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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
-----
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
-----------------
Commission file number 1-8483
UNOCAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3825062
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2141 ROSECRANS AVENUE, SUITE 4000, EL SEGUNDO, CALIFORNIA 90245
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 726-7600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1.00 per share New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 X No
---- ----
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1996 (based upon the average of the high and low
prices of these shares reported in the New York Stock Exchange Composite
Transactions listing for that date) was $7,869 million.
Shares of Common Stock outstanding as of March 15, 1996: 247,860,562
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 1996 Annual
Meeting of Stockholders (to be filed with the Securities and Exchange Commission
on or about April 22, 1996) are incorporated by reference into Part III.
PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES
HISTORY AND ORGANIZATION
Unocal Corporation was incorporated in Delaware on March 18, 1983, to operate
as the parent of Union Oil Company of California (Union Oil), which was
incorporated in California on October 17, 1890. Virtually all operations are
conducted by Union Oil and its subsidiaries. The terms "Unocal" and "the
company" as used in this report mean Unocal Corporation and its subsidiaries,
except where the context indicates otherwise.
Unocal is a fully integrated energy resources company whose worldwide
operations comprise many aspects of energy production. During 1995, the company
reorganized its business into the following segments in order to remain focused
on its most critical business activities:
. EXPLORATION AND PRODUCTION - this segment is engaged in the exploration
for, and the production and marketing of, crude oil, condensate, natural
gas and natural gas liquids.
. REFINING, MARKETING AND TRANSPORTATION
76 PRODUCTS COMPANY - this segment is principally responsible for the
company's West Coast petroleum refining operations, marketing and
transportation of refined petroleum products and the manufacturing and
marketing of petroleum coke.
. GEOTHERMAL AND POWER OPERATIONS - this segment is involved in the
exploration for, and the production and sale of, geothermal resources for
the generation of electricity.
. DIVERSIFIED BUSINESSES:
AGRICULTURAL PRODUCTS - manufactures and markets nitrogen-based fertilizers
for wholesale markets to the western United States and to the Pacific Rim.
CARBON AND MINERALS - produces and markets petroleum coke (other than on
the West Coast), graphites, solvents and specialty minerals.
PIPELINES - principally includes the company's equity interests in
affiliated pipeline companies.
OTHER - includes the development and sale of real estate assets and the
company's equity interest in The UNO-VEN Company, a refining and marketing
partnership in the midwestern United States.
Unocal competes in a challenging business environment of global competition,
political instability, rapid technological developments, volatile oil and gas
prices, and rising costs of complying with environmental regulations. In order
to meet these challenges, the company's focus remains on its basic businesses
and core competitive strengths. In keeping with this emphasis, the company
continues to sell assets that were marginally related to its core activities or
that were not a good strategic fit for Unocal. In February 1996, Unocal and
Nuevo Energy Company signed an asset purchase agreement for the sale of nearly
all of Unocal's crude oil and natural gas producing properties in California.
Torch Energy Advisors, Inc. negotiated the sale and will operate the properties
on behalf of Nuevo. Proceeds from the sale will allow Unocal to reduce debt and
help fund core activities in Central and Southeast Asia. The company is in the
process of retaining an advisor to assist in the disposal of its oil and gas
interests in the Netherlands sector of the North Sea as the company continues to
shift its focus to Southeast Asia and other areas that offer greater growth
opportunities.
In February 1994, the company was granted a United States patent for
reformulated gasolines that meet the 1996 California state standards for
reduced emissions. Six refining companies filed suit against Unocal in April
1995 to invalidate the patent or declare it unenforceable. See Item 3-Legal
Proceedings. The company intends to aggressively defend its rights under this
patent.
The company's research activities were phased out at its Brea, California
facility during 1995, and routine laboratory operations and seismic data
processing were outsourced. The decision to outsource was based on projected
cost savings. Selected research activities are now handled by the operating
segments.
For a detailed analysis of the company's financial results and information on
capital expenditures, see Management's Discussion and Analysis under Item 7
beginning on page 19 of this report.
1
SEGMENT AND GEOGRAPHIC INFORMATION
Financial information relating to the company's business segments, geographic
areas of operations, and sales revenues by classes of products is presented
under Note 24 to the consolidated financial statements, on page 55 of this
report.
PETROLEUM OPERATIONS
Information regarding oil and gas financial data and oil and gas reserve data
and its related present value of future net cash flow is presented on pages 60
through 65 of this report. During 1995, certain estimates of underground oil and
gas reserves were filed with the Department of Energy under the name of Union
Oil. Such estimates were consistent with reserve data filed with the
Securities and Exchange Commission.
WORLDWIDE OIL AND GAS ACTIVITIES
Unocal conducts exploration, production and development activities, including
low-risk exploration within producing areas with major operations in the United
States, Thailand, Indonesia and Canada. Exploration and production
operations make up approximately 48 percent of Unocal's assets, and of this,
operations in the United States make up 65 percent of the current asset base.
Unocal's future growth will focus principally in the foreign sector, with a
concentration in the Far East. In addition, growth opportunities in the United
States will focus in the Gulf of Mexico.
WORLDWIDE 1995 1994 1993
- ----------------------------------------------------------------
NET PROVED RESERVES AT YEAR END: (a)
Crude oil and condensate - million 667 697 764
barrels
Natural gas - billion cubic feet 6,765 6,911 6,632
NET DAILY PRODUCTION: (a)
Crude oil and condensate - thousand
barrels 240 260 246
Natural gas - million cubic feet 1,765 1,766 1,599
Natural gas liquids - thousand barrels 21 22 20
NATURAL GAS SALES TO PUBLIC - MILLION 1,513 1,529 1,422
CUBIC FEET DAILY
- ----------------------------------------------------------------
(a) Includes foreign production sharing agreements on a gross basis.
Natural gas is reported on a wet-gas basis; production excludes gas
consumed on lease.
The decrease in worldwide crude oil production was mainly due to natural
production declines and the sale of nonstrategic domestic properties. Due to
the accelerated development program initiated in 1993, worldwide natural gas
production remains stable, despite the sales of domestic oil and gas producing
properties.
Operating expense decreased in 1995 due primarily to the sale of nonstrategic
domestic properties and cost reductions. In 1995, average production costs per
barrel of oil equivalent were $2.94, down from $3.00 and $3.40 for 1994 and
1993, respectively.
Unocal pursues exploration opportunities and business development projects to
sustain the long-term growth of the company. The company's exploration activity
in high-risk, high-potential wildcat areas is limited to projects that pass
rigorous geotechnical and economic review. This assures concentration of
technical talent and resources on the most promising areas which have the
highest potential value to the company.
2
UNITED STATES
EXPLORATION
In an effort to reduce exploration risk, Unocal has formed drilling venture
teams to actively solicit opportunities to farm into ready-to-drill projects in
parts of Texas, Oklahoma, Louisiana and the Gulf of Mexico. The company
anticipates this approach will not only reduce risk, but will also put cash to
work more efficiently, offer cash flow recovery and provide upside potential if
energy prices rise.
The company holds approximately 1.2 million net acres of unproved lands in
the United States. Most of these lands are located in Alaska, Louisiana, Texas,
California and New Mexico. Unproved acreage in federal offshore exploration and
production areas is included in the contiguous states.
Unocal concentrates its domestic exploration activities in the Gulf of
Mexico. The company foresees exploration potential along the entire Louisiana
Coast. In 1996, Unocal has plans to drill 16 offshore exploration wells and
4 onshore Texas/Louisiana coast wells. The company is also planning 24
development wells and 141 recompletions. Unocal has recently leased eight deep-
water blocks in a lease sale. The company has acquired 3-D surveys for use in
evaluating exploration potential near existing fields. In the past, these types
of surveys have identified opportunities which resulted in increased production.
PRODUCTION
The company holds approximately 815,000 net acres of proved lands in 19
states. Most of these lands are located in Texas, Louisiana, California,
Alaska, Oklahoma, and New Mexico. Proved acreage in federal offshore
exploration and production areas is included in the contiguous states.
Unocal's domestic crude oil production comes principally from fields in
Alaska (32%), California (23%), Texas (19%) and Louisiana (21%). Approximately
43% of domestic natural gas production is from offshore and onshore fields in
Louisiana, with most of the balance coming from Texas (26%), Alaska (13%), New
Mexico (4%), Oklahoma (3%) and California (2%).
Unocal has varying ownership interests in 21 natural gas processing plants
located near major gas fields in the United States. Of the 21 natural gas
processing plants, interests in 3 are included in the expected sale of the
California oil and gas producing properties. The company operates 11 of these
plants and has full ownership in four. Nineteen of the 21 processing plants
were active in 1995.
UNITED STATES 1995 1994 1993
- ----------------------------------------------------------------
NET PROVED RESERVES AT YEAR END:(a)
Crude oil and condensate - million 387 419 483
barrels
Natural gas - billion cubic feet 3,261 3,580 3,727
NET DAILY PRODUCTION:(a)
Crude oil and condensate - thousand 125 137 148
barrels
Natural gas - million cubic feet 1,103 1,095 952
Natural gas liquids - thousand 16 16 15
barrels
NATURAL GAS SALES TO PUBLIC - MILLION 882 873 752
CUBIC FEET DAILY
- ----------------------------------------------------------------
(a) Natural gas is reported on a wet-gas basis; production excludes gas
consumed on lease.
The decline in crude oil and condensate production reflects the sale of
nonstrategic oil and gas producing properties and natural production decline.
The company expects oil and gas production to further decline in 1996 due to the
sale of its California oil and gas producing properties anticipated to be
completed in April 1996. Domestic natural gas production in 1996 is expected to
be 58% of the company's total production with most coming from the
Louisiana/Gulf Coast area. Even though Unocal's 1995 domestic natural gas
production remained at about the same level as 1994, production in the Gulf of
Mexico has increased over 30 percent since 1993.
3
Most of the company's crude oil produced in the United States is sold to
third parties. A substantial portion of the natural gas produced domestically
is sold to third parties under contracts having terms of less than two years.
The company believes that it has sufficient production capacity in the U.S. to
meet the contracted deliveries. Another significant portion of the domestic gas
production is sold to third parties in the spot market. The remainder is
primarily used in the company's agricultural products manufacturing operations
or as fuel in its refineries.
FOREIGN
EXPLORATION
Unocal pursues oil and gas exploration and development opportunities
overseas, primarily in Thailand, Azerbaijan, Myanmar and Indonesia. Unocal is
also pursuing oil and gas exploration and development opportunities in
Turkmenistan, Pakistan, China and Vietnam.
THAILAND. Considerable exploration potential still exists in the Gulf of
Thailand. Natural gas markets for electricity generation are projected to grow
by 50 percent by the year 2000 and double by 2010.
During 1995 and early 1996, Unocal drilled 29 exploration, appraisal and
delineation wells, of which 22 were successful. This program has extended the
limits of currently producing fields, proved commerciality of the Pladang and
Trat fields and delineated the Pailin field. Further drilling is expected to
take place in Pailin in 1996, subject to the signing of the Pailin gas sales
agreement, to extend the field to the north and potentially increase the
ultimate daily contract quantity.
AZERBAIJAN. Unocal is part of an international consortium participating in
the development of three oil fields in the Caspian Sea offshore Azerbaijan. In
October 1995, the consortium announced two pipeline routes for the export of
initial oil production from Azerbaijan to the Black Sea. The success of the
initial oil program will help determine the feasibility of full field
development. A delineation drilling program, scheduled for completion in 1997,
will help determine proved reserves in the three fields. Unocal holds a 9.5
percent interest. Significant issues remain to be resolved, including
contractual agreements and the routing and construction of a new export
pipeline, before full field development can begin.
MYANMAR. During 1996, a major focus of capital spending will be the Yadana
project offshore Myanmar of which Unocal holds a 28.26 percent interest. This
natural gas project, which is expected to include four offshore platforms,
should begin operations by mid-1998. When fully developed, estimated gross
production is expected to reach 650 million cubic feet of natural gas per day in
1999. Most of the Yadana natural gas production will be shipped by pipeline to
an electric power plant southwest of Bangkok, Thailand.
In March 1996, a potentially significant new gas field was discovered about
six miles south of the Yadana field. Further studies are under way to prove the
commerciality of the new discovery. The discovery could be produced through the
Yadana platform complex currently under construction.
INDONESIA. Oil and gas production has been revitalized in Indonesia as a
result of a successful exploration and development program. Since December 1993,
when the current exploration phase started, Unocal drilled 25 exploration,
delineation and appraisal wells, of which 15 were successful. Fifteen of these
wells were drilled in 1995, with nine successes.
The Company conducted an extensive exploration 3-D seismic program in 1995
and another program is planned for early 1996. An aggressive exploration and
delineation drilling program is also planned for 1996, which will use drilling
technology developed by the company to drill as many as 30 wells in one year.
The company will continue to seek new production sharing agreements in
Indonesia.
4
PRODUCTION
Unocal has oil and gas production in six foreign countries: Thailand,
Indonesia, Canada, the Netherlands, United Kingdom and Zaire. Overseas, Unocal
is the operator in each of these countries except Zaire. The company sells most
of its foreign natural gas production to third parties under long-term
contracts. The crude oil and condensate produced overseas are primarily sold at
spot market prices to third parties.
FOREIGN 1995 1994 1993
- ----------------------------------------------------------------
NET PROVED RESERVES AT YEAR END: (a)
Crude oil and condensate - million 280 278 281
barrels
Natural gas - billion cubic feet 3,504 3,331 2,905
NET DAILY PRODUCTION: (a)
Crude oil and condensate - thousand 115 123 98
barrels
Natural gas - million cubic feet 662 671 647
Natural gas liquids - thousand barrels 5 6 5
NATURAL GAS SALES TO PUBLIC - MILLION
CUBIC FEET DAILY 631 656 670
- ----------------------------------------------------------------
(a) Includes production sharing agreements on a gross basis. Natural gas
is reported on a wet-gas basis; production excludes gas consumed on
lease.
THAILAND. Natural gas and condensate production began in Thailand in 1981
and is Unocal's primary gas producing area outside the United States. Unocal
and its partners have spent more than $3.9 billion developing the offshore gas
fields. In 1996, the Company expects to spend approximately $160 million on
projects that will allow gross production to remain at 950 million cubic feet
of gas per day, once a second pipeline becomes operational.
Gross natural gas production averaged about 720 million cubic feet (mmcf) per
day (466 mmcf net to Unocal) in 1995. Construction of the Petroleum Authority
of Thailand's (PTT) second pipeline is expected to be completed by mid-1996.
This second pipeline should allow Unocal to increase its net gas production from
466 mmcf per day in 1995 to 550 in 1996 and to 655 in 1998, mainly attributable
to the Jakrawan, Funan and Gomin fields. Unocal's net working interests in all
eight producing fields average 65 percent.
The company is negotiating a separate gas sales agreement related to the
development of the Pailin field where gross reserves may exceed one trillion
cubic feet. Production from Pailin should start in 1998 at a gross rate of 150
million cubic feet per day and may peak at a rate of 250 million cubic feet per
day by 1999. Unocal's share in this field is 35 percent.
Unocal's future development plan in the Gulf of Thailand calls for
delineation and additional development of the eight fields operated by Unocal
under the existing gas sales contracts and the new Pailin field. For the next
four years, the company plans to drill nearly 380 wells and install 32
additional production platforms. Estimated gross capital expenditures over the
four year period are $1.0 billion ($632 million net for Unocal).
Natural gas demand in Thailand is expected to continue its active growth over
the next 10 to 15 years, providing a market for increased production from the
Gulf of Thailand.
Unocal's natural gas production in Thailand is sold under long-term
contracts. The contract prices are based on formulas that allow prices to
fluctuate with market prices. The company has typically supplied more natural
gas to PTT than is called for in the daily contract quantity provisions of its
sales contracts. In any event, the company's obligation to deliver gas to PTT
is limited to the available economic production from its properties in Thailand.
INDONESIA. Unocal operates seven producing oil and gas fields. Discoveries
and extensions have increased production to the highest levels in more than a
decade. Net production in 1995 averaged about 68,000 barrels of oil and 179
mmcf of natural gas per day.
During 1995, the Seguni field was discovered and is
expected to begin production early in 1996 from four wells at about 10,000
barrels of oil per day. The time from discovery to production is expected to be
significantly reduced at this field, due to an innovative early production
system. Further delination of this field is planned for 1996. In 1997, the
Santan field is expected to start production, and the company is also planning a
waterflood project in the Attaka field, which has already produced over 500
million barrels of crude oil.
5
CANADA. Net crude oil production averaged 13,900 barrels per day in 1995,
down from 14,600 barrels per day in 1994. The decrease was due to natural
production declines in mature fields and the sale of the Kidney field.
Partially offsetting the decrease was the purchase of an additional working
interest in the Virginia Hills unit.
Unocal Canada operates the Aitken Creek natural gas storage facility in
Northern British Columbia and has a working interest of approximately 94
percent. During 1995, fixed-price seasonal contracts were negotiated and
resulted in the company receiving prices for winter sales which are currently
averaging 30 to 35 percent more than the spot market. The contracts
provide take-or-pay protection for the company.
NETHERLANDS. Daily gross oil production from Unocal's five offshore fields
averaged 14,000 barrels in 1995, up 6,100 barrels from 1994. Unocal holds an 80
percent working interest in all five fields. Gross natural gas production was
19 mmcf per day from two offshore gas fields. Unocal holds a 46 percent working
interest in both fields. The company is currently pursuing advice to assist in
the disposal of oil and gas interests in the Netherlands sector of the North
Sea.
UNITED KINGDOM. Gross production from the Heather field averaged 6,400
barrels of oil per day in 1995, down 15 percent from a year ago. The field is
approaching the end of its production life and the company expects to abandon
the field within the next few years. Unocal holds a 31.25 percent interest in
this field.
ZAIRE. Gross production from five fields averaged 19,600 barrels of oil per
day in 1995, compared with 18,100 barrels per day in 1994. Production from new
fault blocks accounted for the increase in production. Unocal holds a 17.7
percent interest in these fields.
In light of the changing political climates and relationships between
international oil companies and host governments in the foregoing countries and
other parts of the world, including changes in posted or tax-reference prices
for crude oil, increases in tax rates (sometimes retroactive) and demands for
increased participation in the ownership of operations, there could be changes
in the status of Unocal's exploration and production activities in these and
other foreign countries during the coming years.
6
OIL AND GAS ACREAGE
As of December 31, 1995
(thousands of acres)
------------------------------------------
Proved Acreage Prospective Acreage
----------------- ----------------------
Gross Net Gross Net
------ -------- ------------ -------
United States 1,197 815 1,562 1,218
Far East 417 257 11,754 6,930
Other Foreign 262 141 4,978 1,834
----- ----- ------ -----
Total 1,876 1,213 18,294 9,982
===== ===== ====== =====
PRODUCIBLE OIL AND GAS WELLS
As of December 31, 1995
-----------------------------------------
Oil Gas
----------------- ----------------------
Gross Net Gross Net
------ -------- ------------ -------
United States 5,514 3,740 1,827 881
Far East 221 155 398 295
Other Foreign 1,253 502 106 66
----- ----- ------ -----
Total 6,988 4,397 2,331 1,242
===== ===== ====== =====
The company had 143 gross and 91 net producible wells with multiple
completions.
DRILLING IN PROGRESS
As of December 31, 1995
-----------------------
Oil and Gas Wells
-----------------------
Gross Net
------- --------
United States 34 18
Far East 85 56
Other Foreign 5 2
----- ------
Total 124 76
===== ======
The company had one waterflood project in process of installation at December
31, 1995.
NET OIL AND GAS WELLS COMPLETED AND DRY HOLES
Productive Dry
------------------ ------------------
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
Exploratory
United States 15 7 9 11 10 11
Far East 7 9 4 7 3 3
Other Foreign 3 4 1 5 6 4
---- ---- ---- ---- ---- ----
Total 25 20 14 23 19 18
==== ==== ==== ==== ==== ====
Development
United States 113 137 164 5 2 7
Far East 38 50 60 - 4 4
Other Foreign 32 19 17 1 4 2
---- ---- ---- ---- ---- ----
Total 183 206 241 6 10 13
==== ==== ==== ==== ==== ====
7
REFINING, MARKETING AND TRANSPORTATION -- 76 PRODUCTS COMPANY
This business segment is principally responsible for the company's West Coast
petroleum refining operations, marketing and transportation of refined petroleum
products and the manufacturing and marketing of petroleum coke.
REFINING
The company owns three refineries in California that are operated by 76
Products Company, which carries out the company's refining and marketing
activities. The refineries manufacture a complete line of high-quality
petroleum products, including automotive gasoline, jet and turbine fuels,
kerosene, diesel oils, automotive and industrial lubricating oils and petroleum
coke. Green petroleum coke, a by-product of refining operations, is calcined for
use in aluminum production and other industrial applications. Green coke is also
used as a fuel. Calcining plants are located adjacent to the Santa Maria and San
Francisco refineries.
Rated capacities of crude oil processing units for the refineries are
summarized below:
Refinery Barrels Per Day
- ---------------------------------------------------- ---------------
Los Angeles-Wilmington and Carson plants 130,000
San Francisco 77,000
Santa Maria 44,000
The Santa Maria refinery produces unfinished products for further processing
at the company's Los Angeles and San Francisco refineries.
Upgrades to the Los Angeles and San Francisco refineries are now complete
and higher valued products are being produced along with the new reformulated
gasolines (RFG) required by the California Air Resources Board. RFG must be sold
at the retail level by June 1, 1996. The major construction at the refineries
required to manufacture RFG was completed over a three-year period at a cost of
approximately $400 million, $50 million under budget.
The company's input to crude oil processing units and refinery production
data are shown below:
Thousand barrels per day 1995 1994 1993
- -------------------------------------------------------------
Input to crude oil processing units:
Crude oil 203 218 205
Other materials 10 13 12
---- ---- ----
Total 213 231 217
==== ==== ====
Refinery production:
Gasoline 110 115 113
Jet fuel, kerosene and heating oil 24 21 22
Diesel fuel 38 35 28
Other products (lubricants, gas 62 78 71
oils, etc.) ---- ---- ----
Total 234 249 234
==== ==== ====
The decrease in refinery production in 1995 was primarily due to extended
scheduled maintenance at the refineries early in the year.
8
MARKETING
The company markets gasoline and other refined petroleum products in the
western United States under the "Unocal 76" trade name. Gasoline is marketed,
directly or through marketers, to consumers at retail service stations, while
jet fuels, diesel fuel, lube oil and heavy fuel oil are marketed to commercial
users. A significant majority of retail outlets, including locations owned and
leased by the company, are operated by independent dealers. The retail outlets
also sell branded tires, batteries and other automobile accessories. Unocal
currently operates about five percent of the retail outlets and is working
toward operating between 20 to 25 percent.
Unocal's retail marketing covers six western states: California, Arizona,
Nevada, Hawaii, Washington and Oregon. The company has an approximate 13.6
percent market share in the greater Los Angeles metropolitan area, which is one
of the world's largest and most competitive regional gasoline markets. The West
Coast marketing network includes about 1,300 branded retail outlets (1,100 of
which are in California) and 13 proprietary terminals.
The company will continue to expand its marketing operations at retail
outlets with the addition of new businesses to certain existing locations, such
as FastBreak convenience stores, ProWash car washes, AutoPulse car maintenance
services and quick-service restaurants. The company is also working to increase
gasoline retail sales volumes by installing credit card readers at the
dispensers and reconfiguring the service islands. In February 1996, Unocal
entered into a strategic alliance with Fleetman, Inc. to market Fuelman Fleet
Cards and also signed a Memorandum of Understanding with Southern Counties Oil
Company/Cardlock Fuels System which could lead to joint construction,
development and operation of unattended commercial fueling facilities throughout
California. These agreements position the company as a leader in the West Coast
commercial fleet fuel business.
The company is actively pursuing joint ventures and alliances in order to
improve its standing in markets outside California and Hawaii. In October 1995,
Unocal and Circle K Corporation (Circle K), one of the nation's leading
convenience store operators, signed a branding/licensing agreement for more than
400 Circle K sites in the Phoenix and Tucson, Arizona markets. In addition,
Unocal expects to brand and supply 20 existing Circle K sites in Las Vegas,
Nevada and the two companies plan to co-develop new service stations/convenience
store sites in the Las Vegas area. In February 1996, Tosco Corporation, a
petroleum refiner and marketer, announced that it had entered into a merger
agreement with Circle K.
The company's sales volumes of refined products are as follows:
Thousand barrels per day 1995 1994 1993
- -------------------------------------------------------------
Gasoline 145 133 129
Jet fuel, kerosene and heating oil 35 30 27
Diesel fuel 45 37 32
Other products (lubricants, gas oils, 44 52 46
etc.) ---- ---- ----
Total 269 252 234
==== ==== ====
The increase in 1995 refined product sales volumes compared with 1994 is
primarily related to the outside purchase and resale of refined products to
other than retail customers.
TRANSPORTATION
The 76 Products Company has various interests in West Coast pipelines,
through which crude oil production and purchases are transported to the
company's refineries or to selling locations.
At year-end 1995, the company's marine fleet consisted of one crude oil
tanker and two refined product tankers. The company also has an extensive fleet
of product tank trucks.
9
GEOTHERMAL AND POWER OPERATIONS
This segment is involved in the exploration for and the production and sale
of geothermal resources for the generation of electricity. Unocal is the
world's largest supplier of geothermal energy for power generation, with major
operations in California, the Philippines and Indonesia. The production of
geothermal resources for power generation has been a core business for Unocal
for a quarter of a century. Unocal holds over 100 geothermal patents in five
countries. The company currently supplies geothermal energy for about 1,850
megawatts of installed generating capacity worldwide. Capital expenditures are
expected to more than double to $110 million in 1996, focusing on projects in
Indonesia.
In November 1994, Unocal signed amended agreements with PERTAMINA, the
Indonesian state energy company, and PLN, Indonesia's state utility, to develop
and produce the Gunung Salak geothermal resource and to build and operate three
new 55-megawatt electrical generating plants at the field on Java. These plants
in addition to a third new 55-megawatt plant being built by PLN are expected to
begin operation mid-1997. PLN operates two 55-megawatt electrical generating
power plants that began operation during late 1994. When fully operational, the
six electrical generating power plants will have a combined capacity of 330
megawatts (100 million barrels of oil equivalent over a project life of 30
years). The company will provide steam to all six of the Salak power plants and
sell the electricity generated by the three plants to PLN.
During 1995, in the Sarulla contract area on the island of Sumatra in
Indonesia, a discovery well was drilled that indicated a highly productive
geothermal resource. The slimhole well tested sufficient steam to fuel 23
megawatts of generating capacity. The company, which holds a 90 percent interest
in the contract area, is continuing additional resource delineation to confirm
commerciality of the field. Exploration of the 240,000-acre tract is being
conducted under a 1993 contract signed with PERTAMINA, Indonesia's state oil and
gas company. The contract calls for Unocal to explore for, appraise and develop
geothermal resources of up to 1,000 megawatts (315 million barrels of oil
equivalent over a project life of 30 years). If further drilling confirms the
existence of commercially exploitable resources, Unocal will also build and
operate power plants with the first of these scheduled to begin power
generation in 1999 under an energy sales contract with PLN. The company expects
to conduct additional exploration work at Sarulla.
Unocal has been involved in the exploration and development of geothermal
resources in the Philippines since 1971. The company operates the Tiwi and Mak-
Ban geothermal fields which commenced production in 1979. In 1995, the
Philippine National Power Corporation (NPC) selected Unocal as a strategic
partner in NPC's privatization efforts. The company will participate in the
rehabilitation of the 330-megawatt Tiwi and 330-megawatt Mak-Ban power plants.
Unocal expects to participate in the ownership and operation of both the
geothermal resource and power plants.
Unocal has operated The Geysers, a dry-steam reservoir in Northern
California, since 1967. The geothermal steam produced is purchased by a public
utility for power generation. In 1996, the company is scheduled to begin a
project to inject waste water from municipal treatment plants to recharge the
reservoir. This injection project should increase the productivity and extend
the life of this mature steam field.
Below are geothermal reserves and operating data:
1995 1994 1993
------------------------------
Net proved geothermal reserves at year end:
- billion kilowatt-hours 144 143 125
- million equivalent oil barrels 216 215 188
Net daily production
- million kilowatt-hours 16 21 20
- thousand equivalent oil barrels 24 31 30
Net geothermal lands in acres
- proved 20,240 20,240 20,249
- prospective 457,380 457,380 457,943
Net producible geothermal wells 260 261 266
The lower net daily production in 1995 was due to seven months of
discretionary curtailments at The Geysers by the public utility due to an
abundant supply of low cost hydro-power available from record rainfalls and
depressed natural gas prices. Steam production was lower in the Philippines due
primarily to damage to the Tiwi facilities caused by a November typhoon.
Increased production from Indonesian operations partially offset these
decreases.
10
The present value of future net cash flows from proven geothermal reserves at
year-end 1995 was $555 million. The net future cash flows are based on
estimated future revenues less future development and production costs and
income taxes. A 10 percent discount factor was used in calculating the present
value. Estimated future revenues are based on estimated generation of
electricity from proved reserves from existing and new facilities under
development and on actual prices for geothermal steam pursuant to long-term
service and energy sales contracts at year-end. Development and production
costs related to future production are based on year-end cost levels and assume
continuation of existing economic conditions. Income tax is computed by
applying the appropriate year-end statutory tax rates to pretax future cash
flows less recovery of the tax basis of proved properties, and reduced by
applicable tax credits.
The company cautions readers that the data on the present value of future net
cash flows of geothermal reserves are based on many subjective judgments and
assumptions. Different, but equally valid, assumptions and judgments could lead
to significantly different results. Additionally, estimates of physical
quantities of geothermal reserves, power plant efficiency factors, minimum
contract purchase quantities, future rates of production and related prices and
costs for such production are subject to extensive revisions and a high degree
of variability as a result of economic and political changes. Any subsequent
price changes will alter the results and the indicated present value of
geothermal reserves.
DIVERSIFIED BUSINESSES
AGRICULTURAL PRODUCTS
The Agricultural Products business unit manufactures and markets nitrogen-
based fertilizers for wholesale markets to the western United States and to the
Pacific Rim.
Unocal's largest fertilizer manufacturing facility, located in Kenai, Alaska,
produces ammonia and urea for agricultural applications using natural gas as
feedstock. The natural gas comes primarily from nearby Unocal-operated fields.
This manufacturing operation is supported by a system of West Coast terminals
and product upgrading plants in Kennewick, Washington and West Sacramento,
California.
In 1995, Agricultural Products benefited from significant increases in
ammonia and urea products sales prices primarily due to high demand in
international markets. This was partially offset by higher manufacturing costs
due to start-up expenses associated with an ammonia plant located in Finley,
Washington. Plant improvements were completed and production began in
December 1995. Production from the Finley plant is targeted for domestic
markets which will allow more of the Kenai, Alaska facility's marketable
production of ammonia and urea to target international markets.
CARBON AND MINERALS
The Carbon and Minerals business unit produces and markets petroleum coke
(outside the West Coast), graphites, solvents, and specialty minerals.
Green petroleum coke, a by-product of refining operations, is calcined for
use in aluminum production and other industrial applications. Green coke is
also sold in the United States and overseas as fuel. A calcining plant is
located adjacent to The UNO-VEN Company's (UNO-VEN) Chicago Refinery.
The Needle Coker Company, a joint venture equally owned by Unocal and UNO-
VEN, produces calcined needle coke at facilities also adjacent to UNO-VEN's
Chicago Refinery. Needle coke is a high quality petroleum coke used to make
graphite electrodes for the production of steel in electric arc furnaces.
Through its wholly owned subsidiary, Poco Graphite, Inc., the company
manufactures premium graphite materials for use in electrodes, semiconductors,
biomedical products and other advanced technologies. The subsidiary experienced
its ninth consecutive year of sales growth.
Unocal's mineral operations are carried out by Molycorp, Inc., a wholly owned
subsidiary, which mines, processes and markets lanthanides. It operates a
lanthanide mine and mill and a chemical plant at Mountain
11
Pass, California. Lanthanides have a variety of applications in industrial and
electronic products, including high-strength magnets, television phosphors, and
automobile and refining catalysts. Lanthanide markets have become highly
competitive over the past 10 years with the entry of suppliers from China, Japan
and Eastern Europe. Molycorp continued to focus its production on cerium, the
demand for which is growing for use in automobile catalytic converters,
polishing powders and glass to help filter ultraviolet radiation.
Molycorp also owns an approximate 45 percent interest in Companhia Brasileira
de Metalurgia e Mineracao, a Brazilian company which is the world's largest
niobium producer. Niobium is used as a hardening agent in steel.
Molycorp, in response to increased molybdenum demand and prices, is expected
to resume operations in late 1996 at its molybdenum mine and mill in Questa, New
Mexico. After being idle for approximately ten years, this mine is expected to
produce about 14 million pounds per year of molybdenum when it reaches full
production. Molybdenum is used in the production of stainless and alloy steels,
nonferrous alloys, pigments, lubricants and catalysts.
PIPELINES
Pipelines principally includes the company's equity interests in petroleum
pipeline companies in undivided interest systems and wholly owned pipeline
systems throughout the United States, other than California. As of December 31,
1995, Unocal had interests in more than 7,200 miles of refined product pipelines
and 6,500 miles of crude oil pipelines through these investments.
Included in Unocal's pipeline investments are: 1) the Colonial Pipeline
Company in which the company holds a 20.75 percent equity interest. The
Colonial Pipeline system runs from Texas to New Jersey and transports a
significant portion of all petroleum products consumed in its 13-state market
area; and 2) the Unocal Pipeline Company, a wholly owned subsidiary of Unocal,
holds a 1.36 percent participation interest in the TransAlaska Pipeline System
(TAPS) which transports crude oil from the North Slope of Alaska to the port of
Valdez in Alaska. In 1995, TAPS oil throughput averaged 1.6 million barrels per
day, of which Unocal's share was approximately 22,000 barrels per day.
In February 1996, Unocal sold its 15 percent interest in the Platte Pipeline
Company, which owns 1,282 miles of crude oil pipeline.
OTHER OPERATIONS
Unocal's real estate activities include the development and sale of certain
real estate assets for industrial, commercial and residential purposes.
Unocal, through a subsidiary, owns a 50 percent interest in UNO-VEN, which
owns and operates a refinery near Chicago, Illinois, 11 product terminals, two
lubricant terminals and a lube oil blending and packaging plant. UNO-VEN has a
long-term crude oil supply agreement with a subsidiary of Petroleos de
Venezuela, S.A. (PDVSA), which provides 135,000 barrels per day of crude oil as
feedstock for the refinery through the year 2009. The purchase prices of the
crude oil are tied to refined product prices at the time of delivery. While this
arrangement limits UNO-VEN's refining margins, it has provided UNO-VEN with
earnings stability. All products produced from its refinery operations are
marketed under the "76" trade name. UNO-VEN supplies, directly or through
jobbers and marketers, approximately 2,500 service stations. UNO-VEN's wholesale
marketing and bulk distribution network consists of 250 terminals.
UNO-VEN is an Illinois general partnership. The managing general partners,
each with a 50 percent interest, are Midwest 76, Inc., a subsidiary of Union
Oil, and a subsidiary of PDV America Corp., (Petroleos de Venezuela America
Corp.). PDV America Corp. is a wholly owned indirect subsidiary of PDVSA.
12
COMPETITION
The energy industry is highly competitive. Unocal competes with numerous
companies in all phases of its petroleum operations. The company competes with
other producers and marketers of non-petroleum energy.
Competition for finding, developing and producing oil and gas resources
occurs in bidding for domestic prospective leases or foreign exploration rights,
acquisition of geological, geophysical and engineering knowledge, and the cost-
efficient development and production of proved oil and gas reserves. The future
availability of prospective domestic leases is subject to competing land uses
and federal, state and local statutes and policies. The company's geothermal
and power operations are in competition with producers of other energy
resources.
Competition also exists in the manufacture, distribution and marketing of
petroleum products. In the refining segment, the ability to produce high-value
products at a competitive cost, while meeting regulatory standards, is of
primary importance. On the marketing side, price, customer service, advertising
and new product development are the major factors affecting competition. In the
Agricultural Products business, the key competitive factors for the company's
fertilizer products are prices, cost and availability of natural gas and other
raw materials.
EMPLOYEES
As of December 31, 1995, Unocal had 12,509 employees compared to 13,127 a
year ago. The decrease principally reflects the impact of business divestments
and a two-year restructuring program. Of the total employees, 2,176 were
represented by various labor unions.
Collective bargaining agreements covering represented employees at Unocal's
refineries and various other facilities were entered into during 1996. Most of
these new labor agreements are for three-year terms. See page 67 of this report
for information on total payroll and employee benefits costs.
GOVERNMENT REGULATION
Certain interstate crude oil pipeline subsidiaries of Unocal are regulated
(as common carriers) by the Federal Energy Regulatory Commission (FERC). As a
lessee from the United States government, Unocal is subject to Department of the
Interior regulations covering activities onshore and on the Outer Continental
Shelf (OCS). In addition, state regulations impose strict controls on both
state-owned and privately-owned lands.
Some federal and state bills would, if enacted, significantly and adversely
affect Unocal and the petroleum industry. These include the imposition of
additional taxes, land use controls, prohibitions against operating in certain
foreign countries and restrictions on development.
Regulations promulgated by the Environmental Protection Agency (EPA), the
Department of the Interior, the Department of Energy, the State Department, the
Department of Commerce and other government agencies are complex and subject to
change. New regulations may be adopted. The company cannot predict how
existing regulations may be interpreted by enforcement agencies or court
rulings, whether amendments or additional regulations will be adopted, or what
effect such changes may have on its business or financial condition.
ENVIRONMENTAL REGULATION
Federal, state and local laws and provisions regulating the discharge of
materials into the environment or otherwise relating to environmental protection
have a continuing impact on the company's operations. Significant federal
legislation applicable to the company's operations includes the following: the
Clean Water Act, as amended in 1977; the Clean Air Act, as amended in 1977 and
1990; the Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act of 1976, as amended in 1984; the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended in 1986; the Toxic
Substances Control Act of 1976, as amended in 1986; and the Oil Pollution Act of
1990. Various state and local governments have adopted or are considering the
adoption of similar laws and regulations.
13
The California Air Resources Board and the federal government have both
adopted new standards for gasoline. The Federal Clean Air Act Amendments of
1990 required the manufacture and sale of reformulated gasolines in areas not
meeting specified air quality standards commencing January 1, 1995. These
requirements apply to the nine areas which have the worst ozone pollution,
including Los Angeles and San Diego. The California Air Resources Board has
established stricter standards than those imposed by the federal rules. These
standards for reformulated gasolines are to become effective for fuel production
at refineries commencing March 1, 1996 and for retail sales commencing on June
1, 1996. Modifications to the company's refineries to meet these regulatory
standards were performed between 1993 and 1995 at a cost of approximately $400
million.
The Air Quality Management Plan for the Los Angeles Basin, as adopted, and
the Clean Air Act Amendments could, by the year 2000, significantly and
adversely affect all of the company's petroleum operations in the Los Angeles
area, including its refining operations located near the Los Angeles harbor and
in Carson. The company believes it can continue to meet the requirements of
existing laws and regulations, although changes in operating procedures and the
acquisition of additional pollution control facilities may be necessary to meet
future regulatory standards.
The company has been a party to a number of administrative and judicial
proceedings under federal, state and local provisions relating to environmental
protection. These proceedings include actions for civil penalties or fines for
alleged environmental violations, permit proceedings including hearing requests
into the issuance or modification of National Pollution Discharge Elimination
System (NPDES) permits, requests for temporary variances from air pollution
regulations for refinery operations, and similar matters. The company has also
joined or intervened with the American Petroleum Institute, the Western States
Petroleum Association and with other oil companies in actions relating to
guidelines and proposed and final regulations of the EPA, the Department of the
Interior and other agencies.
For information regarding the company's environmental-related capital
expenditures and charges to earnings and possibe future environmental exposure,
see Legal Proceedings below and the Environmental Matters section of
Management's Discussion and Analysis on pages 25 through 27 of this report.
ITEM 3 - LEGAL PROCEEDINGS
There is incorporated by reference the information regarding environmental
remediation reserves in Note 17 to the consolidated financial statements on page
50, the discussion thereof in the Environmental Matters section of Management's
Discussion and Analysis, on pages 25 through 27 and the information regarding
contingent liabilities in Note 18 to the consolidated financial statements on
pages 50 and 51 of this report.
(1) The matter previously reported regarding claimed violations concerning
hazardous waste management at the company's Parachute Creek Oil Shale
facility in Colorado has been settled.
(2) The matters previously reported regarding claimed NPDES permit violations
in Cook Inlet have been settled. The company paid $140,000 to EPA;
$499,000 to Greenpeace; and $36,524 to the Trustees for the State of
Alaska.
14
(3) The matter previously reported regarding the complaint filed by the Ventura
County District Attorney for several alleged violations related to
discharges of crude oil into state waters has been settled for a total
payment of $27,000.
(4) In December 1994, the company received notice of alleged violations from
the EPA, Region IX, relating to New Source Performance Standards at its Los
Angeles Refinery - Carson Plant. Civil penalties in excess of $100,000
could be imposed. Proceedings and negotiations are continuing.
(5) In the litigation previously reported as Forty-Niner Truck Plaza Inc., et
--------------------------------
al. v. Unocal Corporation, et al. in Superior Court for Sacramento County,
-------------------------------
the trial court granted the company's motion for a new trial. That order is
now on appeal. This matter does not appear to have a potentially material
effect on the company's financial condition or results of operations, and
no further reports will be made.
(6) On April 13, 1995, Atlantic Richfield Company, Chevron U.S.A., Inc., Exxon
Corporation, Mobil Oil Corporation, Shell Oil Products Company and Texaco
Refining and Marketing, Inc. filed a lawsuit against the company regarding
U.S. Letters Patent No. 5,288,393 issued to the company in 1994 and
covering several patent claims for the composition of reformulated
gasoline. (Atlantic Richfield Company, et al. v. Unocal Corporation, et
------------------------------------------------------------
al., U.S.D.C., C.D. California, No. CV-95-2379-RG). The plaintiffs allege
----
that the company's patent is invalid and unenforceable, and they seek
declaratory relief for equitable estoppel and an injunction against
enforcement. The company has filed its answer as well as a counterclaim
for patent infringement, lost royalties and further injunctive relief.
Discovery and pretrial proceedings are continuing.
(7) Between August 22 and September 6, 1994, a chemical known as "Catacarb" was
released into the environment at the company's San Francisco Refinery near
Rodeo, California. Persons in the surrounding area have claimed that they
were exposed to the chemical in varying degrees. Since September 22, 1994,
42 lawsuits have been filed by or on behalf of all persons, alleged
to be several thousand, claiming that they or their property were adversely
affected by the releases. Thirty-nine of the lawsuits have been
consolidated in the Superior Court for Contra Costa County under the
caption In Re Unocal Refinery Litigation (Santos, et al. v. Unocal
----------------------------------------------------------
Corporation), Case No. 94-04141. The First Amended Model Complaint in this
------------
consolidated action, filed on February 1, 1996, on behalf of individual
plaintiffs and purported classes of plaintiffs, alleges personal injury,
emotional distress, and increased risk of future illness on behalf of the
named plaintiffs and all persons present in and around or downwind from the
San Francisco Refinery, and property damage and loss or diminution of
property value on behalf of all owners of real and personal property in the
vicinity of the Refinery, resulting from the release of Catacarb by the
Refinery. Certain individual plaintiffs allege injury from alleged
subsequent releases at the Refinery of hydrogen sulfide and other
chemicals. The Model Complaint seeks compensatory and punitive damages in
unspecified amounts, equitable relief including the creation of a fund for
medical monitoring and treatment of plaintiffs and members of the purported
classes, statutory penalties and other relief.
The company is also presently in discussions with the EPA to settle an
administrative Complaint issued on November 28, 1995, seeking approximately
$490,000 in civil penalties for failure to report timely the Catacarb
release and a subsequent release of hydrogen sulfide. All state civil and
criminal governmental investigations, claims and charges have been settled.
(8) Citizens for a Better Environment, et al. v. Union Oil Company of
-----------------------------------------------------------------
California, No. C94-0712, U.S. D.C., N.D. California, filed on March 2,
----------
1994, alleges that as of February 28, 1994, the company's San Francisco
Refinery was in violation of the selenium limit in its NPDES permit. The
company denies that any violations have occurred. By a prior Cease and
Desist Order issued after notice and hearing, the permitting agency, the
California Regional Water Quality Control Board, deferred to July 1998, the
effective date of the selenium limitation in question. The company's motion
to dismiss the Citizens action was denied by the trial court. The
--------
company believes that the court's ruling is in error and that it conflicts
15
with precedent from two different federal circuits. The Ninth Circuit
Court of Appeals has accepted the appeal of the trial court decision. That
appeal is now pending and oral arguments are scheduled for April 8, 1996.
(9) In September 1994, the California Regional Water Quality Control Board
issued a Cleanup or Abatement Order relating to prior underground petroleum
leaks along Front Street and vicinity in the town of Avila Beach,
California. In October 1994, the company initiated an administrative
appeal proceeding and a related civil suit in the Superior Court for San
Luis Obispo County for declaratory and injunctive relief and writ of
mandate with respect to the soil and shallow ground water standard to be
applied to the remediation. The company has been working with local
agencies and property owners for several years regarding the hydrocarbon
presence in this location. Various related civil suits have been filed or
threatened.
(10) On March 23, 1994, a civil suit seeking various forms of penalties,
restitution and remediation regarding contamination at the Guadalupe oil
field was filed against the company by the California Attorney General on
behalf of the Department of Fish and Game, the Regional Water Quality
Control Board and the Department of Toxic Substances Control (People v.
---------
Union Oil Company of California, Superior Court for San Luis Obispo County,
--------------------------------
Civil No. 75194). The complaint alleges several categories of violations,
namely, discharge into marine and state waters, failure to report
discharge, destruction of natural resources, failure to warn, exposure
to known carcinogens, public nuisance, unauthorized disposal of hazardous
waste, and labeling violations for "recycled" diluent material. Injunctive
relief and civil penalties are demanded for the various claimed violations,
as well as prejudgment and postjudgment interest, costs and reasonable
attorney fees. Several related follow-on private civil actions have been
filed, including a purported class action, or threatened, each seeking
damages and various other forms of relief similar to those sought by the
Attorney General.
Trial settings have been vacated on motion of the California Attorney
General. The next status conference is scheduled for July 19, 1996.
(11) In September 1994, the U.S. Minerals Management Service (MMS) issued an
administrative compliance order assessing the company approximately $21
million in royalty fees and interest associated with FERC Order No. 94.
The company is presently negotiating with the MMS for a settlement of
outstanding issues which could include this MMS assessment.
(12) In June 1994, the EPA filed an administrative complaint against the company
seeking $252,000 in civil penalties for alleged late filing of certain
reports regarding gas processing plant inventories under the Toxic
Substances Control Act (TSCA) Inventory Update Rule. The company notified
the EPA that no reports for the gas processing facilities had been filed in
1991. Reports, due every four years, were filed in March 1994. No public
safety or environmental harm could be associated with these delayed reports
or any alleged technical violation of the reporting rules, even if the
rules are applicable. The Gas Processors Association has urged an amnesty
for past alleged violations and is seeking EPA clarification of application
of these rules to natural gas streams for the next TSCA Inventory Update
due later this year. The company has appealed this complaint.
(13) On February 9, 1996, Bridas Corporation filed a petition in the District
Court of Fort Bend County, Texas alleging that the company and other
defendants conspired to and did tortiously interfere with certain
agreements and prospective business relations between Bridas and the
government of Turkmenistan (Bridas Corporation v. Unocal Corporation,
-----------------------------------------
et al., Case No. 94144, 268th Judicial District). The Plaintiff alleges
------
that as a result of the defendants' conduct, it has lost the ability to
timely and reasonably develop, produce, transport, export and sell its
interest in the Yashlar area of Turkmenistan, an area that includes the
Yashlar field. The plaintiff also claims it has lost the opportunity to
participate in a Turkmenistan-Pakistan pipeline project. The plaintiff
seeks unspecified actual damages as well as punitive damages, plus interest
at the highest lawful rate. On March 11, 1996, the defendants filed a
notice of removal of the case to U.S. District Court, Southern District of
Texas, Houston Division (Civ. No. H-906-0824).
16
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of Unocal Corporation as of March 1,
1996.
NAME, AGE AND PRESENT
POSITION WITH UNOCAL BUSINESS EXPERIENCE DURING PAST FIVE YEARS
- ---------------------------------------------------------------------------------
ROGER C. BEACH, 59 Mr. Beach has been Chairman of the Board
Chairman and Chief Executive of Directors since April 1995 and Chief
Officer Executive Officer since 1994. He heads the
Director since 1988 Office of the Chief Executive Officer, formed in
Chairman of Management and 1994. He served as President and Chief
Executive Committees Operating Officer from 1992 to 1994. Mr. Beach
was President of the Unocal Refining &
Marketing Division from 1986 to 1992 and from
1987 to 1992 also served as Senior Vice
President.
- ---------------------------------------------------------------------------------
JOHN F. IMLE, JR., 55 Mr. Imle has been President since 1994.
President He directs the company's growth activities and
Director since 1988 Planning Department from the Office of the
Member of Management Chief Executive Officer. From 1992 to 1994 he
Committee served as Executive Vice President and
President of the Energy Resources Division,
which encompassed the company's worldwide oil,
gas and geothermal businesses. Mr. Imle was
Senior Vice President from 1988 until his
appointment as Executive Vice President.
- ---------------------------------------------------------------------------------
NEAL E. SCHMALE, 49 Mr. Schmale has been Chief Financial Officer
Chief Financial Officer since 1994, when he joined the Office of the
Director since 1991 Chief Executive Officer. He served as Senior
Member of Management Vice President of the company from 1988 to
Committee 1994. Mr. Schmale was President of the
Petroleum Products & Chemicals Division (which
encompassed refining, marketing, chemicals and
minerals operations) from 1992 to 1994. He was
President of the Unocal Chemicals & Minerals
Division from 1991 to 1992.
- ---------------------------------------------------------------------------------
LAWRENCE M. HIGBY, 50 Mr. Higby has been a Group Vice President and
Group Vice President and President of the company's 76 Products Company
President, 76 Products business segment since 1994. From 1992 to 1994,
Company he was Executive Vice President, Marketing for
the Los Angeles Times and Chairman for the
Orange County Edition. In 1991, he was Senior
Vice President, Consumer Marketing for the Los
Angeles Times and President of the Orange County
Edition. Prior to 1991, he was Senior Vice
President for Marketing, Programming and Sales
for Times Mirror Cable Television.
- ---------------------------------------------------------------------------------
JOHN W. SCHANCK, 44 Mr. Schanck has been Group Vice President, Oil
Group Vice President, Oil and Gas Operations, since 1994. From 1992 to
and Gas Operations 1994, he was Vice President, Worldwide
Exploration, of the Energy Resources Division.
From 1989 through 1991, he was President of
Unocal Canada Limited.
- ---------------------------------------------------------------------------------
DENNIS P.R. CODON, 47 Mr. Codon has been Vice President, General
Vice President, General Counsel and Chief Legal Officer since 1992.
Counsel, He has been Corporate Secretary since 1990.
Chief Legal Officer, and He served as Deputy General Counsel in 1990
Corporate and various other positions in the Law
Secretary Department prior thereto.
- ---------------------------------------------------------------------------------
CHARLES S. McDOWELL, 54 Mr. McDowell has been a Vice President since
Vice President and 1991 and Comptroller since 1986.
Comptroller
The bylaws of the company provide that each executive officer shall hold
office until the annual organizational meeting of the Board of Directors held
June 3, 1996 and until his successor shall be elected and qualified, unless he
shall resign or shall be removed or otherwise disqualified to serve.
17
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
1995 Quarters 1994 Quarters
----------------------------------- -----------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
------------------------------------------------------------------------------------------------------------------------
Market price per common share - high $29-1/8 $30-1/8 $30-1/2 $29-7/8 $ 30 $29-5/8 $30-3/4 $29-7/8
- low 25-1/4 27-5/8 26-7/8 24-3/4 24-7/8 24-3/8 26-5/8 25-5/8
Cash dividends paid per common share .20 .20 .20 .20 .20 .20 .20 .20
------------------------------------------------------------------------------------------------------------------------
Prices in the foregoing table are from the New York Stock Exchange Composite
Transactions listing. On March 15, 1996, the high price per share was $32 and
the low price per share was $31-5/8.
Unocal common stock is listed for trading on the New York, Pacific and
Chicago Stock Exchanges in the United States, on the Stock Exchange of Singapore
and on the Basel, Geneva and Zurich Stock Exchanges in Switzerland.
As of March 15, 1996, the approximate number of holders of record of Unocal
common stock was 35,051 and the number of shares outstanding was 247,860,562.
Unocal's quarterly dividend declared has been $.20 per common share since the
third quarter of 1993. The previous quarterly dividend rate was $.175 per share
since the third quarter of 1989. The company has paid a quarterly dividend for
80 consecutive years.
ITEM 6 - SELECTED FINANCIAL DATA - SEE PAGE 67
18
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED RESULTS
Millions of Dollars 1995 1994 1993
- ------------------------------------------------------------------
Net earnings excluding special items: $ 297 $ 300 $ 347
Special items:
Cumulative effect of accounting changes - (277) (130)
Impairment of long-lived assets (SFAS (53) - -
No. 121)
Litigation (37) (43) (30)
Environmental remediation provisions (26) (99) (10)
Write-downs of assets (12) (44) (12)
Asset sales 71 8 66
Provision for abandonment and
remediation of the Guadalupe oil field - (16) -
Restructuring costs - (15) -
Other 20 33 (18)
-----------------------------------------------------------------
Net earnings (loss) including
special items $ 260 $(153) $ 213
--------------------------
The 1995 earnings excluding special items reflected lower margins for refined
petroleum products due primarily to lower refinery production, lower worldwide
crude oil production, lower average sales prices for natural gas and lower
geothermal steam production. Partially offsetting these negative factors were
higher worldwide average crude oil sales prices and higher average sales prices
for agricultural products.
Comparing the 1994 operating results with 1993, the reduction in earnings
reflected the adverse effects of lower average crude oil and natural gas prices
and lower margins in West Coast refining and marketing operations. These
negative factors were partially offset by higher natural gas production, higher
foreign crude oil production, stronger agricultural products earnings, and lower
domestic oil and gas operating and depreciation expenses.
In the above special items table, the Other category for 1995 included
benefits of $34 million from a bankruptcy settlement with Columbia Gas
Transmission Corporation (Columbia settlement) and $18 million from a settlement
to recover lease bonus and rentals relating to Outer Continental Shelf leases
offshore Florida and Alaska (OCS Settlement). Partially offsetting these
benefits were charges of $18 million for a deferred tax adjustment and $14
million for a receivable write-down. For 1994, the amount included a $24
million gain from the settlement of a lawsuit against Mesa Petroleum and a $9
million benefit related to the cancellation of the lease on the Unocal
headquarters building in downtown Los Angeles. For 1993, the amount included a
$14 million charge for the effect of the federal tax rate change on deferred
taxes and a $4 million provision for the closure of the company's credit card
center.
REVENUES
Consolidated revenues in 1995 were $8.4 billion, up $460 million from year-
end 1994 and up $81 million from 1993. The increase from 1994 was primarily due
to higher petroleum product sales volumes, agricultural products average sales
prices and gains on sales of assets. The decrease in 1994 from 1993 was mainly
due to lower refined product prices and volumes.
COSTS AND OTHER DEDUCTIONS
Adjusted to exclude special items, crude oil and product purchases, operating
expense, and selling, administrative and general expense totaled $5.3 billion in
1995, compared with $5.0 billion in 1994 and $5.3 billion in 1993. The increase
in 1995 was primarily due to increased expense for crude oil and product
purchases resulting from higher average crude oil prices and increased purchases
of refined products for resale due to extended maintenance activities at the
refineries.
19
The higher depreciation, depletion and amortization expense in 1995 was due
to an $87 million charge resulting from the adoption of Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," as described in Note
2 to the consolidated financial statements.
The company's interest expense increased in 1995 due primarily to higher
debt.
OIL AND GAS EXPLORATION AND PRODUCTION
This segment is engaged in the exploration for, and the production and
marketing of crude oil, condensate, natural gas and natural gas liquids.
Millions of Dollars 1995 1994 1993
- ------------------------------------------------------------------
Net earnings excluding special items $ 395 $ 406 $ 422
Special items:
Columbia and OCS settlements 52 - -
Asset sales 35 3 23
Impairment of long-lived assets (SFAS (53) - -
No. 121)
Write-downs of assets (8) (15) -
Provision for abandonment and
remediation of the Guadalupe oil field - (16) -
Other - - (8)
-----------------------------------------------------------------
Net earnings including special items $ 421 $ 378 $ 437
========================
The 1995 earnings excluding special items reflected lower worldwide crude oil
production and lower average domestic natural gas sales prices. Worldwide crude
oil production in 1995 averaged 240,400 barrels per day, down from 259,800 in
1994 and 246,000 in 1993. The decrease was mainly due to natural production
declines and the sale of nonstrategic domestic properties. The company's average
domestic sales price for natural gas was $1.56 per thousand cubic feet, down
from $1.78 in 1994 and $1.97 in 1993.
Positive factors in 1995 were higher average worldwide crude oil sales
prices, lower effective foreign income tax rates and lower domestic operating
expense. Unocal's average worldwide sales price for crude oil was $15.40 per
barrel in 1995, up from $13.63 in 1994 and $14.21 in 1993. The decrease in
domestic operating expense was primarily due to sales of nonstrategic domestic
properties and cost reductions. In 1995, the company reduced its worldwide
average production costs per barrel of oil equivalent to $2.94, compared with
$3.00 for 1994 and $3.40 for 1993. Domestic natural gas production averaged
1,103 million cubic feet per day in 1995, up from 1,095 in 1994 and 952 in 1993.
The accelerated development program initiated in 1993, primarily in the Gulf of
Mexico, has allowed Unocal to keep its domestic natural gas production stable
despite the continuing sales of oil and gas properties.
Comparing the adjusted 1994 results with 1993, the decrease reflected lower
worldwide natural gas and crude oil sales prices and lower domestic crude oil
production. The decrease in production was mainly due to asset sales and natural
declines. Positive factors in 1994 were higher natural gas production, higher
foreign crude oil production and lower domestic operating expense. The increase
in foreign crude oil production was due to new production in Indonesia and the
Netherlands. The 1994 results also benefited from a $38 million reduction in
depreciation and depletion expense as a result of the change in accounting
policy for recognizing the reduction in value of the company's producing
properties, as described in Note 2. The pro forma effect of this accounting
change on 1993 results would have been an increase in net earnings of $31
million.
REFINING, MARKETING AND TRANSPORTATION -- 76 PRODUCTS COMPANY
This business segment is principally responsible for the company's West Coast
petroleum refining operations, marketing and transportation of refined petroleum
products, and the manufacturing and marketing of petroleum coke.
20
Millions of Dollars 1995 1994 1993
- -----------------------------------------------------------------
Net earnings excluding special items $ 10 $ 37 $ 92
Special items:
Asset sales 1 1 -
Write-downs of assets - (20) (10)
Litigation - (2) -
Environmental remediation provision - (2) -
Federal tax rate change - - (7)
Closing of the credit card center - - (4)
----------------------------------------------------------------
Net earnings including special items $ 11 $ 14 $ 71
======================
The lower 1995 earnings excluding special items reflected lower refined
product margins and lower refinery production volumes due to extended
maintenance and modification activities early in the year. These negative
factors were partially offset by California business tax credits of $18 million
(net of federal tax effect) related to refinery modifications to produce
reformulated fuels and by lower operating and selling expenses.
Petroleum product sales volumes were 269,000 barrels per day in 1995, up from
252,000 barrels per day in 1994. Due to scheduled refinery maintenance in
1995, the increased sales volumes and lower margins were principally related to
the outside purchase and resale of refined petroleum products to other than
retail customers.
Comparing 1994 results with 1993, the decrease was principally due to lower
margins resulting from weak selling prices for refined products, which were
partially offset by lower crude oil and product purchase costs.
GEOTHERMAL AND POWER OPERATIONS
This segment is involved in the exploration for, and the production and sale
of geothermal resources for the generation of electricity.
Millions of Dollars 1995 1994 1993
- ----------------------------------------------------------------
Net earnings excluding special items $ 19 $ 32 $ 21
Special items:
Asset sales 7 - 6
Federal tax rate change - - (1)
- ----------------------------------------------------------------
Net earnings including special items $ 26 $ 32 $ 26
======================
The decreased 1995 earnings excluding special items resulted from lower steam
production and prices at The Geysers in Northern California and lower steam
production in the Philippines primarily due to damage to the Tiwi facilities
caused by a November typhoon. The lower production at The Geysers was due to
seven months of discretionary curtailments by the public utility company that
purchases the steam to generate electricity. The curtailments were the product
of abundant supplies of inexpensive hydro-power available from record rainfall
in the western U.S. and depressed natural gas prices. These negative factors
were partially offset by increased production and prices for Indonesian
operations. The increased production resulted from a full year of supplying
steam from the Gunung Salak field to power two 55-megawatt power plants that
began commercial operation during the third quarter of 1994. The power plants
are located on the island of Java and are operated by Indonesia's state utility
company.
Comparing the 1994 operating results with 1993, the increase reflected higher
domestic earnings, primarily due to reduced depreciation expense at The Geysers,
and the start-up of Indonesian operations.
DIVERSIFIED BUSINESSES
Agricultural Products manufactures and markets nitrogen-based fertilizers for
wholesale markets to the western United States and to the Pacific Rim. Carbon
and Minerals produces and markets petroleum coke (other than on the West Coast),
graphites, solvents and specialty minerals. Pipelines principally includes the
company's equity interests in affiliated pipeline companies. Other includes the
development and sale of real estate assets and the company's equity interest in
The UNO-VEN Company, a refining and marketing partnership in the midwestern
United States.
21
Millions of Dollars 1995 1994 1993
- ----------------------------------------------------------------
Net earnings excluding special items
Agricultural Products $ 70 $ 27 $ 19
Carbon and Minerals 52 42 29
Pipelines 66 56 52
Other 6 14 18
- ----------------------------------------------------------------
Total $ 194 $ 139 $ 118
Special items:
Agricultural Products 4 2 (1)
Pipelines - - 2
Other 1 - (2)
- ----------------------------------------------------------------
Net earnings including special items $ 199 $ 141 $ 117
=====================
In 1995, Agricultural Products continued to benefit from significant
increases in ammonia and urea product sales prices primarily due to high demand
in international markets. This was partially offset by higher raw materials
costs and higher manufacturing costs due to start-up expenses associated with an
ammonia plant located in Finley, Washington. Plant improvements were completed
and production began in December 1995. Production from the Finley plant is
targeted for domestic markets. This will allow more of the Kenai, Alaska
facility's marketable production of ammonia and urea to target international
markets.
Comparing the 1994 Agricultural Products earnings with 1993, the increase
reflected considerably higher margins on sales of ammonia and urea products,
particularly in Asian markets.
In 1995, Carbon and Minerals benefited from higher petroleum coke and
lanthanide earnings. The increase in 1994 from 1993 was primarily due to higher
lanthanide earnings.
CORPORATE AND UNALLOCATED
Millions of Dollars 1995 1994 1993
- ------------------------------------------------------------------
Net earnings effect excluding special
items
Administrative and General expense $ (84) $ (70) $ (61)
Net interest expense (178) (174) (193)
Environmental and Litigation expense (29) (48) (43)
Other (30) (22) (29)
- ------------------------------------------------------------------
Total (321) (314) (326)
Special items:
Environmental and Litigation (63) (138) (36)
provisions
Tax adjustments (Other) (18) - (1)
Receivable write-down (Other) (14) - -
Write-downs of assets (Other) (2) (9) -
Asset sales (Other) 21 2 34
Mesa settlement (Other) - 24 -
Restructuring costs (A&G) - (15) -
UOC lease termination (Other) - 9 -
-----------------------------------------------------------------
Net earnings effect including special
items $(397) $(441) $(329)
=======================
The higher Administrative and General expense in 1995 was primarily due to
the income tax effect of allocable expenses to foreign operations for tax
purposes and lower pension income.
Net interest expense represents interest income and expense, net of
capitalized interest. The increase in 1995 was primarily due to higher debt,
while the decrease in 1994 reflected the benefit of refinancing debt at lower
interest rates.
22
The Other category includes all unallocated corporate items and miscellaneous
operations. In addition, this category, especially in prior years, includes the
earnings effects and close-down expenses of businesses that were sold or being
phased-out, such as the company's Process, Technology and Licensing business
(sold in 1995), national auto/truckstop system (sold in 1993), Imperial Valley
geothermal operations (sold in 1993), PureGro chemical operations (sold in
1993), and Southeast marketing operations (phased-out beginning in 1992). This
category also includes corporate items such as tax adjustments and certain
special items noted in the above table.
FINANCIAL CONDITION
Dollars in millions 1995 1994 1993
- --------------------------------------------------------------
Current ratio 1.2 1.2 1.3
Total debt $3,706 $3,466 $3,522
Equity $2,930 $2,815 $3,129
Capital employed $6,636 $6,281 $6,651
Total debt/ capital employed 56% 55% 53%
Floating-rate debt/ total debt 24% 25% 16%
- --------------------------------------------------------------
Cash flow from operating activities, including working capital and other
changes, was $1,277 million in 1995, $1,299 million in 1994 and $1,100 million
in 1993. The 1995 amount included $200 million of proceeds from the sale of
trade receivables (see Note 23 to the consolidated financial statements), $71
million from the Columbia settlement and $34 million from the OCS settlement.
These benefits were more than offset by temporary working capital changes. The
1994 cash flow reflected decreased working capital requirements and significant
income tax refunds received during the year. These benefits were partially
offset by lower operational earnings. The 1993 amount reflected significant
payments for legal and tax settlements and an adjustment for a 1992 crude oil
forward sale.
During 1995, the company generated $204 million in pretax proceeds from sales
of assets, primarily nonstrategic oil and gas properties and the company's
Process, Technology and Licensing business. Proceeds from sales of assets in
1994 totaled $156 million, primarily from the sale of nonstrategic oil and gas
properties. Proceeds of $586 million in 1993 included $218 million from the
sale of the Imperial Valley and other geothermal assets, $172 million from the
sale of the company's national auto/truckstop system and $106 million from the
sale of various nonstrategic oil and gas properties.
In 1995 and 1994, the company also generated approximately $55 million and
$54 million, respectively, in cash from the sale of its common stock, primarily
through the Dividend Reinvestment and Common Stock Purchase Plan.
The company's total debt at year-end 1995 increased by $240 million from a
year ago to $3,706 million. The increase was primarily due to the carrying
values of debt-related currency swaps in the amount of $137 million being
classified as long-term receivables at December 31, 1995. As a result, the
principal amounts of the company's foreign-currency debt, when stated at the
current exchange rates, totaled $350 million, an increase of $130 million from
year-end 1994. The difference between the carrying values of the currency swaps
and the increase in the principal amounts of the related foreign-currency debt
represents the net gain that would have occurred if the currency swaps and debt
had been settled at the end of December 1995. This classification has no effect
on the consolidated cash flow statement.
For 1996, the company expects cash generated from operational earnings and
asset sales to be adequate to meet its operating requirements, capital spending
and dividend payments. In addition, the company has substantial borrowing
capacity to meet unanticipated cash requirements. At December 31, 1995, the
company had approximately $1.5 billion of undrawn commitments under various
credit facilities with major banks.
The company's foreign operations have limited exposures to foreign currency
risks. In most countries, energy products are valued and sold in U.S. dollars,
and foreign currency operating cost exposures have not been significant. In the
Philippines and Thailand, the company is paid for product deliveries in the
local currencies, but at prices indexed to U.S. dollar valuations. Such funds,
less amounts required for local currency-denominated obligations, are converted
to U.S. dollars as soon as practicable and periodically remitted to the U.S.
parent. The company's Canadian subsidiary is paid in Canadian dollars for its
crude oil and natural gas sales. Excess Canadian funds generally have been
invested in other Unocal foreign operations rather than remitted to the U.S.
parent.
23
The company has only limited involvement with derivative financial
instruments. The majority are debt-related and are used to manage interest rate
and foreign currency exchange rate risks. The company also uses futures
contracts to hedge its exposure to fluctuations in petroleum commodity prices.
Such contracts covered less than one percent of the company's annual oil and gas
production at year-end 1995. Authorization from the Board of Directors is needed
before the company hedges more than 15% of its production of oil and gas,
refined products, and of crude oil purchased for refinery supply.
CAPITAL EXPENDITURES
Estimated
Millions of Dollars 1996 1995 1994 1993
- -------------------------------------------------------------------------------
Exploration and Production
Domestic $ 360 $ 497 $ 486 $ 562
Foreign 525 353 310 330
- -------------------------------------------------------------------------------
Total 885 850 796 892
Refining, Marketing and Transportation
76 Products Company 220 422 367 231
Geothermal and Power Operations 110 51 35 48
Diversified Businesses
Agricultural Products 14 55 8 8
Carbon and Minerals 24 12 8 4
Pipeline 9 5 5 4
Other 3 6 12 7
Corporate and Unallocated 35 58 41 55
---------------------------------
Total $1,300 $1,459 $1,272 $1,249
=================================
Capital spending in 1995 on foreign oil and gas exploration and production
was up 14 percent compared with 1994, primarily reflecting increased
expenditures in Myanmar, Indonesia, the Netherlands and Azerbaijan. The $422
million spent by 76 Products Company during 1995 primarily reflected refinery
upgrades to complete environmental requirements for reformulated gasoline
required by the California Air Resources Board, and the addition of refinery
units to increase production of higher value products. Capital spending on
geothermal energy projects in 1995 primarily focused on development work at the
Salak field on the island of Java and exploration drilling on the island of
Sumatra, in Indonesia.
The forecasted 1996 capital expenditures will focus on development of
overseas oil and gas projects, particularly in Myanmar, Thailand, Indonesia and
Azerbaijan. This capital plan reflects Unocal's continued emphasis on energy
development projects overseas with higher potential rates of return.
The foreign petroleum exploration and production capital spending plan is up
49 percent from the 1995 amount. A major focus of this spending will be the
Yadana field development and pipeline project offshore Myanmar. This natural gas
project is expected to be in operation by mid-1998. In Thailand, the company
plans to develop its existing fields in order to increase natural gas production
capacity, as a second pipeline from the Gulf of Thailand to shore is being
constructed by the Thai government. In Indonesia, the company plans to further
develop new oil and gas reserves offshore East Kalimantan and accelerate its
successful exploratory drilling program by drilling 15 to 25 exploratory wells
in known producing basins as the first phase of a 65-well, multi-year program.
Another important overseas project is in the Caspian Sea, offshore Azerbaijan.
Unocal is a member of an international consortium that is moving forward with a
development program to begin initial oil production by mid-1997.
The Louisiana/Gulf of Mexico area accounts for 64 percent of the 1996
domestic capital budget, as the company moves ahead with development of key
natural gas projects.
The capital spending plan for petroleum exploration and production includes
$230 million for worldwide exploration. Of this, $170 million, or 74 percent,
is planned for projects near existing operations that have a high potential for
success.
24
Planned capital expenditures for 76 Products Company in 1996 are down 48
percent from 1995. The allocated capital for this segment has been significantly
reduced since refinery modifications have been completed to manufacture
California-mandated reformulated gasoline. Of the 1996 amount, about $95 million
is planned for marketing operations, mostly for the addition of new profit
centers to existing locations, such as convenience stores, car washes, quick-
service restaurants and car maintenance services. Another $85 million is planned
for the company's California refineries on projects to enhance profitability and
meet environmental regulations.
Capital expenditures for Geothermal and Power Operations are expected to more
than double in 1996, focusing on projects in Indonesia. The company expects to
accelerate development of resource production facilities at the Salak field and
conduct additional exploration at the Sarulla contract area on the island of
Sumatra. The company also expects to be a 50 percent owner in a venture that
expects to build and operate power plants at the Salak field that will utilize
its steam production.
The decrease in Agricultural Products capital spending in 1996 reflects
reduced expenditures for the startup of the Finley, Washington, ammonia
manufacturing plant. The planned increase in capital spending for Carbon and
Minerals reflects anticipated projects at the Mountain Pass, Chicago Carbon and
Poco Graphite facilities.
ENVIRONMENTAL MATTERS
Unocal continues to make substantial capital and operating expenditures for
environmental protection and to comply with federal, state and local laws and
provisions regulating the discharge of materials into the environment. In many
cases, investigatory or remedial work is now required at various sites even
though past operations followed practices and procedures that were considered
acceptable under environmental laws and regulations, if any, existing at the
time.
In 1995, the company recorded approximately $230 million in environment-
related capital expenditures, compared with an average of approximately $160
million per year for the prior three years. Estimated 1996 capital expenditures
for environment-related costs are $90 million. The capital expenditures for
1994 and 1995 included significant amounts for refinery modifications to
manufacture reformulated gasoline for the California market. No significant
capital expenditures related to reformulated gasoline are anticipated in 1996.
The amount charged to 1995 earnings for remediation costs and for operating,
maintenance and administrative costs to maintain environmental compliance was
approximately $170 million, and such costs averaged approximately $270 million
per year for the prior three years, including $370 million in 1994. The amount
charged to 1994 earnings included provisions of $187 million for certain known
future environmental remediation costs, of which $152 million was recorded in
the fourth quarter of 1994. The 1994 fourth quarter provision was primarily the
result of an extensive and ongoing review by the company of its reserves for
environmental assessment/remediation costs and its procedures for monitoring
such reserves. In 1995, the company's continuing review identified additional
future remediation costs which resulted in provisions of $45 million that were
included in the amount charged to 1995 earnings.
At December 31, 1995, the company's reserves for environmental remediation
obligations totaled $214 million, of which $83 million was included in other
current liabilities. The total reserve amount is grouped into five categories
and discussed below.
SUPERFUND AND SIMILAR SITES. At year-end 1995, Unocal had received
notification from the federal Environmental Protection Agency that the company
may be a potentially responsible party (PRP) at 40 sites and may share certain
liabilities at these sites. In addition, various state agencies and private
parties had identified 30 other similar PRP sites that may require investigation
and remediation. Of the total, the company has denied responsibility at 2 sites
and at another 13 sites the company's liability, although unquantified, appears
to be de minimis. The total also includes 25 sites which are under
investigation or in litigation, for which the company's potential liability is
not presently determinable. Of the remaining 30 sites, where probable costs can
be reasonably estimated, reserves of $32 million had been established for future
remediation and settlement costs. These 70 sites are exclusive of 44 sites
where the company's liability has been settled or where the company has no
evidence of liability and there has been no further indication of liability by
government agencies or third parties for at least a 12-month period.
25
Unocal does not consider the number of sites for which it has been named a
PRP as a relevant measure of liability. Although the liability of a PRP is
generally joint and several, the company is usually just one of several
companies designated as a PRP. The company's ultimate share of the remediation
costs at those sites often is not determinable due to many unknown factors as
discussed in Note 18 to the consolidated financial statements. The solvency of
other responsible parties and disputes regarding responsibilities may also
impact the company's ultimate costs.
FORMER COMPANY-OPERATED SITES. Reserves of $35 million had been established
for this category of sites. Of the total, $14 million was for approximately 190
service station sites on leased properties at which operations have ceased and
which the company is obligated to remediate before returning them to the owners.
Also included was $12 million for approximately 230 service station sites that
the company previously owned or leased. The current owners of such properties
are holding the company responsible for environmental remediation costs.
COMPANY FACILITIES SOLD WITH RETAINED LIABILITIES. This category had
reserves of $71 million for accrued environmental liabilities related to major
company assets that were sold in prior years. Included are the company's former
auto/truckstop facilities, a former mine site in Wyoming, industrial chemical
and polymer sites and agricultural chemical sites. In each sale, the company
retained a contractual remediation or indemnification obligation and is
responsible only for certain environmental problems associated with its past
operations. The reserves represent presently estimated future costs for
investigation/feasibility studies and identified remediation work as a result of
claims made by buyers of the properties.
Also included are reserves for the remediation of certain facilities which
were transferred to The UNO-VEN Company in 1989 in connection with its
formation. The facilities included the Chicago Refinery and related product
terminals and service stations. Under the UNO-VEN Asset Purchase and
Contribution Agreement, the company retained certain environmental liabilities
that would require Unocal to either manage remediation work or reimburse UNO-VEN
for remediation costs resulting from valid environmental claims. The agreement
required all claims to be filed by November 30, 1995. The company has not
completely evaluated the additional claims made by UNO-VEN near or on the
November 30, 1995 deadline; however, it does not anticipate that any additional
material liabilities beyond the current reserves will be incurred for these
claims.
INACTIVE OR CLOSED COMPANY FACILITIES. Reserves of $57 million had been
established for these types of facilities. Major sites included in this
category are the former Beaumont refinery in Texas and the shale oil project and
a chemical facility in Colorado. Also included in this category is the Questa
molybdenum mine in New Mexico. In the second quarter of 1995, an additional $9
million was added to the reserve for the estimated costs of investigations and
remedial activities for the Questa site.
This category also includes the cleanup at the Guadalupe oil field on the
central California coast of underground releases of a diesel-like additive
formerly used to produce the field's heavy crude oil. During 1995, an additional
reserve of $8 million was provided for estimated costs to complete the beach
cleanup and for assessing and investigating the inland portion of the field. At
year-end 1995, the reserve that had been established for the above activities
had been fully utilized. The company expects to incur additional, but
indeterminate, costs for continuing assessment, investigation and remediation of
the inland portion of the field.
Also included in this category is the Avila Beach, California site. In 1988,
petroleum hydrocarbon contamination under the Front Street section of the town
was discovered. It was determined that the source of the contamination had been
leaking pipelines that ran between a tank farm and wharf operated by the
company. The company has installed interim systems as an initial remediation
measure until a final remedial action plan is completed and implemented. The
company is currently developing a plan that will be submitted by mid-1996 to the
Regional Water Quality Control Board for approval. The plan will outline the
procedures that will be used to determine the desired alternatives
for the site's final remediation. The future costs related to the final
remediation will not be determined until these alternatives are identified. The
year-end reserve included the estimated remaining cost for the excavation of one
section of the beach where contaminants were detected close to the surface of
the sand during the company's third quarter 1995 testing and monitoring of the
site. The company completed the cleanup of this area in January 1996 as required
by a state order.
ACTIVE COMPANY FACILITIES. The company had provided $19 million for estimated
future costs of remedial orders, corrective actions and other investigation,
remediation and monitoring obligations at certain operating facilities and
producing oil and gas fields. The operating facilities primarily consist of
refineries, marketing terminals and bulk plants.
26
The total environmental remediation reserves recorded on the consolidated
balance sheet represent the company's estimate of assessment and remediation
costs based on currently available facts, existing technology, and presently
enacted laws and regulations. The remediation cost estimates, in many cases,
are based on plans recommended to the regulatory agencies for approval and are
subject to future revisions. The ultimate costs to be incurred will likely
exceed the total amounts reserved, since many of the sites are relatively early
in the remedial investigation or feasibility study phase. Additional
liabilities may be accrued as the assessment work is completed and formal
remedial plans are formulated.
The company estimated, to the extent it was able to do so, that it could
incur approximately $180 million of additional costs in excess of the $214
million accrued at December 31, 1995. The amount of such possible additional
costs reflects, in most cases, the high end of the range of costs of feasible
alternatives identified by the company for those sites with respect to which
investigation or feasibility studies have advanced to the stage of analyzing
such alternatives. However, such estimated possible additional costs are not an
estimate of the total remediation costs beyond the amounts reserved, since at a
large number of sites the company is not yet in a position to estimate such
possible additional costs.
Both the amounts reserved and estimates of possible additional costs may
change in the near term, in some cases, substantially, as additional information
becomes available regarding the nature and extent of site contamination,
required or agreed upon remediation methods, and other actions by governmental
agencies and private parties.
See Notes 17 and 18 to the consolidated financial statements for additional
information.
FUTURE ACCOUNTING CHANGE
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." The new requirements under SFAS No. 123 are generally effective
for 1996 financial statements. Companies must either expense the value of
stock-based compensation or disclose in a footnote what the earnings and
earnings per share would be had the value been expensed. The company expects to
adopt the disclosure method. At adoption, the effect on earnings and earnings
per share is not expected to be material.
OUTLOOK
Certain of the statements in this discussion, as well as other
forward-looking statements within this document, contain estimates and
projections of amounts of or increases in future revenues, earnings, cash flows,
capital expenditures, assets, liabilities and other financial items and of
future levels of or increases in reserves, production, sales including related
costs and prices, and other statistical items; plans and objectives of
management regarding the company's future operations, products and services; and
certain assumptions underlying such estimates, projection plans and objectives.
While these forward-looking statements are made in good faith, future operating,
market, competitive, legal, economic, political, environmental, and other
conditions and events could cause actual results to differ materially from those
in the forward-looking statements.
Crude oil prices are expected to be unstable in 1996 because of the uncertain
effect of the United Nations' seeming willingness to allow a partial resumption
of oil exports from Iraq. However, domestic natural gas prices are expected to
remain strong in early 1996, at least until the winter selling season is over
and natural gas inventories within the industry are replenished.
The sale of the company's California oil and gas producing properties is
expected to be completed in April 1996. The proceeds are expected to be used to
reduce debt and fund capital projects overseas. The sale includes Unocal's
interests in 68 oil and gas fields, including 11 producing platforms off the
California coast in state and federal waters. Unocal's average net daily
production from the properties in the proposed sale was 27,000 barrels of oil
and 59 million cubic feet (mmcf) of natural gas during 1995, and proven reserves
of 184 million barrels of oil equivalent at year-end 1995. For 1995, Unocal's
California oil and gas producing properties generated pretax operating earnings
and cash flow of approximately $14 million and $64 million, respectively. Unocal
has approximately 600 employees involved in its California oil and gas
operations. While many of those employees will be offered positions with the
buyer or at other Unocal operations, some layoffs are expected (see Note 25 for
additional information). The sale of these producing properties is not expected
to have a material effect on Unocal's future operating results.
27
On a worldwide basis, 1996 daily natural gas production is expected to
average nearly 1.8 billion cubic feet, up slightly from 1995. Crude oil and
condensate production is expected to average 210,000 barrels per day, down from
240,000 last year.
The company anticipates an approximate 15 percent increase in foreign natural
gas production in 1996. This improvement is expected mainly from a significant
increase in the company's Gulf of Thailand production beginning in the second
quarter of 1996, when the Petroleum Authority of Thailand's new pipeline comes
on stream. Also, oil and gas production should continue to improve in Indonesia
as a result of successful exploration and development programs that have
revitalized operations.
For 1996, the company expects domestic crude oil and natural gas production
to be lower, reflecting the expected completion of the sale of its California
producing oil and gas properties and continued natural production declines. The
company will continue to focus on domestic natural gas production in the
Louisiana/Gulf Coast area.
The company is in the process of retaining an advisor to assist in the
disposal of its oil and gas interests in the Netherlands sector of the North Sea
as it continues to shift its strategic focus to Southeast Asia and other areas
that offer greater opportunities for growth. Unocal's net daily production from
its Netherlands operations in 1995 was 11,000 barrels of crude oil and
condensate and 9 mmcf of natural gas.
In Thailand, the company expects to spend approximately $160 million on
development projects that should allow the company to sustain gross production
at 950 mmcf of natural gas per day once a second pipeline becomes operational in
1996. The planned production for 1996 is expected to average 825 mmcf per day
(gross). Natural gas demand in Thailand is expected to continue its active
growth over the next 10 to 15 years, providing a market for the increased
production from the Gulf of Thailand.
Unocal is currently pursui