Assessment of future strategic directions for ChevronTexaco

1. Assessment of future strategic directions for ChevronTexaco London April 19, 2002

2. Framework Alternate strategic directions have been derived from a framework that considers the present industry success factors and issues specific to ChevronTexaco in the context of future scenarios Industry success factors Future scenarios Specific CVX issues Alternate strategic directions

3. Industry success factors

4. Total shareholder return (1992 – 1999) 288% BP 168% ExxonMobil 175% Shell 141% Chevron Texaco 144% TotalFina 197% Amerada Hess 62% Occidental 25% 167% Phillips 97% Marathon 175% S&P 500 Some relevant historical examples A review of the different strategies employed during the period just prior to the significant M&A activity provides some insights on the conventional industry characteristics and key capabilities that have driven shareholder value BP • During the the referenced time period, BP provided the highest shareholder return, by focusing on several key strategic priorities: • cost reduction • high-grading of its asset portfolio through divestiture • reduction in capital spending as a % of cash flow • As a result, BP positioned itself for future significant acquisitions Exxon • Exxon generated significantly less shareholder return during the same period than BP, partially because it was starting from a higher level. • Exxon has been following a long-term strategy of being an efficient asset operator coupled with a financial discipline – however, without growth, this strategy will ultimately lead to diminishing returns • Consequently, Exxon also moved forward with a acquisition strategy Phillips Petroleum • Chevron followed a strategy of divesting under-performing downstream assets, shifting towards an upstream emphasis, and focusing on creating maximum value from the remaining reduced asset • This strategy provided for limited shareholder returns, as Phillips Petroleum had a size disadvantage in comparison with the other international integrated oil • Phillips Petroleum has since reversed its strategy and is now trying to emulate the other large international oil companies

5. Industry characteristics Characteristics inherent to the oil industry have had a significant influence on the effectiveness of strategic choices and the ability of companies to create shareholder value Cost savings have been passed on to consumers, as indicated by the ongoing trend of decreasing oil prices in real terms Cost cutting by itself has limited impact on shareholder value, as the initiatives are quickly copied The pressure to increase shareholder value continues to drive M&As and share buyback programs • Growth in the oil industry is linked to global GDP growth – difficult to achieve shareholder value from organic growth Companies will need to outsource activities and non-core assets, for which they have no competitive advantage The ability to achieve returns in excess of cost of capital is being eroded, as the importance of external service providers continues to grow

6. Key organizational capabilities Consistent with the industry characteristics are key organizational capabilities that are essential to driving shareholder value and are relevant to any specific strategy • Financial discipline • Performance management • Investment decisions • Project management • External/internal reporting Effective management of free cash flow • Portfolio management • Alignment of assets with core capabilities • Acquisition/divestiture skills • Risk management Continuous optimization of asset portfolio • Operational effectiveness • Asset management • Supply chain management • Effective utilization of external service providers Sustainable improvements from core asset base

7. Validation of key organizational capabilities The validity of the key organizational capabilities are indicated by an assessment of the relative impact of key value drivers • An assessment of the value drivers indicates that cost of capital and capital expenditures as a percentage of total revenues have the biggest impact on value creation… • …as such, improving financial discipline and improving creditability with the external financial markets should be a strategic priority • The importance of portfolio management is also validated, as the cost of capital and future capital expenditures are both a function of the asset and business portfolio • An increase in EBITDA margin also has a significant impact, while working capital has less impact, and revenue growth has the least impact on value creation… • …as such, growth without effective operational management that drives down costs and to a lesser degree, working capital will have limited impact on shareholder value

8. ExxonMobil: Impact of value drivers ExxonMobil : Change in value with 1.0% change in driver Cost of capital Capital expenditure as a % of revenue Working capital as a % of revenue Cash tax rate EDITDA margin Revenue growth -40000 -30000 -20000 -10000 0 10000 20000 30000 Change in value ($ million)

9. ChevronTexaco: Impact of value drivers ChevronTexaco: Change in value with 1.0% change in driver Cost of capital Capital expenditure as a % of revenue Working capital as a % of revenue Cash tax rate EDITDA margin Revenue growth -20000 -15000 -10000 -5000 0 5000 10000 Change in value ($ million)

10. Shell: Impact of value drivers Shell: Change in value with 1.0% change in driver Cost of capital Capital expenditure as a % of revenue Working capital as a % of revenue Cash tax rate EDITDA margin Revenue growth -20000 -15000 -10000 -5000 0 5000 10000 15000 Change in value ($ million)

11. BP: Impact of value drivers BP: Change in value with 1.0% change in driver Cost of capital Capital expenditure as a % of revenue Working capital as a % of revenue Cash tax rate EDITDA margin Revenue growth -80000 -60000 -40000 -20000 0 20000 40000 60000 Change in value ($million)

12. Strategic questions • How different will the future be from the recent past? • Will future developments change the key success factors and/or their relevant importance? • What will be important portfolio considerations? • role of downstream? • convergence along the energy supply chain? • options for the future? • What are potential strategic alternatives for ChevronTexaco’s, given its current position?

13. Future scenarios

14. Methodology for developing scenarios Potential scenarios for the future can be developed from assessing the key drivers of change, identifying the givens and uncertainties, and then focusing on the key uncertainties to build the scenarios 2 1 3 4

15. Key drivers of change Future developments will be driven by macro-drivers, and drivers specific to the upstream segment and to the downstream sectors Key drivers of change Upstream drivers R&M drivers Macro-level drivers • Global product flows • Energy technologies • E&P technologies • Product specifications • Economic growth • Investment strategies • Investment strategies • Geopolitical • OPEC policies • Penetration of new retail formats • Environmental policies • Production from mature fields • Non-oil potential

16. Potential future scenarios for 2007 -- 2012 Potential scenarios can be developed by considering future demand characteristics and the oil industry’s actions and reactions to its perceptions of the future • Slightly weaker oil prices ($18 -- 22), as OPEC builds market share • Refining margins return to equilibrium level with trend of specification convergence ($2.25 US Gulf Coast crack spread) • Marketing profitability tends to be weak with strong competition from non-traditional formats and continued fragmentation • Favorable oil prices ($22 -- 25), as supply stays aligned with demand • Refining margins stay strong ($3.00 US Gulf Coast crack spread), with further consolidation and limited capital investment • Marketing profitability improves, as industry consolidates and strong non-fuel demand and limited further penetration of non-oil marketers Strong than expected and oil-based Demand characteristics • Growth of energy demand in developed economies • Growth of demand in emerging economies • Degree of hydrocarbon dependence • Very weak oil prices ($8--12), with oversupply conditions with shift away from oil and intense competition • Refining margins weaken substantially ($1.50 US Gulf Coast crack spread), as industry does not adequately restructure • Marketing profitability is very low, as volume per site continues to decrease with lower overall demand and improved vehicle efficiencies • Energy suppliers converge along the gas and electricity supply chain, as demand moves away from oil • Weak oil prices ($12 – 15), driven by low demand, but do not collapse • Refining margins stay acceptable (US $2.00 Gulf Coast crack spread), with industry restructuring • Marketing margins remain average (in comparison with latter half of previous decade), with industry restructuring Slower than expected and changing Unfocused and slow Aggressive and Fast Industry actions/reactions • Degree of consolidation • Level of convergence between energy supply • OPEC policies • Investment strategies Note Crude Prices are based on Brent Refining crack spreads are US Gulf Coast

17. Potential strategic alternatives

18. Retail Fuel Market Shares in Europe 12.0% 10.0% 8.0% 6.0% 4.0% 1.8% 2.0% - Aral Agip OKP OMV Shell Neste Statoil Texaco Conoco Petrogal TotalFinaElf Portfolio issues specific to ChevronTexaco ChevronTexaco’s current size and portfolio mix present some specific issues that need to be considered in developing a future strategy • ChevronTexaco is not receiving the same low cost of capital that is being rewarded to BP, ExxonMobil, and Shell, which partially stems from CVX’s smaller scale • Another factor driving the higher cost of capital is the higher relative exposure to changes in the price of crude oil • ChevronTexaco’s upstream portfolio is weighted towards liquid, as the primary energy mix is getting lighter • ChevronTexaco has the smallest European downstream presence in comparison with the other international majors, as its downstream portfolio is focused in Asia and the Americas

19. Range of potential strategies The range of future potential strategies can be developed by moving along two dimensions – degree of change in comparison to ChevronTexaco’s current position and movement away from the traditional integrated oil model Major change Shift emphasis away from physical assets Grow to become mega-major Fill gaps in portfolio Become diversified energy company Focus portfolio in areas of competitive advantage Divest downstream Maintain current portfolio Minor change Traditional Radical

20. Alternatives consistent with integrated oil model Alternative Strategic priority Key questions • Are there sufficient efficiency opportunities to create shareholder value? • Can CVX beat ExxonMobil at its own game? Maintain current portfolio Focus on gaining operating efficiencies and driving returns from the existing asset base Fill gaps in portfolio Undertake acquisitions designed to addressed specific portfolio issues – gas portfolio, address downstream performance in Asia • Does minor additions to the portfolio translate into only minor improvements to shareholder value? • Can CVX overcome its higher cost of capital than that rewarded the other international majors? • Divest under-performing assets and those assets for which CVX does not have derive a competitive advantage from owning or operating • Build in areas of strength – West Africa Focus portfolio in areas of competitive advantage • Does this strategy invalidate the merger? • Are there specific geographic areas and/or activities that CvX should stay focused? Grow to become a super-major Undertake a major acquisition to reduce gap in scale with Shell, BP, and ExxonMobil • Are there suitable acquisition targets after the latest M&A round? • What will be the reaction of the other international majors? Are they intending to growth still further?

21. Alternatives that move CVX away from integrated model Alternative Strategic priority Key questions Become a diversified energy company • Develop options for the future, as a hedge against dramatic change to the current energy environment • Decrease focus on liquid hydrocarbons value chain • Will there be convergence opportunities that will create value? • Does decreased focus and the potential for operating inefficiencies out-weighed by the option value associated with a more diversified portfolio? Divest downstream • Divest the downstream assets, with the logic that: • the downstream assets represent the largest risk in a changing environment… • …In terms of potential decrease in value and the potential need for significant capital investment • Is CVX willing to live with the increased earning volatility associated with upstream companies? • Are the lower returns on the downstream outweighed by the lower cost of capital associated with an integrated oil company? • If the downstream business is divested – should it be done piecemeal or in its entirety? • Will the downstream assets ever be worth more than today, if CVX does not make any additional portfolio additions? Shift emphasis away from physical assets • Maintain minimal assets required to offset trading risks • Build new businesses that leverage information, such as energy services • Leverage CVX’s strong balance sheet and debt rating • Does CVX have the capabilities to extend its trading operations? • Can CVX develop sufficient scale in new information-dominated businesses? • Is this a sustainable business model?