MAJOR SHIFT IN EXPENDITURES TO FIELD DEVELOPMENTS
Over the past several years we have significantly shifted our exploration and production capital expenditures to field developments. In 2003 we invested approximately $700 million, or 56% of our upstream capital spending in developments, and in 2004, we plan to invest approximately $900 million, or about 60% of our upstream capital expenditures in developments. These amounts compare to average annual development spending during 2000-2002 of $423 million, or 37% of upstream capital expenditures.

We are currently investing in 12 field developments in the deepwater Gulf of Mexico, West Africa, North Sea and Southeast Asia. We estimate that these developments should add in excess of 100,000 barrels of oil equivalent per day of new production by 2006. In addition, the lower costs of this new production combined with other cost cutting initiatives should reduce unit costs by $2-3 per barrel by 2006.

RESHAPING OUR EXISTING ASSET PORTFOLIO
In 2003 we sold $545 million of assets of which $478 million were mature or high cost exploration and production properties. We sold our interests in the shallow water Gulf of Mexico, the Jabung Field in Indonesia, and in several small fields in the United Kingdom sector of the North Sea.

We also completed three significant asset swaps in 2003. In the first, we swapped mature, high cost assets in Colombia for a 25% interest in significant, long-lived natural gas reserves in the Malaysia- Thailand Joint Development Area, bringing our interest in the area to 50%. In the second transaction, we transferred a 14% interest and the operatorship of the Scott and Telford Fields in the North Sea in exchange for an additional 22.5% interest in the Llano Field in the deepwater Gulf of Mexico, bringing our interest in the field to 50%. We also exchanged our 25% stake in Premier Oil plc for a 23% interest in the Natuna Sea Block A in Indonesia.

RESTRUCTURING OUR EXPLORATION AND PRODUCTION ORGANIZATION
Last year we took steps to restructure our exploration and production business. As part of this reorganization, we reduced headcount by about 30%, or roughly 700 positions. As a result, we expect to achieve annual after-tax cost savings of $30 million. Sixty percent of these savings are expected to be realized in 2004, and the full amount in 2005.

CREATING VALUE THROUGH FOCUSED, HIGH-IMPACT EXPLORATION
Our exploration strategy is to drill fewer, but higher impact wells than in the past. In 2004, we expect to drill about 15 high impact exploration and appraisal wells. In 2004, over one half of our exploration activity will be in the deepwater Gulf of Mexico.

Last year we announced several discoveries, including two significant deepwater Gulf of Mexico wells: the successful appraisal of our Shenzi discovery, in which we have a 28% interest and which encountered about 500 feet of net oil pay, and Tubular Bells, in which we have a 20% interest. Both Shenzi and Tubular Bells will be further appraised in 2004.

REFINING AND MARKETING
Our refining and marketing business posted its best annual results in a decade. Earnings at HOVENSA, our refining joint venture in the U.S. Virgin Islands, and our retail and energy marketing businesses were strong.

Net income per barrel of refined products sold ranked in the top quartile versus competitors for 2003. The first quarter of 2004 has started well, and we anticipate another year of strong financial performance for our refining and marketing business.