UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

þ  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

OR

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to           

 

Commission File Number 001-00368

Chevron Corporation

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code (925) 842-1000

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ          No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o          No þ

 

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 þ          No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ          No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes o       No þ

 

Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter — $136,438,881,628 (As of June 30, 2010)

 

Number of Shares of Common Stock outstanding as of February 18, 2011 — 2,007,449,583

 

DOCUMENTS INCORPORATED BY REFERENCE

(To The Extent Indicated Herein)

 

Notice of the 2011 Annual Meeting and 2011 Proxy Statement, to be filed pursuant to Rule 14a-6(b) under the Securities Exchange Act of 1934, in connection with the company’s 2011 Annual Meeting of Stockholders (in Part III)

 

 

 

TABLE OF CONTENTS

 

CAUTIONARY STATEMENT 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 of Chevron Corporation contains forward-looking statements relating to Chevron’s operations that are based on management’s current expectations, estimates and projections about the petroleum, chemicals and other energy-related industries. Words such as “anticipates,” “expects,” “intends,” “plans,” “targets,” “projects,” “believes,” “seeks,” “schedules,” “estimates,” “budgets” and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond the company’s control and are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The reader should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Unless legally required, Chevron undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Among the important factors that could cause actual results to differ materially from those in the forward-looking statements are: changing crude oil and natural gas prices; changing refining, marketing and chemical margins; actions of competitors or regulators; timing of exploration expenses; timing of crude oil liftings; the competitiveness of alternate-energy sources or product substitutes; technological developments; the results of operations and financial condition of equity affiliates; the inability or failure of the company’s joint-venture partners to fund their share of operations and development activities; the potential failure to achieve expected net production from existing and future crude oil and natural gas development projects; potential delays in the development, construction or start-up of planned projects; the potential disruption or interruption of the company’s net production or manufacturing facilities or delivery/transportation networks due to war, accidents, political events, civil unrest, severe weather or crude oil production quotas that might be imposed by the Organization of Petroleum Exporting Countries; the potential liability for remedial actions or assessments under existing or future environmental regulations and litigation; significant investment or product changes under existing or future environmental statutes, regulations and litigation; the potential liability resulting from other pending or future litigation; the company’s future acquisition or disposition of assets and gains and losses from asset dispositions or impairments; government-mandated sales, divestitures, recapitalizations, industry-specific taxes, changes in fiscal terms or restrictions on scope of company operations; foreign currency movements compared with the U.S. dollar; the effects of changed accounting rules under generally accepted accounting principles promulgated by rule-setting bodies; and the factors set forth under the heading “Risk Factors” on pages 32 through 34 in this report. In addition, such statements could be affected by general domestic and international economic and political conditions. Unpredictable or unknown factors not discussed in this report could also have material adverse effects on forward-looking statements.

 

 

 

Summary Description of Chevron

 

Chevron Corporation,^* a Delaware corporation, manages its investments in subsidiaries and affiliates and provides administrative, financial, management and technology support to U.S. and international subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining operations, power generation and energy services. Upstream operations consist primarily of exploring for, developing and producing crude oil and natural gas; processing, liquefaction, transportation and regasification associated with liquefied natural gas; transporting crude oil by major international oil export pipelines; transporting, storage and marketing of natural gas; and a gas-to-liquids project. Downstream operations consist primarily of refining of crude oil into petroleum products; marketing of crude oil and refined products; transporting of crude oil and refined products by pipeline, marine vessel, motor equipment and rail car; and manufacturing and marketing of commodity petrochemicals, plastics for industrial uses and fuel and lubricant additives.

 

A list of the company’s major subsidiaries is presented on pages E-4 and E-5. As of December 31, 2010, Chevron had approximately 62,000 employees (including about 3,900 service station employees). Approximately 30,000 employees (including about 3,600 service station employees), or 48 percent, were employed in U.S. operations.

 

Overview of Petroleum Industry

 

Petroleum industry operations and profitability are influenced by many factors, and individual petroleum companies have little control over some of them. Governmental policies, particularly in the areas of taxation, energy and the environment have a significant impact on petroleum activities, regulating how companies are structured and where and how companies conduct their operations and formulate their products and, in some cases, limiting their profits directly. Prices for crude oil, natural gas, petroleum products and petrochemicals are generally determined by supply and demand for these commodities. However, some governments impose price controls on refined products such as gasoline or diesel fuel. The members of the Organization of Petroleum Exporting Countries (OPEC) are typically the world’s swing producers of crude oil and their production levels are a major factor in determining worldwide supply. Demand for crude oil and its products and for natural gas is largely driven by the conditions of local, national and global economies, although weather patterns and taxation relative to other energy sources also play a significant part. Seasonality is not a primary driver of changes in the company’s quarterly earnings during the year.

 

Strong competition exists in all sectors of the petroleum and petrochemical industries in supplying the energy, fuel and chemical needs of industry and individual consumers. Chevron competes with fully integrated, major global petroleum companies, as well as independent and national petroleum companies, for the acquisition of crude oil and natural gas leases and other properties and for the equipment and labor required to develop and operate those properties. In its downstream business, Chevron also competes with fully integrated, major petroleum companies and other independent refining, marketing, transportation and chemicals entities and national petroleum companies in the sale or acquisition of various goods or services in many national and international markets.

 

Operating Environment

 

Refer to pages FS-2 through FS-10 of this Form 10-K in Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the company’s current business environment and outlook.

 

 

^*  Incorporated in Delaware in 1926 as Standard Oil Company of California, the company adopted the name Chevron Corporation in 1984 and ChevronTexaco Corporation in 2001. In 2005, ChevronTexaco Corporation changed its name to Chevron Corporation. 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 all of them taken as a whole, but unless stated otherwise it does not include “affiliates” of Chevron — i.e., those companies accounted for by the equity method (generally owned 50 percent or less) or investments accounted for by the cost method. 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.

Chevron Strategic Direction

 

Chevron’s primary objective is to create shareholder value and achieve sustained financial returns from its operations that will enable it to outperform its competitors. In the upstream, the company’s strategies are to grow profitably in core areas, build new legacy positions and commercialize the company’s equity natural gas resource base while growing a high-impact global gas business. In the downstream, the strategies are to improve returns and grow earnings across the value chain. The company also continues to utilize technology across all its businesses to differentiate performance, and to invest in profitable renewable energy and energy efficiency solutions.

 

 

The upstream and downstream activities of the company and its equity affiliates are widely dispersed geographically, with operations in North America, South America, Europe, Africa, Asia and Australia. Tabulations of segment sales and other operating revenues, earnings and income taxes for the three years ending December 31, 2010, and assets as of the end of 2010 and 2009 — for the United States and the company’s international geographic areas — are in Note 11 to the Consolidated Financial Statements beginning on page FS-41. Similar comparative data for the company’s investments in and income from equity affiliates and property, plant and equipment are in Notes 12 and 13 on pages FS-43 through FS-45.

 

Total expenditures for 2010 were $21.8 billion, including $1.4 billion for the company’s share of equity-affiliate expenditures. In 2009 and 2008, expenditures were $22.2 billion and $22.8 billion, respectively, including the company’s share of affiliates’ expenditures of $1.6 billion in 2009 and $2.3 billion in 2008.

 

Of the $21.8 billion in expenditures for 2010, 87 percent, or $18.9 billion, was related to upstream activities. Approximately 80 percent was expended for upstream operations in 2009 and 2008. International upstream accounted for about 82 percent of the worldwide upstream investment in 2010, more than 80 percent in 2009 and about 70 percent in 2008, reflecting the company’s continuing focus on opportunities available outside the United States.

 

In 2011, the company estimates capital and exploratory expenditures will be $26.0 billion, including $2.0 billion of spending by affiliates. Approximately 85 percent of the total, or $22.6 billion, is budgeted for exploration and production activities, with $17.2 billion of that amount for projects outside the United States. Acquisition costs associated with the announced purchase of Atlas Energy, Inc., are not included.

 

Refer also to a discussion of the company’s capital and exploratory expenditures on page FS-13.

 

The table on the following page summarizes the net production of liquids and natural gas for 2010 and 2009 by the company and its affiliates. Worldwide oil-equivalent production, including volumes from synthetic oil in 2010 and oil sands in 2009, was 2.763 million barrels per day, up about 2 percent from 2009. The increase was mainly associated with the start-up and ramp-up of several major capital projects — the expansion at Tengiz in Kazakhstan, the Tahiti Field in the U.S. Gulf of Mexico, Frade in Brazil, Agbami in Nigeria, and Tombua-Landana and Mafumeira Norte in Angola. Normal field declines and the impact of higher prices on cost-recovery volumes and other contractual provisions decreased net production from last year’s comparative period. Refer to the “Results of Operations” section beginning on page FS-7 for a detailed discussion of the factors explaining the 2008 — 2010 changes in production for crude oil and natural gas liquids, and natural gas.

 

The company estimates its average worldwide oil-equivalent production in 2011 will be approximately 2.790 million barrels per day based on the average West Texas Intermediate crude oil price of $79 per barrel in 2010. This estimate is subject to many factors and uncertainties, including additional quotas that may be imposed by OPEC, price effects on production volumes calculated under production-sharing and variable-royalty provisions of certain agreements, changes in fiscal terms or restrictions on the scope of company operations, delays in project startups, fluctuations in demand for natural gas in various markets, weather conditions that may shut in production, civil unrest, changing geopolitics, delays in completion of maintenance turnarounds, greater-than-expected declines in production from mature fields, or other disruptions to operations. The outlook for future production levels is also affected by the size and number of economic investment opportunities and, for new large-scale projects, the time lag between initial exploration and the beginning of production. Refer to the “Review of Ongoing Exploration and Production Activities in Key Areas,” beginning on page 9, for a discussion of the company’s major crude oil and natural gas development projects.

 

 

Refer to Table IV on page FS-71 for the company’s average sales price per barrel of crude oil, condensate and natural gas liquids and per thousand cubic feet of natural gas produced and the average production cost per oil-equivalent barrel for 2010, 2009 and 2008.

 

The following table summarizes gross and net productive wells at year-end 2010 for the company and its affiliates:

 

Productive Oil and Gas Wells¹ at December 31, 2010

 

		Productive2,3								Productive2
		Oil Wells								Gas Wells
		Gross				Net				Gross				Net
United States			49,455				32,462				11,637				5,720
Other Americas			640				487				49				25
Africa			2,387				798				17				7
Asia			12,420				10,693				3,050				1,920
Australia			753				422				64				11
Europe			325				101				156				37
Total Consolidated Companies			65,980				44,963				14,973				7,720
Equity in Affiliates			1,135				404				7				2
Total Including Affiliates			67,115				45,367				14,980				7,722
Multiple completion wells included above:			901				590				370				303

		Net Mileage1,2
United States:
Crude Oil			2,417
Natural Gas			2,400
Petroleum Products3			5,456
Total United States			10,273
International:
Crude Oil4			700
Natural Gas5			650
Petroleum Products3			424
Total International			1,774
Worldwide			12,047

		U.S. Flag								Foreign Flag
						Cargo Capacity								Cargo Capacity
		Number				(Millions of Barrels)				Number				(Millions of Barrels)
Owned			1				0.2				1				1.1
Bareboat-Chartered			4				1.4				17				25.0
Time-Chartered2			—				—				14				10.6
Total			5				1.6				32				36.7

 

1	Consolidated companies only. Excludes tankers chartered on a voyage basis, those with dead-weight tonnage less than 25,000 and those used exclusively for storage.
2	Tankers chartered for more than one year.

 

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. The company’s U.S.-flagged fleet is engaged primarily in transporting refined products between the Gulf Coast and the East Coast and from California refineries to terminals on the West Coast and in Alaska and Hawaii. As part of its fleet modernization program, the company replaced two U.S.-flagged product tankers in 2010. The company plans to retire one additional U.S.-flagged product tanker in 2011. The new tankers are expected to bring improved efficiencies to Chevron’s U.S.-flagged fleet.

 

The foreign-flagged vessels are engaged primarily in transporting crude oil from the Middle East, Southeast Asia, the Black Sea, Mexico and West Africa to ports in the United States, Europe, Australia and Asia. The company’s foreign-flagged vessels also transport refined products to and from various locations worldwide.

 

In addition to the vessels described above, the company owns a one-sixth interest in each of seven liquefied natural gas tankers transporting cargoes for the North West Shelf Venture in Australia.

 

Chevron’s fleet of owned and chartered tankers is completely double-hulled. The company is a member of many oil-spill-response cooperatives in areas in which it operates around the world.

 

Chevron’s U.S.-based mining company produces and markets coal and molybdenum. Sales occur in both U.S. and international markets.

 

The company owns and is the operator of an underground coal mine, North River, in Alabama, and surface coal mines in Kemmerer, Wyoming, and McKinley, New Mexico. The company also owns a 50 percent interest in Youngs Creek Mining Company, LLC, which was formed to develop a coal mine in northern Wyoming.

 

As of early 2011, the sale of the North River Mine and other coal-related assets in Alabama was under negotiation. Additionally, in January 2011, the company announced the intent to divest its remaining coal mining operations. Activities related to full reclamation continued in 2010 at the company’s McKinley, New Mexico, mine, which ceased coal production at the end of 2009.

 

At year-end 2010, Chevron controlled approximately 189 million tons of proven and probable coal reserves in the United States, including reserves of low-sulfur coal. The company is contractually committed to deliver between 7 million and 8 million tons of coal per year through the end of 2013 and believes it will satisfy these contracts from existing coal reserves. Coal sales from wholly owned mines in 2010 were 8 million tons, down about 2 million tons from 2009.

 

In addition to the coal operations, Chevron owns and operates the Questa molybdenum mine in New Mexico. At year-end 2010, Chevron controlled approximately 53 million pounds of proven molybdenum reserves at Questa. Production and underground development at Questa continued at reduced levels in 2010 in response to weak prices for molybdenum.

 

Chevron’s Global Power Company manages interests in 13 power assets with a total operating capacity of more than 3,100 megawatts, primarily through joint ventures in the United States and Asia. Twelve of these are efficient combined-cycle and gas-fired cogeneration facilities that utilize waste heat recovery to produce electricity and support industrial thermal hosts. The thirteenth facility is a wind farm, located in Casper, Wyoming, that is designed to optimize the use of a decommissioned refinery site for delivery of clean, renewable energy to the local utility.

 

The company has major geothermal operations in Indonesia and the Philippines and is investigating several advanced solar technologies for use in oil field operations as part of its renewable-energy strategy. For additional information on the company’s geothermal operations and renewable energy projects, refer to pages 21 and 22 and “Research and Technology” below.

 

CES is a wholly owned subsidiary that develops and builds sustainable energy projects to increase energy efficiency and renewable power, reduce energy costs, and ensure reliable, high-quality energy for government, education and business facilities. Since 2000, CES has developed hundreds of projects that help customers reduce their energy costs and environmental impact. Projects announced in 2010 include the City of Brea Energy Efficiency and Solar Project in California, the Marine Corps Logistics Base Albany Landfill Gas Project in Georgia, and the University of Utah Thermal Storage and New Central Plant Project.

 

The company’s energy technology organization supports Chevron’s upstream and downstream businesses by providing technology, services and competency development in earth sciences; reservoir and production engineering; drilling and completions; facilities engineering; manufacturing; process technology; catalysis; technical computing; and health, environment and safety disciplines. The information technology organization integrates computing, telecommunications, data management, security and network technology to provide a standardized digital infrastructure and enable Chevron’s global operations and business processes.

 

Chevron Technology Ventures (CTV) manages investments and projects in emerging energy technologies and their integration into Chevron’s core businesses. As of the end of 2010, CTV continued to explore technologies such as next-generation biofuels and advanced solar. In 2010, the company constructed and commissioned a one megawatt concentrating photovoltaic (CPV) solar facility on the tailing site of Chevron’s molybdenum mine in Questa, New Mexico. This beneficial reuse project is one of the largest CPV installations in the world. Also in 2010, the company constructed and commissioned a 0.74 megawatt next generation solar photovoltaic installation on a former refinery site in Bakersfield, California. Seven solar panel technologies are being tested to establish the viability of these solar technologies at other Chevron sites.

 

Chevron’s research and development expenses were $526 million, $603 million and $702 million for the years 2010, 2009 and 2008, respectively.

 

Some of the investments the company makes in the areas described above are in new or unproven technologies and business processes, and ultimate technical or commercial successes are not certain.

 

Virtually all aspects of the company’s businesses are subject to various U.S. federal, state and local environmental, health and safety laws and regulations and to similar laws and regulations in other countries. These regulatory requirements continue to change and increase in both number and complexity and to govern not only the manner in which the company conducts its operations, but also the products it sells. Most of the costs of complying with the many laws and regulations pertaining to its operations are, or are expected to become, embedded in the normal costs of conducting business.

 

In 2010, the company’s U.S. capitalized environmental expenditures were $639 million, representing about 12 percent of the company’s total consolidated U.S. capital and exploratory expenditures. These environmental expenditures include capital outlays to retrofit existing facilities as well as those associated with new facilities. The expenditures relate mostly to air- and water-quality projects and activities at the company’s refineries, oil and gas producing facilities, and marketing facilities. For 2011, the company estimates U.S. capital expenditures for environmental control facilities will be

approximately $800 million. The future annual capital costs are uncertain and will be governed by several factors, including future changes to regulatory requirements.

 

Environmental-related regulations, including those intended to address concerns about greenhouse gas emissions and global climate change, continue to evolve. For instance, in December 2009, the U.S. Environmental Protection Agency (EPA) issued a final endangerment finding for greenhouse gases, which found that emissions of six greenhouse gases threaten the public health and welfare. Greenhouse gases from new motor vehicles and engines also contribute to such pollution. Subsequently, in 2010, the EPA finalized two regulations under the Clean Air Act that establish greenhouse gas emission standards for new light-duty vehicles and clarify preconstruction permitting requirements for new or modified stationary source facilities with greenhouse gas emissions that exceed 75,000 tons per year of carbon dioxide equivalent. In November 2010, the agency issued updated guidance on determining the “best available control technologies” (BACT) that would be required to be implemented by certain new and modified stationary source facilities beginning in January 2011, but there remains significant uncertainty regarding the impact of applying BACT requirements on a case by case basis. Finally, in two recent settlement agreements, the EPA agreed to schedules for undertaking additional greenhouse gas rulemakings applicable to utilities and refineries. The agency is beginning to develop these new regulations, which are scheduled to be effective in May 2012 (utilities) and November 2012 (refineries), so it is not possible to predict their impact at this time. The EPA’s endangerment finding, motor vehicle greenhouse gas standards, and greenhouse gas permit rule have all been challenged in federal courts and decisions are pending.

 

The EPA also finalized its revised Renewable Fuel Standard (RFS2) regulations as required by the Energy Independence and Security Act of 2007. The regulations require fuel providers to blend increased volumes of renewable fuels into gasoline and diesel each year and establish specific greenhouse gas reduction and feedstock criteria for subcategories of renewable fuel, including cellulosic fuel, advanced biofuel and biomass-based diesel. The specific impacts of this regulation are determined by many factors, including fluctuating markets for renewable fuels and EPA regulatory decisions on potential waivers of volume requirements.

 

Additionally, under California’s Global Warming Solutions Act, enacted in 2006, the California Air Resources Board (CARB), charged with implementing the law, has adopted a new low-carbon fuel standard intended to reduce the carbon intensity of transportation fuels. The state is behind schedule in completing certain elements of the standard. Consequently, initial carbon intensity reduction requirements are effective as of January 2011, but CARB has delayed other aspects of compliance until it completes further updates to the regulation later in the year. In December 2010, CARB adopted regulations implementing the cap and trade program requirements of the Global Warming Solutions Act. The first compliance period of the cap and trade program begins in 2012 and ends in December 2014. CARB has yet to develop detailed regulations to implement this portion of the Act, including the determination of how emissions allowances will be allocated and traded during this period. The effect of any such regulation on the company’s business is uncertain.

 

Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages FS-17 through FS-20 for additional information on environmental matters and their impact on Chevron and on the company’s 2010 environmental expenditures, remediation provisions and year-end environmental reserves. Refer also to Item 1A. Risk Factors on pages 32 through 34 for a discussion of greenhouse gas regulation and climate change.

 

The company’s Internet Web site is www.chevron.com. Information contained on the company’s Internet Web site is not part of this Annual Report on Form 10-K. The company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on the company’s Web site soon after such reports are filed with or furnished to the Securities and Exchange Commission (SEC). The reports are also available on the SEC’s Web site at www.sec.gov.

 

Chevron is a global energy company with a diversified business portfolio, a strong balance sheet, and a history of generating sufficient cash to fund capital and exploratory expenditures and to pay dividends. Nevertheless, some inherent risks could materially impact the company’s financial results of operations or financial condition.

 

Chevron is exposed to the effects of changing commodity prices.

 

Chevron is primarily in a commodities business with a history of price volatility. The single largest variable that affects the company’s results of operations is the price of crude oil, which can be influenced by general economic conditions and geopolitical risk. Chevron accepts the risk of changing commodity prices as part of its business planning process. As such, an investment in the company carries significant exposure to fluctuations in crude oil prices.

 

During extended periods of historically low prices for crude oil, the company’s upstream earnings and capital and exploratory expenditure programs will be negatively affected. Upstream assets may also become impaired. The impact on downstream earnings is dependent upon the supply and demand for refined products and the associated margins on refined product sales.

 

The scope of Chevron’s business will decline if the company does not successfully develop resources.

 

The company is in an extractive business; therefore, if Chevron is not successful in replacing the crude oil and natural gas it produces with good prospects for future production or through acquisitions, the company’s business will decline. Creating and maintaining an inventory of projects depends on many factors, including obtaining and renewing rights to explore, develop and produce hydrocarbons; drilling success; ability to bring long-lead-time, capital-intensive projects to completion on budget and schedule; and efficient and profitable operation of mature properties.

 

The company’s operations could be disrupted by natural or human factors.

 

Chevron operates in both urban areas and remote and sometimes inhospitable regions. The company’s operations and facilities are therefore subject to disruption from either natural or human causes beyond its control, including hurricanes, floods and other forms of severe weather, war, civil unrest and other political events, fires, earthquakes, explosions and system failures, any of which could result in suspension of operations or harm to people or the natural environment.

 

The company’s operations have inherent risks and hazards that require significant and continuous oversight.

 

Chevron’s results depend on its ability to identify and mitigate the risks and hazards inherent to operating in the crude oil and natural gas industry. The company seeks to minimize these operational risks by carefully designing and building its facilities and conducting its operations in a safe and reliable manner. However, failure to manage these risks effectively could result in unexpected incidents, including releases, explosions or mechanical failures resulting in personal injury, loss of life, environmental damage, loss of revenues, legal liability and/or disruption to operations. Chevron has implemented and maintains a system of policies, behaviors and compliance mechanisms to manage safety, health, environmental, reliability and efficiency risks; to verify compliance with applicable laws and policies; and to respond to and learn from unexpected incidents. Nonetheless, in certain situations where Chevron is not the operator, the company may have limited influence and control over third parties, which may limit its ability to manage and control such risks.

 

Chevron’s business subjects the company to liability risks from litigation or government action.

 

The company produces, transports, refines and markets materials with potential toxicity, and it purchases, handles and disposes of other potentially toxic materials in the course of the company’s business. Chevron operations also produce byproducts, which may be considered pollutants. Often these operations are conducted through joint ventures over which the company may have limited influence and control. Any of these activities could result in liability arising from private litigation or government action, either as a result of an accidental, unlawful discharge or as a result of new conclusions on the effects of the company’s operations on human health or the environment. In addition, to the extent that societal pressures or political or other factors are involved, it is possible that such liability could be imposed without regard to the company’s causation of or contribution to the asserted damage, or to other mitigating factors.

Political instability could harm Chevron’s business.

 

The company’s operations, particularly exploration and production, can be affected by changing economic, regulatory and political environments in the various countries in which it operates. As has occurred in the past, actions could be taken by governments to increase public ownership of the company’s partially or wholly owned businesses or to impose additional taxes or royalties.

 

In certain locations, 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, acts of violence or strained relations between a government and the company or other governments may affect the company’s operations. Those developments have, at times, significantly affected the company’s related operations and results and are carefully considered by management when evaluating the level of current and future activity in such countries. At December 31, 2010, 25 percent of the company’s net proved reserves were located in Kazakhstan. The company also has significant interests in Organization of Petroleum Exporting Countries (OPEC)-member countries including Angola, Nigeria and Venezuela and in the Partitioned Zone between Saudi Arabia and Kuwait. Twenty-three percent of the company’s net proved reserves, including affiliates, were located in OPEC countries at December 31, 2010.

 

Regulation of greenhouse gas emissions could increase Chevron’s operational costs and reduce demand for Chevron’s products.

 

Continued political attention to issues concerning climate change, the role of human activity in it, and potential mitigation through regulation could have a material impact on the company’s operations and financial results.

 

International agreements and national or regional legislation and regulatory measures to limit greenhouse emissions are currently in various stages of discussion or implementation. For instance, the Kyoto Protocol and California’s Global Warming Solutions Act, along with other actual or pending federal, state and provincial regulations, envision a reduction of greenhouse gas emissions through market-based regulatory programs, technology-based or performance-based standards or a combination of them. The company is subject to existing greenhouse gas emissions limits in jurisdictions where such regulation is currently effective, including the European Union and New Zealand.

 

In 2010, the U.S. Environmental Protection Agency (EPA) finalized two regulations under the Clean Air Act that establish greenhouse gas emission standards for new light-duty vehicles and clarify preconstruction permitting requirements for new or modified stationary source facilities with greenhouse gas emissions that exceed 75,000 tons per year of carbon dioxide equivalent. In addition, the EPA recently agreed to develop additional regulations on greenhouse gas emissions from utilities and refineries. The agency is beginning to develop these new regulations, which are scheduled to be effective in May 2012 (utilities) and November 2012 (refineries), so it is not possible to predict their impact at this time.

 

The U.S. Congress has previously considered and may in the future consider legislation aimed at reducing greenhouse gas emissions. At this time it is not possible to predict any specific Congressional actions in 2011 or beyond, and it is unclear how any such legislation would reconcile with the Clean Air Act or current EPA regulations.

 

In December 2010, California adopted regulations implementing the cap and trade program requirements of the state’s Global Warming Solutions Act, also known as AB32. The first compliance period of the cap and trade program begins in 2012 and ends in December 2014. Chevron may incur costs associated with emissions reduction activities, and the purchase of allowances or credits for its facilities in California. In addition, Chevron’s purchased energy costs from utilities may increase starting in January 2012, when electricity generators are required to purchase allowances or credits for electricity sold in California.

 

These and other greenhouse gas emissions-related laws, policies and regulations may result in substantial capital, compliance, operating and maintenance costs. The level of expenditure required to comply with these laws and regulations is uncertain and is expected to vary by jurisdiction depending on the laws enacted in each jurisdiction, the company’s activities in it and market conditions. The company’s exploration and production of crude oil, natural gas and various minerals such as coal; the upgrading of production from oil sands into synthetic oil; power generation; the conversion of crude oil and natural gas into refined products; the processing, liquefaction and regasification of natural gas; the transportation of crude oil, natural gas and related products and consumers’ or customers’ use of the company’s products result in greenhouse gas emissions that could well be regulated. Some of these activities, such as consumers’ and customers’ use of the company’s products, as well as actions taken by the company’s competitors in response to such laws and regulations, are beyond the company’s control.

 

The effect of regulation on the company’s financial performance will depend on a number of factors including, among others, the sectors covered, the greenhouse gas emissions reductions required by law, the extent to which Chevron would

be entitled to receive emission allowance allocations or would need to purchase compliance instruments on the open market or through auctions, the price and availability of emission allowances and credits, and the impact of legislation or other regulation on the company’s ability to recover the costs incurred through the pricing of the company’s products. Material price increases or incentives to conserve or use alternative energy sources could reduce demand for products the company currently sells and adversely affect the company’s sales volumes, revenues and margins.

 

Changes in management’s estimates and assumptions may have a material impact on the company’s consolidated financial statements and financial or operations performance in any given period.

 

In preparing the company’s periodic reports under the Securities Exchange Act of 1934, including its financial statements, Chevron’s management is required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include measurement of benefit obligations for pension and other postretirement benefit plans; estimates of crude oil and natural gas recoverable reserves; accruals for estimated liabilities, including litigation reserves; and impairments to property, plant and equipment. Changes in estimates or assumptions or the information underlying the assumptions, such as changes in the company’s business plans, general market conditions or changes in commodity prices, could affect reported amounts of assets, liabilities or expenses.

 

 

None.

 

 

The location and character of the company’s crude oil, natural gas and mining properties and its refining, marketing, transportation and chemicals facilities are described on page 3 under Item 1. Business. Information required by Subpart 1200 of Regulation S-K (“Disclosure by Registrants Engaged in Oil and Gas Producing Activities”) is also contained in Item 1 and in Tables I through VII on pages FS-66 through FS-80. Note 13, “Properties, Plant and Equipment,” to the company’s financial statements is on page FS-45.

 

 

Ecuador

Chevron is a defendant in a civil lawsuit before the Superior Court of Nueva Loja in Lago Agrio, Ecuador, brought in May 2003 by plaintiffs who claim to be representatives of certain residents of an area where an oil production consortium formerly had operations. The lawsuit alleges damage to the environment from the oil exploration and production operations and seeks unspecified damages to fund environmental remediation and restoration of the alleged environmental harm, plus a health monitoring program. Until 1992, Texaco Petroleum Company (Texpet), a subsidiary of Texaco Inc., was a minority member of this consortium with Petroecuador, the Ecuadorian state-owned oil company, as the majority partner; since 1990, the operations have been conducted solely by Petroecuador. At the conclusion of the consortium and following an independent third-party environmental audit of the concession area, Texpet entered into a formal agreement with the Republic of Ecuador and Petroecuador for Texpet to remediate specific sites assigned by the government in proportion to Texpet’s ownership share of the consortium. Pursuant to that agreement, Texpet conducted a three-year remediation program at a cost of $40 million. After certifying that the sites were properly remediated, the government granted Texpet and all related corporate entities a full release from any and all environmental liability arising from the consortium operations.

 

Based on the history described above, Chevron believes that this lawsuit lacks legal or factual merit. As to matters of law, the company believes first, that the court lacks jurisdiction over Chevron; second, that the law under which plaintiffs bring the action, enacted in 1999, cannot be applied retroactively; third, that the claims are barred by the statute of limitations in Ecuador; and, fourth, that the lawsuit is also barred by the releases from liability previously given to Texpet by the Republic of Ecuador and Petroecuador and by the pertinent provincial and municipal governments. With regard to the facts, the company believes that the evidence confirms that Texpet’s remediation was properly conducted and that the remaining environmental damage reflects Petroecuador’s failure to timely fulfill its legal obligations and Petroecuador’s further conduct since assuming full control over the operations.

 

In 2008, a mining engineer appointed by the court to identify and determine the cause of environmental damage, and to specify steps needed to remediate it, issued a report recommending that the court assess $18.9 billion, which would, according to the engineer, provide financial compensation for purported damages, including wrongful death claims, and

pay for, among other items, environmental remediation, health care systems and additional infrastructure for Petroecuador. The engineer’s report also asserted that an additional $8.4 billion could be assessed against Chevron for unjust enrichment. In 2009, following the disclosure by Chevron of evidence that the judge participated in meetings in which businesspeople and individuals holding themselves out as government officials discussed the case and its likely outcome, the judge presiding over the case was recused. In 2010, Chevron moved to strike the mining engineer’s report and to dismiss the case based on evidence obtained through discovery in the United States indicating that the report was prepared by consultants for the plaintiffs before being presented as the mining engineer’s independent and impartial work and showing further evidence of misconduct. In August 2010, the judge issued an order stating that he was not bound by the mining engineer’s report and requiring the parties to provide their positions on damages within 45 days. Chevron subsequently petitioned for recusal of the judge, claiming that he had disregarded evidence of fraud and misconduct and that he had failed to rule on a number of motions within the statutory time requirement.

 

In September 2010, Chevron submitted its position on damages, asserting that no amount should be assessed against it. The plaintiffs’ submission, which relied in part on the mining engineer’s report, took the position that damages are between approximately $16 billion and $76 billion and that unjust enrichment should be assessed in an amount between approximately $5 billion and $38 billion. The next day, the judge issued an order closing the evidentiary phase of the case and notifying the parties that he had requested the case file so that he could prepare a judgment. Chevron petitioned to have that order declared a nullity in light of Chevron’s prior recusal petition, and because procedural and evidentiary matters remain unresolved. In October 2010, Chevron’s motion to recuse the judge was granted. A new judge took charge of the case and revoked the prior judge’s order closing the evidentiary phase of the case. On December 17, 2010, the judge issued an order closing the evidentiary phase of the case and notifying the parties that he had requested the case file so that he could prepare a judgment.

 

Chevron and Texpet filed an arbitration claim in September 2009 against the Republic of Ecuador before the Permanent Court of Arbitration in The Hague under the Rules of the United Nations Commission on International Trade Law. The claim alleges violations of the Republic of Ecuador’s obligations under the United States-Ecuador Bilateral Investment Treaty (BIT) and breaches of the settlement and release agreements between the Republic of Ecuador and Texpet (described above), which are investment agreements protected by the BIT. Through the arbitration, Chevron and Texpet are seeking relief against the Republic of Ecuador, including a declaration that any judgment against Chevron in the Lago Agrio litigation constitutes a violation of Ecuador’s obligations under the BIT. On February 9, 2011, the Permanent Court of Arbitration issued an Order for Interim Measures requiring the Republic of Ecuador to take all measures at its disposal to suspend or cause to be suspended the enforcement or recognition within and without Ecuador of any judgment against Chevron in the Lago Agrio case pending further order of the Tribunal. Chevron expects to continue seeking permanent injunctive relief and monetary relief before the Tribunal.

 

Through a series of recent U.S. court proceedings initiated by Chevron to obtain discovery relating to the Lago Agrio litigation and the BIT arbitration, Chevron has obtained evidence that it believes shows a pattern of fraud, collusion, corruption, and other misconduct on the part of several lawyers, consultants and others acting for the Lago Agrio plaintiffs. In February 2011, Chevron filed a civil lawsuit in the Federal District Court for the Southern District of New York against the Lago Agrio plaintiffs and several of their lawyers, consultants and supporters alleging violations of the Racketeer Influenced and Corrupt Organizations Act and other state laws. Through the civil lawsuit, Chevron is seeking relief that includes an award of damages and a declaration that any judgment against Chevron in the Lago Agrio litigation is the result of fraud and other unlawful conduct and is therefore unenforceable. On February 8, 2011, the Court issued a temporary restraining order prohibiting the Lago Agrio plaintiffs and persons acting in concert with them from taking any action in furtherance of recognition or enforcement of any judgment against Chevron in the Lago Agrio case until March 8, 2011. Chevron’s motion for a preliminary injunction is presently before the Court.

 

On February 14, 2011, the Provincial Court in Lago Agrio rendered an adverse judgment in the case. The Provincial Court rejected Chevron’s defenses to the extent the Court addressed them in its opinion. The judgment assesses approximately $8.6 billion in damages and about $0.9 billion for the plaintiffs’ representatives. It also assesses an additional amount of approximately $8.6 billion in punitive damages unless the company provides a public apology. Chevron continues to believe the Court’s judgment is illegitimate and unenforceable in Ecuador, the United States and other countries. The company also believes the judgment is the product of fraud, and contrary to the legitimate scientific evidence. Chevron will appeal this decision in Ecuador. Chevron cannot predict the timing or ultimate outcome of the appeals process in Ecuador. Chevron will continue a vigorous defense of any imposition of liability. Because Chevron has no substantial assets in Ecuador, Chevron would expect enforcement actions as a result of this judgment to be brought in other jurisdictions. Chevron expects to contest any such actions.

 

The ultimate outcome of the foregoing matters, including any financial effect on Chevron, remains uncertain. Management does not believe an estimate of a reasonably possible loss (or a range of loss) can be made in this case. Due to the defects

associated with the judgment, the 2008 engineer’s report and the September 2010 plaintiffs’ submission, management does not believe these documents have any utility in calculating a reasonably possible loss (or a range of loss). Moreover, the highly uncertain legal environment surrounding the case provides no basis for management to estimate a reasonably possible loss (or a range of loss).

 

California Air Resources Board

As reported in the company’s annual report on Form 10-K for the year ended December 31, 2009, in November 2008, the California Air Resources Board (CARB) proposed a civil penalty against the company’s Sacramento, California, terminal for alleged violations between August and December 2007 of CARB’s regulations governing the minimum concentration of additives in gasoline. Due to a computer programming error, the Sacramento terminal’s automatic dispensers had failed to inject additive detergent into a gasoline line.

 

As reported in the company’s annual report on Form 10-K for the year ended December 31, 2009, in November 2008, CARB proposed a civil penalty against the company’s Richmond, California, refinery for a notice of violation relating to gasoline that was not properly certified as to composition. The company corrected the composition certificates for the gasoline without requiring any change to the composition of the gasoline. In July 2009, CARB issued the refinery a notice of violation relating to an error in gasoline blending that caused the product composition certifications to be in error. The composition certifications were corrected without requiring any change to the gasoline. Discussions with CARB officials relating to all of these matters continue.

 

As reported in the company’s quarterly report on Form 10-Q for the quarter ended September 30, 2010, on July 14, 2009, CARB issued a notice of violation against Chevron Products Company for alleged violations of CARB’s regulations governing the certification of gasoline that occurred during storage at a third-party facility and which had been self-reported by the company on discovery. The company has determined that resolution of this matter may result in the payment of a civil penalty exceeding $100,000.

 

Other Government Proceedings

As reported in the company’s annual report on Form 10-K for the year ended December 31, 2009, in July 2009, the Hawaii Department of Health (DOH) alleged that Chevron is obligated to pay stipulated civil penalties exceeding $100,000 in conjunction with commitments the company undertook to install and operate certain air pollution abatement equipment at its Hawaii Refinery pursuant to Clean Air Act settlement with the United States Environmental Protection Agency and DOH. The company has disputed many of the allegations.

 

As reported in the company’s quarterly report on Form 10-Q for the quarter ended March 31, 2010, in March 2010, the United States Department of Justice (DOJ) indicated that it intends to seek a civil penalty against the company’s service station operations in Puerto Rico for alleged violations of the Commonwealth of Puerto Rico’s underground storage tank regulations. The alleged violations include failure to test leak detectors, perform release monitoring and maintain compliance records. The DOJ’s action may result in payment of a civil penalty exceeding $100,000.

 

As reported in the company’s quarterly report on Form 10-Q for the quarter ended June 30, 2010, Chevron has entered into negotiations with the United States Environmental Protection Agency (EPA) with respect to alleged air pollution violations at the company’s Perth Amboy, New Jersey refinery identified in a September 16, 2008 Compliance Order issued by the EPA. The alleged violations relate to certain management and reporting requirements set forth in the EPA’s Leak Detection and Repair regulations (these regulations pertain to the control and monitoring of fugitive emissions from refinery process equipment). Based on discussions with the EPA, it appears that the resolution of this matter will result in the payment of a civil penalty exceeding $100,000.

 

In the fourth quarter 2010, Chevron paid the United States Department of Transportation a $423,000 civil penalty as the result of an 800 barrel crude oil spill that occurred on June 12, 2010. The spill originated from a pipeline that runs from the company’s Rangely Colorado Field to its Salt Lake Refinery.

 

The California Attorney General has alleged violations of the State’s underground storage tank regulations at the company’s service stations in the State of California. The allegations are part of a state-wide enforcement action which the company determined in the fourth quarter 2010 may result in the payment of a civil penalty exceeding $100,000.

 

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-24.

 

CHEVRON CORPORATION
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