Overview

The Corporation is a global integrated energy company that operates in two segments, Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. The M&R segment manufactures, purchases, transports, trades and markets refined petroleum products, natural gas and electricity.

Net income in 2008 was $2,360 million compared with $1,832 million in 2007 and $1,920 million in 2006. Diluted earnings per share were $7.24 in 2008 compared with $5.74 in 2007 and $6.08 in 2006. A table of items affecting comparability between periods is shown on page 21.

Exploration and Production

The Corporation's strategy for the E&P segment is to profitably grow reserves and production in a sustainable and financially disciplined manner. The Corporation's total proved reserves were 1,432 million barrels of oil equivalent
(boe) at December 31, 2008 compared with 1,330 million boe at December 31, 2007 and 1,243 million boe at December 31, 2006. Total proved reserves at year end 2008 increased 102 million boe or 8% from the end of 2007.

E&P net income was $2,423 million in 2008, $1,842 million in 2007 and $1,763 million in 2006. The improved results in 2008 as compared to 2007 were primarily driven by higher average crude oil selling prices. At December 31, 2008, crude oil selling prices were significantly below the average prices in 2008.

Production averaged 381,000 barrels of oil equivalent per day (boepd) in 2008 compared with 377,000 boepd in 2007 and 359,000 boepd in 2006. Production in 2008 increased 4,000 boepd or 1% from 2007. In 2009, the Corporation currently estimates total worldwide production to be approximately 380,000 boepd to 390,000 boepd.

During 2008, the Corporation progressed the following development projects that will add to its production in future years:

• In November 2008, upon the commissioning of a third-party gas export pipeline to Thailand, Phase 2 gas sales commenced at Block A-18 of the Joint Development Area of Malaysia and Thailand (JDA) (Hess 50%).

• In the deepwater Gulf of Mexico, development of the Shenzi Field (Hess 28%) progressed. Tension leg platform tendons, hull and topsides were installed and flowlines were laid and tested. First production is expected in the second quarter of 2009.

• Additional production from a Phase 2 oil project at the Ujung Pangkah Field (Hess 75%) in Indonesia is expected in mid 2009.

• Development of a residual oil zone advanced at the Seminole-San Andres Unit (Hess 34%) with the installation of facilities and equipment.

During 2008, the Corporation's exploration activities included:

• In the Pony prospect on Green Canyon Block 468 (Hess 100%) in the deepwater Gulf of Mexico, the Corporation successfully completed drilling an appraisal well. The Corporation is evaluating development options for Pony.

• At the Corporation's Tubular Bells prospect (Hess 20%) located in the Mississippi Canyon area of the deepwater Gulf of Mexico, a third well was successfully drilled during 2008. The operator is evaluating development options for Tubular Bells.

• The Corporation completed drilling its initial four exploration wells of a 16 well commitment on the WA-Block-390-P offshore Western Australia (Hess 100%). Three of the four wells discovered natural gas and the Corporation plans to drill five additional exploration wells in 2009. The operator of the WA-Block 404-P (Hess 50%) offshore Western Australia plans to drill three exploration wells in 2009.

• The Corporation drilled a successful exploration well in Area 54 offshore Libya (Hess 100%). The Corporation intends to obtain 3D seismic in Area 54 and further drilling is planned.

• The Corporation drilled a successful exploration well on the West Med Block (Hess 55%) in Egypt, which encountered natural gas and crude oil. The Corporation is currently conducting engineering studies and further exploratory drilling is planned.

• The operator commenced drilling of an exploration well on the BM-S-22 Block (Hess 40%) in the Santos Basin offshore Brazil and filed a Notice of Discovery with the regulators on January 16, 2009.

• The Corporation was successful in acquiring new deepwater blocks in the Central and Western Gulf of Mexico and the offshore Semai V exploration block in Indonesia.

Marketing and Refining

The Corporation's strategy for the M&R segment is to deliver consistent operating performance and generate free cash flow. M&R net income was $277 million in 2008, $300 million in 2007 and $394 million in 2006. Earnings in 2008 and 2007 reflect lower average margins compared to the prior periods.

Refining operations contributed net income of $73 million in 2008, $193 million in 2007 and $240 million in 2006. The Corporation received cash distributions from HOVENSA totaling $50 million in 2008, $300 million in 2007 and $400 million in 2006. Gross crude runs at HOVENSA averaged 441,000 barrels per day in 2008 compared with 454,000 barrels per day in 2007 and 448,000 barrels per day in 2006. In 2007, HOVENSA successfully completed the first turnaround of its delayed coker unit. The Port Reading refinery operated at an average of 64,000 barrels per day in 2008 versus 61,000 barrels per day in 2007 and 63,000 barrels per day in 2006. Marketing earnings were $240 million in 2008, $83 million in 2007 and $108 million in 2006. Total refined product sales volumes averaged 472,000 barrels per day in 2008 compared with 451,000 barrels per day in 2007 and 459,000 barrels per day in 2006.

Liquidity and Capital and Exploratory Expenditures

Net cash provided by operating activities was $4,567 million in 2008, $3,507 million in 2007 and $3,491 million in 2006, principally reflecting increased earnings. At December 31, 2008, cash and cash equivalents totaled $908 million compared with $607 million at December 31, 2007. Total debt was $3,955 million at December 31, 2008 compared with $3,980 million at December 31, 2007. The Corporation's debt to capitalization ratio at December 31, 2008 was 24.3% compared with 28.9% at the end of 2007. The Corporation has debt maturities of $143 million in 2009 and $31 million in 2010. In February 2009, the Corporation issued $250 million of 5 year notes with a coupon of 7% and $1 billion of 10 year notes with a coupon of 8.125%.

Capital and exploratory expenditures were as follows for the years ended December 31:

                                                                        2008             2007
                                                                       (Millions of dollars)

Exploration and Production
United States                                                        $     2,164       $  1,603
International                                                              2,477          2,183

Total Exploration and Production                                           4,641          3,786
Marketing, Refining and Corporate                                            187            140

Total Capital and Exploratory Expenditures                           $     4,828       $  3,926

Exploration expenses charged to income included above:
United States                                                        $       211       $    192
International                                                                179            156

Total exploration expenses charged to income included above          $       390       $    348

The Corporation anticipates $3.2 billion in capital and exploratory expenditures in 2009, of which $3.1 billion relates to E&P operations.

Consolidated Results of Operations

The after-tax results by major operating activity are summarized below:

                                               2008        2007        2006
                                                   (Millions of dollars,
                                                  except per share data)

             Exploration and Production       $ 2,423     $ 1,842     $ 1,763
             Marketing and Refining               277         300         394
             Corporate                           (173 )      (150 )      (110 )
             Interest expense                    (167 )      (160 )      (127 )

             Net income                       $ 2,360     $ 1,832     $ 1,920

             Net income per share - diluted   $  7.24     $  5.74     $  6.08

In the discussion that follows, the financial effects of certain transactions are disclosed on an after-tax basis. Management reviews segment earnings on an after-tax basis and uses after-tax amounts in its review of variances in segment earnings. Management believes that after-tax amounts are a preferable method of explaining variances in earnings, since they show the entire effect of a transaction rather than only the pre-tax amount. After-tax amounts are determined by applying the income tax rate in each tax jurisdiction to pre-tax amounts.

The following table summarizes, on an after-tax basis, items of income (expense) that are included in net income and affect comparability between periods. The items in the table below are explained, and the pre-tax amounts are shown, on pages 25 through 27.

                                             2008          2007      2006
                                                (Millions of dollars)

               Exploration and Production   $   (26 )     $  (74 )   $ 173
               Marketing and Refining             -           24         -
               Corporate                          -          (25 )       -

                                            $   (26 )     $  (75 )   $ 173

Comparison of Results

Exploration and Production

Following is a summarized income statement of the Corporation's Exploration and
Production operations:


                                                               2008         2007         2006
                                                                    (Millions of dollars)

Sales and other operating revenues*                           $ 9,806      $ 7,498      $ 6,524
Other, net                                                       (167 )         65          428

Total revenues and non operating income                         9,639        7,563        6,952

Costs and expenses
Production expenses, including related taxes                    1,872        1,581        1,250
Exploration expenses, including dry holes and lease
impairment                                                        725          515          552
General, administrative and other expenses                        302          257          209
Depreciation, depletion and amortization                        1,952        1,503        1,159

Total costs and expenses                                        4,851        3,856        3,170

Results of operations from continuing operations before
income taxes                                                    4,788        3,707        3,782
Provision for income taxes                                      2,365        1,865        2,019

Results of operations                                         $ 2,423      $ 1,842      $ 1,763

* Amounts differ from E&P operating revenues in Note 17 "Segment Information" primarily due to the exclusion of sales of hydrocarbons purchased from third parties.

After considering the Exploration and Production items in the table on page 21, the remaining changes in Exploration and Production earnings are primarily attributable to changes in selling prices, production volumes, operating costs, exploration expenses, foreign exchange, and income taxes, as discussed below.

Selling prices: Higher average selling prices increased Exploration and Production revenues by approximately $2,100 million in 2008 compared with 2007. At December 31, 2008, the selling prices of crude oil and natural gas had decreased significantly from the average 2008 selling prices indicated below. In 2007, an increase in average crude oil selling prices and reduced hedge positions compared with 2006 increased revenues by approximately $740 million.

The Corporation's average selling prices were as follows:

                                                     2008        2007        2006

        Crude oil-per barrel (including hedging)
        United States                              $ 96.82     $ 69.23     $ 60.45
        Europe                                       78.75       60.99       56.19
        Africa                                       78.72       62.04       51.18
        Asia and other                               97.07       72.17       61.52
        Worldwide                                    82.04       63.44       55.31
        Crude oil-per barrel (excluding hedging)
        United States                              $ 96.82     $ 69.23     $ 60.45
        Europe                                       78.75       60.99       58.46
        Africa                                       93.57       71.71       62.80
        Asia and other                               97.07       72.17       61.52
        Worldwide                                    89.23       67.79       60.41
        Natural gas liquids-per barrel
        United States                              $ 64.98     $ 51.89     $ 46.22
        Europe                                       74.63       57.20       47.30
        Worldwide                                    67.61       53.72       46.59
        Natural gas-per mcf (including hedging)
        United States                              $  8.61     $  6.67     $  6.59
        Europe                                        9.44        6.13        6.20
        Asia and other                                5.24        4.71        4.05
        Worldwide                                     7.17        5.60        5.50
        Natural gas-per mcf (excluding hedging)
        United States                              $  8.61     $  6.67     $  6.59
        Europe                                        9.79        6.13        6.20
        Asia and other                                5.24        4.71        4.05
        Worldwide                                     7.30        5.60        5.50

The after-tax impacts of hedging reduced earnings by $423 million ($685 million before income taxes) in 2008, $244 million ($399 million before income taxes) in 2007 and $285 million ($449 million before income taxes) in 2006. In October 2008, the Corporation closed its Brent crude oil hedge positions by entering into offsetting contracts with the same counterparty covering 24,000 barrels per day from 2009 through 2012 at a per barrel price of $86.95 each year. The deferred after-tax loss as of the date the hedge positions were closed will be recorded in earnings as the contracts mature. The estimated annual after-tax loss from the closed positions will be approximately $335 million from 2009 through 2012. The pretax amounts will continue to be recorded as a reduction of revenue and allocated to the selling prices of the Corporation's African production.

Production and sales volumes: The Corporation's crude oil and natural gas production was 381,000 boepd in 2008 compared with 377,000 boepd in 2007 and 359,000 boepd in 2006. The Corporation currently estimates that its 2009 production will average between 380,000 and 390,000 boepd.

The Corporation's net daily worldwide production was as follows:

                                                               2008      2007      2006

  Crude oil (thousands of barrels per day)
  United States                                                  32        31        36
  Europe                                                         83        93       109
  Africa                                                        124       115        85
  Asia and other                                                 13        21        12

  Total                                                         252       260       242

  Natural gas liquids (thousands of barrels per day)
  United States                                                  10        10        10
  Europe                                                          4         5         5

  Total                                                          14        15        15

  Natural gas (thousands of mcf per day)
  United States                                                  78        88       110
  Europe                                                        255       259       283
  Asia and other                                                356       266       219

  Total                                                         689       613       612

  Barrels of oil equivalent* (thousands of barrels per day)     381       377       359

* Reflects natural gas production converted on the basis of relative energy content (six mcf equals one barrel).

United States: Crude oil production in the United States was higher in 2008 compared with 2007, principally due to production from new wells in North Dakota and the deepwater Gulf of Mexico. This increased production was partially offset by the impact of hurricanes in the Gulf of Mexico. Natural gas production was lower in 2008, primarily reflecting hurricane downtime and natural decline. Hurricane impacts reduced full year 2008 production by an estimated 7,000 boepd. At December 31, 2008, approximately 15,000 boepd remained shut-in from the hurricanes and this production is expected to be brought back on line by the end of the first quarter of 2009. Crude oil and natural gas production in 2007 decreased compared with 2006 principally due to natural decline and asset sales.

Europe: Crude oil production in 2008 was lower than in 2007, due to temporary shut-ins at three North Sea fields, cessation of production at the mature Fife, Fergus, Flora and Angus Fields, and natural decline. These decreases were partially offset by increased production in Russia. Crude oil production in 2007 was lower than in 2006, reflecting natural decline, facilities work on three North Sea fields, and the sale of the Corporation's interests in the Scott and Telford Fields in the United Kingdom, partially offset by higher Russian production. Natural gas production was comparable in 2008 and 2007, but decreased in 2007 compared with 2006 principally due to lower nominations related to the shut-down of a non-operated pipeline and natural decline. The decreases were partially offset by higher natural gas production from the Atlantic and Cromarty Fields in the United Kingdom which commenced in June 2006.

Africa: Crude oil production increased in 2008 compared with 2007, primarily due to higher production at the Okume Complex in Equatorial Guinea, partially offset by a lower entitlement to Algerian production. Crude oil production increased in 2007 compared with 2006 primarily due to the start-up of the Okume Complex in December 2006.

Asia and other: The change in crude oil production from 2006 through 2008 principally reflects changes to the Corporation's entitlement to production in Azerbaijan. The increase in 2007 compared with 2006 also reflects increased gross production from the fields in Azerbaijan. Natural gas production increased in 2008 compared with 2007 due to increased production from Block A-18 in the Joint Development Area of Malaysia and Thailand (JDA) and a full year of production from the Ujung Pangkah Field in Indonesia. Higher natural gas

production in 2007 compared with 2006 was principally due to new production from the Sinphuhorm onshore gas project in Thailand which commenced in November 2006 and production from the Ujung Pangkah Field which commenced in April 2007. These increases were partially offset by the planned shut-down of the JDA to install facilities required for Phase 2 gas sales.

Sales volumes: Higher sales volumes and other operating revenues increased revenue by approximately $200 million in 2008 compared with 2007 and $240 million in 2007 compared with 2006.

Operating costs and depreciation, depletion and amortization: Cash operating costs, consisting of production expenses and general and administrative expenses, increased by $321 million in 2008 and $409 million in 2007 compared with the corresponding amounts in prior years (excluding the charges for hurricane related costs in 2008 and vacated leased office space in 2006 that are discussed below). The increases in 2008 and 2007 were primarily due to higher production volumes, increased production taxes (due to higher realized selling prices), increased costs of services and materials and higher employee costs. Cash operating costs per barrel of oil equivalent were $15.49 in 2008, $13.36 in 2007 and $10.92 in 2006. Cash operating costs in 2009 are estimated to be in the range of $15.00 to $16.00 per barrel of oil equivalent.

Excluding the pre-tax amount of asset impairments, depreciation, depletion and amortization charges increased by $531 million and $232 million in 2008 and 2007, respectively. The increases were primarily due to higher production volumes and per barrel costs. Depreciation, depletion and amortization costs per barrel of oil equivalent were $13.79 in 2008, $10.11 in 2007 and $8.85 in 2006. Depreciation, depletion and amortization costs for 2009 are estimated to be in the range of $13.00 to $14.00 per barrel.

Exploration expenses: Exploration expenses were higher in 2008 compared with 2007, principally due to higher dry hole costs. Exploration expenses were lower in 2007 compared with 2006, primarily reflecting lower dry hole costs, partially offset by increased seismic studies.

Income taxes: After considering the items in the table below, the effective income tax rates for Exploration and Production operations were 49% in 2008, 50% in 2007 and 54% in 2006. The effective income tax rate for E&P operations in 2009 is estimated to be in the range of 57% to 61%. The increase from the 2008 effective rate largely reflects the impact of Libyan taxes in a lower commodity price environment.

Foreign Exchange: The after-tax foreign currency loss was $84 million in 2008, compared with a loss of $7 million in 2007 and a gain of $10 million in 2006. The increased foreign currency loss reflects the effect of significant exchange rate movements in the fourth quarter of 2008 on the remeasurement of assets, liabilities and foreign currency forward contracts by certain foreign businesses.

Reported Exploration and Production earnings include the following items of income (expense) before and after income taxes:

                                                      Before Income Taxes                 After Income Taxes
                                                  2008         2007       2006        2008        2007       2006
                                                                       (Millions of dollars)

Gains from asset sales                           $     -      $   21      $ 369      $     -      $  15      $ 236
Asset impairments                                    (30 )      (112 )        -          (17 )      (56 )        -
Hurricane related costs                              (15 )         -          -           (9 )        -          -
Estimated production imbalance settlements             -         (64 )        -            -        (33 )        -
Accrued office closing costs                           -           -        (30 )          -          -        (18 )
Income tax adjustments                                 -           -          -            -          -        (45 )

                                                 $   (45 )    $ (155 )    $ 339      $   (26 )    $ (74 )    $ 173

2008: The charge for asset impairments relates to mature fields in the United States and the United Kingdom North Sea. The pre-tax amount of this charge is reflected in depreciation, depletion and amortization. The hurricane costs relate to expenses associated with Hurricanes Gustav and Ike in the Gulf of Mexico and are recorded in production expenses.

2007: The gain from asset sales relates to the sale of the Corporation's interests in the Scott and Telford fields in the United Kingdom North Sea. The charge for asset impairments relates to two mature fields also in the United Kingdom North Sea. The estimated production imbalance settlements represent a charge for adjustments to prior meter readings at two offshore fields, which are recorded as a reduction of sales and other operating revenues.

2006: The gains from asset sales relate to the sale of certain United States oil and gas producing properties located in the Permian Basin in Texas and New Mexico and onshore Gulf Coast. The accrued office closing cost relates to vacated leased office space in the United Kingdom. The related expenses are reflected principally in general and administrative expenses. The income tax adjustment represents a one-time adjustment to the Corporation's deferred tax liability resulting from an increase in the supplementary tax on petroleum operations in the United Kingdom from 10% to 20%.

The Corporation's future Exploration and Production earnings may be impacted by external factors, such as political risk, volatility in the selling prices of crude oil and natural gas, reserve and production changes, industry cost inflation, exploration expenses, the effects of weather and changes in foreign exchange and income tax rates.

Marketing and Refining

Earnings from Marketing and Refining activities amounted to $277 million in 2008, $300 million in 2007 and $394 million in 2006. After considering the liquidation of LIFO inventories reflected in the table on page 21 and discussed below, the earnings were $277 million, $276 million and $394 million, respectively.

Refining: Refining earnings, which consist of the Corporation's share of HOVENSA's results, Port Reading earnings, interest income on a note receivable from PDVSA and results of other miscellaneous operating activities, were $73 million in 2008, $193 million in 2007, and $240 million in 2006.

The Corporation's share of HOVENSA's net income was $27 million ($44 million before income taxes) in 2008, $108 million ($176 million before income taxes) in 2007 and $124 million ($201 million before income taxes) in 2006. The lower earnings in 2008 and 2007, compared with the respective prior years, were principally due to lower refining margins. The 2008 utilization rate for the fluid catalytic cracking unit at HOVENSA reflects lower utilization due to weak refining margins, planned and unplanned maintenance of certain units, and a refinery wide shut down for Hurricane Omar. In 2007, the coker unit at HOVENSA . . .