• Midstream-This segment gathers, processes and markets natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids, predominantly in the United States and Trinidad. The Midstream segment primarily consists of our 50 percent equity investment in DCP Midstream, LLC.

• Refining and Marketing (R&M)-This segment purchases, refines, markets and transports crude oil and petroleum products, mainly in the United States, Europe and Asia.

• LUKOIL Investment-This segment consists of our equity investment in the ordinary shares of OAO LUKOIL, an international, integrated oil and gas company headquartered in Russia. At December 31, 2008, our ownership interest was 20 percent based on issued shares and 20.06 percent based on estimated shares outstanding.

• Chemicals-This segment manufactures and markets petrochemicals and plastics on a worldwide basis. The Chemicals segment consists of our 50 percent equity investment in Chevron Phillips Chemical Company LLC (CPChem).

• Emerging Businesses-This segment represents our investment in new technologies or businesses outside our normal scope of operations.

In 2008, the energy industry was characterized by extreme volatility. Forecasts of worldwide economic growth and increasingly scarce supply, a weakening U.S. dollar, and other factors helped drive crude oil prices to record highs. This was followed by an abrupt shift into a severe global financial recession, which reduced current and forecasted demand for petroleum products. Because of this, crude oil prices fell rapidly and refining margins also significantly weakened. As a result of the significant drop in global equity markets during the fourth quarter of 2008, we recorded two individually significant impairments in 2008 that were primarily linked to market capitalizations-a $25.4 billion write-down of our E&P segment's recorded goodwill, and a $7.4 billion reduction in the carrying value of our LUKOIL investment. These impairments contributed to a net loss in 2008 of $17.0 billion, compared with net income in 2007 of $11.9 billion, which includes the impact of a $4.5 billion impairment due to expropriation of our Venezuelan assets. Since these 2008 and 2007 impairment charges were noncash, they did not impact our cash provided by operating activities, which was $22.7 billion in 2008, compared with $24.6 billion in 2007.
Crude oil and natural gas prices, along with refining margins, are the most significant factors in our profitability, and are driven by market factors over which we have no control. However, from a competitive perspective, there are other important factors we must manage well to be successful, including:
• Operating our producing properties and refining and marketing operations safely, consistently and in an environmentally sound manner. Safety is our first priority, and we are committed to protecting the health and safety of everyone who has a role in our operations and the communities in which we operate. Maintaining high utilization rates at our refineries and minimizing downtime in producing fields enable us to capture the value available in the market in terms of prices and margins. During 2008, our worldwide refining capacity utilization rate was 90 percent, compared with 94 percent in 2007. The lower rate primarily reflects reduced throughput at our Wilhelmshaven, Germany, refinery due to economic conditions, as well as higher unplanned downtime including impacts from hurricanes in the U.S. Gulf Coast region. Concerning the environment, we strive to conduct our operations in a manner consistent with our environmental stewardship principles.

• Adding to our proved reserve base. We primarily add to our proved reserve base in three ways:

• Successful exploration and development of new fields.

• Acquisition of existing fields.

• Applying new technologies and processes to improve recovery from existing fields.

Through a combination of all three methods listed above, we have been successful in the past in maintaining or adding to our production and proved reserve base. Although it cannot be assured, we anticipate being able to do so in the future. In the three years ending December 31, 2008, our reserve replacement was 124 percent, including the impacts of the Burlington Resources acquisition, additional equity investments in LUKOIL, the FCCL Oil Sands Partnership with EnCana, the Australia Pacific LNG joint venture with Origin Energy, and the expropriation of our Venezuelan oil assets.
Access to additional resources has become increasingly difficult as direct investment is prohibited in some nations, while fiscal and other terms in other countries can make projects uneconomic or unattractive. In addition, political instability, competition from national oil companies, and lack of access to high-potential areas due to environmental or other regulation may negatively impact our ability to increase our reserve base. As such, the timing and level at which we add to our reserve base may, or may not, allow us to replace our production over subsequent years.
• Controlling costs and expenses. Since we cannot control the prices of the commodity products we sell, controlling operating and overhead costs, within the context of our commitment to safety and environmental stewardship, are high priorities. We monitor these costs using various methodologies that are reported to senior management monthly, on both an absolute-dollar basis and a per-unit basis. Because managing operating and overhead costs is critical to maintaining competitive positions in our

industries, cost control is a component of our variable compensation programs. In response to the current depressed market environment, we expect to reduce our work force in 2009, reduce the headcount of contractors, and continue to emphasize cost discipline throughout our operations.
With the rise in commodity prices over the last several years and through the first half of 2008, and the subsequent increase in industry-wide spending on capital and major maintenance programs, we and other energy companies experienced inflation for the costs of certain goods and services in excess of general worldwide inflationary trends. Such costs included rates for drilling rigs, steel and other raw materials, as well as costs for skilled labor. With the weakening of the economy and the decline in commodity prices, our industry began to see some relief from this upward cost pressure in late 2008 and into early 2009.
• Selecting the appropriate projects in which to invest our capital dollars. We participate in capital-intensive industries. As a result, we must often invest significant capital dollars to explore for new oil and gas fields, develop newly discovered fields, maintain existing fields, or continue to maintain and improve our refinery complexes. We invest in those projects that are expected to provide an adequate financial return on invested dollars. However, there are often long lead times from the time we make an investment to the time that investment is operational and begins generating financial returns.

In October 2008, we formed Australia Pacific LNG, a 50/50 joint venture with Origin Energy for the development of coalbed natural gas in Australia, and the subsequent liquefaction and transport of the liquefied natural gas targeting Asia Pacific markets. In January 2007, we entered into two 50/50 business ventures with EnCana to create an integrated North American heavy oil business, consisting of the upstream FCCL Oil Sands Partnership in Canada and the downstream WRB Refining LLC in the United States.
Our capital expenditures and investments in 2008 totaled $19.1 billion, and we anticipate capital expenditures and investments to be approximately $11.7 billion in 2009. The reduced capital budget in 2009 reflects the impact of the Origin transaction on the 2008 totals, and a planned reduction in response to current market conditions. In addition to our capital program, we paid dividends on our common stock of $2.9 billion in 2008, and repurchased $8.2 billion of our common stock.
• Managing our asset portfolio. We continue to evaluate opportunities to acquire assets that will contribute to future growth at competitive prices. The 2006 Burlington Resources acquisition, the 2007 EnCana business ventures, and the 2008 Origin Energy joint venture are examples of such activity. We also continually assess our assets to determine if any no longer fit our strategic plans and should be sold or otherwise disposed. This management of our asset portfolio is important to ensuring our long-term growth and maintaining adequate financial returns. In 2008, we completed the disposition of our retail marketing assets in Norway, Sweden and Denmark, and we also sold all of our E&P properties in Argentina and the Netherlands. We closed on the sale of a large part of our U.S. retail marketing assets in January 2009.

• Developing and retaining a talented work force. We strive to attract, train, develop and retain individuals with the knowledge and skills to implement our business strategy and who support our values and ethics. Throughout the company, we focus on the continued learning, development and technical training of our employees. Professional new hires participate in structured development programs designed to accelerate their technical and functional skills.

Our key performance indicators are shown in the statistical tables provided at the beginning of the operating segment sections that follow. These include crude oil, natural gas and natural gas liquids prices and production, refining capacity utilization, and refinery output.

Other significant factors that can affect our profitability include:
• Impairments. As mentioned above, we participate in capital-intensive industries. At times, our investments become impaired when our reserve estimates are revised downward, when crude oil or natural gas prices, or refinery margins decline significantly for long periods of time, or when a decision to dispose of an asset leads to a write-down to its fair market value. We may also invest large amounts of money in exploration blocks which, if exploratory drilling proves unsuccessful, could lead to a material impairment of leasehold values. Before-tax impairments in 2008, excluding the goodwill impairment discussed below and a $7.4 billion impairment related to our LUKOIL investment, totaled $1.7 billion. This amount compares with $0.4 billion of impairments, excluding the impairment of expropriated assets (discussed below), in 2007.

• Goodwill. At year-end 2008, we had $3.8 billion of goodwill on our balance sheet, compared with $29.3 billion at year-end 2007. In 2008, we recorded a $25.4 billion complete impairment of our E&P segment goodwill, primarily as a function of decreased year-end commodity prices and the decline in our market capitalization. For additional information, see Note 9-Goodwill and Intangibles, in the Notes to Consolidated Financial Statements. Deterioration of market conditions in the future could lead to other goodwill impairments that may have a substantial negative, though noncash, effect on our profitability.

• Effective tax rate. Our operations are located in countries with different tax rates and fiscal structures. Accordingly, even in a stable commodity price and fiscal/regulatory environment, our overall effective tax rate can vary significantly between periods based on the "mix" of pretax earnings within our global operations.

• Fiscal and regulatory environment. As commodity prices and refining margins fluctuated upward over the last several years, certain governments have responded with changes to their fiscal take. These changes have generally negatively impacted our results of operations, and further changes to government fiscal take could have a negative impact on future operations. In June 2007, our Venezuelan oil projects were expropriated, and we recorded a $4.5 billion after-tax impairment (see the "Expropriated Assets" section of Note 10-Impairments, in the Notes to Consolidated Financial Statements). The company was also negatively impacted by increased production taxes enacted by the state of Alaska in the fourth quarter of 2007. In October 2007, the government of Ecuador increased the tax rate of the Windfall Profits Tax Law implemented in 2006, increasing the amount of government royalty entitlement on crude oil production to 99 percent of any increase in the price of crude oil above a contractual reference price. In Canada, the Alberta provincial government changed the royalty structure for Crown lands, effective January 1, 2009, so that a component of the new royalty rate is tied to prevailing prices. In October 2008, we and our co-venturers signed definitive agreements for the proportional dilution of our equity interests in the Republic of Kazakhstan's North Caspian Sea Production Sharing Agreement, which includes the Kashagan field, to allow the state-owned energy company to increase its ownership percentage effective January 1, 2008. Partially offsetting the above fiscal take increases were lower corporate income tax rates enacted by Canada and Germany during 2007. These tax rate reductions applied to all corporations and were not exclusive to the oil and gas industry.

Segment Analysis
The E&P segment's results are most closely linked to crude oil and natural gas prices. These are commodity products, the prices of which are subject to factors external to our company and over which we have no control. Industry crude oil prices for West Texas Intermediate (WTI) were higher in 2008, compared with 2007, averaging $99.56 per barrel in 2008, an increase of 38 percent. The increase was driven by concerns during the first half of 2008 of adequate supplies given the strong oil demand growth in developing Asia and the Middle East. The average annual price for WTI moderated due to the economic crisis in the second half of 2008 that impacted demand from all regions of the world. Industry natural gas prices for Henry Hub increased 32 percent during 2008 to an average price of $9.04 per million British thermal units (MMBTU), primarily due to increased demand from the industrial and electric power sector during the first half of 2008 and higher oil prices. These factors were moderated by higher domestic production and lower demand, which led to higher storage in the second half of 2008.
The Midstream segment's results are most closely linked to natural gas liquids prices. The most important factor on the profitability of this segment is the results from our 50 percent equity investment in DCP Midstream. DCP Midstream's natural gas liquids prices increased 11 percent in 2008.
Refining margins, refinery utilization, cost control and marketing margins primarily drive the R&M segment's results. Refining margins are subject to movements in the cost of crude oil and other feedstocks, and the sales prices for refined products, both of which are subject to market factors over which we have no control. Industry refining margins in the United States were lower overall in comparison with 2007. The primary factor contributing to the reduced refining margins in 2008 was a decrease in gasoline demand.
The LUKOIL Investment segment consists of our investment in the ordinary shares of LUKOIL. At December 31, 2008, our ownership interest in LUKOIL was 20 percent based on issued shares and 20.06 percent based on estimated shares outstanding. LUKOIL's results are subject to factors similar to those of our E&P and R&M segments. LUKOIL's upstream results are closely linked to Russian (Urals) crude oil prices and are heavily impacted by extraction tax rates. Refining margins are significant factors on LUKOIL's downstream results. Export tariff rates for crude oil and refined products also have a significant impact on both upstream and downstream results.
The Chemicals segment consists of our 50 percent interest in CPChem. The chemicals and plastics industry is mainly a commodity-based industry where the margins for key products are based on market factors over which CPChem has little or no control. CPChem is investing in feedstock-advantaged areas in the Middle East with access to large, growing markets, such as Asia.
The Emerging Businesses segment represents our investment in new technologies or businesses outside our normal scope of operations. Activities within this segment are currently focused on power generation and innovation of new technologies, such as those related to conventional and nonconventional hydrocarbon recovery (including heavy oil), refining, alternative energy, biofuels and the environment. Some of these technologies have the potential to become important drivers of profitability in future years.

RESULTS OF OPERATIONS

Consolidated Results
A summary of the company's net income (loss) by business segment follows:

                                                     Millions of Dollars
          Years Ended December 31              2008          2007         2006

          Exploration and Production (E&P)   $ (13,479 )      4,615        9,848
          Midstream                                541          453          476
          Refining and Marketing (R&M)           2,322        5,923        4,481
          LUKOIL Investment                     (5,488 )      1,818        1,425
          Chemicals                                110          359          492
          Emerging Businesses                       30           (8 )         15
          Corporate and Other                   (1,034 )     (1,269 )     (1,187 )

          Net income (loss)                  $ (16,998 )     11,891       15,550

2008 vs. 2007
The lower results in 2008 were primarily the result of:
• A $25,443 million before- and after-tax goodwill impairment of all E&P segment goodwill. This impairment was recorded during the fourth quarter.

• A $7,410 million before- and after-tax impairment of our LUKOIL investment taken during the fourth quarter.

• Lower U.S. refining margins in our R&M segment.

• An increase in other asset impairments, predominantly in our E&P and R&M segments.

These items were partially offset by:
• Higher crude oil, natural gas and natural gas liquids prices, benefiting our E&P, Midstream and LUKOIL Investment segments. Commodity price benefits were somewhat counteracted by increased production taxes.

• A 2007 complete impairment ($4,588 million before-tax, $4,512 million after-tax) of our oil interests in Venezuela, resulting from their expropriation on June 26, 2007.

2007 vs. 2006
The lower results in 2007 were primarily the result of:
• The complete impairment of our oil interests in Venezuela.

• Lower crude oil production in the E&P segment.

• Higher production and operating expenses, higher production taxes, and higher depreciation, depletion and amortization expense in the E&P segment.

These items were partially offset by:
• The net benefit of asset rationalization efforts in the E&P and R&M segments.

• Higher realized crude oil, natural gas, and natural gas liquids prices in the E&P segment.

• Higher realized worldwide refining margins, including the benefit of planned inventory reductions, in the R&M segment.

• Increased equity earnings from our investment in LUKOIL due to higher estimated commodity prices and volumes, and an increase in our average equity ownership percentage.

Statement of Operations Analysis
2008 vs. 2007
Sales and other operating revenues increased 28 percent in 2008, while purchased crude oil, natural gas and products increased 37 percent. These increases were mainly the result of higher petroleum product prices and higher prices for crude oil, natural gas and natural gas liquids.
Equity in earnings of affiliates decreased 16 percent in 2008, reflecting:
• Lower results from WRB Refining LLC, due to lower margins and a decline in equity ownership in accordance with the designed formation of the venture.

• Lower results from CPChem, due to higher operating costs, lower specialties, aromatics and styrenics margins, and lower olefins and polyolefins volumes.

• The absence of earnings from our heavy oil joint ventures expropriated by Venezuela in 2007.

• Increased losses related to our Naryanmarneftegaz (NMNG) joint venture as a result of higher production taxes and increased depreciation, depletion and amortization (DD&A) costs during the startup and early production phase of the Yuzhno Khylchuyu (YK) field.

These negative results were somewhat offset by improved results from the FCCL Oil Sands Partnership, DCP Midstream, LUKOIL (excluding the investment impairment), and CFJ Properties.
Other income decreased 45 percent during 2008, mainly due to a lower net benefit from asset rationalization efforts, the release in 2007 of escrowed funds associated with our Hamaca joint venture in Venezuela, and the settlement of retroactive adjustments for crude oil quality differentials on Trans-Alaska Pipeline System shipments (Quality Bank) in 2007.
Exploration expenses increased 33 percent during 2008, reflecting increased dry hole costs and higher expenses for post-discovery feasibility and development planning studies.
Impairments increased from $5,030 million in 2007 to $34,539 million in 2008. This increase reflects a $25,443 million goodwill impairment recorded during 2008 in our E&P segment. Also contributing to the increase was a $7,410 million impairment of our LUKOIL investment taken during 2008. These 2008 impairments were partially offset by a 2007 impairment of $4,588 million related to the expropriation of our oil interests in Venezuela.
Other impairments increased $1,244 million during 2008 primarily due to property impairments taken in response to a significantly diminished outlook for crude oil and natural gas prices, refining margins and power spreads, as well as in response to revised capital spending plans. For additional information, see Note 7-Investments, Loans, and Long-Term Receivables, Note 9-Goodwill and Intangibles, and Note 10-Impairments, in the Notes to Consolidated Financial Statements.
Interest and debt expense decreased 25 percent in 2008, primarily due to lower average interest rates, as well as the absence of 2007 interest expense related to the Alaska Quality Bank settlements.
Foreign currency transaction losses incurred during 2008 totaled $117 million, compared with foreign currency transaction gains of $201 million in 2007. This change occurred as the Canadian dollar, Russian rouble, British pound, and euro all weakened against the U.S. dollar during 2008, compared with the strengthening of these currencies against the U.S. dollar in 2007.
See Note 21-Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our income tax expense and effective tax rate.

2007 vs. 2006
Equity in earnings of affiliates increased 21 percent in 2007. The increase reflects earnings from WRB and FCCL, our downstream and upstream business ventures with EnCana, formed in January 2007. Also, we had improved results from LUKOIL, reflecting higher estimated commodity prices and volumes, and an increase in our average equity ownership percentage. These increases were partially offset by lower earnings from Hamaca and Petrozuata, our heavy oil joint ventures expropriated by Venezuela in the second quarter of 2007. Additionally, CPChem reported lower earnings, primarily due to lower olefins and polyolefins margins.
Other income increased 188 percent during 2007, primarily due to:
• Higher net gains on asset dispositions associated with asset rationalization efforts.

• The release in 2007 of escrowed funds related to the extinguishment of Hamaca project financing.

• The Alaska Quality Bank settlements in 2007.

These increases were partially offset by the recognition in 2006 of recoveries on business interruption insurance claims attributable to losses sustained from hurricanes in 2005.
Exploration expenses increased 21 percent during 2007, primarily reflecting the amortization of unproved North American leaseholds obtained in the Burlington Resources acquisition and the impairment of an international exploration license. The increase also reflects higher geological and geophysical expenses and higher dry hole costs.
Depreciation, depletion and amortization increased 14 percent during 2007, primarily resulting from the addition of Burlington Resources' assets in the E&P segment's depreciable asset base for a full year in 2007 versus only nine months in 2006.
Impairments reflects an impairment of $4,588 million related to the expropriation of our oil interests in Venezuela recorded in the second quarter of 2007. Impairments unrelated to the expropriation decreased 35 percent during 2007, primarily due to impairments recorded in 2006 of certain assets held for sale in the R&M segment, comprised of properties, plants and equipment, trademark intangibles and goodwill.
Interest and debt expense increased 15 percent during 2007, primarily due to the interest expense component of the Alaska Quality Bank settlements, as well as . . .