------------------------------------------------------------------------------------------------
TOTAL COSTS INCURRED $ 817 $ 807 $ 822 $ 2,446 $ 107 $ 7 $ 2,560
<FN>
(1)Includes costs incurred whether capitalized or charged to earnings. Excludes support equipment
expenditures.
(2)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.
(3)Does not include properties acquired through property exchanges.
</FN>
</TABLE>
FS-32
<PAGE>
<TABLE>
<CAPTION>
TABLE II - CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES
Consolidated Companies Affiliated Companies
------------------------------------ --------------------
Millions of dollars U.S. Africa Other Total CPI TCO Worldwide
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1997
Unproved properties $ 370 $ 58 $ 236 $ 664 $ - $ 378 $ 1,042
Proved properties and related producing assets 16,284 3,303 5,644 25,231 1,112 491 26,834
Support equipment 503 209 310 1,022 578 209 1,809
Deferred exploratory wells 120 46 58 224 - - 224
Other uncompleted projects 826 549 821 2,196 338 153 2,687
- ----------------------------------------------------------------------------------------------------------------------
GROSS CAPITALIZED COSTS 18,103 4,165 7,069 29,337 2,028 1,231 32,596
- ----------------------------------------------------------------------------------------------------------------------
Unproved properties valuation 153 42 98 293 - - 293
Proved producing properties -
Depreciation and depletion 11,657 1,459 2,521 15,637 626 51 16,314
Future abandonment and restoration 926 304 177 1,407 44 6 1,457
Support equipment depreciation 315 79 130 524 343 53 920
- ----------------------------------------------------------------------------------------------------------------------
Accumulated provisions 13,051 1,884 2,926 17,861 1,013 110 18,984
- ----------------------------------------------------------------------------------------------------------------------
NET CAPITALIZED COSTS $ 5,052 $ 2,281 $ 4,143 $ 11,476 $ 1,015 $ 1,121 $ 13,612
======================================================================================================================
AT DECEMBER 31, 1996
Unproved properties $ 301 $ 59 $ 208 $ 568 $ - $ 420 $ 988
Proved properties and related producing assets 16,284 2,753 4,267 23,304 1,018 524 24,846
Support equipment 525 158 254 937 548 200 1,685
Deferred exploratory wells 157 43 94 294 - - 294
Other uncompleted projects 446 678 1,520 2,644 293 97 3,034
- ------------------------------------------------------------------------------------------------------------------
GROSS CAPITALIZED COSTS 17,713 3,691 6,343 27,747 1,859 1,241 30,847
- ------------------------------------------------------------------------------------------------------------------
Unproved properties valuation 150 37 86 273 - - 273
Proved producing properties -
Depreciation and depletion 11,422 1,240 2,259 14,921 557 34 15,512
Future abandonment and restoration 996 272 160 1,428 37 4 1,469
Support equipment depreciation 310 75 137 522 309 46 877
- ------------------------------------------------------------------------------------------------------------------
Accumulated provisions 12,878 1,624 2,642 17,144 903 84 18,131
- ------------------------------------------------------------------------------------------------------------------
NET CAPITALIZED COSTS $ 4,835 $ 2,067 $ 3,701 $ 10,603 $ 956 $ 1,157 $ 12,716
==================================================================================================================
AT DECEMBER 31, 1995
Unproved properties $ 329 $ 57 $ 190 $ 576 $ - $ 420 $ 996
Proved properties and related producing assets 16,261 1,959 5,334 23,554 900 408 24,862
Support equipment 686 138 295 1,119 494 207 1,820
Deferred exploratory wells 148 40 62 250 - - 250
Other uncompleted projects 368 1,010 1,176 2,554 320 112 2,986
- ------------------------------------------------------------------------------------------------------------------
GROSS CAPITALIZED COSTS 17,792 3,204 7,057 28,053 1,714 1,147 30,914
- ------------------------------------------------------------------------------------------------------------------
Unproved properties valuation 213 30 95 338 - - 338
Proved producing properties -
Depreciation and depletion 11,282 1,071 3,119 15,472 492 18 15,982
Future abandonment and restoration 1,062 247 291 1,600 24 2 1,626
Support equipment depreciation 384 64 179 627 277 30 934
- ------------------------------------------------------------------------------------------------------------------
Accumulated provisions 12,941 1,412 3,684 18,037 793 50 18,880
- ------------------------------------------------------------------------------------------------------------------
NET CAPITALIZED COSTS $ 4,851 $ 1,792 $ 3,373 $ 10,016 $ 921 $ 1,097 $ 12,034
</TABLE>
TABLE III - RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (1)
The company's results of operations from oil and gas producing 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 FS-8
reflects income taxes computed on an effective rate basis. In accordance
with SFAS No. 69, income taxes in Table III 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 FS-8.
FS-33
<PAGE>
TABLE III - RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING
ACTIVITIES (1) - Continued
<TABLE>
<CAPTION>
Consolidated Companies Affiliated Companies
------------------------------------ ------------------------
Millions of dollars U.S. Africa Other Total CPI TCO Worldwide
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Revenues from net production
Sales $ 1,931 $ 1,782 $ 899 $ 4,612 $ 43 $ 283 $ 4,938
Transfers 1,799 273 656 2,728 634 - 3,362
- -------------------------------------------------------------------------------------------------------------
Total 3,730 2,055 1,555 7,340 677 283 8,300
Production expenses (1,272) (297) (278) (1,847) (246) (79) (2,172)
Proved producing properties depreciation,
depletion and abandonment provision (737) (256) (311) (1,304) (81) (37) (1,422)
Exploration expenses (227) (66) (200) (493) (16) - (509)
Unproved properties valuation (16) (7) (10) (33) - - (33)
Other income (expense) (2) 87 (46) 196 237 10 (13) 234
- -------------------------------------------------------------------------------------------------------------
Results before income taxes 1,565 1,383 952 3,900 344 154 4,398
Income tax expense (555) (939) (365) (1,859) (173) (46) (2,078)
- -------------------------------------------------------------------------------------------------------------
Results of Producing Operations $ 1,010 $ 444 $ 587 $ 2,041 $ 171 $ 108 $ 2,320
=============================================================================================================
YEAR ENDED DECEMBER 31, 1996
Revenues from net production
Sales $ 1,695 $ 975 $ 984 $ 3,654 $ 45 $ 256 $ 3,955
Transfers 2,073 1,181 756 4,010 648 - 4,658
- ------------------------------------------------------------------------------------------------------------
Total 3,768 2,156 1,740 7,664 693 256 8,613
Production expenses (1,252) (242) (342) (1,836) (213) (97) (2,146)
Proved producing properties depreciation,
depletion and abandonment provision (678) (194) (296) (1,168) (80) (34) (1,282)
Exploration expenses (172) (85) (198) (455) (8) - (463)
Unproved properties valuation (12) (6) (8) (26) - - (26)
Other income (expense) (2) 46 (74) 112 84 8 (13) 79
- ------------------------------------------------------------------------------------------------------------
Results before income taxes 1,700 1,555 1,008 4,263 400 112 4,775
Income tax expense (600) (1,059) (471) (2,130) (212) (34) (2,376)
- ------------------------------------------------------------------------------------------------------------
Results of Producing Operations $ 1,100 $ 496 $ 537 $ 2,133 $ 188 $ 78 $ 2,399
============================================================================================================
YEAR ENDED DECEMBER 31, 1995
Revenues from net production
Sales $ 1,189 $ 748 $ 783 $ 2,720 $ 35 $ 125 $ 2,880
Transfers 1,689 824 662 3,175 583 - 3,758
- ------------------------------------------------------------------------------------------------------------
Total 2,878 1,572 1,445 5,895 618 125 6,638
Production expenses (1,196) (190) (400) (1,786) (195) (94) (2,075)
Proved producing properties depreciation,
depletion and abandonment provision (752) (174) (316) (1,242) (69) (26) (1,337)
Exploration expenses (102) (57) (213) (372) (9) - (381)
Unproved properties valuation (18) (7) (11) (36) - - (36)
New accounting standard for impaired assets (753) - (128) (881) - - (881)
Other income (expense) (2) 130 (52) 37 115 (13) - 102
- ------------------------------------------------------------------------------------------------------------
Results before income taxes 187 1,092 414 1,693 332 5 2,030
Income tax expense (61) (660) (246) (967) (176) (4) (1,147)
- ------------------------------------------------------------------------------------------------------------
Results of Producing Operations $ 126 $ 432 $ 168 $ 726 $ 156 $ 1 $ 883
============================================================================================================
<FN>
(1) 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 of
producing operations.
(2) Includes gas processing fees, 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 earnings
of NGC 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 NGC Corporation.
"Other international" includes $71 before-tax gains from the sale of 10 percent of Chevron's interest
in TCO and $18 for the sale of producing properties.
In 1996, in the United States, a $48 before-tax gain from the merger of the company's natural gas
liquids company and natural gas marketing business with NGC Corporation and a $19 refund of federal
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 impairments
and employee severance provisions.
In 1995, before-tax 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 earnings $29.
</FN>
</TABLE>
FS-34
<PAGE>
TABLE III - RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING
ACTIVITIES (1),(2) - Continued
<TABLE>
<CAPTION>
Consolidated Companies Affiliated Companies
-------------------------------------- --------------------
Per-unit Average Sales Price and Production Cost (1),(2) U.S. Africa Other Total CPI TCO Worldwide
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Average sales prices
Liquids, per barrel $ 17.33 $ 18.15 $ 16.88 $ 17.53 $ 15.35 $ 10.69 $ 16.82
Natural gas, per thousand cubic feet 2.42 - 2.35 2.40 - .51 2.35
Average production costs, per barrel 5.47 2.61 2.89 4.17 5.59 2.78 4.22
==============================================================================================================================
YEAR ENDED DECEMBER 31, 1996
Average sales prices
Liquids, per barrel $ 18.41 $ 20.41 $ 18.50 $ 19.12 $ 16.26 $ 12.27 $ 18.42
Natural gas, per thousand cubic feet 2.29 - 2.08 2.25 - .57 2.21
Average production costs, per barrel 5.40 2.29 3.31 4.16 4.99 4.15 4.23
==============================================================================================================================
YEAR ENDED DECEMBER 31, 1995
Average sales prices
Liquids, per barrel $ 14.98 $ 16.49 $ 15.32 $ 15.55 $ 14.35 $ 11.51 $ 15.29
Natural gas, per thousand cubic feet 1.52 - 1.72 1.56 - .71 1.55
Average production costs, per barrel 5.11 2.00 3.83 4.12 4.52 7.73 4.24
==============================================================================================================================
Average sales price for liquids ($/Bbl)
DECEMBER 1997 $ 15.63 $ 15.60 $ 15.09 $ 15.48 $ 14.16 $ 9.40 $ 14.91
December 1996 21.07 23.54 19.45 21.54 19.06 13.64 20.68
December 1995 15.47 17.45 16.03 16.25 15.39 11.37 16.01
==============================================================================================================================
Average sales price for natural gas ($/MCF)
DECEMBER 1997 $ 2.25 $ - $ 2.76 $ 2.31 $ - $ .63 $ 2.26
December 1996 3.73 - 2.24 3.42 - .81 3.36
December 1995 2.04 - 1.99 2.03 - .77 2.02
==============================================================================================================================
<FN>
(1) 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
of producing operations.
(2) Natural gas converted to crude oil equivalent gas (OEG) barrels at a
rate of 6 MCF=1 OEG barrel.
</FN>
</TABLE>
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 corporation's reserves advisory committee to ensure
that rigorous professional standards and the reserves definitions prescribed
by the Securities and Exchange Commission are consistently applied throughout
the company.
Proved reserves are the estimated quantities that geologic and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions. 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 equipment 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 company'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.
In June 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
Maracaibo. 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 recorded for the company's Boscan service agreement, which began in 1996.
FS-35
<PAGE>
TABLE IV - RESERVE QUANTITIES INFORMATION - Continued
<TABLE>
<CAPTION>
NET PROVED RESERVES OF CRUDE OIL, CONDENSATE NET PROVED RESERVES OF NATURAL GAS
AND NATURAL GAS LIQUIDS Millions of barrels Billions of cubic feet
----------------------------------------------- -------------------------------------------------
Consolidated Companies Affiliates Consolidated Companies Affiliates
-------------------------- ---------- World- --------------------------- ----------- World-
U.S. Africa Other Total CPI TCO wide U.S. Africa Other Total CPI TCO wide
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RESERVES AT
JANUARY 1, 1995 1,200 804 465 2,469 603 1,095 4,167 5,576 - 2,722 8,298 151 1,518 9,967
Changes attributable to:
Revisions 25 62 74 161 (28) 2 135 3 62 71 136 13 2 151
Improved recovery 7 36 66 109 42 - 151 7 - 23 30 - - 30
Extensions
and discoveries 87 137 14 238 - - 238 609 22 175 806 6 - 812
Purchases (1) 3 25 - 28 - - 28 48 - 2 50 - - 50
Sales (2) (6) - (5) (11) - - (11) (29) - (23) (52) - - (52)
Production (129) (95) (76) (300) (55) (10) (365) (682) - (176) (858) (15) (15) (888)
- -------------------------------------------------------------------------------------------------------------------------------
RESERVES AT
DECEMBER 31, 1995 1,187 969 538 2,694 562 1,087 4,343 5,532 84 2,794 8,410 155 1,505 10,070
Changes attributable to:
Revisions (9) 73 24 88 (4) 69 153 (225) 209 489 473 (1) (18) 454
Improved recovery 38 22 22 82 60 - 142 20 - 16 36 1 - 37
Extensions
and discoveries 63 74 6 143 2 - 145 676 - 7 683 15 - 698
Purchases (1) 2 - - 2 - - 2 5 - 11 16 - - 16
Sales (2) (7) - (32) (39) - - (39) (47) - (11) (58) - - (58)
Production (125) (106) (76) (307) (54) (21) (382) (686) - (171) (857) (18) (25) (900)
- --------------------------------------------------------------------------------------------------------------------------------
RESERVES AT
DECEMBER 31, 1996 1,149 1,032 482 2,663 566 1,135 4,364 5,275 293 3,135 8,703 152 1,462 10,317
Changes attributable to:
Revisions 8 (16) 38 30 37 92 159 (98) (67) 211 46 19 120 185
Improved recovery 139 72 7 218 27 - 245 111 - 1 112 5 - 117
Extensions
and discoveries 57 156 14 227 4 - 231 470 - 12 482 2 - 484
Purchases (1) - - 51 51 - - 51 3 - 1 4 - - 4
Sales (2) (32) - (1) (33) - (120) (153) (95) - (7) (102) - (156) (258)
Production (125) (113) (72) (310) (56) (25) (391) (675) (3) (166) (844) (17) (25) (886)
- -------------------------------------------------------------------------------------------------------------------------------
RESERVES AT
DECEMBER 31, 1997 1,196 1,131 519 2,846 578 1,082 4,506 4,991 223 3,187 8,401 161 1,401 9,963
===============================================================================================================================
Developed reserves
- -------------------------------------------------------------------------------------------------------------------------------
At January 1, 1995 1,097 546 293 1,936 499 414 2,849 4,919 - 1,508 6,427 135 574 7,136
At December 31, 1995 1,061 596 371 2,028 457 406 2,891 4,929 84 1,726 6,739 140 562 7,441
At December 31, 1996 1,027 658 281 1,966 448 500 2,914 4,727 293 1,634 6,654 136 643 7,433
At December 31, 1997 1,025 721 293 2,039 435 532 3,006 4,391 223 1,695 6,309 145 688 7,142
===============================================================================================================================
<FN>
(1) Includes reserves acquired through property exchanges.
(2) Includes reserves disposed of through property exchanges.
</FN>
</TABLE>
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 contractual 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 calculated by applying
appropriate year-end statutory tax rates. These rates reflect allowable
deductions and tax credits and are applied to estimated future pre-tax net
cash flows, 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 management'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
arbitrary valuation prescribed under SFAS No. 69 requires assumptions as to
the timing and amount of future development 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.
FS-36
<PAGE>
TABLE V - STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATED
TO PROVED OIL AND GAS RESERVES - Continued
<TABLE>
<CAPTION>
Consolidated Companies Affiliated Companies
------------------------------------------ --------------------
Millions of dollars U.S. Africa Other Total CPI TCO Worldwide
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1997
Future cash inflows from production $ 28,270 $ 16,560 $ 16,860 $ 61,690 $ 9,240 $ 10,890 $ 81,820
Future production and development costs (14,030) (4,810) (5,090) (23,930) (6,340) (6,550) (36,820)
Future income taxes (4,710) (6,630) (4,330) (15,670) (1,390) (600) (17,660)
- -----------------------------------------------------------------------------------------------------------------------
Undiscounted future net cash flows 9,530 5,120 7,440 22,090 1,510 3,740 27,340
10 percent midyear annual discount for
timing of estimated cash flows (3,910) (1,780) (3,290) (8,980) (650) (2,710) (12,340)
- -----------------------------------------------------------------------------------------------------------------------
STANDARDIZED MEASURE OF DISCOUNTED
FUTURE NET CASH FLOWS $ 5,620 $ 3,340 $ 4,150 $ 13,110 $ 860 $ 1,030 $ 15,000
=======================================================================================================================
AT DECEMBER 31, 1996
Future cash inflows from production $ 45,620 $ 24,220 $ 19,560 $ 89,400 $ 12,220 $ 16,040 $ 117,660
Future production and development costs (14,430) (3,840) (4,590) (22,860) (7,560) (5,330) (35,750)
Future income taxes (11,170) (12,560) (5,290) (29,020) (2,210) (4,220) (35,450)
- -----------------------------------------------------------------------------------------------------------------------
Undiscounted future net cash flows 20,020 7,820 9,680 37,520 2,450 6,490 46,460
10 percent midyear annual discount for
timing of estimated cash flows (8,250) (2,700) (4,300) (15,250) (1,020) (5,070) (21,340)
- -----------------------------------------------------------------------------------------------------------------------
Standardized Measure of Discounted
Future Net Cash Flows $ 11,770 $ 5,120 $ 5,380 $ 22,270 $ 1,430 $ 1,420 $ 25,120
=======================================================================================================================
AT DECEMBER 31, 1995
Future cash inflows from production $ 30,200 $ 17,570 $ 15,340 $ 63,110 $ 9,530 $ 15,630 $ 88,270
Future production and development costs (14,140) (4,350) (4,600) (23,090) (5,700) (7,140) (35,930)
Future income taxes (5,390) (7,910) (3,660) (16,960) (1,950) (3,350) (22,260)
- -----------------------------------------------------------------------------------------------------------------------
Undiscounted future net cash flows 10,670 5,310 7,080 23,060 1,880 5,140 30,080
10 percent midyear annual discount for
timing of estimated cash flows (4,260) (1,830) (3,140) (9,230) (800) (3,700) (13,730)
- -----------------------------------------------------------------------------------------------------------------------
Standardized Measure of Discounted
Future Net Cash Flows $ 6,410 $ 3,480 $ 3,940 $ 13,830 $ 1,080 $ 1,440 $ 16,350
=======================================================================================================================
</TABLE>
TABLE VI - CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS FROM PROVED RESERVES
<TABLE>
<CAPTION>
Consolidated Companies Affiliated Companies Worldwide
------------------------ ---------------------- -------------------------
Millions of dollars 1997 1996 1995 1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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) (639) (454) (6,128) (6,467) (4,563)
Development costs incurred 1,908 1,662 1,661 311 173 104 2,219 1,835 1,765
Purchases of reserves 173 28 230 - - - 173 28 230
Sales of reserves (238) (353) (116) (140) - - (378) (353) (116)
Extensions, discoveries and improved
recovery, less related costs 2,161 3,745 2,927 104 316 165 2,265 4,061 3,092
Revisions of previous quantity estimates 535 969 1,979 980 59 (723) 1,515 1,028 1,256
Net changes in prices, development
and production costs (20,440) 13,495 3,602 (3,570) 721 1,756 (24,010) 14,216 5,358
Accretion of discount 3,673 2,236 1,513 516 418 310 4,189 2,654 1,823
Net change in income tax 8,561 (7,514) (3,577) 1,474 (718) (538) 10,035 (8,232) (4,115)
- --------------------------------------------------------------------------------------------------------------------
Net change for the year (9,160) 8,440 4,110 (960) 330 620 (10,120) 8,770 4,730
- --------------------------------------------------------------------------------------------------------------------
PRESENT VALUE AT DECEMBER 31 $13,110 $22,270 $13,830 $1,890 $2,850 $2,520 $15,000 $25,120 $16,350
====================================================================================================================
</TABLE>
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 quantity estimates."
FS-37
<PAGE>
<TABLE>
<CAPTION>
FIVE-YEAR FINANCIAL SUMMARY (1)
Millions of dollars, except per-share amounts 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA
REVENUES
Sales and other operating revenues
Refined products $ 15,584 $ 15,785 $ 13,471 $ 14,328 $ 16,089
Crude oil 11,297 12,397 9,376 8,249 8,501
Natural gas 2,568 3,299 2,019 2,138 2,156
Natural gas liquids 553 1,167 1,285 1,180 1,235
Other petroleum 1,109 1,184 1,144 944 967
Chemicals 3,520 3,422 3,758 3,065 2,708
Coal and other minerals 369 340 358 416 447
Excise taxes 5,574 5,202 4,988 4,790 4,068
Corporate and other 9 (14) (89) 20 20
- ----------------------------------------------------------------------------------------------------
Total sales and other operating revenues 40,583 42,782 36,310 35,130 36,191
Income from equity affiliates 688 767 553 440 440
Other income 679 344 219 284 451
- ----------------------------------------------------------------------------------------------------
TOTAL REVENUES 41,950 43,893 37,082 35,854 37,082
COSTS, OTHER DEDUCTIONS AND INCOME TAXES 38,694 41,286 36,152 34,161 35,817
- ----------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING PRINCIPLES $ 3,256 $ 2,607 $ 930 $ 1,693 $ 1,265
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES - - - - -
- ----------------------------------------------------------------------------------------------------
NET INCOME $ 3,256 $ 2,607 $ 930 $ 1,693 $ 1,265
====================================================================================================
PER SHARE OF COMMON STOCK:
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING PRINCIPLES - BASIC $4.97 $3.99 $1.43 $2.60 $1.94
- DILUTED $4.95 $3.98 $1.43 $2.59 $1.94
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES - - - - -
- ----------------------------------------------------------------------------------------------------
NET INCOME PER SHARE OF COMMON STOCK - BASIC $4.97 $3.99 $1.43 $2.60 $1.94
- DILUTED $4.95 $3.98 $1.43 $2.59 $1.94
====================================================================================================
Cash Dividends Per Share $2.28 $2.08 $1.925 $1.85 $1.75
====================================================================================================
CONSOLIDATED BALANCE SHEET DATA (YEAR-END)
Current assets $ 7,006 $ 7,942 $ 7,867 $ 7,591 $ 8,682
Properties, plant and equipment (net) 22,671 21,496 21,696 22,173, 21,865
Total assets 35,473 34,854 34,330 34,407 34,736
Short-term debt 1,637 2,706 3,806 4,014 3,456
Other current liabilities 5,309 6,201 5,639 5,378 7,150
Long-term debt and capital lease obligations 4,431 3,988 4,521 4,128 4,082
Stockholders' equity 17,472 15,623 14,355 14,596 13,997
Per share $ 26.64 $ 23.92 $ 22.01 $ 22.40 $ 21.49
====================================================================================================
SELECTED DATA
Return on average stockholders' equity 19.7% 17.4% 6.4% 11.8% 9.1%
Return on average capital employed 15.0% 12.7% 5.3% 8.7% 6.8%
Total debt/total debt plus equity 25.8% 30.0% 36.7% 35.8% 35.0%
Capital and exploratory expenditures (2) $ 5,541 $ 4,840 $ 4,800 $ 4,819 $ 4,440
Common stock price - High $89 3/16 $68 3/8 $53 5/8 $49 3/16 $49 3/8
- Low $61 3/4 $51 $43 3/8 $39 7/8 $33 11/16
- Year-end $77 $65 $52 3/8 $44 5/8 $43 9/16
Common shares outstanding
at year-end (in thousands) 655,931 653,086 652,327 651,751 651,478
Weighted average shares
outstanding for the year (in thousands) 654,991 652,769 652,084 651,672 650,958
Number of employees at year-end (3) 39,362 40,820 43,019 45,758 45,576
===================================================================================================
<FN>
(1) Comparability between years is affected by changes in accounting
methods: 1997, 1996 and 1995 reflect adoption of Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of".
Share and per-share amounts for all years reflect the two-for-one
stock split in May 1994.
(2) Includes equity in affiliates' expenditures. $1,174 $983 $912 $846 $701
(3) Includes service station personnel.
</FN>
</TABLE>
FS-38
CALTEX GROUP OF COMPANIES
COMBINED FINANCIAL STATEMENTS
December 31, 1997
C-1
<PAGE>
CALTEX GROUP OF COMPANIES
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
INDEX
Page
------
General Information C-3 to C-6
Independent Auditors' Report C-7
Combined Balance Sheet C-8 to C-9
Combined Statement of Income C-10
Combined Statement of Stockholders' Equity C-11
Combined Statement of Cash Flows C-12
Notes to Combined Financial Statements C-13 to C-24
Note: Financial statement schedules are omitted as permitted by Rule 4.03 and
Rule 5.04 of Regulation S-X.
C-2
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
The Caltex Group of Companies (Group) is jointly owned 50% each by Chevron
Corporation and Texaco Inc. and was created in 1936 by its two owners to
produce, transport, refine and market crude oil and petroleum products. The
Group is comprised of the following companies:
- - Caltex Petroleum Corporation, a company incorporated in Delaware that,
through its many subsidiaries and affiliates, conducts refining,
transporting, and marketing activities in the Eastern Hemisphere;
- - P. T. Caltex Pacific Indonesia, an exploration and production company
incorporated and operating in Indonesia; and,
- - American Overseas Petroleum Limited, a company incorporated in the
Bahamas, that, through its subsidiary, provides services for and manages
certain exploration and production operations in Indonesia in which Chevron
and Texaco have interests, but not necessarily jointly or in the same
properties.
A brief description of each company's operations and other items follow:
Caltex Petroleum Corporation (Caltex)
- -------------------------------------
Through its subsidiaries and affiliates, Caltex operates in approximately
60 countries, principally in Africa, Asia, the Middle East, New Zealand and
Australia. Caltex is involved in all aspects of the downstream business:
refining, distribution, shipping, storage, marketing, supply and trading
operations. At year end 1997, Caltex had over 7,600 employees, of which
approximately 3% were located in the United States.
The majority of refining and certain marketing operations are conducted
through joint ventures. Caltex has equity interests in 13 refineries with a
refining capacity of more than 900,000 barrels per day. Caltex continues to
improve its refineries with investments designed to provide higher yields and
meet environmental regulations. Additionally, it has interests in two
lubricant refineries, six asphalt plants, 17 lubricating oil blending plants
and more than 500 ocean terminals and depots. Caltex also has an interest in a
fleet of vessels and owns or has equity interests in numerous pipelines.
Caltex sales of crude oil and petroleum products were 1.4 million barrels per
day in 1997.
Caltex and its affiliates maintain a strong marketing presence through a
network of 7,900 retail outlets, of which 4,600 are branded as Caltex. It also
operates 305 Star Mart convenience stores. A significant portion of the $2.3
billion that Caltex plans to invest over the next three years is targeted to
stimulate retail growth and continue the roll-out of the company's new
corporate and retail image.
Caltex introduced a new corporate and retail identity in 1996 and is actively
pursuing its objective of reimaging over 3,000 branded sites by 2000.
Underperforming stations with poor prospects for improvement are being
eliminated. New Caltex Star Mart convenience stores anchor many high-volume
station locations. Many stations also include new ancillary revenue centers
such as quick-service restaurants, auto lube bays and brushless car washes.
In 1997, Caltex continued its refinery upgrade projects in the Philippines
and Korea and enhanced its role in Australia through an affiliate's
acquisition of the remaining 50% interest in Australian Petroleum Pty. Limited
(APPL) thereby becoming the largest oil company in Australia. It also continued
to make inroads into emerging countries such as China, Vietnam, Indonesia and
India in selected product markets. Caltex increased its market share in
Thailand by acquiring British Petroleum's retail service station network of 47
sites, and has entered the independent power producer market in Japan through
an affiliate.
In addition to the retail initiatives, Caltex has created specialized business
units that are helping Caltex operating companies position themselves for
larger shares of the high-growth markets for lubricating oils and greases,
aviation fuels, and liquefied petroleum gas. Caltex conducts international
crude oil and petroleum product logistics and trading operations from a
subsidiary in Singapore. Caltex is also active in the petrochemical business,
particularly in Japan and Korea.
C-3
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
P. T. Caltex Pacific Indonesia (CPI)
- ------------------------------------
CPI holds a Production Sharing Contract in Central Sumatra through the year
2021. CPI also acts as operator in Sumatra for eight other petroleum
contract areas, with 33 fields, which are jointly held by Chevron and Texaco.
Exploration is pursued through an area comprising 18.3 million acres with
production established in the giant Minas and Duri fields, along with smaller
fields. Gross production from fields operated by CPI for 1997 was over 765,000
barrels per day. CPI entitlements are sold to its stockholders, who use them
in their systems or sell them to third parties. At year end 1997, CPI had
approximately 6,100 employees, all located in Indonesia.
American Overseas Petroleum Limited (AOPL)
- ------------------------------------------
In addition to providing services to CPI, AOPL, through its subsidiary
Amoseas Indonesia Inc., manages selective contract areas for Texaco's and
Chevron's undivided interests in Indonesia, excluding Sumatra. At year end,
AOPL had approximately 250 employees, of which 6% were located in the United
States.
Economic Uncertainties
- ----------------------
During the second half of 1997, many of the countries in the Pacific Rim
experienced major devaluations in their currencies compared to the U.S. dollar.
The Group has significant operations (either subsidiary or affiliate) in most
of the "currency crisis" areas (Indonesia, Korea, Philippines, Thailand and
Malaysia), which are material to the Group's net income, cash flows and
capital. Such operations accounted for approximately 84% of the Group's
earnings in 1997. The economies and related oil consumption in the areas
involved are being negatively affected by the crisis. In some cases, normal
short-term trade related financing provided by international banks has been
curtailed.
The devaluations in these five countries resulted in significant net
exchange gains of $211 million, $73 million of pre-tax exchange losses offset
by $284 million in net local tax benefits, inclusive of amounts applicable to
equity affiliates. The tax benefits resulted from the increase in the amount
of local currencies required to repay debt denominated in U.S. dollars. These
tax benefits are reflected in the income statement but the increased local
currency debt amounts are not, as there is no change in the U.S. dollar value
of the debt. A significant portion of the tax benefit has been recorded as a
deferred tax asset to be realized based on future local currency taxable
income. Reported earnings include additional reserves for potential bad debts
related to the currency crisis of $48 million.
Local currency selling prices for petroleum products in these markets could
not be immediately increased to fully recover prior dollar margins. The most
significant uncertainties that will affect Group operating results and cash
flows in these areas in 1998 are the ability to raise local currency selling
prices and restore dollar marketing margins, continued weak regional refining
margins and reduced demand and liquidity concerns relative to its operating
companies and their customers. Certain subsidiaries of Caltex Petroleum
Corporation, beginning in January 1998, provided short-term trade financing
of up to $500 million for a four-month period to its Korean affiliate.
This support is considered temporary.
The Group is further focusing on cost management and its recurring
capital investment in the areas involved. While the impact of the crisis on
period operating results has been, and is expected to continue to be
significant, the Group does not expect this will have a material effect on its
consolidated financial position or liquidity.
C-4
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
Environmental Activities
- ------------------------
The Group's activities are subject to various environmental, health and
safety regulations in each of the countries in which it operates. Such
regulations vary significantly in degree of scope, standards and enforcement.
The Group's policy is to comply with all applicable environmental, health and
safety laws and regulations as well as its own internal policies. The Group
has an active program to ensure that its environmental standards are
maintained, which includes closely monitoring applicable statutory and
regulatory requirements, as well as enforcement policies in each of the
countries in which it operates, and conducting periodic environmental
compliance audits.
The environmental guidelines and definitions promulgated by the American
Petroleum Institute provide the basis for reporting the Group's expenditures.
For the year ended December 31, 1997, the Group, including its equity share of
affiliates, incurred total costs of approximately $160 million, including
capital costs of $98 million and nonremediation related operating expenses of
$62 million. The major component of the Group's expenditures is for the
prevention of air pollution. As of December 31, 1997, the Group had accrued
$110 million for various known remediation activities, including $88 million
relating to the future cost of restoring and abandoning existing oil and gas
properties.
While the Group has provided for known environmental obligations that 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. However,
the Group believes that future environmental expenditures will not materially
affect its financial position or liquidity.
Year 2000 Compliance Issues
- ---------------------------
The Group's computer systems, software and mechanical equipment containing
embedded technology are impacted by the year 2000 programming problems.
Older programs may incorrectly interpret this date causing systems And
equipment to shut down, produce erroneous information or malfunction.
The Group has established various teams to address these issues. While it is
not possible at this time to quantify the impact of this problem on the
operations of the Group, evaluations are currently underway to assess the risks
and compliance issues the Group is facing. Strategies are being developed to
mitigate risks, and correct various system and mechanical problems already
identified. The Group is also working with customers and suppliers to ensure
that data interfaces, equipment, software and other issues have been properly
identified and measures taken to protect the operations of the Group from
problems outside the organization.
Much of the cost of compliance is included in planned system or equipment
upgrades already scheduled or underway, although certain programs will be
accelerated to ensure that major problems are properly addressed before the
target dates. Other costs which are classified as incremental expenses will
represent a redeployment of existing resources. At this time, estimates of the
total incremental costs to be incurred to correct these issues are unavailable.
However, the Group believes that the cost of compliance with these issues will
not have a material effect on the Group's combined financial position, results
of operations or liquidity.
Refining Synergies
- ------------------
During 1997, Caltex' Thailand affiliate, Star Petroleum Refining Company
(SPRC), and Rayong Refining Company (RRC), an affiliate of the Royal Dutch
Petroleum Company, signed a Memorandum of Understanding to pursue an operating
alliance to optimize the operations of the two nearby refineries as a single
economic group. Significant economic benefits are possible from this
arrangement. SPRC and RRC are currently evaluating various proposed structures
and synergies, as well as conducting discussions with lenders to ensure proper
concurrences are obtained. To date, discussions are still in the early stages
and no legally binding agreements have been executed.
C-5
<PAGE>
CALTEX GROUP OF COMPANIES
GENERAL INFORMATION
Supplemental Market Risk Disclosures
- ------------------------------------
The Group uses derivative financial instruments for hedging purposes. These
instruments principally include interest rate and/or currency swap
contracts, forward and option contracts to buy and sell foreign currencies, and
commodity futures, options, swaps and other derivative instruments. Hedged
market risk exposures include certain portions of assets, liabilities, future
commitments and anticipated sales. Positions are adjusted for changes in the
exposures being hedged. Since the Group hedges only a portion of its market
risk exposures, market risk exposure remains on the unhedged portion. The
Notes to the financial statements provide data relating to derivatives and
applicable accounting policies.
Debt and debt-related derivatives
The Group is exposed to interest rate risk on its short-term and long-term
debt with variable interest rates (approximately $1.9 billion at December
31, 1997, before the effects of related net interest rate swaps of $0.4
billion). The Group seeks to balance the benefit of lower cost variable rate
debt, having inherent increased risk, with more expensive, but less risky
fixed rate debt. This is accomplished through adjusting the mix of fixed and
variable rate debt, as well as the use of derivative financial instruments,
principally interest rate swaps.
Based on the overall interest rate exposure on variable rate debt and interest
rate swaps taken separately at December 31, 1997, a hypothetical 2% change in
the interest rates would not materially affect the Group's combined financial
position, net income or liquidity.
Crude oil and petroleum product hedging
The Group hedges a portion of the market risks associated with its crude oil
and petroleum product purchases and sales. The Group uses established
petroleum futures exchanges, as well as "over-the counter" hedge instruments,
including futures, options, swaps, and other derivative products which reduce
the Group's exposure to price volatility in the physical markets.
As a sensitivity, a hypothetical 13% change in crude oil and petroleum
product prices would not result in a material loss on the outstanding
derivatives at the end of 1997, in terms of the Group's financial position,
results of operations or liquidity.
Currency-related derivatives
The Group is exposed to foreign currency exchange risk in the countries in
which it operates. To hedge against adverse changes in foreign currency
exchange rates against the U.S. dollar, the Group sometimes enters into forward
exchange and option contracts. Depending on the exposure being hedged, the
Group either purchases or sells selected foreign currencies. At year end
1997, the Group had net local currency purchase contracts of approximately $417
million to hedge certain specific transactions or net exposures including
foreign currency denominated debt. A hypothetical 10% change in exchange rates
against the U.S. dollar would not result in a net material change in the
Group's operating results or cash flows from the derivatives and their related
underlying hedged positions as of the end of 1997.
C-6
<PAGE>
Independent Auditors' Report
----------------------------
To the Stockholders
The Caltex Group of Companies:
We have audited the accompanying combined balance sheets of the Caltex
Group of Companies as of December 31, 1997 and 1996, and the related combined
statements of income, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997. These combined
financial statements are the responsibility of the Group's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of the Caltex
Group of Companies as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
Dallas, Texas
February 9, 1998
C-7
<PAGE>
<TABLE>
<CAPTION>
CALTEX GROUP OF COMPANIES
COMBINED BALANCE SHEET
ASSETS
As of December 31
---------------------
(Millions of dollars)
1997 1996
------ ------
<S>
Current assets:
<C> <C>
Cash and cash equivalents, including time deposits
of $69 in 1997 and $21 in 1996 $ 282 $ 206
Marketable securities 82 116
Accounts and notes receivable, less allowance for
doubtful accounts of $21 in 1997 and $18 in 1996:
Trade 808 864
Affiliates 368 452
Other 360 318
-------- --------
1,536 1,634
Inventories:
Crude oil 127 159
Petroleum products 437 503
Materials and supplies 28 53
-------- --------
592 715
Deferred income taxes 29 10
-------- --------
Total current assets 2,521 2,681
Investments and advances:
Equity in affiliates 2,035 1,842
Miscellaneous investments and long-term receivables,
less allowance of $13 in 1997 116 153
-------- --------
Total investments and advances 2,151 1,995
Property, plant, and equipment, at cost:
Producing 4,058 3,721
Refining 1,272 1,550
Marketing 2,892 2,451
Other 13 8
-------- --------
8,235 7,730
Accumulated depreciation, depletion and amortization (3,393) (3,217)
-------- --------
Net property, plant and equipment 4,842 4,513
Prepaid and deferred charges 200 206
-------- --------
Total assets $ 9,714 $ 9,395
======== ========
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
CALTEX GROUP OF COMPANIES
COMBINED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
As of December 31
---------------------
(Millions of dollars)
1997 1996
------ ------
<S>
Current liabilities:
<C> <C>
Short-term debt $ 1,554 $ 1,246
Accounts payable:
Trade and other 1,053 1,236
Stockholders 102 176
Affiliates 60 84
-------- --------
1,215 1,496
Accrued liabilities 138 148
Estimated income taxes 84 109
-------- --------
Total current liabilities 2,991 2,999
Long-term debt 770 713
Employee benefit plans 106 107
Deferred credits and other noncurrent liabilities 1,050 949
Deferred income taxes 190 249
Minority interest in subsidiary companies 15 122
-------- --------
Total 5,122 5,139
Stockholders' equity:
Common stock 355 355
Capital in excess of par value 2 2
Retained earnings 4,342 3,910
Currency translation adjustment (120) (36)
Unrealized holding gain on investments 13 25
-------- --------
Total stockholders' equity 4,592 4,256
-------- --------
Total liabilities and stockholders' equity $ 9,714 $ 9,395
======== ========
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
CALTEX GROUP OF COMPANIES
COMBINED STATEMENT OF INCOME
Year ended December 31
------------------------------
(Millions of dollars)
1997 1996 1995
---- ---- ----
<S>
Revenues:
<C> <C> <C>
Sales and other operating revenues(1) $ 17,920 $ 16,895 $ 15,067
Gain on sale of investment in affiliate - 1,132 -
Income in equity affiliates 390 51 425
Dividends, interest and other income 47 88 130
--------- --------- ---------
Total revenues 18,357 18,166 15,622
Costs and deductions:
Cost of sales and operating expenses(2) 15,909 14,774 13,045
Selling, general and administrative
expenses 580 532 620
Depreciation, depletion and amortization 421 407 361
Maintenance and repairs 143 134 104
Foreign exchange, net (55) 6 (37)
Interest expense 146 140 159
Minority interest 3 (2) 4
--------- --------- ---------
Total costs and deductions 17,147 15,991 14,256
--------- --------- ---------
Income before income taxes 1,210 2,175 1,366
Provision for income taxes 364 982 467
--------- --------- ---------
Net income $ 846 $ 1,193 $ 899
========= ========= =========
<FN>
(1) Includes sales to:
Stockholders $1,695 $1,711 $1,376
Affiliates 3,018 2,841 1,524
(2) Includes purchases from:
Stockholders $2,174 $2,634 $1,834
Affiliates 1,813 1,297 1,638
See accompanying notes to combined financial statements.
</FN>
</TABLE>
C-10
<PAGE>
<TABLE>
<CAPTION>
CALTEX GROUP OF COMPANIES
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
(Millions of dollars)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Common stock and capital in
excess of par value $ 357 $ 357 $ 357
======= ======= =======
Retained earnings:
Balance at beginning of year $ 3,910 $ 4,187 $ 3,898
Net income 846 1,193 899
Cash dividends (414) (1,470) (610)
------- ------- -------
Balance at end of year $ 4,342 $ 3,910 $ 4,187
======= ======= =======
Currency translation adjustment:
Balance at beginning of year $ (36) $ 350 $ 399
Sale of investment in affiliate - (240) -
Other changes during the year (84) (146) (49)
------- ------- -------
Balance at end of year $ (120) $ (36) $ 350
======= ======= =======
Unrealized holding gain on investments:
Balance at beginning of year $ 25 $ 65 $ 79
Change during the year (12) (40) (14)
------- ------- -------
Balance at end of year $ 13 $ 25 $ 65
======= ======= =======
Total stockholders' equity - end of year $ 4,592 $ 4,256 $ 4,959
======= ======= =======
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
CALTEX GROUP OF COMPANIES
COMBINED STATEMENT OF CASH FLOWS
Year ended December 31
------------------------------
(Millions of dollars)
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Operating activities:
Net income $ 846 $ 1,193 $ 899
Reconciliation to net cash
provided by operating activities:
Depreciation, depletion and amortization 421 407 361
Dividends (less) more than income
in equity affiliates (347) 38 (349)
Net losses on asset sales 16 10 11
Deferred income taxes (51) 36 18
Prepaid charges and deferred credits 103 38 69
Changes in operating working capital (150) (7) (27)
Gain on sale of investment in affiliate - (1,132) -
Other (13) (12) 66
----- ----- -----
Net cash provided by operating
activities 825 571 1,048
Investing activities:
Capital expenditures (905) (741) (663)
Investments in and advances to affiliates (10) (30) (150)
Net sales (purchases) of investment
instruments 34 (55) (7)
Proceeds from sale of investment
in affiliate - 1,984 -
Proceeds from asset sales 156 95 46
----- ----- -----
Net cash (used for) provided by
investing activities (725) 1,253 (774)
Financing activities:
Debt with terms in excess of three months :
Borrowings 845 1,112 1,063
Repayments (628) (1,351) (1,093)
Net increase (decrease) in other debt 323 (53) 275
Dividends paid, including minority interest (414) (1,490) (617)
----- ----- -----
Net cash provided by (used for)
financing activities 126 (1,782) (372)
Effect of exchange rate changes on
cash and cash equivalents (150) (2) 13
Cash and cash equivalents:
Net change during the year 76 40 (85)
Beginning of year balance 206 166 251
----- ----- -----
End of year balance $ 282 $ 206 $ 166
===== ===== =====
<FN>
See accompanying notes to combined financial statements.
</FN>
</TABLE>
C-12
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies
Principles of combination
The combined financial statements of the Caltex Group of Companies (Group)
include the accounts of Caltex Petroleum Corporation and subsidiaries,
American Overseas Petroleum Limited and subsidiary, and P.T. Caltex Pacific
Indonesia. Intercompany transactions and balances have been eliminated.
Subsidiaries include companies owned directly or indirectly more than 50
percent except cases in which control does not rest with the Group.
Chevron Corporation and Texaco Inc. (stockholders), through subsidiary
companies, each own 50% of the common shares of the Group companies. The Group
is primarily engaged in exploring, producing, refining, transporting and
marketing crude oil and petroleum products in the Asia-Pacific and East-of-Suez
Regions. The Group's accounting policies are in accordance with United States
generally accepted accounting principles.
Translation of foreign currencies
The U.S. dollar is the functional currency for all principal subsidiary and
affiliate operations. Effective October 1, 1997, the Group changed the
functional currency for its affiliates in Japan and Korea from the local
currency to the U.S. dollar. Major changes in economic facts and
circumstances, including a significant reduction in regulatory restrictions
for petroleum products in those countries, supported this change in functional
currency.
The change in functional currency is applied on a prospective basis. The
U.S. dollar translated amounts of nonmonetary assets and liabilities at
September 30, 1997 become the historical accounting basis for those assets and
liabilities at October 1, 1997 and for subsequent periods. As a result of the
change in functional currency, translation gains and losses on U.S. dollar
denominated assets and liabilities of these affiliates will not arise in the
Group's financial statements for periods after September 30, 1997. The $83
million cumulative translation adjustments for Korea and Japan at September 30,
1997 recorded prior to the change will remain as a separate component of
stockholders' equity.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
Short-term investments
All highly liquid investments are classified as available for sale. Those
with a maturity of three months or less when purchased are considered as
"Cash equivalents" and those with longer maturities are classified as
"Marketable securities".
Inventories
Crude oil and petroleum product inventories are stated at cost, primarily
determined using the last-in, first-out (LIFO) method. Costs include
applicable acquisition and refining costs, duties, import taxes, freight, etc.
Materials and supplies are stated at average cost. Inventories are valued at
the lower of cost or current market.
Investments and advances
Investments in affiliates in which the Group has an ownership interest of 20%
to 50% or majority-owned investments where control does not rest with the
Group, are accounted for by the equity method. The Group's share of
earnings or losses of these companies is included in current results,
and the recorded investments reflect the underlying equity in each company.
Investments in other affiliates are carried at cost and dividends are
reported as income.
Property, plant and equipment
Exploration and production activities are accounted for under the successful
efforts method. Depreciation, depletion and amortization expenses for
capitalized costs relating to producing properties, including intangible
development costs, are determined using the unit-of-production method. All
other assets are depreciated by class on a straight-line basis using rates
based upon the estimated useful life of each class.
C-13
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies - continued
Maintenance and repairs necessary to maintain facilities in operating
condition are charged to income as incurred. Additions and improvements that
materially extend the life of assets are capitalized. Upon disposal of
assets, any net gain or loss is included in income.
Derivative financial instruments
The Group uses various derivative financial instruments for hedging purposes.
These instruments principally include interest rate and/or currency swap
contracts, forward and option contracts to buy and sell foreign currencies,
and commodity futures, options, swaps and other derivative instruments.
Hedged market risk exposures include certain portions of assets,
liabilities, future commitments and anticipated sales. Prior realized
gains and losses on hedges of existing nonmonetary assets are included
in the carrying value of those assets. Gains and losses related to qualifying
hedges of firm commitments or anticipated transactions are deferred and
recognized in income when the underlying hedged transaction is recognized
in income. If the derivative instrument ceases to be a hedge, the related gains
and losses are recognized currently in income. Gains and losses on derivative
contracts that do not qualify as hedges are recognized currently in other
income.
Accounting for contingencies
Certain conditions may exist as of the date financial statements are issued,
which may result in a loss to the Group, but which will only be resolved when
one or more future events occur or fail to occur. Assessing contingencies
necessarily involves an exercise of judgment. In assessing loss contingencies
related to legal proceedings that are pending against the Group or unasserted
claims that may result in such proceedings, the Group evaluates the perceived
merits of any legal proceedings or unasserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a
material liability had been incurred and the amount of the loss can be
estimated, then the estimated liability is accrued in the Group's financial
statements. If the assessment indicates that a potentially material liability
is not probable, but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, together with an
estimate of the range of possible loss if determinable are disclosed.
Loss contingencies considered remote are generally not disclosed unless they
involve guarantees, in which case the nature and amount of the guarantee
would be disclosed. However, in some instances in which disclosure is not
otherwise required, the Group may disclose contingent liabilities of an unusual
nature which, in the judgment of management and its legal counsel, may be of
interest to stockholders or others.
Environmental matters
The Group's environmental policies encompass the existing laws in each country
in which the Group operates and the Group's own internal standards.
Expenditures that create future benefits or contribute to future revenue
generation are capitalized. Future remediation costs are accrued based on
estimates of known environmental exposure even if uncertainties exist about
the ultimate cost of the remediation. Such accruals are based on the best
available undiscounted estimates using data primarily developed by third party
experts. Costs of environmental compliance for past and ongoing operations,
including maintenance and monitoring, are expensed as incurred. Recoveries
from third parties are recorded as assets when realizable.
Reclassifications
Certain amounts for 1996 have been reclassified to conform with the current
year's presentation.
Note 2 - Asset Sale
Effective April 1, 1997 Caltex Trading and Transport Corporation, a subsidiary
of the Group, sold its 40% interest in its Bahrain refining joint venture
(Bapco) plus related assets to its partner, the Government of the State of
Bahrain, at net book value of approximately $140 million.
C-14
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 3 - Inventories
The excess of current cost over the reported value of inventory
maintained on the LIFO basis was approximately $28 million and $125 million at
December 31, 1997 and 1996, respectively.
During the periods presented, inventory quantities valued on the LIFO basis
were reduced at certain locations. Inventory reductions, net of related
market valuation adjustments ($14 million in 1997), decreased net income $5
million in 1997 and $1 million in 1995 and increased net income $4 million in
1996.
Certain inventories were recorded at market, which was lower than the
LIFO carrying value. Adjustments to market reduced earnings $36 million in
Earnings increased $29 million in 1996 and $25 million in 1995 due to
recovery of market values over previous years' writedowns.
Note 4 - Equity in affiliates
Investments in affiliates at equity include the following:
<TABLE>
<CAPTION>
As of December 31
---------------------
(Millions of dollars)
Equity % 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Caltex Australia Limited
(Australian Petroleum Pty. Limited ) 50% $ 300 $ 336
Koa Oil Company, Limited 50% 353 364
LG-Caltex Oil Corporation 50% 999 739
Star Petroleum Refining Company, Ltd. 64% 228 287
All other Various 155 116
------- -------
$ 2,035 $ 1,842
======= =======
</TABLE>
The carrying value of the Group's investment in its affiliates in excess
of its proportionate share of affiliate net equity is being amortized over
approximately 20 years.
In 1995, Caltex Australia Limited (CAL), a subsidiary of the Group, combined
its petroleum refining and marketing operations with those of Ampol Limited
to form Australian Petroleum Pty. Limited (APPL) which owns and manages the
combined refining and marketing operations. CAL contributed net assets at
their carrying value of $419 million for its 50% equity interest in APPL and no
gain or loss was recognized.
On December 31, 1997, CAL acquired the remaining 50% of APPL from its partner,
a subsidiary of Pioneer International Limited, for approximately $186
million in cash plus the issuance of an additional 90 million shares of CAL
stock. As a result of this transaction, the Group's equity in CAL has declined
from 75% to 50% and its indirect equity in APPL has increased to 50% from
37.5%. This transaction was recorded as a purchase. CAL is now classified as
an affiliate and the individual assets and liabilities have been excluded from
the Group's consolidated financial statements for 1997.
Effective April 1, 1996, the Group sold its 50% investment in Nippon
Petroleum Refining Company, Limited (NPRC) to its partner, Nippon Oil Company,
Limited (NOC) for approximately $2 billion in cash. The Group's net income in
1996 includes a net after-tax gain of approximately $620 million related to
this sale. The combined statement of income includes Group product sales to
NOC of approximately $0.5 billion in the first quarter of 1996 and $2.1 billion
in 1995.
During 1995, an affiliate sold certain property required by the local
government. The Group's share (approximately $171 million) of the resulting
gain was included in the Group's 1995 net income.
C-15
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 4 - Equity in affiliates - continued
The remaining interest in Star Petroleum Refining Company, Ltd. (SPRC) is
owned by a Thailand governmental entity. Provisions in the SPRC shareholders
agreement limit the Group's control and provide for active participation of the
minority shareholder in routine business operating decisions. The agreement
also mandates reduction in Group ownership to a minority position by the year
2000, however, it is likely that this will be delayed in view of the current
economic difficulties.
Shown below is summarized financial information for these affiliates (in
millions of dollars):
<TABLE>
<CAPTION>
100% Equity Share
--------------------- ---------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Current assets $ 4,768 $ 6,128 $ 2,400 $ 3,075
Other assets 7,345 7,303 3,867 3,836
Current liabilities 4,740 5,191 2,411 2,618
Other liabilities 3,483 4,768 1,879 2,533
------- ------- ------- -------
Net worth $ 3,890 $ 3,472 $ 1,977 $ 1,760
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
100% Equity Share
---------------------- ---------------------
1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 14,669 $ 15,436 $ 15,396 $ 7,452 $ 7,751 $ 7,674
Operating income 1,078 749 955 532 364 472
Net income 853 133 859 390 51 425
</TABLE>
Cash dividends received from these affiliates were $43 million, $89
million, and $76 million in 1997, 1996 and 1995, respectively.
Retained earnings as of December 31, 1997 and 1996, includes $1.4 billion
and $1.0 billion, respectively, representing the Group's share of undistributed
earnings of affiliates at equity.
Note 5 - Short-term debt
Short term debt consists primarily of demand and promissory notes,
acceptance credits, overdrafts and the current portion of long-term debt. The
weighted average interest rates on short-term financing as of December 31, 1997
and 1996 were 7.9% and 7.5%, respectively. Unutilized lines of credit
available for short-term financing totaled $411 million as of December 31,
1997.
C-16
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 6 - Long-term debt
Long-term debt, with related interest rates for 1997 and 1996 consist of
the following:
<TABLE>
<CAPTION>
As of December 31
----------------------
(Millions of dollars)
1997 1996
----- -----
<S> <C> <C>
U.S. dollar debt:
Variable interest rate term loans $ 348 $ 294
Fixed interest rate term loans
with 6.40% and 6.25% average rates 100 110
Australian dollar debt:
Promissory notes payable with
6.73 % average rate - 20
Fixed interest rate loan with
11.2% rate due 2001 218 224
New Zealand dollar debt:
Variable interest rate term loans 63 46
Fixed interest rate loan with
8.09% rate due 2000 6 7
Malaysian ringgit debt:
Fixed interest rate loan with
8.56% and 6.32% average rates 21 8
South African rand debt:
Fixed interest rate loan with
17.8% rate due 2003 9 -
Other 5 4
----- -----
$ 770 $ 713
===== =====
</TABLE>
Aggregate maturities of long -term debt for the next five years are as follows
(in millions of dollars): 1998 - $62 (included in short-term debt);
1999 - $75; 2000 - $133; 2001- $379; 2002 - $174; 2003 and thereafter - $9.
Note 7 - Operating leases
The Group has operating leases involving various marketing assets for
which net rental expense was $105 million, $92 million, and $91 million in
1997, 1996 and 1995, respectively.
Future net minimum rental commitments under operating leases having non-
cancelable terms in excess of one year are as follows (in millions of dollars):
1998 - $44; 1999 - $36; 2000 - $32; 2001 - $34; 2002 - $33, and 2003 and
thereafter - $48.
C-17
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 8 - Employee benefit plans
The Group has various retirement plans. Generally, these plans provide
defined benefits based on final or final average pay. The benefit levels,
vesting terms and funding practices vary among plans.
The funded status of retirement plans, primarily foreign and inclusive of
affiliates at equity, is as follows:
<TABLE>
<CAPTION>
As of December 31
----------------------------------
(Millions of dollars)
Assets Exceed Accumulated
Accumulated Benefits
Funding Status Benefits Exceed Assets
-------------- --------------- ---------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Actuarial present value :
Vested benefit obligation $ 184 $ 203 $ 74 $ 88
Accumulated benefit obligation 197 224 93 113
Projected benefit obligation 293 387 112 136
Amount of assets available for benefits :
Funded assets at fair value $ 276 $ 348 $ 46 $ 51
Net pension (asset) liability recorded (15) (3) 54 67
----- ----- ----- -----
Total assets $ 261 $ 345 $ 100 $ 118
===== ===== ===== =====
Assets less than projected
benefit obligation $ (32) $ (42) $ (12) $ (18)
Consisting of:
Unrecognized transition net assets
(liabilities) 1 - (4) (9)
Unrecognized net losses (26) (26) (6) (6)
Unrecognized prior service costs (7) (16) (2) (3)
Weighted average rate assumptions:
Discount rate 9.7% 10.9% 5.0% 5.6%
Rate of increase in compensation 7.8% 8.6% 2.8% 3.3%
Expected return on plan assets 10.3% 11.0% 4.0% 4.5%
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31
------------------------
(Millions of dollars)
Components of Pension Expense 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Cost of benefits earned during the year $ 26 $ 26 $ 32
Interest cost on projected benefit obligation 44 46 55
Actual return on plan assets (41) (40) (47)
Net amortization and deferral 11 10 12
------ ------ ------
Total $ 40 $ 42 $ 52
====== ====== ======
</TABLE>
C-18
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 9 - Commitments and contingencies
On June 17, 1997, Caltex Petroleum Corporation (CPC) received a claim from the
U.S. Internal Revenue Service (IRS) for $292 million in excise tax, along with
penalties and interest bringing the total to approximately $2 billion. The IRS
claim relates to crude oil sales to Japanese customers beginning in 1980.
Prior to this time, CPC directly supplied crude oil to its Japanese customers,
however, in 1980, a CPC subsidiary also became a contractual supplier of crude
oil. The IRS position is that the additional supplier constituted a transfer
of property, and was thus taxable. CPC is challenging the claim since the
addition of another supplying company was not a taxable event. Additionally,
CPC believes the claim is based on an overstated value. Finally, CPC
disagrees with the imposition and calculation of interest and penalties.
CPC believes the underlying excise tax claim is wrong, it also believes the
related claim for penalties is wrong and the IRS claim for interest is flawed.
CPC is challenging the claim and fully expects to prevail.
To litigate this claim, CPC has been required to maintain a letter of credit
in the amount of $2.3 billion, including interest for 1998. This letter
was provided to the IRS during February, 1998. For excise taxes, unlike income
taxes, the taxpayer is required to pay a portion of the tax liability to gain
access to the courts. The required cash payment will not have a material
impact on the Group's financial position or liquidity.
CPC also is involved in IRS tax audits for years 1987-1993. While no
claims have been asserted by the IRS for these years, in the opinion of
management, adequate provision has been made for income taxes for all years
either under examination or subject to future examination.
CPC and certain of its subsidiaries are named as defendants, along with
privately held Philippine ferry and shipping companies and the shipping
company's insurer, in various lawsuits filed in the U.S. and the Philippines on
behalf of at least 3,350 parties, who were either survivors of, or relatives of
persons who allegedly died in a collision in Philippine waters on December 20,
1987. One vessel involved in the collision was carrying CPC products in
connection with a contract of affreightment. Although CPC had no direct or
indirect ownership in or operational responsibility for either vessel, various
theories of liability have been alleged against CPC. The major suit filed in
the U.S. (Louisiana State Court) does not mention a specific monetary recovery
although the pleadings contain a variety of demands for various categories of
compensatory as well as punitive damages. Consequently, no reasonable estimate
of damages involved or being sought can be made at this time. CPC sought to
preclude the plaintiffs from pursuing the Louisiana litigation on various
federal and procedural grounds. Having pursued these remedies in the federal
court system without success (including a denial of a writ of certiorari by the
U.S. Supreme Court), CPC management intends to continue to contest all of the
foregoing litigation vigorously on various substantive and procedural grounds.
The Group may be subject to loss contingencies pursuant to environmental laws
and regulations in each of the countries in which it operates that, in the
future, may require the Group to take action to correct or remediate the
effects on the environment of prior disposal or release of petroleum substances
by the Group. The amount of such future cost is indeterminable due to such
factors as the nature of the new regulations, the unknown magnitude of any
possible contamination, the unknown timing and extent of the corrective actions
that may be required, and the extent to which such costs are recoverable from
third parties.
In the Group's opinion, while it is impossible to ascertain the ultimate
legal and financial liability, if any, with respect to the above mentioned and
other contingent liabilities, the aggregate amount that may arise from such
liabilities is not anticipated to be material in relation to the Group's
combined financial position or liquidity, or results of operations over a
reasonable period of time.
In 1996, a CPC subsidiary entered into a contractual commitment, for a
period of eleven years, to purchase petroleum products in conjunction with the
financing of a refinery owned by an affiliate. Total future estimated
commitments (in billions of dollars) for CPC under this and other similar
contracts, based on current pricing and projected growth rates, are: 1998 -
$0.7, 1999 - $0.8, 2000 - $0.8, 2001 - $0.8, 2002 - $0.7, and 2003 to
expiration of contracts - $3.6. Purchases (in billions of dollars) under this
and other similar contracts were $1.0, $0.8, and $0.5 in 1997, 1996 and 1995,
respectively.
C-19
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 9 - Commitments and contingencies - continued
CPC is contingently liable for sponsor support funding for both construction
completion (maximum $192 million) and post-completion loan repayments
(maximum $304 million) in connection with an affiliate's project finance
obligations. While the project is operational, construction completion
as defined includes achieving extended continuous operation and satisfying
certain financial conditions, which contractually must be met or resolved by
June 30, 1998. The post-completion support declines progressively as the
related long-term loans are repaid (final payment due 2010). As of December
31, 1997, there have been no calls made by lenders on either type of sponsor
support. However, CPC has provided short-term extended trade credit related to
crude oil supply of approximately $144 million to the affiliate as of December
31, 1997. Discussions are ongoing with the lenders and the Group anticipates
that some sponsor support will be required, including replacing existing
extended trade credit. However, the Group believes that this support will not
have a material impact on its combined financial position or liquidity, or
results of operations over a reasonable period of time.
Note 10 - Financial Instruments
Certain Group companies are parties to financial instruments with off-balance
sheet credit and market risk, principally interest rate risk. The Group's
outstanding commitments for interest rate swaps and foreign currency
contractual amounts are:
<TABLE>
<CAPTION>
As of December 31
-------------------
(Millions of dollars)
1997 1996
----- -----
<S> <C> <C>
Interest rate swaps - Pay Fixed, Receive Floating $ 591 $ 460
Interest rate swaps - Pay Floating, Receive Fixed 209 265
Commitments to purchase foreign currencies 467 417
Commitments to sell foreign currencies 50 11
</TABLE>
The Group enters into interest rate swaps in managing its interest risk, and
their effects are recognized in the statement of income at the same time as
the interest expense on the debt to which they relate. The swap contracts have
remaining maturities of up to eight years. Unrealized gains and losses on
contracts outstanding at year-end 1997 and 1996 were not material.
The Group enters into forward exchange contracts to hedge against some of its
foreign currency exposure stemming from existing liabilities and firm
commitments. Contracts to purchase foreign currencies (principally Australian
and Singapore dollars) hedging existing liabilities have maturities of up to
four years. Unrealized gains and losses applicable to outstanding forward
exchange contracts at December 31, 1997 and 1996 were not material.
The Group hedges a portion of the market risks associated with its crude oil
and petroleum product purchases and sales. Established petroleum futures
exchanges are used, as well as "over-the counter" hedge instruments, including
futures, options, swaps, and other derivative products which reduce the Group's
exposure to price volatility in the physical markets. The derivative positions
are marked-to-market for valuation purposes. Gains and losses on hedges are
deferred and recognized concurrently with the underlying commodity
transactions. Derivative gains and losses not considered as a hedge are
recognized currently in income. Open positions and related unrealized gains
and losses on commodity-based derivative hedging contracts outstanding as of
December 1997 and 1996 were not material.
The Group's long-term debt of $770 million and $713 million as of
December 31, 1997 and 1996, respectively, had fair values of $731 million and
$756 million as of December 31, 1997 and 1996, respectively. The fair value
estimates were based on the present value of expected cash flows discounted at
current market rates for similar obligations. The reported amounts of
financial instruments such as cash and cash equivalents, marketable securities,
notes and accounts receivable, and all current liabilities approximate fair
value because of their short maturities
C-20
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 10 - Financial Instruments - continued
The Group had investments in debt securities available-for-sale at amortized
costs of $82 million and $116 million at December 31, 1997 and 1996,
respectively. The fair value of these securities at December 31, 1997 and 1996
approximates amortized costs. As of December 31, 1997 and 1996, investments in
debt securities available-for-sale had maturities less than ten years. As of
December 31, 1997 and 1996, the Group's carrying amount for investments in
affiliates accounted for at equity included $12 million and $25 million,
respectively, for after tax unrealized net gains on investments held by these
companies.
The Group is exposed to credit risks in the event of non-performance by
counterparties to financial instruments. For financial instruments with
institutions, the Group does not expect any counterparty to fail to meet its
obligations given their high credit ratings. Other financial instruments
exposed to credit risk consist primarily of trade receivables. These
receivables are dispersed among the countries in which the Group operates, thus
limiting concentration of such risk.
The Group performs ongoing credit evaluations of its customers and generally
does not require collateral. Letters of credit are the principal security
obtained to support lines of credit when the financial strength of a customer
is not considered sufficient. Credit losses have historically been within
management's expectations.
Note 11 - Taxes
Taxes charged to income consist of the following:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------
(Millions of dollars)
1997 1996 1995
-------- ------ ------
<S> <C> <C> <C>
Taxes other than income taxes (International):
Duties, import and excise taxes $ 1,409 $ 1,349 $ 1,660
Other 19 18 29
------- ----- -----
Total taxes other than income taxes $ 1,428 $ 1,367 $ 1,689
======= ===== ======
Income taxes:
U.S. taxes :
Current $ 8 $ 455 $ 24
Deferred (2) 19 (23)
------- ----- -----
Total U.S. 6 474 1
International taxes:
Current 407 491 425
Deferred (49) 17 41
------- ------ -----
Total International 358 508 466
Total provision for income taxes $ 364 $ 982 $ 467
======= ====== =====
</TABLE>
C-21
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 11 - Taxes - continued
Income taxes have been computed on an individual company basis at rates in
effect in the various countries of operation. The effective tax rate
differs from the "expected" tax rate (U.S. Federal corporate tax rate) as
follows:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax rate 35.0% 35.0% 35.0%
Effect of recording equity in net income
of affiliates on an after tax basis (11.3) (0.7) (10.9)
Effect of dividends received from
subsidiaries and affiliates (0.3) (0.5) 2.9
Income subject to foreign taxes at other
than U.S. statutory tax rate 5.2 8.1 8.3
Effect of sale of investment in affiliate - 3.6 -
Other 1.4 (0.3) (1.1)
---- ---- ----
Effective tax rate 30.0% 45.2% 34.2%
==== ==== ====
</TABLE>
Deferred income taxes are provided in each tax jurisdiction for temporary
differences between the financial reporting and the tax basis of assets and
liabilities. A valuation allowance has been established to adjust recorded
deferred tax assets to amounts likely to be recoverable. Temporary differences
and tax loss carryforwards which give rise to deferred tax liabilities (assets)
are as follows:
<TABLE>
<CAPTION>
As of December 31
-------------------
(Millions of dollars)
1997 1996
----- -----
<S> <C> <C>
Depreciation $ 314 $ 337
Miscellaneous 22 28
----- -----
Deferred tax liabilities 336 365
----- -----
Investment allowances (74) (73)
Tax loss carryforwards (50) (10)
Foreign exchange (33) -
Retirement benefits (30) (28)
Miscellaneous (15) (25)
----- -----
Deferred tax assets (202) (136)
Valuation allowance 27 10
----- -----
Net deferred taxes $ 161 $ 239
===== =====
</TABLE>
C-22
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 11 - Taxes - continued
Deferred taxes are classified on the combined balance sheet as current assets
of $29 million and noncurrent liabilities of $190 million as of December 31,
1997, and current assets of $10 million and noncurrent liabilities of $249
million as of December 31, 1996.
Undistributed earnings of subsidiaries and affiliates, for which no U.S.
deferred income tax provision has been made, approximated $3.4 billion as of
December 31, 1997 and $3.0 billion as of December 31, 1996. Such earnings have
been or are intended to be indefinitely reinvested, and become taxable in the
U.S. only upon remittance as dividends. It is not practical to estimate the
amount of tax that may be payable on the eventual remittance of such earnings.
Upon remittance, certain foreign countries impose withholding taxes which,
subject to certain limitations, are available for use as tax credits against
the U.S. tax liability.
Note 12 - Combined statement of cash flows
Changes in operating working capital consist of the following:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------
(Millions of dollars)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Accounts and notes receivable $ 33 $ (235) $ 42
Inventories 85 (16) (89)
Accounts payable (252) 210 15
Accrued liabilities 1 18 31
Estimated income taxes (17) 16 (26)
---- ---- ----
Total $ (150) $ (7) $ (27)
==== ==== ====
</TABLE>
Net cash provided by operating activities includes the following cash
payments for interest and income taxes:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------
(Millions of dollars)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest paid (net of capitalized interest) $ 138 $ 137 $ 144
Income taxes paid $ 440 $ 865 $ 466
</TABLE>
The deconsolidation of Caltex Australia Limited as of December 31, 1997, as
described in Note 4, results in a noncash reduction in the following
combined balance sheet captions, which have not been included in the combined
statement of cash flows:
Net working capital $ 60
Equity in affiliates 94
Long-term debt 45
Minority interest 109
C-23
<PAGE>
CALTEX GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 12 - Combined statement of cash flows - continued
During 1995, Caltex Australia Limited exchanged, in a noncash investing
transaction, its petroleum refining and marketing net assets of $419 million
for an investment in Australian Petroleum Pty. Limited, an affiliate of the
Group. No significant noncash investing or financing transactions occurred in
1996.
Net cash provided by operating activities in 1996 includes income tax payments
relating to the sale of an investment in an affiliate. Proceeds from this
sale are included in net cash provided by investing activities.
Note 13 - Oil and gas exploration, development and producing activities
The financial statements of Chevron Corporation and Texaco Inc. contain
required supplementary information on oil and gas producing activities,
including disclosures on affiliates at equity. Accordingly, such disclosures
are not presented herein.
C-24
<PAGE>
Exhibit 12.1
<TABLE>
<CAPTION>
CHEVRON CORPORATION - TOTAL ENTERPRISE BASIS
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
Year Ended December 31,
--------------------------------------
1997 1996 1995(1) 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Income $3,256 $2,607 $ 930 $1,693 $1,265
Income Tax Expense 2,428 2,624 1,094 1,322 1,389
Distributions (Less Than)
Greater Than Equity in Earnings
of Less Than 50 Percent
Owned Affiliates (70) 29 (5) (3) 6
Minority Interest 11 4 - 3 (2)
Previously Capitalized Interest
Charged to Earnings During Period 28 24 47 32 20
Interest and Debt Expense 405 471 557 453 390
Interest Portion of Rentals (2) 167 158 148 156 169
------ ------ ------ ------ ------
Earnings Before Provision for
Taxes And Fixed Charges $6,225 $5,917 $2,771 $3,656 $3,237
------ ------ ------ ------ ------
Interest and Debt Expense $ 405 $ 471 $ 557 $ 453 $ 390
Interest Portion of Rentals (2) 167 158 148 156 169
Capitalized Interest 82 108 141 80 60
------ ------ ------ ------ ------
Total Fixed Charges $ 654 $ 737 $ 846 $ 689 $ 619
------ ------ ------ ------ ------
- ----------------------------------------------------------------------------
Ratio Of Earnings To Fixed Charges 9.52 8.03 3.28 5.31 5.23
- ----------------------------------------------------------------------------
<FN>
(1) The information for 1995,1996 and 1997 reflects the company's adoption of
the Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
effective October 1, 1995.
(2) Calculated as one-third of rentals.
</FN>
</TABLE>
E-1
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF CHEVRON CORPORATION*
At December 31, 1997
------------------------------------
Name of Subsidiary State or Country
(Reported by Principal Area of Operation) in Which
Organized
---------------------------------------- ----------------
United States
-------------
Chevron U.S.A. Inc. Pennsylvania
Principal Divisions:
Chevron U.S.A. Production Company
Chevron Products Company
Chevron Capital U.S.A. Inc. Delaware
Chevron Chemical Company Delaware
Chevron Oil Finance Company Delaware
Chevron Pipe Line Company Delaware
Huntington Beach Company California
The Pittsburg & Midway Coal Mining Co. Missouri
International
-------------
Bermaco Insurance Company Limited Bermuda
Cabinda Gulf Oil Company Limited Bermuda
Chevron Asiatic Limited Delaware
Chevron Canada Limited Canada
Chevron Canada Enterprises Limited Canada
Chevron Canada Resources Canada
Chevron International Limited Liberia
Chevron International Oil Company, Inc. Delaware
Chevron Niugini Pty. Limited Papua New Guinea
Chevron Overseas Petroleum Inc. Delaware
Chevron Standard Limited Delaware
Chevron U.K. Limited United Kingdom
Chevron Transport Corporation Liberia
Chevron Nigeria Limited Nigeria
Insco Limited Bermuda
* All of the subsidiaries in the above list are wholly owned,
either directly or indirectly, by Chevron
Corporation. Certain subsidiaries are not listed since,
considered in the aggregate as a single
subsidiary, they would not constitute a significant
subsidiary at December 31, 1997.
E-2
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
-----------------------------------
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 2-98466) and
Form S-8 (Nos. 333-02011, 333-21805, 333-21807, 333-21809, 333-26731,
333-46261, 33-3899, 33-34039 and 33-35283) of Chevron Corporation, and to the
incorporation by reference in the Prospectus constituting part of the
Registration Statement on Form S-3 (No. 33-14307) of Chevron Capital U.S.A.
Inc. and Chevron Corporation, and to the incorporation by reference in the
Registration Statement on Form S-3 (No. 33-58838) of Chevron Canada Finance
Limited and Chevron Corporation, and to the incorporation by reference in the
Registration Statements on Form S-3 (Nos. 33-56373 and 33-56377) of Chevron
Transport Corporation and Chevron Corporation, and to the incorporation by
reference in the Prospectus constituting part of the Registration Statement on
Form S-8 (No. 2-90907) of Caltex Petroleum Corporation of our report dated
February 20, 1998, appearing on page FS-14 of this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Francisco, California
March 25, 1998
E-3
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 2-98466) and
Form S-8 (Nos. 333-02011, 333-21805, 333-21807, 333-21809, 333-26731, 333-
46261, 33-3899, 33-34039 and 33-35283) of Chevron Corporation, and to the
incorporation by reference in the Prospectus constituting part of the
Registration Statement on Form S-3 (No.33-14307) of Chevron Capital U.S.A.
Inc. and Chevron Corporation, and to the incorporation by reference in the
Registration Statement on Form S-3 (No. 33-58838) of Chevron Canada Finance
Limited and Chevron Corporation, and to the incorporation by reference in the
Registration Statements on Form S-3 (Nos. 33-56373 and 33-56377) of Chevron
Transport Corporation and Chevron Corporation, and to the incorporation by
reference in the Registration Statement on Form S-8 (No. 2-90907) of Caltex
Petroleum Corporation of our report dated February 9, 1998, relating to the
combined balance sheets of the Caltex Group of Companies as of December 31,
1997 and 1996, and the related combined statements of income, retained
earnings and cash flows for each of the years in the three-year period ended
December 31, 1997, which report appears in the December 31, 1997, Annual
Report on Form 10-K of Chevron Corporation.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Dallas, Texas
March 25, 1998
E-4
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
25th day of March, 1998.
/s/ Samuel H. Armacost
----------------------
Exhibit 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
25th day of March, 1998.
/s/ K. T. Derr
--------------
Exhibit 24.3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
25th day of March, 1998.
/s/ Sam Ginn
------------
Exhibit 24.4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
25th day of March, 1998.
/s/ Carla A. Hills
------------------
Exhibit 24.5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
25th day of March, 1998.
/s/ J. Bennett Johnston
-----------------------
Exhibit 24.6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
25th day of March, 1998.
/s/ R. H. Matzke
----------------
Exhibit 24.7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
25th day of March, 1998.
/s/ Charles M. Pigott
---------------------
Exhibit 24.8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
25th day of March, 1998.
/s/ Condoleezza Rice
--------------------
Exhibit 24.9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
_25th day of March, 1998.
/s/ F. A. Shrontz
-----------------
Exhibit 24.10
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
25th day of March, 1998.
/s/ James N. Sullivan
---------------------
Exhibit 24.11
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
25th day of March, 1998.
/s/ Chang-Lin Tien
------------------
Exhibit 24.12
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
25th day of March, 1998.
/s/ George H Weyerhaeuser
-------------------------
Exhibit 24.13
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
25th day of March, 1998.
/s/ John A. Young
-----------------
Exhibit 24.14
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
25th day of March, 1998.
/s/ M. R. Klitten
-----------------
Exhibit 24.15
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, Chevron Corporation, a Delaware corporation (the "Corporation"),
contemplates filing with the Securities and Exchange Commission at Washington,
D.C., under the provisions of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, an Annual Report on Form 10-K.
WHEREAS, the undersigned is an officer or director, or both, of the
Corporation.
N O W, T H E R E F O R E, the undersigned hereby constitutes and appoints
LYDIA I. BEEBE, HILMAN P. WALKER, TERRY MICHAEL KEE and KEITH J. MENDELSON, or
any of them, his or her attorneys-in-fact and agents, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, to sign the aforementioned Annual Report
on Form 10-K (and any and all amendments thereto) and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as to
all intents and purposes he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitutes, may lawfully do and cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this
25th day of March, 1998.
/s/ S. J. Crowe
---------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AT DECEMBER 31, 1997 AND INCOME STATEMENT FOR THE
TWELVE MONTH PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THEIR RELATED FOOTNOTES.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,015
<SECURITIES> 655
<RECEIVABLES> 3,406
<ALLOWANCES> 32
<INVENTORY> 1,378
<CURRENT-ASSETS> 7,006
<PP&E> 49,233
<DEPRECIATION> 26,562
<TOTAL-ASSETS> 35,473
<CURRENT-LIABILITIES> 6,946
<BONDS> 4,431
<COMMON> 1,069
0
0
<OTHER-SE> 16,403
<TOTAL-LIABILITY-AND-EQUITY> 35,473
<SALES> 40,583
<TOTAL-REVENUES> 41,950
<CGS> 0
<TOTAL-COSTS> 36,448
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 312
<INCOME-PRETAX> 5,502
<INCOME-TAX> 2,246
<INCOME-CONTINUING> 3,256
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,256
<EPS-PRIMARY> 4.97
<EPS-DILUTED> 4.95
</TABLE>
Exhibit 99.1
DEFINITIONS OF SELECTED FINANCIAL TERMS
----------------------------------------
Return On Average Stockholders' Equity
- --------------------------------------
Net income divided by average stockholders' equity. Average stockholders'
equity is computed by averaging the sum of the beginning of year and end of
year balances.
Return On Average Capital Employed
- ----------------------------------
Net income plus after-tax interest expense divided by average capital
employed. Capital employed is stockholders' equity plus short-term debt plus
long-term debt plus capital lease obligations plus minority interests.
Average capital employed is computed by averaging the sum of capital employed
at the beginning of the year and at the end of the year.
Total Debt-To-Total Debt Plus Equity Ratio
- ------------------------------------------
Total debt, including capital lease obligations, divided by total debt plus
stockholders' equity.
Current Ratio
- -------------
Current assets divided by current liabilities.
Interest Coverage Ratio
- -----------------------
Income before income tax expense and cumulative effect of change in accounting
principle, plus interest and debt expense and amortization of capitalized
interest, divided by before-tax interest costs.
E-5
