FORM 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to

VALERO ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		74-1828067 (I.R.S. Employer Identification No.)
One Valero Way San Antonio, Texas (Address of principal executive offices)		78249 (Zip Code)

Registrant’s telephone number, including area code: (210) 345-2000

Securities registered pursuant to Section 12(b) of the Act: Common stock, $0.01 par value per share listed on the New York Stock Exchange.

Securities registered pursuant to Section 12(g) of the Act: None.

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates was approximately $40.9 billion based on the last sales price quoted as of June 29, 2007 on the New York Stock Exchange, the last business day of the registrant’s most recently completed second fiscal quarter.

As of January 31, 2008, 534,652,367 shares of the registrant’s common stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

We intend to file with the Securities and Exchange Commission a definitive Proxy Statement for our Annual Meeting of Stockholders scheduled for May 1, 2008, at which directors will be elected. Portions of the 2008 Proxy Statement are incorporated by reference in Part III of this Form 10-K and are deemed to be a part of this report.

 

 

CROSS-REFERENCE SHEET

The following table indicates the headings in the 2008 Proxy Statement where certain information required in Part III of Form 10-K may be found.

Form 10-K Item No. and Caption		Heading in 2008 Proxy Statement
10.     Directors, Executive Officers and Corporate Governance		Information Regarding the Board of Directors, Independent Directors, Audit Committee, Governance Documents and Codes of Ethics, Proposal No. 1 Election of Directors, Information Concerning Nominees and Other Directors, and Section 16(a) Beneficial Ownership Reporting Compliance
11.     Executive Compensation		Compensation Committee, Compensation Discussion and Analysis, Director Compensation, Executive Compensation, and Certain Relationships and Related Transactions
12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		Beneficial Ownership of Valero Securities and Equity Compensation Plan Information
13.     Certain Relationships and Related Transactions, and Director Independence		Certain Relationships and Related Transactions and Independent Directors
14.     Principal Accountant Fees and Services		KPMG Fees for Fiscal Year 2007, KPMG Fees for Fiscal Year 2006, and Audit Committee Pre-Approval Policy

Copies of all documents incorporated by reference, other than exhibits to such documents, will be provided without charge to each person who receives a copy of this Form 10-K upon written request to Jay D. Browning, Senior Vice President-Corporate Law and Secretary, Valero Energy Corporation, P.O. Box 696000, San Antonio, Texas 78269-6000.

CONTENTS

				PAGE
PART I
Items 1., 1A. & 2.		Business, Risk Factors and Properties			1
		Segments			1
		Valero’s Operations			2
		Risk Factors			11
		Environmental Matters			13
		Properties			13
		Executive Officers of the Registrant			14
Item 1B.		Unresolved Staff Comments			14
Item 3.		Legal Proceedings			15
Item 4.		Submission of Matters to a Vote of Security Holders			16
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			17
Item 6.		Selected Financial Data			20
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			45
Item 8.		Financial Statements and Supplementary Data			50
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			124
Item 9A.		Controls and Procedures			124
Item 9B.		Other Information			124
PART III
Item 10.		Directors, Executive Officers and Corporate Governance			125
Item 11.		Executive Compensation			125
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			125
Item 13.		Certain Relationships and Related Transactions , and Director Independence			125
Item 14.		Principal Accountant Fees and Services			125
PART IV
Item 15.		Exhibits and Financial Statement Schedules			125
Signatures					130

PART I

The terms “Valero,” “we,” “our,” and “us,” as used in this report, may refer to Valero Energy Corporation, to one or more of our consolidated subsidiaries, or to all of them taken as a whole. In this Form 10-K, we make certain forward-looking statements, including statements regarding our plans, strategies, objectives, expectations, intentions, and resources, under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You should read our forward-looking statements together with our disclosures beginning on page 21 below under the heading: “CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.”

ITEMS 1., 1A. and 2. BUSINESS, RISK FACTORS AND PROPERTIES

Overview. We are a Fortune 500 company based in San Antonio, Texas. Our corporate offices are at One Valero Way, San Antonio, Texas, 78249, and our telephone number is (210) 345-2000. Our common stock trades on the New York Stock Exchange under the symbol “VLO.” We were incorporated in Delaware in 1981 under the name Valero Refining and Marketing Company, and our name was changed to Valero Energy Corporation on August 1, 1997. On January 31, 2008, we had 21,651 employees.

We own and operate 17 refineries located in the United States, Canada, and Aruba that produce conventional gasolines, distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products as well as a slate of premium products including RBOB¹, gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur and ultra-low-sulfur diesel fuel, and oxygenates (liquid hydrocarbon compounds containing oxygen).

We market branded and unbranded refined products on a wholesale basis in the United States and Canada through an extensive bulk and rack marketing network. We also sell refined products through a network of about 5,800 retail and wholesale branded outlets in the United States, Canada, and Aruba.

Available Information. Our internet website address is www.valero.com. Information contained on our website is not part of this annual report on Form 10-K. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K filed with (or furnished to) the Securities and Exchange Commission (SEC) are available on our internet website (in the “Investor Relations” section), free of charge, soon after we file or furnish such material. We also post our corporate governance guidelines, code of business conduct and ethics, code of ethics for senior financial officers, and the charters of the committees of our board of directors in the same website location. Our governance documents are available in print to any stockholder that makes a written request to Jay D. Browning, Senior Vice President-Corporate Law and Secretary, Valero Energy Corporation, P.O. Box 696000, San Antonio, Texas 78269-6000.

SEGMENTS

Our business is organized into two reportable segments: refining and retail. Our refining segment includes refining operations, wholesale marketing, product supply and distribution, and transportation operations. The refining segment is segregated geographically into the Gulf Coast, Mid-Continent, West Coast, and Northeast regions.

Our retail segment includes company-operated convenience stores, Canadian dealers/jobbers, truckstop facilities, cardlock facilities, and home heating oil operations. The retail segment is segregated into two geographic regions. Our retail operations in eastern Canada are referred to as Retail - Canada. Our retail operations in the United States are referred to as Retail - U.S. The financial information about our segments in Note 19 of Notes to Consolidated Financial Statements is incorporated herein by reference.

VALERO’S OPERATIONS

REFINING

On December 31, 2007, our refining operations included 17 refineries in the United States, Canada, and Aruba with a combined total throughput capacity of approximately 3.1 million barrels per day (BPD). The following table presents the locations of these refineries and their feedstock throughput capacities. These capacities exclude any throughput enhancements completed after December 31, 2007.

As of December 31, 2007
				Throughput Capacity(a)
Refinery		Location		(barrels per day)
Gulf Coast:
Corpus Christi (b)		Texas			315,000
Port Arthur		Texas			310,000
Aruba		Aruba			275,000
St. Charles		Louisiana			250,000
Texas City		Texas			245,000
Houston		Texas			145,000
Three Rivers		Texas			100,000
Krotz Springs		Louisiana			85,000
					1,725,000
West Coast:
Benicia		California			170,000
Wilmington		California			135,000
					305,000
Mid-Continent:
Memphis		Tennessee			195,000
McKee		Texas			170,000
Ardmore		Oklahoma			90,000
					455,000
Northeast:
Quebec City		Quebec, Canada			215,000
Delaware City		Delaware			210,000
Paulsboro		New Jersey			195,000
					620,000
Total					3,105,000

We process a wide slate of feedstocks, including sour crude oils, intermediates, and residual fuel oil (resid), which typically can be purchased at prices below West Texas Intermediate, a benchmark crude oil. In 2007, sour crude oils, acidic sweet crude oils, and resid represented 57% of our throughput volumes, sweet crude oils

represented 26%, and the remaining 17% was composed of blendstocks and other feedstocks. Our ability to process significant amounts of sour crude oils enhances our competitive position in the industry relative to refiners that process primarily sweet crude oils because sour crude oils typically can be purchased at prices below sweet crude oils.

In 2007, gasolines and blendstocks represented 46% of our refined product slate; distillates - such as home heating oil, diesel fuel, and jet fuel - represented 33%; petrochemicals represented 3%; and asphalt, lubricants, gas oils, No. 6 fuel oil, petroleum coke, and other products comprised the remaining 18%.

     Gulf Coast

The following table presents the percentages of principal charges and yields (on a combined basis) for the nine refineries in this region for the year ended December 31, 2007. Total throughput volumes for the Gulf Coast refining region averaged 1,537,000 BPD for the 12 months ended December 31, 2007.

Combined Gulf Coast Region Charges and Yields

				Percentage
Charges:
		sour crude oil		54%
		sweet crude oil		14%
		residual fuel oil		13%
		other feedstocks		8%
		blendstocks		11%
Yields:
		gasolines and blendstocks		43%
		distillates		32%
		petrochemicals		4%
		other products (includes vacuum gas oil, No. 6 fuel oil, petroleum coke, asphalt, and other)		21%

Corpus Christi East and West Refineries. Our Corpus Christi East and West Refineries are located on the Texas Gulf Coast along the Corpus Christi Ship Channel. The West Refinery specializes in processing primarily lower-cost sour crude oil and resid into premium products such as RBOB. The East Refinery processes heavy, high-sulfur crude oil into conventional gasoline, diesel, jet fuel, asphalt, aromatics, and other light products. The East and West Refineries are substantially integrated allowing for the transfer of various feedstocks and blending components between the two refineries and the sharing of resources. The refineries typically receive and deliver feedstocks and products by tanker and barge via deepwater docking facilities along the Corpus Christi Ship Channel. Three truck racks with a total of 16 bays service local markets for gasoline, diesel, jet fuels, liquefied petroleum gases, and asphalt. The refineries distribute refined products using the Colonial, Explorer, Valley, and other major pipelines.

Port Arthur Refinery. Our Port Arthur Refinery is located on the Texas Gulf Coast approximately 90 miles east of Houston. The refinery processes primarily heavy sour crude oils and other feedstocks into conventional and premium gasoline and RBOB, as well as diesel, jet fuel, petrochemicals, petroleum coke, and sulfur. The refinery receives crude oil over marine docks and has access to the Sunoco and Oiltanking terminals at Nederland, Texas. Finished products are distributed into the Colonial, Explorer, and TEPPCO pipelines or across the refinery docks into ships or barges. The refinery also has truck-rack access.

Aruba Refinery. Our Aruba Refinery is located on the island of Aruba in the Caribbean Sea. It processes primarily heavy sour crude oil and produces primarily intermediate feedstocks and finished distillate products. Significant amounts of the refinery’s intermediate feedstock production are transported and further processed in our other refineries in the Gulf Coast, West Coast, and Northeast regions. The refinery receives crude oil by ship at its two deepwater marine docks, which can berth ultra-large crude carriers. The refinery’s products are delivered by ship primarily into markets in the U.S. Gulf Coast, Florida, the New York Harbor, the Caribbean, and Europe.

St. Charles Refinery. Our St. Charles Refinery is located approximately 15 miles from New Orleans along the Mississippi River. The refinery processes sour crude oils and other feedstocks into gasoline, distillates, and other light products. The refinery receives crude oil over five marine docks and has access to the Louisiana Offshore Oil Port where it can receive crude oil through a 24-inch pipeline. Finished products can be shipped over these docks or by pipeline into either the Plantation or Colonial pipeline network for distribution to the eastern United States.

Texas City Refinery. Our Texas City Refinery is located southeast of Houston on the Texas City Ship Channel. The refinery processes primarily heavy sour crude oils into a wide slate of products. The refinery receives and delivers its feedstocks and products by tanker and barge via deepwater docking facilities along the Texas City Ship Channel and uses the Colonial, Explorer, and TEPPCO pipelines for distribution of its products.

Houston Refinery. Our Houston Refinery is located on the Houston Ship Channel. It processes primarily sour crude oils and low-sulfur resid into conventional gasoline and distillates. The refinery also produces roofing-grade asphalt. The refinery receives its feedstocks via tanker at deepwater docking facilities along the Houston Ship Channel and delivers its products through major refined-product pipelines, including the Colonial, Explorer, and TEPPCO pipelines.

Three Rivers Refinery. Our Three Rivers Refinery is located in South Texas between Corpus Christi and San Antonio. It processes primarily heavy sweet and sour crude oils into conventional gasoline and distillates. The refinery has access to crude oil from foreign sources delivered to the Texas Gulf Coast at Corpus Christi as well as crude oil from domestic sources through third-party pipelines. A 70-mile pipeline that can deliver 120,000 BPD of crude oil connects the Three Rivers Refinery to Corpus Christi. The refinery distributes its refined products primarily through pipelines owned by NuStar Energy L.P.

Krotz Springs Refinery. Our Krotz Springs Refinery is located between Baton Rouge and Lafayette, Louisiana on the Atchafalaya River. It processes light sweet crude oils (received by pipeline and barge) into conventional gasoline and distillates. The refinery’s location provides access to upriver markets on the Mississippi River, and its docking facilities along the Atchafalaya River are sufficiently deep to allow barge access. The facility also uses the Colonial pipeline to transport products to markets in the southeastern and northeastern United States.

     West Coast

The following table presents the percentages of principal charges and yields (on a combined basis) for the two refineries in this region for the year ended December 31, 2007. Total throughput volumes for the West Coast refining region averaged approximately 289,000 BPD for the 12 months ended December 31, 2007.

Combined West Coast Region Charges and Yields

				Percentage
Charges:
		sour crude oil		63%
		high-acid sweet crude oil		5%
		sweet crude oil		4%
		other feedstocks		10%
		blendstocks		18%
Yields:
		gasolines and blendstocks		60%
		distillates		23%
		other products (includes vacuum gas oil, No. 6 fuel oil, petroleum coke, asphalt, and other)		17%

Benicia Refinery. Our Benicia Refinery is located northeast of San Francisco on the Carquinez Straits of San Francisco Bay. It processes sour crude oils into premium products, primarily CARBOB gasoline. (CARBOB is a reformulated gasoline mixture that meets the specifications of the California Air Resources Board when blended with ethanol.) The refinery receives crude oil supplies via a deepwater dock that can berth large crude oil carriers and a 20-inch crude oil pipeline connected to a southern California crude oil delivery system. Most of the refinery’s products are distributed via the Kinder Morgan pipeline in California.

Wilmington Refinery. Our Wilmington Refinery is located near Los Angeles, California. The refinery processes a blend of lower-cost heavy and high-sulfur crude oils. The refinery can produce all of its gasoline as CARBOB gasoline and produces both ultra-low-sulfur diesel and CARB diesel. The refinery is connected by pipeline to marine terminals and associated dock facilities that can move and store crude oil and other feedstocks. Refined products are distributed via the Kinder Morgan pipeline system and various third-party terminals in southern California, Nevada, and Arizona.

     Mid-Continent

The following table presents the percentages of principal charges and yields (on a combined basis) for the three refineries in this region for the year ended December 31, 2007. Total throughput volumes for the Mid-Continent refining region averaged 402,000 BPD for the 12 months ended December 31, 2007. (The information presented below excludes the charges and yields of the Lima, Ohio refinery, which we sold effective July 1, 2007. The sale is more fully described in Note 2 of Notes to Consolidated Financial Statements.)

Combined Mid-Continent Region Charges and Yields

				Percentage
Charges:
		sour crude oil		10%
		sweet crude oil		81%
		other feedstocks		1%
		blendstocks		8%
Yields:
		gasolines and blendstocks		48%
		distillates		39%
		petrochemicals		3%
		other products (includes vacuum gas oil, No. 6 fuel oil, asphalt, and other)		10%

Memphis Refinery. Our Memphis Refinery is located in Tennessee along the Mississippi River’s Lake McKellar. It processes primarily light sweet crude oils. Almost all of its production is light products, including regular and premium gasoline, diesel, jet fuels, and petrochemicals. Crude oil is supplied to the refinery via the Capline pipeline and can also be received, along with other feedstocks, via barge. The refinery’s products are distributed via truck racks at our three product terminals, barges, and a pipeline directly to the Memphis airport.

McKee Refinery. Our McKee Refinery is located in the Texas Panhandle. It processes primarily sweet crude oils and produces conventional gasoline, RBOB, low-sulfur diesel, jet fuels, and asphalt. The refinery has access to crude oil from Texas, Oklahoma, Kansas, and Colorado through third-party pipelines. The refinery also has access at Wichita Falls, Texas to third-party pipelines that transport crude oil from the Texas Gulf Coast and West Texas to the Mid-Continent region. The refinery distributes its products primarily via NuStar Energy L.P.’s pipelines to markets in Texas, New Mexico, Arizona, Colorado, and Oklahoma.

Ardmore Refinery. Our Ardmore Refinery is located in Ardmore, Oklahoma, approximately 90 miles from Oklahoma City. It processes medium sour and light sweet crude oils into conventional gasoline, low-sulfur diesel, and asphalt. Crude oil is delivered to the refinery through NuStar Energy L.P.’s crude oil gathering and trunkline systems, other third-party pipelines, and trucking operations. Refined products are transported via pipelines, railcars, and trucks.

     Northeast

The following table presents the percentages of principal charges and yields (on a combined basis) for the three refineries in this region for the year ended December 31, 2007. Total throughput volumes for the Northeast refining region averaged 570,000 BPD for the 12 months ended December 31, 2007.

Combined Northeast Region Charges and Yields

				Percentage
Charges:
		sour crude oil		40%
		high-acid sweet crude oil		11%
		sweet crude oil		31%
		residual fuel oil		7%
		other feedstocks		3%
		blendstocks		8%
Yields:
		gasolines and blendstocks		45%
		distillates		38%
		petrochemicals		1%
		other products (includes vacuum gas oil, No. 6 fuel oil, petroleum coke, asphalt, and other)		16%

Quebec City Refinery. Our Quebec City Refinery is located in Lévis, Canada (near Quebec City). It processes sweet crude oils and lower-quality, sweet acidic crude oils into conventional gasoline, low-sulfur diesel, jet fuels, heating oil, and propane. The refinery receives crude oil by ship at its deepwater dock on the St. Lawrence River. We charter large ice-strengthened, double-hulled crude oil tankers that can navigate the St. Lawrence River year-round. The refinery transports its products to its primary terminals in Quebec and Ontario primarily by train, and also uses ships and trucks extensively throughout eastern Canada.

Delaware City Refinery. Our Delaware City Refinery is located along the Delaware River near Wilmington, Delaware. The refinery processes primarily sour crude oils into a wide slate of products including conventional gasoline, RBOB, petroleum coke, sulfur, low-sulfur diesel, and home heating oil. Feedstocks and refined products are transported via pipeline, barge, and truck-rack facilities. The refinery’s production is sold primarily in the U.S. Northeast.

Paulsboro Refinery. Our Paulsboro Refinery is located in Paulsboro, New Jersey, approximately 15 miles south of Philadelphia on the Delaware River. The refinery processes primarily sour crude oils into a wide slate of products including gasoline, distillates, lube oil basestocks, asphalt, petroleum coke, sulfur, and fuel oil. Feedstocks and refined products are typically transported by tanker and barge via refinery-owned dock facilities along the Delaware River, Buckeye Partners’ product distribution system, an onsite truck rack owned by NuStar Energy L.P., railcars, and the Colonial pipeline, which allows products to be sold into the New York Harbor market.

     Feedstock Supply

Approximately 67% of our current crude oil feedstock requirements are purchased through term contracts while the remaining requirements are generally purchased on the spot market. Our term supply agreements include arrangements to purchase feedstocks at market-related prices directly or indirectly from various foreign national oil companies (including feedstocks originating in Saudi Arabia, Mexico, Iraq, Kuwait, Venezuela, Colombia, and Africa) as well as international and domestic oil companies. About 80% of these crude oil feedstocks are imported from foreign sources and about 20% are domestic. In the event we become unable to purchase crude oil from any one of these sources, we believe that adequate alternative supplies of crude oil would be available.

The U.S. network of crude oil pipelines and terminals allows us to acquire crude oil from producing leases, domestic crude oil trading centers, and ships delivering cargoes of foreign and domestic crude oil. Our Quebec City and Aruba Refineries rely on foreign crude oil that is delivered to the refineries’ dock facilities by ship. We use the futures market to manage a portion of the price risk inherent in purchasing crude oil in advance of our delivery date and holding inventories of crude oils and refined products.

     Refining Segment Sales

Our refining segment includes sales of refined products in both the wholesale rack and bulk markets. These sales include refined products that are manufactured in our refining operations as well as refined products purchased or received on exchange from third parties. Most of our refineries have access to deepwater transportation facilities and interconnect with common-carrier pipeline systems, allowing us to sell products in most major geographic regions of the United States and eastern Canada. No customer accounted for more than 10% of our total operating revenues in 2007.

          Wholesale Marketing

We market branded and unbranded transportation fuels on a wholesale basis in 45 states through an extensive rack marketing network. The principal purchasers of our transportation fuels from terminal truck racks are wholesalers, distributors, retailers, and truck-delivered end users throughout the United States.

The majority of our rack volume is sold through unbranded channels. The remainder is sold to distributors and dealers that are members of the Valero-brand family that operate approximately 3,850 branded sites. These sites are independently owned and are supplied by us under multi-year contracts. For wholesale branded sites, we promote our Valero^® brand throughout the United States. In addition, we offer the Beacon^® brand in California and the Shamrock^® brand elsewhere in the United States. We are finalizing the process of converting the remaining Diamond Shamrock^® branded sites to the Valero^® brand.

We also sell a variety of other products produced at our refineries including asphalt, lube base oils, petroleum coke, and sulfur. These products are transported via pipelines, barges, trucks, and railcars. We produce approximately 38,000 BPD of asphalt, which is sold to customers in the paving and roofing industries. We have the second largest asphalt production capacity in the United States. We produce asphalt at six refineries and market asphalt in 20 states through 20 truck-loading facilities. We also produce packaged roofing products at three manufacturing facilities, and modified paving asphalts at nine polymer modifying plants. We are a significant producer of petroleum coke in the United States, supplying primarily power generation customers and cement manufacturers. We are also a significant producer of sulfur in the United States with sales primarily to customers in the agricultural sector.

We produce and market a variety of commodity petrochemicals including aromatic solvents (benzene, toluene, and xylene) and refinery- and chemical-grade propylene. Aromatic solvents and propylene are sold to customers in the chemical industry for further processing into such products as paints, plastics, and adhesives.

          Bulk Sales and Trading

We sell a significant portion of our gasoline and distillate production through bulk sales channels. Our bulk sales are made to various oil companies and traders as well as certain bulk end-users such as railroads, airlines, and utilities. Our bulk sales are transported primarily by pipeline, barges, and tankers to major tank farms and trading hubs.

We also enter into refined product exchange and purchase agreements. These agreements help to minimize transportation costs, optimize refinery utilization, balance refined product availability, broaden geographic distribution, and make sales to markets not connected to our refined product pipeline systems. Exchange agreements provide for the delivery of refined products by us to unaffiliated companies at our and third parties’ terminals in exchange for delivery of a similar amount of refined products to us by these unaffiliated companies at specified locations. Purchase agreements involve our purchase of refined products from third parties with delivery occurring at specified locations.

RETAIL

Our retail segment operations include the following:

	•		sales of transportation fuels at retail stores and unattended self-service cardlocks,
	•		sales of convenience store merchandise in retail stores, and
	•		sales of home heating oil to residential customers.

We are one of the largest independent retailers of refined products in the central and southwest United States and eastern Canada. Our retail operations are segregated geographically into two groups: Retail - U.S. and Retail - Canada.

     Retail - U.S.

Sales in Retail - U.S. represent sales of transportation fuels and convenience store merchandise through our company-operated retail sites. For the year ended December 31, 2007, total sales of refined products through Retail - U.S.’s retail sites averaged approximately 113,500 BPD. In addition to transportation fuels, our company-operated convenience stores sell snacks, candy, beer, fast foods, cigarettes, and fountain drinks. On December 31, 2007, we had 953 company-operated sites in Retail - U.S. (of which 77% were owned and 23% were leased). Our company-operated stores are operated primarily under the brand names Corner Store^® and Stop N Go^®. Transportation fuels sold in our Retail - U.S. stores are sold primarily under the Valero^® brand, with some sites selling under the Diamond Shamrock^® brand pending their conversion to the Valero^® brand.

     Retail - Canada

Sales in Retail - Canada include the following:

	•		sales of refined products and convenience store merchandise through our company-operated retail sites and cardlocks,
	•		sales of refined products through sites owned by independent dealers and jobbers, and
	•		sales of home heating oil to residential customers.

Retail - Canada includes retail operations in eastern Canada where we are a major supplier of refined products serving Quebec, Ontario, and the Atlantic Provinces of Newfoundland, Nova Scotia, New Brunswick, and Prince Edward Island. For the year ended December 31, 2007, total retail sales of refined products through Retail - Canada averaged approximately 77,000 BPD. Transportation fuels are sold under the Ultramar^® brand through a network of 920 outlets throughout eastern Canada. On December 31, 2007, we owned or leased 432 retail stores in Retail - Canada and distributed gasoline to 488 dealers and independent jobbers. In addition, Retail - Canada operates 89 cardlocks, which are card- or key-activated, self-service, unattended stations that allow commercial, trucking, and governmental fleets to buy transportation fuel 24 hours a day. Retail - Canada operations also include a large home heating oil business that provides home heating oil to approximately 150,000 households in eastern Canada. Our home heating oil business tends to be seasonal to the extent of increased demand for home heating oil during the winter.

RISK FACTORS

Our financial results are affected by volatile refining margins.

Our financial results are primarily affected by the relationship, or margin, between refined product prices and the prices for crude oil and other feedstocks. Our cost to acquire feedstocks and the price at which we can ultimately sell refined products depend upon several factors beyond our control, including regional and global supply of and demand for crude oil, gasoline, diesel, and other feedstocks and refined products. These in turn depend on, among other things, the availability and quantity of imports, the production levels of domestic and foreign suppliers, levels of refined product inventories, U.S. relationships with foreign governments, political affairs, and the extent of governmental regulation. Historically, refining margins have been volatile, and we believe they will continue to be volatile in the future.

Compliance with and changes in environmental laws could adversely affect our performance.

The principal environmental risks associated with our operations are emissions into the air and releases into the soil, surface water, or groundwater. Our operations are subject to extensive federal, state, and local environmental laws and regulations, including those relating to the discharge of materials into the environment, waste management, pollution prevention measures, greenhouse gas emissions, and characteristics and composition of gasoline and diesel fuels. If we violate or fail to comply with these laws and regulations, we could be fined or otherwise sanctioned. Because environmental laws and regulations are becoming more stringent and new environmental laws and regulations are continuously being enacted or proposed, such as those relating to greenhouse gas emissions and climate change (e.g., California’s AB-32 “Global Warming Solutions Act”), the level of expenditures required for environmental matters could increase in the future. Future legislative action and regulatory initiatives could result in changes to operating permits, additional remedial actions, or increased capital expenditures and operating costs that cannot be assessed with certainty at this time. In addition, any major upgrades in any of our refineries could require material additional expenditures to comply with environmental laws and regulations.

Disruption of our ability to obtain crude oil could adversely affect our operations.

A significant portion of our feedstock requirements is satisfied through supplies originating in Saudi Arabia, Mexico, Iraq, Kuwait, Venezuela, Colombia, and Africa. We are, therefore, subject to the political, geographic, and economic risks attendant to doing business with suppliers located in, and supplies originating from, those areas. If one or more of our supply contracts were terminated, or if political events disrupt our traditional crude oil supply, we believe that adequate alternative supplies of crude oil would be available, but it is possible that we would be unable to find alternative sources of supply. If we are unable to obtain adequate crude oil volumes or are able to obtain such volumes only at unfavorable prices, our results of operations could be materially adversely affected, including reduced sales volumes of refined products or reduced margins as a result of higher crude oil costs.

Competitors that produce their own supply of feedstocks, have more extensive retail outlets, or have greater financial resources may have a competitive advantage.

The refining and marketing industry is highly competitive with respect to both feedstock supply and refined product markets. We compete with many companies for available supplies of crude oil and other feedstocks and for outlets for our refined products. We do not produce any of our crude oil feedstocks. Many of our competitors, however, obtain a significant portion of their feedstocks from company-owned production and some have more extensive retail outlets than we have. Competitors that have their own production or extensive retail outlets (and greater brand-name recognition) are at times able to offset losses from refining operations with profits from producing or retailing operations, and may be better positioned to withstand periods of depressed refining margins or feedstock shortages.

Some of our competitors also have materially greater financial and other resources than we have. Such competitors have a greater ability to bear the economic risks inherent in all phases of our industry. In addition, we compete with other industries that provide alternative means to satisfy the energy and fuel requirements of our industrial, commercial, and individual consumers.

A significant interruption in one or more of our refineries could adversely affect our business.

Our refineries are our principal operating assets. As a result, our operations could be subject to significant interruption if one or more of our refineries were to experience a major accident or mechanical failure, be damaged by severe weather or other natural or man-made disaster, such as an act of terrorism, or otherwise be forced to shut down. If any refinery were to experience an interruption in operations, earnings from the refinery could be materially adversely affected (to the extent not recoverable through insurance) because of lost production and repair costs.

Our operations expose us to many operating risks, not all of which are insured.

Our refining and marketing operations are subject to various hazards common to the industry, including explosions, fires, toxic emissions, maritime hazards, and uncontrollable flows of oil and gas. They are also subject to the additional hazards of loss from severe weather conditions. As protection against operating hazards, we maintain insurance coverage against some, but not all, such potential losses. We may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased substantially, and could escalate further. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. For example, insurance carriers are now requiring broad exclusions for losses due to war risk and terrorist acts. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position.

Compliance with and changes in tax laws could adversely affect our performance.

We are subject to extensive tax liabilities, including federal, state, and foreign income taxes and transactional taxes such as excise, sales/use, payroll, franchise, withholding, and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted or proposed that could result in increased expenditures for tax liabilities in the future. Many of these liabilities are subject to periodic audits by the respective taxing authority. Subsequent changes to our tax liabilities as a result of these audits may subject us to interest and penalties.

ENVIRONMENTAL MATTERS

We incorporate by reference into this Item the environmental disclosures contained in the following sections of this report:

	•		Item 1 under the caption “Risk Factors - Compliance with and changes in environmental laws could adversely affect our performance,”
	•		Item 3 “Legal Proceedings” under the caption “Environmental Enforcement Matters,” and
	•		Item 8 “Financial Statements” in Note 23 of Notes to Consolidated Financial Statements.

Capital Expenditures Attributable to Compliance with Environmental Regulations. In 2007, our capital expenditures attributable to compliance with environmental regulations were $614 million, and are currently estimated to be approximately $575 million for 2008 and approximately $665 million for 2009. The estimates for 2008 and 2009 do not include amounts related to capital investments at our facilities that management has deemed to be strategic investments rather than expenditures relating to environmental regulatory compliance.

PROPERTIES

Our principal properties are described above under the caption “Valero’s Operations,” and that information is incorporated herein by reference. We also own feedstock and refined product storage facilities in various locations. We believe that our properties and facilities are generally adequate for our operations and that our facilities are maintained in a good state of repair. As of December 31, 2007, we were the lessee under a number of cancelable and non-cancelable leases for certain properties. Our leases are discussed more fully in Note 22 of Notes to Consolidated Financial Statements.

Our patents relating to our refining operations are not material to us as a whole. The trademarks and tradenames under which we conduct our retail and branded wholesale business - including Valero^®, Diamond Shamrock^®, Shamrock^®, Ultramar^®, Beacon^®, Corner Store^®, and Stop N Go^® - and other trademarks employed in the marketing of petroleum products are integral to our wholesale and retail marketing operations.

EXECUTIVE OFFICERS OF THE REGISTRANT

Name		Age*				Positions Held with Valero		Officer Since
William R. Klesse			61			Chief Executive Officer, President, and Chairman of the Board			2001
Michael S. Ciskowski			50			Executive Vice President and Chief Financial Officer			1998
S. Eugene Edwards			51			Executive Vice President-Corporate Development and Strategic Planning			1998
Joseph W. Gorder			50			Executive Vice President-Marketing and Supply			2003
Richard J. Marcogliese			55			Executive Vice President and Chief Operating Officer			2001

Mr. Klesse was elected as Valero’s Chairman of the Board on January 18, 2007, and as Chief Executive Officer on December 31, 2005. He added the title of President on January 17, 2008. He was Valero’s Vice-Chairman of the Board from October 31, 2005 to January 18, 2007. He previously served as Executive Vice President and Chief Operating Officer since January 2003. He served as an Executive Vice President of Valero since the date of our acquisition of Ultramar Diamond Shamrock Corporation (UDS) on December 31, 2001.

Mr. Ciskowski was elected Executive Vice President and Chief Financial Officer on August 19, 2003. Before that, he served as Executive Vice President-Corporate Development since April 2003, and Senior Vice President in charge of business and corporate development since 2001.

Mr. Edwards was elected Executive Vice President-Corporate Development and Strategic Planning in December 2005. Prior to that he had served as Senior Vice President since December 2001 with responsibilities for product supply, trading, and wholesale marketing. He has held several positions in the company with responsibility for planning and economics, business development, risk management, and marketing.

Mr. Gorder was elected Executive Vice President-Marketing and Supply in December 2005. He had previously served as Senior Vice President-Corporate Development since August 2003. Prior to that he held several positions with Valero and UDS with responsibilities for corporate development and marketing.

Mr. Marcogliese was elected Executive Vice President and Chief Operating Officer on October 26, 2007. He previously held the title Executive Vice President-Operations since December 2005. Prior to that he served as Senior Vice President overseeing refining operations since July 2001.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 3. LEGAL PROCEEDINGS

     Litigation

For the legal proceedings listed below, we incorporate by reference into this Item our disclosures made in Part II, Item 8 of this report included in Note 24 of Notes to Consolidated Financial Statements under the caption “Litigation Matters.”

	•		MTBE Litigation
	•		Retail Fuel Temperature Litigation
	•		Rosolowski
	•		Other Litigation

     Environmental Enforcement Matters

While it is not possible to predict the outcome of the following environmental proceedings, if any one or more of them were decided against us, we believe that there would be no material effect on our consolidated financial position or results of operations. We are reporting these proceedings to comply with SEC regulations, which require us to disclose certain information about proceedings arising under federal, state, or local provisions regulating the discharge of materials into the environment or protecting the environment if we reasonably believe that such proceedings will result in monetary sanctions of $100,000 or more.

United States Department of Justice (DOJ)/ United States Environmental Protection Agency (EPA) (Corpus Christi West Refinery). The DOJ proposed a penalty of $2.4 million to resolve alleged violations of the Clean Water Act resulting from an oil spill at our Corpus Christi West Refinery in June 2006. We are pursuing settlement of this matter with the DOJ and EPA.

United States of America, et al. v. The Premcor Refining Group Inc., et al., United States District Court, Western District of Texas (Civil Action No. SA07CA0683RF, August 16, 2007). In the past several years, the EPA issued to a majority of refiners operating in the United States a series of information requests pursuant to Section 114 of the Clean Air Act as part of the EPA’s National Petroleum Refinery Initiative (Initiative) to reduce air emissions. Three refineries that we acquired in the Premcor Acquisition (the Port Arthur, Memphis, and Lima Refineries) had received information requests as part of this Initiative (the Delaware City Refinery was already subject to a separate Section 114 settlement). In August 2007, we reached an Initiative settlement with the EPA and the DOJ covering these three refineries. In the fourth quarter of 2007, a consent decree fully resolving this matter was entered in federal court.

Bay Area Air Quality Management District (BAAQMD) (Benicia Refinery). In 2005, the BAAQMD issued 25 violation notices (VNs) for various incidents at our Benicia Refinery and asphalt plant, including alleged excess emissions, recordkeeping discrepancies, and other matters. In the fourth quarter of 2007, we settled 24 of these VNs. We do not believe that the remaining 2005 VN will result in monetary sanctions of $100,000 or more. In 2006, the BAAQMD issued 22 VNs, and in 2007, the BAAQMD issued 30 VNs for these facilities containing allegations similar to the 2005 VNs. We are pursuing settlement of the 2006 and 2007 VNs and the one remaining VN from 2005.

Delaware Department of Natural Resources and Environmental Control (DDNREC) (Delaware City Refinery). On October 11, 2007, the DDNREC issued a notice of violation (NOV) to our Delaware City Refinery alleging unauthorized emissions and failure to report emissions from the refinery’s frozen earth storage unit. We are pursuing settlement of this matter.

Los Angeles Regional Water Quality Control Board (LARWQCB) (Wilmington Marine Terminal). In December 2007, as part of the National Pollutant Discharge Elimination System Permit renewal process for our Wilmington marine terminal, the LARWQCB issued an NOV and Request for Information. The NOV alleges violations of acute toxicity effluent limits between 2000 and 2006 and reporting violations between 2001 and 2005. We are currently pursuing settlement of this NOV.

New Jersey Department of Environmental Protection (NJDEP) (Paulsboro Refinery). We were subject to 17 air-related Administrative Order and Notice of Civil Administrative Penalty Assessments (Notices) issued by the NJDEP in 2005 and 2006 relating to our Paulsboro Refinery. Additionally, in March 2007, the NJDEP issued a Notice to our Paulsboro Refinery alleging unauthorized air emissions and late reporting regarding a release and flaring event that occurred in February 2007. We are pursuing settlement of these Notices.

People of the State of Illinois, ex rel. v. The Premcor Refining Group Inc., et al., Third Judicial Circuit Court, Madison County (Case No. 03-CH-00459, filed May 29, 2003) (Hartford refinery and terminal). The Illinois Environmental Protection Agency (Illinois EPA) has issued several NOVs alleging violations of air and waste regulations at Premcor’s Hartford, Illinois terminal and now-closed refinery. We are negotiating the terms of a consent order for corrective action.

South Coast Air Quality Management District (SCAQMD) (Wilmington Refinery). In 2007, the SCAQMD issued nine NOVs for various alleged violations at our Wilmington Refinery and asphalt plant including excess emissions, recordkeeping discrepancies, and other matters. We are currently pursuing settlement of the NOVs.

Texas Commission on Environmental Quality (TCEQ) (McKee Refinery). We received a proposed Agreed Order from the TCEQ for $115,728 on November 26, 2007, to resolve three outstanding notices of enforcement pertaining to alleged violations of state and federal air regulations at our McKee Refinery. We are currently in settlement discussions with the TCEQ to resolve this matter.

TCEQ (Port Arthur Refinery). In September 2005, we received two enforcement actions from the TCEQ relating to alleged Texas Clean Air Act violations at the Port Arthur Refinery dating back to 2002. The TCEQ had originally proposed penalties of $880,240 for these events. In 2007, these enforcement actions were referred to the Texas Attorney General’s office and consolidated with TCEQ Docket No. 2005-1596-AIR-E, which assessed an additional penalty of $130,563. The Texas Attorney General has made a demand of $4 million to resolve these matters. The federal consent decree related to the Section 114 Initiative described above (see United States of America, et al. v. The Premcor Refining Group, Inc., et al.) proposes to resolve the violations addressed by the TCEQ’s enforcement actions. We are in discussions with the Texas Attorney General to clarify what, if any, remaining issues must be resolved.

TCEQ (Texas City Refinery). On July 11, 2007, we received a Notice of Enforcement from the TCEQ for excess air emissions that began in 2005 at our Texas City Refinery relating to a partially open flare valve. On September 25, 2007, the TCEQ issued a proposed Agreed Order with a proposed administrative penalty of $228,900. We settled this matter with the TCEQ in the fourth quarter of 2007.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the New York Stock Exchange under the symbol “VLO.”

As of January 31, 2008, there were 8,253 holders of record of our common stock.

The following table shows the high and low sales prices of and dividends declared on our common stock for each quarter of 2007 and 2006.

		Sales Prices of the								Dividends
		Common Stock								Per
Quarter Ended		High				Low				Common Share
2007:
December 31		$	75.75			$	60.80			$	0.12
September 30			78.68				60.00				0.12
June 30			77.89				63.53				0.12
March 31			66.02				47.66				0.12
2006:
December 31		$	57.09			$	47.52			$	0.08
September 30			68.83				46.84				0.08
June 30			70.75				55.19				0.08
March 31			63.70				47.99				0.06

On January 17, 2008, our board of directors declared a quarterly cash dividend of $0.12 per common share payable March 12, 2008 to holders of record at the close of business on February 13, 2008.

Dividends are considered quarterly by the board of directors and may be paid only when approved by the board.

The following table discloses purchases of shares of Valero’s common stock made by us or on our behalf during the fourth quarter of 2007.

																		Maximum Number (or
										Total Number of								Approximate Dollar
										Shares Not				Total Number of				Value) of Shares
										Purchased as Part				Shares Purchased as				that May Yet Be
										of Publicly				Part of Publicly				Purchased Under the
		Total Number of				Average Price Paid				Announced Plans or				Announced Plans or				Plans or Programs
Period		Shares Purchased				per Share				Programs (1)				Programs				(2)(3)
October 2007			1,128,269			$	68.55				1,128,269				0			$2.05 billion
November 2007			7,739,092			$	66.89				459,244				7,279,848			$1.57 billion
December 2007			6,550,192			$	67.52				25,092				6,525,100			$1.13 billion
Total			15,417,553			$	67.28				1,612,605				13,804,948			$1.13 billion

The following Performance Graph is not “soliciting material,” is not deemed filed with the SEC, and is not to be incorporated by reference into any of Valero’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, respectively.

The following line graph compares the cumulative total return* on an investment in our common stock against the cumulative total return of the S&P 500 Composite Index and an index of peer companies (selected by us) for the five-year period commencing December 31, 2002 and ending December 31, 2007. The peer group consists of the following ten companies that are engaged in the domestic energy industry: Chevron Corporation, ConocoPhillips, Exxon Mobil Corporation, Frontier Oil Corporation, Hess Corporation, Marathon Oil Corporation, Murphy Oil Corporation, Occidental Petroleum Corporation, Sunoco, Inc., and Tesoro Corporation.

		12/2002				12/2003				12/2004				12/2005				12/2006				12/2007
Valero Common Stock		$	100			$	126.79			$	250.58			$	572.48			$	570.61			$	786.90
S&P 500			100				128.68				142.69				149.70				173.34				182.87
Peer Group			100				127.33				164.65				196.08				262.97				341.28

This Performance Graph and the related textual information are based on historical data and are not indicative of future performance.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data for the five-year period ended December 31, 2007 was derived from our audited consolidated financial statements. The following table should be read together with the historical consolidated financial statements and accompanying notes included in Item 8, “Financial Statements and Supplementary Data,” and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The following summaries are in millions of dollars except for per share amounts:

		Year Ended December 31,
		2007 (a)				2006 (a)				2005 (a) (b)				2004 (c)				2003 (d)
Operating revenues (e)		$	95,327			$	87,640			$	80,616			$	54,589			$	37,951
Operating income			6,918				7,722				5,268				2,979				1,222
Income from continuing operations			4,565				5,287				3,473				1,804				622
Earnings per common share from continuing operations - assuming dilution			7.72				8.36				5.90				3.27				1.27
Dividends per common share			0.48				0.30				0.19				0.145				0.105
Property, plant and equipment, net			21,709				20,180				17,378				10,317				8,195
Goodwill			4,061				4,103				4,837				2,401				2,402
Total assets			42,722				37,753				32,798				19,392				15,664
Long-term debt and capital lease obligations (less current portion)			6,470				4,619				5,156				3,901				4,245
Stockholders’ equity			18,507				18,605				15,050				7,798				5,735

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following review of our results of operations and financial condition should be read in conjunction with Items 1, 1A and 2, “Business, Risk Factors and Properties,” and Item 8, “Financial Statements and Supplementary Data,” included in this report. In the discussions that follow, all per-share amounts assume dilution.

CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report, including without limitation our disclosures below under the heading “Results of Operations - Outlook,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “could,” “should,” “may,” and similar expressions.

These forward-looking statements include, among other things, statements regarding:

	•		future refining margins, including gasoline and distillate margins;
	•		future retail margins, including gasoline, diesel, home heating oil, and convenience store merchandise margins;
	•		expectations regarding feedstock costs, including crude oil differentials, and operating expenses;
	•		anticipated levels of crude oil and refined product inventories;
	•		our anticipated level of capital investments, including deferred refinery turnaround and catalyst costs and capital expenditures for environmental and other purposes, and the effect of those capital investments on our results of operations;
	•		anticipated trends in the supply of and demand for crude oil and other feedstocks and refined products in the United States, Canada, and elsewhere;
	•		expectations regarding environmental, tax, and other regulatory initiatives; and
	•		the effect of general economic and other conditions on refining and retail industry fundamentals.

We based our forward-looking statements on our current expectations, estimates, and projections about ourselves and our industry. We caution that these statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual results may differ materially from the future performance that we have expressed or forecast in the forward-looking statements. Differences between actual results and any future performance suggested in these forward-looking statements could result from a variety of factors, including the following:

	•		acts of terrorism aimed at either our facilities or other facilities that could impair our ability to produce or transport refined products or receive feedstocks;
	•		political and economic conditions in nations that consume refined products, including the United States, and in crude oil producing regions, including the Middle East and South America;
	•		the domestic and foreign supplies of refined products such as gasoline, diesel fuel, jet fuel, home heating oil, and petrochemicals;
	•		the domestic and foreign supplies of crude oil and other feedstocks;
	•		the ability of the members of the Organization of Petroleum Exporting Countries (OPEC) to agree on and to maintain crude oil price and production controls;
	•		the level of consumer demand, including seasonal fluctuations;
	•		refinery overcapacity or undercapacity;

	•		the actions taken by competitors, including both pricing and the expansion and retirement of refining capacity in response to market conditions;
	•		environmental, tax, and other regulations at the municipal, state, and federal levels and in foreign countries;
	•		the level of foreign imports of refined products;
	•		accidents or other unscheduled shutdowns affecting our refineries, machinery, pipelines, or equipment, or those of our suppliers or customers;
	•		changes in the cost or availability of transportation for feedstocks and refined products;
	•		the price, availability, and acceptance of alternative fuels and alternative-fuel vehicles;
	•		delay of, cancellation of, or failure to implement planned capital projects and realize the various assumptions and benefits projected for such projects or cost overruns in constructing such planned capital projects;
	•		earthquakes, hurricanes, tornadoes, and irregular weather, which can unforeseeably affect the price or availability of natural gas, crude oil and other feedstocks, and refined products;
	•		rulings, judgments, or settlements in litigation or other legal or regulatory matters, including unexpected environmental remediation costs, in excess of any reserves or insurance coverage;
	•		legislative or regulatory action, including the introduction or enactment of federal, state, municipal, or foreign legislation or rulemakings, which may adversely affect our business or operations;
	•		changes in the credit ratings assigned to our debt securities and trade credit;
	•		changes in currency exchange rates, including the value of the Canadian dollar relative to the U.S. dollar; and
	•		overall economic conditions.

Any one of these factors, or a combination of these factors, could materially affect our future results of operations and whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.

All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to publicly release the results of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

OVERVIEW

In this overview, we discuss the major transactions of our business during the year ended December 31, 2007 and describe some of the primary factors that we believe affected our results of operations during the year. Although we reported strong earnings from continuing operations for 2007, they decreased from comparable earnings reported in 2006. We reported income from continuing operations of $4.6 billion, or $7.72 per share, for the year ended December 31, 2007 compared to $5.3 billion, or $8.36 per share, for the year ended December 31, 2006. Our profitability is substantially determined by the spread between the price of refined products and the price of crude oil, referred to as the “refined product margin.” Gasoline and distillate margins in 2007 improved compared to such margins in 2006 primarily due to supply limitations caused by industry-wide refinery downtime, both planned and unplanned, lower imports into the United States, and tighter product specifications. However, rapidly rising crude oil prices resulted in lower margins for certain of our secondary products, such as asphalt, fuel oils, petroleum coke, and sulfur, the prices of which did not increase nearly as much as the cost of the feedstocks used to produce them.

In addition, our contribution to earnings resulting from processing sour crude oil rather than sweet crude oil at many of our refineries decreased compared to 2006. Since more than 60% of our total crude oil throughput represents sour crude oil and acidic sweet crude oil feedstocks that are purchased at prices less than sweet crude oil, our profitability is significantly affected by the spread between sweet crude oil and sour crude oil prices, referred to as the “sour crude oil differential.” Sour crude oil differentials relative to WTI crude oil for 2007, although good, decreased compared to the strong differentials in 2006.

The fourth quarter of 2007 demonstrated the advantages of our complex and geographically diverse refining system. While refined product margins were reduced due to a significant increase in feedstock costs relative to product prices, our complex refineries were able to mitigate this unfavorable effect by benefiting from wide sour crude oil differentials. In addition, while product margins in the West Coast region were low, we were able to compensate somewhat for the effect of the low West Coast margins with earnings in the other geographic regions in which we operate.

On February 16, 2007, our McKee Refinery was shut down due to a fire originating in its propane deasphalting unit, which reduced operating income by approximately $325 million during the year ended December 31, 2007. The refinery recommenced operations in April at a reduced throughput rate, with run rates increasing to near full capacity by the end of the third quarter of 2007. All repairs have now been completed and the refinery is running at normal capacity as of February 2008.

Effective July 1, 2007, we sold our refinery in Lima, Ohio to Husky Refining Company (Husky), a wholly owned subsidiary of Husky Energy Inc. The sales price was approximately $2.4 billion, including approximately $550 million from the sale of working capital to Husky, primarily related to the sale of inventory by our marketing and supply subsidiary. The sale resulted in a pre-tax gain of $827 million. During 2007, we also recognized a pre-tax gain of $91 million related to a foreign currency exchange rate gain resulting from the repayment of a loan by a foreign subsidiary. In the second quarter of 2007, we entered into an accelerated share repurchase program under which we purchased 42.1 million shares of our common stock, which was subsequently funded mainly with proceeds from our issuance of $2.25 billion of new debt during 2007.

During 2007, we continued our ongoing effort to increase shareholder value by using a balanced approach to allocating our cash flow. For the year ended December 31, 2007, we generated $5.3 billion of net cash from operating activities, using portions of that cash to increase our 2007 common stock dividends from $0.08 per share to $0.12 per share and to purchase 42.2 million shares of our common stock in addition to the 42.1 million shares purchased under the accelerated share repurchase program discussed above. During 2007, we repurchased 14% of our shares that were outstanding at the beginning of 2007. We also invested $2.8 billion of capital into our refining system and other assets.

RESULTS OF OPERATIONS

2007 Compared to 2006

Financial Highlights
(millions of dollars, except per share amounts)

		Year Ended December 31,
		2007 (a)				2006 (a)				Change
Operating revenues (b)		$	95,327			$	87,640			$	7,687
Costs and expenses:
Cost of sales (b)			81,645				73,863				7,782
Refining operating expenses			4,016				3,622				394
Retail selling expenses (b)			750				719				31
General and administrative expenses			638				598				40
Depreciation and amortization expense:
Refining			1,222				985				237
Retail			90				87				3
Corporate			48				44				4
Total costs and expenses			88,409				79,918				8,491
Operating income			6,918				7,722				(804	)
Equity in earnings of NuStar Energy L.P (c)			-				45				(45	)
Other income, net			167				350				(183	)
Interest and debt expense:
Incurred			(466	)			(377	)			(89	)
Capitalized			107				165				(58	)
Minority interest in net income of NuStar GP Holdings, LLC (c)			-				(7	)			7
Income from continuing operations before income tax expense			6,726				7,898				(1,172	)
Income tax expense			2,161				2,611				(450	)
Income from continuing operations			4,565				5,287				(722	)
Income from discontinued operations, net of income tax expense (a)			669				176				493
Net income			5,234				5,463				(229	)
Preferred stock dividends			-				2				(2	)
Net income applicable to common stock		$	5,234			$	5,461			$	(227	)
Earnings per common share - assuming dilution:
Continuing operations		$	7.72			$	8.36			$	(0.64	)
Discontinued operations			1.16				0.28				0.88
Total		$	8.88			$	8.64			$	0.24

Operating Highlights
(millions of dollars, except per barrel and per gallon amounts)

		Year Ended December 31,
		2007				2006				Change
Refining (a):
Operating income		$	7,355			$	8,182			$	(827	)
Throughput margin per barrel (d)		$	12.33			$	12.47			$	(0.14	)
Operating costs per barrel:
Refining operating expenses		$	3.93			$	3.53			$	0.40
Depreciation and amortization			1.20				0.96				0.24
Total operating costs per barrel		$	5.13			$	4.49			$	0.64
Throughput volumes (thousand barrels per day):
Feedstocks:
Heavy sour crude			638				697				(59	)
Medium/light sour crude			635				618				17
Acidic sweet crude			80				65				15
Sweet crude			724				752				(28	)
Residuals			247				234				13
Other feedstocks			173				147				26
Total feedstocks			2,497				2,513				(16	)
Blendstocks and other			301				298				3
Total throughput volumes			2,798				2,811				(13	)
Yields (thousand barrels per day):
Gasolines and blendstocks			1,285				1,348				(63	)
Distillates			919				891				28
Petrochemicals			82				80				2
Other products (e)			507				491				16
Total yields			2,793				2,810				(17	)
Retail - U.S.:
Operating income		$	154			$	113			$	41
Company-operated fuel sites (average)			957				982				(25	)
Fuel volumes (gallons per day per site)			4,979				4,985				(6	)
Fuel margin per gallon		$	0.174			$	0.162			$	0.012
Merchandise sales		$	1,024			$	960			$	64
Merchandise margin (percentage of sales)			29.7	%			29.6	%			0.1	%
Margin on miscellaneous sales (b)		$	101			$	85			$	16
Retail selling expenses (b)		$	494			$	485			$	9
Depreciation and amortization expense		$	59			$	60			$	(1	)
Retail - Canada:
Operating income		$	95			$	69			$	26
Fuel volumes (thousand gallons per day)			3,234				3,176				58
Fuel margin per gallon		$	0.248			$	0.217			$	0.031
Merchandise sales		$	187			$	167			$	20
Merchandise margin (percentage of sales)			27.8	%			27.4	%			0.4	%
Margin on miscellaneous sales		$	37			$	32			$	5
Retail selling expenses		$	256			$	234			$	22
Depreciation and amortization expense		$	31			$	27			$	4

Refining Operating Highlights by Region (f)
(millions of dollars, except per barrel amounts)

		Year Ended December 31,
		2007				2006				Change
Gulf Coast:
Operating income		$	4,505			$	5,109			$	(604	)
Throughput volumes (thousand barrels per day)			1,537				1,532				5
Throughput margin per barrel (d)		$	12.81			$	13.23			$	(0.42	)
Operating costs per barrel:
Refining operating expenses		$	3.70			$	3.26			$	0.44
Depreciation and amortization			1.08				0.84				0.24
Total operating costs per barrel		$	4.78			$	4.10			$	0.68
Mid-Continent (a):
Operating income		$	910			$	1,041			$	(131	)
Throughput volumes (thousand barrels per day)			402				410				(8	)
Throughput margin per barrel (d)		$	11.66			$	11.32			$	0.34
Operating costs per barrel:
Refining operating expenses		$	4.13			$	3.36			$	0.77
Depreciation and amortization			1.33				1.00				0.33
Total operating costs per barrel		$	5.46			$	4.36			$	1.10
Northeast:
Operating income		$	1,084			$	944			$	140
Throughput volumes (thousand barrels per day)			570				563				7
Throughput margin per barrel (d)		$	10.46			$	9.80			$	0.66
Operating costs per barrel:
Refining operating expenses		$	3.98			$	4.10			$	(0.12	)
Depreciation and amortization			1.27				1.11				0.16
Total operating costs per barrel		$	5.25			$	5.21			$	0.04
West Coast:
Operating income		$	856			$	1,088			$	(232	)
Throughput volumes (thousand barrels per day)			289				306				(17	)
Throughput margin per barrel (d)		$	14.41			$	15.07			$	(0.66	)
Operating costs per barrel:
Refining operating expenses		$	4.82			$	4.04			$	0.78
Depreciation and amortization			1.49				1.27				0.22
Total operating costs per barrel		$	6.31			$	5.31			$	1.00

Average Market Reference Prices and Differentials (g)
(dollars per barrel)

		Year Ended December 31,
		2007				2006				Change
Feedstocks:
West Texas Intermediate (WTI) crude oil		$	72.27			$	66.00			$	6.27
WTI less sour crude oil at U.S. Gulf Coast (h)			4.95				7.01				(2.06	)
WTI less Mars crude oil			5.61				7.12				(1.51	)
WTI less Alaska North Slope (ANS) crude oil			0.58				2.47				(1.89	)
WTI less Maya crude oil			12.41				14.80				(2.39	)
Products:
U.S. Gulf Coast:
Conventional 87 gasoline less WTI			13.78				11.34				2.44
No. 2 fuel oil less WTI			11.94				9.80				2.14
Ultra-low-sulfur diesel less WTI (i)			17.76				N.A.				N.A.
Propylene less WTI			11.05				8.78				2.27
U.S. Mid-Continent:
Conventional 87 gasoline less WTI			18.02				12.16				5.86
Low-sulfur diesel less WTI			21.30				18.59				2.71
U.S. Northeast:
Conventional 87 gasoline less WTI			13.98				10.62				3.36
No. 2 fuel oil less WTI			12.96				9.60				3.36
Lube oils less WTI			48.29				55.56				(7.27	)
U.S. West Coast:
CARBOB 87 gasoline less ANS			23.80				21.52				2.28
CARB diesel less ANS			22.66				23.96				(1.30	)

General

Operating revenues increased 9% for the year ended December 31, 2007 compared to the year ended December 31, 2006 primarily as a result of higher refined product prices. Operating income decreased $804 million, or 10%, and income from continuing operations decreased $722 million, or 14%, for the year ended December 31, 2007 compared to the year ended December 31, 2006 primarily due to an $827 million decrease in refining segment operating income. The refining segment operating income and income from continuing operations exclude the operations of the Lima Refinery which are classified as discontinued operations due to our sale of that refinery as discussed in Note 2 of Notes to Consolidated Financial Statements.

Refining

Operating income for our refining segment decreased from $8.2 billion for the year ended December 31, 2006 to $7.4 billion for the year ended December 31, 2007 resulting mainly from increased refining operating expenses (including depreciation and amortization expense) of $631 million. In addition, total throughput margin for the refining segment declined by $196 million due to a $0.14 per barrel decrease in refining throughput margin and lower throughput volumes.

Refining operating expenses, excluding depreciation and amortization expense, increased $0.40 per barrel, or 11%, for the year ended December 31, 2007 compared to the year ended December 31, 2006. Operating expenses increased mainly due to increases in maintenance expense, employee compensation and related benefits, outside services, and energy costs, as well as increased accruals for sales and use taxes. Refining depreciation and amortization expense increased 24% from 2006 to 2007 primarily due to the implementation of new capital projects, increased turnaround and catalyst amortization, and the write-off of costs related to the McKee Refinery as a result of a fire originating in its propane deasphalting unit in February 2007.

Total refining throughput margins for 2007 compared to 2006 were impacted by the following factors:

	•		Overall, gasoline and distillate margins relative to WTI increased in 2007 compared to 2006 due to a decline in refined product inventory levels resulting from unplanned refinery outages, lower imports, more stringent product specifications and regulations, and heavy industry turnaround activity, as well as moderately stronger demand.
	•		Sour crude oil feedstock differentials to WTI crude oil during 2007 decreased from the strong differentials in 2006. However, other light, sweet crude oils priced at a premium to WTI in 2007; thus, sour crude oil feedstock differentials relative to those other light, sweet crude oils in 2007 were comparable to the wide differentials experienced in 2006. These wide differentials are attributable to continued ample supplies of sour crude oils and heavy sour residual fuel oils on the world market. Differentials on sour crude oil feedstocks also continued to benefit from increased demand for sweet crude oil resulting from lower sulfur specifications for gasoline and diesel and a global increase in refined product demand.
	•		Margins on various secondary refined products such as asphalt, fuel oils, petroleum coke, and sulfur were lower in 2007 as prices for these products did not increase in proportion to the costs of the feedstocks used to produce them.
	•		Throughput volumes decreased 13,000 barrels per day during 2007 compared to 2006 primarily due to a reduction in throughput volumes at our McKee Refinery as a result of the fire discussed above.

Retail

Retail operating income was $249 million for the year ended December 31, 2007 compared to $182 million for the year ended December 31, 2006. This 37% increase in operating income was primarily attributable to

increased in-store sales and improved retail fuel margins in our U.S. and Canadian retail operations, partially offset by higher selling expenses related mainly to retail reorganization expenses and an increase in the Canadian dollar exchange rate relative to the U.S. dollar.

Corporate Expenses and Other

General and administrative expenses, including corporate depreciation and amortization expense, increased $44 million for the year ended December 31, 2007 compared to the year ended December 31, 2006. This increase was primarily due to 2007 executive retirement expenses, an increase in employee compensation and benefits, including incentive compensation, a $13 million termination fee paid in 2007 for the cancellation of our services agreement with NuStar Energy L.P., and increased charitable contributions, partially offset by 2006 expenses attributable to Premcor headquarters personnel that were not incurred during 2007.

“Other income, net” for the year ended December 31, 2007 included a $91 million pre-tax gain related to a foreign currency exchange rate gain resulting from the repayment of a loan by a foreign subsidiary. “Other income, net” for the year ended December 31, 2006 included a pre-tax gain of $328 million related to the sale of our ownership interest in NuStar GP Holdings, LLC, as discussed in Note 9 of Notes to Consolidated Financial Statements. Excluding these effects, “other income, net” increased $54 million from 2006 to 2007 primarily due to increased interest income related to our significantly higher cash balance during 2007.

Interest and debt expense increased primarily due to the issuance of $2.25 billion of notes in June 2007 to fund the accelerated share repurchase program (as discussed in Note 12 of Notes to Consolidated Financial Statements), increased interest on tax liabilities, and reduced capitalized interest due to a reduced balance of capital projects under construction.

Income tax expense decreased $450 million from 2006 to 2007 mainly as a result of lower income from continuing operations before income tax expense. Our effective tax rate for the year ended December 31, 2007 decreased from the year ended December 31, 2006 primarily due to an increase in the percentage of pre-tax income contributed by the Aruba Refinery, the profits of which are non-taxable in Aruba through December 31, 2010, combined with favorable tax law changes.

Income from discontinued operations, net of income tax expense, increased $493 million from the year ended December 31, 2006 to the year ended December 31, 2007 due primarily to a pre-tax gain of $827 million, or $426 million after tax, on the sale of the Lima Refinery in July 2007 combined with a $67 million increase in net income from the operations of the Lima Refinery between the two years. The increase in net income from the operations of the Lima Refinery was mainly attributable to a 94% increase in the refinery’s throughput margin per barrel, from $8.99 per barrel for the year ended December 31, 2006 to $17.41 per barrel for the six months ended June 30, 2007, which more than offset the effect of a decline in throughput volumes resulting from only six months of operations in 2007 prior to its sale.

2006 Compared to 2005

Financial Highlights
(millions of dollars, except per share amounts)

		Year Ended December 31,
		2006 (a)				2005 (a) (b)				Change
Operating revenues (c) (d)		$	87,640			$	80,616			$	7,024
Costs and expenses:
Cost of sales (b) (c) (d)			73,863				70,438				3,425
Refining operating expenses			3,622				2,816				806
Retail selling expenses (c)			719				700				19
General and administrative expenses			598				558				40
Depreciation and amortization expense:
Refining			985				716				269
Retail			87				83				4
Corporate			44				37				7
Total costs and expenses			79,918				75,348				4,570
Operating income			7,722				5,268				2,454
Equity in earnings of NuStar Energy L.P.			45				41				4
Other income, net			350				53				297
Interest and debt expense:
Incurred			(377	)			(334	)			(43	)
Capitalized			165				66				99
Minority interest in net income of NuStar GP Holdings, LLC			(7	)			-				(7	)
Income from continuing operations before income tax expense			7,898				5,094				2,804
Income tax expense			2,611				1,621				990
Income from continuing operations			5,287				3,473				1,814
Income from discontinued operations, net of income tax expense (a)			176				117				59
Net income			5,463				3,590				1,873
Preferred stock dividends			2				13				(11	)
Net income applicable to common stock		$	5,461			$	3,577			$	1,884
Earnings per common share - assuming dilution:
Continuing operations		$	8.36			$	5.90			$	2.46
Discontinued operations			0.28				0.20				0.08
Total		$	8.64			$	6.10			$	2.54

Operating Highlights
(millions of dollars, except per barrel and per gallon amounts)

		Year Ended December 31,
		2006				2005 (b)				Change
Refining (a):
Operating income (b)		$	8,182			$	5,709			$	2,473
Throughput margin per barrel (e)		$	12.47			$	11.10			$	1.37
Operating costs per barrel:
Refining operating expenses		$	3.53			$	3.17			$	0.36
Depreciation and amortization			0.96				0.81				0.15
Total operating costs per barrel		$	4.49			$	3.98			$	0.51
Throughput volumes (thousand barrels per day):
Feedstocks:
Heavy sour crude			697				548				149
Medium/light sour crude			618				610				8
Acidic sweet crude			65				103				(38	)
Sweet crude			752				620				132
Residuals			234				181				53
Other feedstocks			147				132				15
Total feedstocks			2,513				2,194				319
Blendstocks and other			298				241				57
Total throughput volumes			2,811				2,435				376
Yields (thousand barrels per day):
Gasolines and blendstocks			1,348				1,144				204
Distillates			891				745				146
Petrochemicals			80				70				10
Other products (f)			491				477				14
Total yields			2,810				2,436				374
Retail - U.S.:
Operating income		$	113			$	81			$	32
Company-operated fuel sites (average)			982				1,024				(42	)
Fuel volumes (gallons per day per site)			4,985				4,830				155
Fuel margin per gallon		$	0.162			$	0.154			$	0.008
Merchandise sales		$	960			$	934			$	26
Merchandise margin (percentage of sales)			29.6	%			29.7	%			(0.1	)%
Margin on miscellaneous sales (c)		$	85			$	68			$	17
Retail selling expenses (c)		$	485			$	482			$	3
Depreciation and amortization expense		$	60			$	60			$	-
Retail - Canada:
Operating income		$	69			$	73			$	(4	)
Fuel volumes (thousand gallons per day)			3,176				3,204				(28	)
Fuel margin per gallon		$	0.217			$	0.211			$	0.006
Merchandise sales		$	167			$	150			$	17
Merchandise margin (percentage of sales)			27.4	%			25.6	%			1.8	%
Margin on miscellaneous sales		$	32			$	30			$	2
Retail selling expenses		$	234			$	218			$	16
Depreciation and amortization expense		$	27			$	23			$	4

See the footnote references on pages 33 and 34.

Refining Operating Highlights by Region (g)
(millions of dollars, except per barrel amounts)

		Year Ended December 31,
		2006				2005 (b)				Change
Gulf Coast:
Operating income		$	5,109			$	3,962			$	1,147
Throughput volumes (thousand barrels per day) (h)			1,532				1,364				168
Throughput margin per barrel (e)		$	13.23			$	11.73			$	1.50
Operating costs per barrel:
Refining operating expenses		$	3.26			$	3.03			$	0.23
Depreciation and amortization			0.84				0.74				0.10
Total operating costs per barrel		$	4.10			$	3.77			$	0.33
Mid-Continent (a) (i):
Operating income		$	1,041			$	665			$	376
Throughput volumes (thousand barrels per day) (h)			410				311				99
Throughput margin per barrel (e)		$	11.32			$	10.01			$	1.31
Operating costs per barrel:
Refining operating expenses		$	3.36			$	3.42			$	(0.06	)
Depreciation and amortization			1.00				0.74				0.26
Total operating costs per barrel		$	4.36			$	4.16			$	0.20
Northeast:
Operating income		$	944			$	725			$	219
Throughput volumes (thousand barrels per day) (h)			563				448				115
Throughput margin per barrel (e)		$	9.80			$	8.33			$	1.47
Operating costs per barrel:
Refining operating expenses		$	4.10			$	3.11			$	0.99
Depreciation and amortization			1.11				0.78				0.33
Total operating costs per barrel		$	5.21			$	3.89			$	1.32
West Coast:
Operating income		$	1,088			$	978			$	110
Throughput volumes (thousand barrels per day)			306				312				(6	)
Throughput margin per barrel (e)		$	15.07			$	13.42			$	1.65
Operating costs per barrel:
Refining operating expenses		$	4.04			$	3.59			$	0.45
Depreciation and amortization			1.27				1.23				0.04
Total operating costs per barrel		$	5.31			$	4.82			$	0.49
Operating income for regions above		$	8,182			$	6,330			$	1,852
LIFO charge (b)			-				(621	)			621
Total refining operating income		$	8,182			$	5,709			$	2,473