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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
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SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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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
Pacific Exchange
Chicago Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange
Chicago 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 17, 1997 (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 $9,785 million.
Shares of Common Stock outstanding as of March 17, 1997: 250,086,778
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders (to be filed with the Securities and Exchange Commission
on or about April 21, 1997) are incorporated by reference into Part III.
PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES
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 explores for, develops, produces and markets crude oil and natural gas
resources around the world. The company's largest operations are in the Gulf
Coast region of the United States and in Southeast Asia. In addition, Unocal is
the world's leading geothermal energy producer and manufactures and markets
nitrogen-based fertilizers, petroleum coke, graphites, solvents and specialty
minerals.
STRATEGIC FOCUS
Today's global energy environment has changed dramatically. In response to
this changing environment, Unocal is moving aggressively to implement a growth
strategy that will ensure its participation in new global energy opportunities.
To help realize these new opportunities, the company established a second
corporate office in Kuala Lumpur, Malaysia. This office will focus on building
high-level business relationships and opportunities.
The company will continue to build on its basic strengths of an established
presence and solid business relationships in Asia, an international reputation
for technical competence and innovation and a proven record as an efficient, low
cost project operator. During 1996, the company built on its operational
strengths by selling assets that had historically low returns and by increasing
capital spending in international areas in which the company has a strong
competitive position.
In April 1996, the company completed the sale of nearly all of its crude oil
and natural gas producing properties in California. Proceeds of $472 million
from the sale were used primarily to reduce debt. In December 1996, the company
signed a definitive agreement with Tosco Corporation for the sale of
substantially all of its West Coast petroleum refining, marketing and
transportation assets. The sale is valued at approximately $2 billion.
Proceeds from the sale are expected to be used to reduce debt, repurchase common
stock and fund potentially higher return projects overseas. For additional
information on the sale, see Management's Discussion and Analysis under Item 7
and Note 3 to the Consolidated Financial Statements under Item 8. The company
also signed a letter of intent in December 1996 to restructure The UNO-VEN
Company, a refining and marketing partnership in the Midwest, of which it owns
50 percent. Under the terms of the proposed agreement, the refining and
marketing assets of UNO-VEN, together with substantially all of its non-
environmental liabilities, would be distributed to an affiliate of the partner.
UNO-VEN, which would become wholly owned indirectly by Unocal, would realize
approximately $250 million. The company's involvement in the petroleum refining
and marketing business would essentially end with the sale of the West Coast
refining, marketing and transportation assets and restructuring of UNO-VEN.
During 1996, the company continued to focus on international oil and gas
operations and infrastructure project development. The company is aggressively
pursuing opportunities in areas that have recently opened up due to a changing
global energy environment. Political barriers are falling and, as a result,
access to known energy resources has greatly expanded. Also contributing to
this improved energy environment are growing cooperation and interdependence
between energy suppliers and users. These changes have created new growth
opportunities, and the company's goal is to participate in those opportunities
which offer the greatest potential. In keeping with this strategic focus, the
company's estimated 1997 capital expenditures for foreign oil and gas
exploration and production are 44 percent above the 1996 level.
1
OPERATIONAL AUTONOMY
To improve Unocal's competitiveness, the company organized its operating
groups into business units with greater autonomy.
In August 1996, the company formed the Spirit Energy 76 business unit (Spirit
Energy). Spirit Energy will focus on growth in the contiguous United States by
maximizing efficiencies and lowering costs of existing operations. In addition,
the new unit will invest in higher return projects and expects to increase the
overall return on the company's domestic oil and gas assets. Spirit Energy will
focus primarily in the Gulf of Mexico region, where the company has significant
natural gas operations with excellent growth opportunities.
During 1996, the company organized the New Ventures group into teams of
professionals from various disciplines that are pursuing potentially high-return
energy projects in Asia and Latin America. The focus of these teams is to
identify and capture new market-to-resource and value-added opportunities. The
new opportunities include exploration in known resource areas and key
infrastructure projects such as pipelines, power plants and fertilizer plants.
The company also created a new International Operations group that will focus
on overseas oil, gas and geothermal projects and smooth the transition of the
New Ventures group's projects into operations.
In addition, the company merged the Alaska oil and gas operations with the
Agricultural Products business unit. Natural gas from the company's South
Alaska operations is the feedstock for the agricultural products plants in
Kenai. The merger is expected to strengthen the long-term value of the
company's Alaska operations by improving operating efficiencies and providing
greater coordination between the natural gas operations and ammonia/urea
manufacturing.
During 1997, the company organized into the following reporting segments:
. EXPLORATION AND PRODUCTION
United States
Spirit Energy 76
Other
International
. GEOTHERMAL OPERATIONS
. DIVERSIFIED BUSINESS GROUP
Agricultural Products
Carbon and Minerals
Pipelines
. CORPORATE AND UNALLOCATED
New Ventures Group
Other
For detailed analysis of the company's results of operations and financial
condition, see Management's Discussion and Analysis under Item 7 beginning on
page 19 of this report.
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 26 to the Consolidated Financial Statements and Selected Financial
Data on pages 62 and 75, respectively, of this report.
EXPLORATION AND PRODUCTION
Information regarding oil and gas financial data and oil and gas reserve data
and the related present value of future net cash flows from oil and gas
operations is presented on pages 67 through 73 of this report. During 1996,
2
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. At December 31, 1996, exploration and
production operations accounted for approximately 62 percent of Unocal's assets
from continuing operations, and of this, operations in the United States make up
60 percent of the asset base. Unocal's future growth will focus principally in
the foreign sector, with concentration in the Far East and Central Asia. In
addition, growth opportunities in the United States will focus primarily in the
Gulf of Mexico.
Worldwide 1996 1995 1994
- ----------------------------------------------------------------------------------------------
Net proved reserves at year end: (a)
Crude oil and condensate - million barrels 513 667 697
Natural gas - billion cubic feet 6,795 6,765 6,911
Net daily production: (a)
Crude oil and condensate - thousand barrels 207 240 260
Natural gas - million cubic feet 1,812 1,765 1,766
Natural gas liquids - thousand barrels 20 21 22
Natural gas sales to public - million cubic feet daily 1,596 1,513 1,529
- ---------------------------------------------------------------------------------------------
(a) Includes foreign production sharing agreements on a gross basis (see
Foreign Reserve/Production table on page 6 for host country share
information). 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 the sale of
California properties and natural production declines. Worldwide natural gas
production increased during 1996, primarily due to increased development of
fields in Thailand, Indonesia and in the Gulf of Mexico.
Higher crude oil prices in 1996 resulted in increased expenses for crude oil
and product purchases as compared to 1995. This was partially offset by
decreased operating expenses in California as a result of the sale of oil and
gas producing properties. During 1996, total operating expense increased
partially due to new gas production in Thailand and the Gulf of Mexico. The
company's continuing efforts to increase production and decrease operating costs
resulted in decreased 1996 average production costs per barrel of oil equivalent
to $2.73, down from $2.94 and $3.00 for 1995 and 1994, respectively.
Unocal pursues exploration opportunities and business development projects to
help sustain the long-term growth of the company. The company's exploration
program remains primarily focused on low-risk market-to-resource and value-added
opportunities.
UNITED STATES
EXPLORATION
After several years of focusing on exploration opportunities in and around
producing fields and increasing domestic production from existing reserves,
Spirit Energy is planning to expand its domestic operations. Spirit Energy will
focus exclusively on opportunities in the contiguous United States, primarily
the Gulf of Mexico region. Spirit Energy will continue its exploration efforts
near established fields, but will also renew its emphasis on new field wildcat
drilling. In 1997, Spirit Energy expects to participate in 16 onshore and 28
offshore exploratory wells, including 15 new wildcat wells in the transition
zone and deep water areas in the Gulf of Mexico.
The company holds approximately 893,000 net acres of unproved lands in the
United States. Most of the prospective lands are located in Alaska, Louisiana
and Texas. Unproved acreage in federal offshore exploration and production
areas is included in the contiguous states.
3
In March 1997, Spirit Energy was high bidder for interests in 55 deep-water
and 18 continental shelf blocks in the Gulf of Mexico. The company expects
exploration activity to begin as soon as the new blocks are awarded, and
drilling in some prospects could begin in early 1998. The company has a 100
percent interest on all bids for blocks on the continental shelf and on 36 of
the 55 deep-water blocks. The remaining 19 deep-water bids were acquired with
partners. The company's interest in these 19 blocks ranges from 50 percent to
75 percent. In addition, the company entered into an agreement in December 1996
with Forcenergy Inc. to further develop the company's leasehold position in the
Cook Inlet area of South Alaska. The agreement requires Forcenergy to spend $30
million over a five year period on lease acquisition, development and
exploratory drilling on programs generated from the company's prospective
inventory. Under the terms of the agreement, the company will contribute
existing geologic and geophysical information in return for a 50 percent
interest in the results of the efforts.
PRODUCTION
In 1996, the company realigned its Alaska upstream oil and gas operations with
its Alaska Agricultural Products business unit to take advantage of existing
synergy. Consolidation of these two operations is also expected to provide
overall cost savings through operating efficiencies.
In the lower 48 states, Spirit Energy will continue its efforts to increase
production through the development of established fields. In 1997, the business
unit plans to participate in drilling 88 new development wells, including 30
offshore wells.
The company holds approximately 709,000 net acres of proved lands in 19
states. Most of these lands are located in Texas, Louisiana, Alaska, Oklahoma,
and New Mexico. Proved acreage in federal offshore exploration and production
areas is included in the contiguous states.
Unocal's 1996 domestic crude oil production came principally from fields in
Alaska (38%), Texas (24%) and Louisiana (25%). Various other states contributed
the remaining amount (13%). Domestic natural gas production in 1996 was
primarily from offshore and onshore fields in Louisiana (45%), Texas (27%) and
Alaska (14%). Various other states contributed the remainder (14%).
Unocal has various ownership interests in 18 natural gas processing plants
located near major gas fields in the United States. The company operates nine
of these plants and has full ownership in two. Fifteen of the 18 plants were
active in 1996.
United States 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
Net proved reserves at year end:
Crude oil and condensate - million barrels 236 387 419
Natural gas - billion cubic feet (a) 2,575 3,261 3,580
Net daily production:
Crude oil and condensate - thousand barrels 96 125 137
Natural gas - million cubic feet (a) 1,075 1,103 1,095
Natural gas liquids - thousand barrels 14 16 16
Natural gas sales to public - million cubic feet daily 891 882 873
- ----------------------------------------------------------------------------------------------------
(a) Natural gas is reported on a wet-gas basis; production excludes gas consumed
on lease.
The decrease in crude oil and condensate production reflects the sale of the
California oil and gas producing properties and natural production declines.
The company expects oil production to further decline in 1997 due to the full
year effect of the California oil and gas producing properties sale, which was
completed in April 1996. Domestic natural gas production in 1997 is expected to
remain at or slightly above the 1996 level, with most of the company's
production coming from the Louisiana/Gulf Coast area. Production increases in
the Gulf of Mexico have virtually offset diminished gas production due to the
divestment of the California oil and gas properties.
Most of the company's crude oil production 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
4
is primarily used in the company's agricultural products manufacturing
operations or as fuel in its oil and gas operations.
FOREIGN
EXPLORATION
Unocal pursues oil and gas exploration and development opportunities around
the world. Major areas of interest currently include Thailand, Indonesia,
Myanmar and Azerbaijan. Unocal is also pursuing oil and gas exploration and
development opportunities in Bangladesh, China, Pakistan, Turkmenistan and
Vietnam.
THAILAND. Thailand's increasing demand for electrical power from natural gas-
fired power generating plants is expected to provide a steady market for natural
gas for the next 10 to 15 years. The company intends to capitalize on this
demand by intensifying its oil and gas exploration projects. In October 1996, a
Unocal-led consortium launched a six-year exploration program on two blocks
offshore Thailand in the deep-water section of the Andaman Sea. Seismic work
has begun in anticipation of drilling two exploratory wells in late 1997.
In November 1996, the company discovered the Plamuk natural gas field in the
Gulf of Thailand. Further work is planned on the field in 1997 to confirm its
size and finalize its development schedule. This exploration program also
confirmed extensions to several existing fields in the area and proved the
commerciality of the Pladang field.
INDONESIA. The application of innovative exploration techniques has allowed
the company to continue its successful exploration activities in Indonesia. In
1996, the company drilled 20 exploration and delineation wells using the new
Saturation Exploration (SX) "slimhole" well technology. This drilling technique
enabled the company to decrease its average drilling costs per well in Indonesia
by approximately 70 percent.
Plans call for the drilling of 30 exploration wells offshore East Kalimantan
in 1997, including deep-water and transition zone plays. These wells are part of
a 2-1/2 year exploration program that may eventually include more than 70
possible wells. New 3-D seismic and low-cost exploration will continue to
create opportunities to enhance the company's reserve base in this region.
MYANMAR. Progress continues on the Yadana natural gas field offshore Myanmar.
Production from this natural gas project should begin by mid-1998. When fully
developed, estimated gross production is expected to reach 650 million cubic
feet of natural gas per day in late 1999 or early 2000. Construction of the
onshore section of the Myanmar to Thailand natural gas pipeline is currently
underway. Once completed, the Yadana field production will be shipped by
pipeline to an electric power plant southwest of Bangkok, Thailand. Unocal has
a 28.26 percent working interest in the Yadana field.
In March 1996, the company and its partners discovered two potentially
significant new gas fields near the Yadana field. Further studies are underway
to prove the commerciality of the new discoveries. These fields could be
produced through the Yadana platform complex currently under construction. In
January 1997, the company signed an agreement with Myanmar's state-owned oil and
gas enterprise for exploration of two new blocks in the Andaman Sea. Seismic
work is scheduled for mid-1997.
AZERBAIJAN. Unocal is a member in two international consortia participating
in the development of Caspian Sea oil fields, offshore Azerbaijan. The
Azerbaijan International Operating Company (AIOC) is currently developing the
Azeri, Chirang and Gunashli oil fields. The company has a 10 percent interest
in AIOC. Initial production is scheduled in late 1997 or early 1998. In
December 1996, the company signed a production-sharing agreement with the State
Oil Company of the Azerbaijan Republic to develop the Ashrafi and Dan Ulduzu oil
fields also in the Caspian Sea, offshore Azerbaijan. First production from
these fields is expected in 2003. The company has a 25-1/2 percent working
interest in the prospect. Many challenges still lie ahead as the consortia must
resolve issues related to proposed pipeline routes and the construction of oil
export pipelines and facilities.
PRODUCTION
Unocal has oil and gas production in six foreign countries: Thailand,
Indonesia, Canada, The Netherlands, United Kingdom and Zaire. Unocal is the
operator in each of these countries, except Zaire. The company sells
5
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 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
Net proved reserves at year end: (a)
Crude oil and condensate - million barrels 277 280 278
Natural gas - billion cubic feet 4,220 3,504 3,331
Net daily production: (b)
Crude oil and condensate - thousand barrels 111 115 123
Natural gas - million cubic feet 737 662 671
Natural gas liquids - thousand barrels 6 5 6
Natural gas sales to public - million cubic feet daily 705 631 656
- -------------------------------------------------------------------------------------------------------------------------------
(a) Includes host countries' shares under certain production sharing contracts of:
Crude oil and condensate - million barrels 70 71 69
Natural gas - billion cubic feet 530 457 386
Natural gas is reported on a wet basis.
(b) Includes host country share in Indonesia of:
Crude oil and condensate - thousand barrels 28 30 30
Natural gas - million cubic feet 27 22 26
Natural gas is reported on a wet basis; production excludes gas consumed on lease. Host country share
of natural gas liquids production is insignificant.
THAILAND. At the time production began at Unocal's Erawan field in 1981,
Thailand was importing about 95 percent of its commercial energy resources. In
1996, the company's natural gas production supported approximately 30 percent of
Thailand's electricity generation and satisfied approximately 20 percent of its
total energy requirements. Once the construction of additional onshore
processing facilities is completed in the second quarter of 1997, the company
expects gross production from the nine fields it currently operates in the Gulf
of Thailand to reach one billion cubic feet (bcf) of natural gas per day.
In 1996, gross natural gas production averaged approximately 789 million cubic
feet (mmcf) per day (509 mmcf net) compared with approximately 720 mmcf per day
(466 mmcf net) in 1995. Production increases were primarily attributable to the
Satun, Platong, Jakrawan and Gomin fields. Development of the new Pailin natural
gas field continues as four wells, completed in January and February 1997,
showed net gas pay and confirmed the future locations for two production
platforms. Five additional wells are planned for the remainder of 1997 in the
Pailin field. In 1996, the company signed a 30-year natural gas purchase
agreement with the state-run Petroleum Authority of Thailand (PTT) for sales of
Pailin field production. Initial production from the Pailin field is expected to
be nearly 165 mmcf per day in 1999 rising to approximately 330 mmcf per day by
2001 once the reserves are fully delineated. Unocal has a 35 percent working
interest in this field. In November 1996, the company discovered the Plamuk
field, a new natural gas field also in the Gulf of Thailand. Further work is
planned for this field in 1997 to confirm its size and delineation schedule.
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. The company signed its first production sharing contract with
Indonesia in 1968, and has been operating there ever since. In 1996, Unocal
operated nine producing oil and gas fields offshore East Kalimantan with daily
gross production of almost 90,000 barrels (bbls) of oil and 255 mmcf of gas per
day compared with 68,000 bbls of oil per day and 179 mmcf of gas per day in
1995. In 1996, production began from the new Seguni oil field, offshore East
Kalimantan. Initial gross production averaged about 3,900 bbls per day from
five completions during 1996. The company is continuing its development of
existing oil and gas fields in Indonesia. In 1996, horizontal development
drilling in the Attaka oil field has deferred natural production declines and
stabilized field output at
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nearly 46,000 gross bbls per day. A total of 14 horizontal wells were drilled
in the Attaka and Serang oil fields in 1996. The company plans to drill
approximately 16 additional horizontal wells in these fields in 1997.
Development of newly discovered oil and gas fields is also progressing. In
1997, the company plans to begin production from the Santan oil and gas field.
Natural gas production of 40 mmcf per day and oil production of 1,500 bbls per
day is expected once the field is fully delineated and the reserves are
stabilized in early 1998. In addition, first production for the Peciko field
is expected in 1999. The company has a 100% working interest in the Santan and
Peciko fields.
CANADA. Net crude oil production averaged 13,400 barrels per day in 1996,
down from 13,900 barrels per day in 1995. The decrease was due to natural
production declines in mature fields. Partially offsetting these declines was
increased production at the Southwest Saskatchewan field due to a horizontal
drilling program initiated in 1996.
As part of Unocal Canada's plans to maximize its 94 percent working interest
ownership of the Aitken Creek natural gas storage facility in Northern British
Columbia, the company is planning multiple seismic programs over seven
exploration blocks in the Southern Northwest Territories in 1997. In addition,
three exploration wells are also planned for these blocks during the year.
NETHERLANDS. Daily gross production from the company's five offshore fields
averaged nearly 11,000 bbls of oil per day in 1996, down approximately 3,000
bbls per day from 1995. Unocal holds an 80 percent working interest in all five
fields. Gross natural gas production from the L-11 and Halfweg offshore gas
fields averaged 58 mmcf per day in 1996, up from 39 mmcf per day in 1995.
Unocal holds a 48 percent working interest in the L-11 gas field and a 46
percent working interest in the Halfweg gas field.
The company is planning an exploration well for late 1997 to test a gas
prospect in the Q/1 block. This block appears to have geological structures
comparable to those in the company's Halfweg gas field.
UNITED KINGDOM. Gross production from the Heather field averaged
approximately 6,300 bbls of oil per day in 1996, down 100 bbls of oil per day
from a year ago. The company expects to abandon the field within the next few
years as it is approaching the end of its economic life. Unocal holds a 31.25
percent working interest in this field.
ZAIRE. Gross production from five fields averaged nearly 21,800 barrels of
oil per day in 1996, compared with 19,600 barrels per day in 1995. Production
increases are the result of the completion of five additional development wells
in new fault blocks during 1996. Unocal has a 17.7 percent working interest in
these fields.
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, could lead to changes in the
status of Unocal's exploration and production activities in these and other
foreign countries during the coming years.
As of December 31, 1996
(thousands of acres)
------------------------------------------------------------
Proved Acreage Prospective Acreage
------------------------ ----------------------------
Gross Net Gross Net
-------- -------- ---------- ----------
United States 1,010 709 1,096 893
Far East 453 265 25,187 11,929
Other Foreign 267 150 11,307 5,418
------ ------ -------- --------
Total 1,730 1,124 37,590 18,240
====== ====== ======== =======
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Producible Oil and Gas Wells As of December 31, 1996
Oil Gas
------------------------ ------------------------
Gross Net Gross Net
-------- -------- -------- --------
United States 3,298 1,847 1,701 822
Far East 235 166 389 287
Other Foreign 1,146 457 112 61
------ ------ ------ ------
Total 4,679 2,470 2,202 1,170
====== ====== ====== ======
The company had 195 gross and 136 net producible wells with multiple
completions.
Drilling in Progress As of December 31, 1996
Oil and Gas Wells
------------------------
Gross Net
-------- --------
United States 14 6
Far East 56 35
Other Foreign 5 2
-------- --------
Total 75 43
======= =======
The company had one waterflood project in process at December 31, 1996.
Net Oil and Gas Wells Completed and Dry Holes
Productive Dry
-------------------------- ---------------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
Exploratory
United States 13 15 7 11 11 10
Far East 15 7 9 14 7 3
Other Foreign 2 3 4 5 5 6
--- --- --- --- --- ---
Total 30 25 20 30 23 19
=== === === === === ===
Development
United States 76 113 137 4 5 2
Far East 90 38 50 - - 4
Other Foreign 26 32 19 2 1 4
--- --- --- --- --- ---
Total 192 183 206 6 6 10
=== === === === === ===
REFINING, MARKETING AND TRANSPORTATION - 76 PRODUCTS
In December 1996, the company signed a definitive agreement with Tosco
Corporation for the sale of virtually all of its West Coast petroleum refining,
marketing and transportation assets. The sale is valued at approximately $2
billion. The results of operations and assets of this segment have been
classified as discontinued operations. For additional information see
Management's Discussion and Analysis under Item 7 on page 24 and Note 3 to the
Consolidated Financial Statements under Item 8 on page 44.
The company's decision to sell the refining, marketing and transportation
assets was based on its strategic focus of selling assets that have historically
low returns. The sale of these assets will enable the company to shift capital
spending to higher return projects.
8
GEOTHERMAL OPERATIONS
This business segment explores for and produces and sells geothermal resources
used to generate 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 primarily in the United States and the
Philippines. The company currently supplies geothermal energy for about 1,890
megawatts of installed generating capacity worldwide.
In Indonesia, at the Salak field on the island of Java, the company supplies
steam to two 55-megawatt power plants owned by PLN, Indonesia's state-owned
electrical corporation. During 1997, the company expects to begin supplying
steam to four additional 55-megawatt power plants. PLN is building and will
operate one of the four 55-megawatt power plants. A 50 percent owned affiliate
is building and will operate the remaining three power plants. By year-end
1997, the Salak project is expected to generate a combined capacity of 330-
megawatts (100 million barrels of oil equivalent over a project life of 30
years).
During 1995, the company drilled a discovery well in the Sarulla contract area
on the Indonesian island of Sumatra. Subsequent drilling and testing during
1996 have confirmed a resource capable of generating 80-megawatts of electric
power. The company previously negotiated a power sales agreement allowing for
the development of up to 1,000-megawatts of generating capacity in the Sarulla
contract area. The first Sarulla power plant is expected to begin operation in
1999. The company is actively pursuing commercialization of this project.
During 1996, a contract dispute arose between the company's subsidiary,
Philippine Geothermal Inc. (PGI), and the National Power Corporation (Napocor)
of the Philippines. Under a service agreement, PGI operates the Tiwi and Mak-Ban
steam fields on Luzon. The service agreement, originally signed in 1971,
provided for a 25-year term with a 25-year renewal option. Napocor has raised a
constitutional challenge to PGI's unilateral right to renew the contract for
another 25 years. On September 30, 1996, Napocor and PGI entered into a
provisional agreement. PGI will continue to operate the fields under the same
terms and conditions of the original agreement except for the service fee
payment. The provisional agreement requires 60 percent of the service fee to be
escrowed until the dispute is resolved. The provisional agreement expires June
30, 1997. The parties are currently negotiating a resolution to the dispute.
The company's geothermal reserves and operating data are summarized below:
1996 1995 1994
- ----------------------------------------------------------------------------------------------
Net proved geothermal reserves at year end:
billion kilowatt-hours 155 144 143
million equivalent oil barrels 232 216 215
Net daily production
million kilowatt-hours 18 16 21
thousand equivalent oil barrels 26 24 31
Net geothermal lands in acres
proved 16,450 20,240 20,240
prospective 383,563 457,380 457,380
Net producible geothermal wells 208 260 261
- ----------------------------------------------------------------------------------------------
During 1996, the company experienced a 12 percent increase in steam
generation, primarily at The Geysers in Northern California due to the use of
discount pricing and expansion of electrical generation at Mak-Ban in the
Philippines.
The present value of future net cash flows from proved geothermal reserves at
year-end 1996 was $544 million. The net future cash flows are based on
estimated future revenues less future development and production costs and
income taxes. The net present value of $544 million does not include future
cash flows for the company's PGl subsidiary due to an unresolved contract
dispute as discussed above. Resolution of this dispute will enhance the value.
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, actual
prices for geothermal steam pursuant to long-term service and energy sales
contracts at
9
year-end and successful resolution of the contract dispute between PGI and
Napocor. 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 pre-tax 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 BUSINESS GROUP
AGRICULTURAL PRODUCTS
The Agricultural Products business unit manufactures and markets nitrogen-
based products for wholesale agricultural and industrial markets supplying the
western United States and the Pacific Rim.
Agricultural Products' largest fertilizer manufacturing facility, located in
Kenai, Alaska, produces ammonia and urea for agricultural applications using
natural gas as feedstock and sells a portion of this production abroad for
industrial uses. During 1996, the company merged the Alaska oil and gas
operations with the Agricultural Products business unit. Natural gas from the
company's South Alaska operations is the feedstock for the Kenai facilities.
The merger will strengthen the long-term value of the company's Alaska
operations by improving operating efficiencies and will provide greater
coordination between the natural gas operations and ammonia/urea manufacturing.
Agricultural Products is also involved in the manufacturing of nitrogen-based
products through its terminal facilities located in the Western United States
and the upgrading of nitrogen-based products through its upgrading plants
located in Kennewick, Washington and West Sacramento, California.
CARBON AND MINERALS
The Carbon and Minerals business unit produces and markets petroleum coke,
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 tenth consecutive year of sales growth.
Unocal's mineral operations are carried out by Molycorp, Inc. (Molycorp), a
wholly owned subsidiary, which mines, processes and markets lanthanides and
molybdenum products. It operates a lanthanide mine and mill and a chemical
plant at Mountain 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, in response to increased molybdenum demand and prices, resumed
operations in late 1996 at its molybdenum mine and mill in Questa, New Mexico.
After being idle for approximately five years, this mine is expected to produce
about 14 million pounds of molybdenum per year when it reaches full production
in 1997.
10
Molybdenum is used in the production of stainless and alloy steels, nonferrous
alloys, pigments, lubricants and catalysts.
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.
PIPELINES
The Pipelines business unit principally includes the company's equity
interests in petroleum pipeline companies and wholly owned pipeline systems
throughout the United States, other than California.
Included in Unocal's pipeline investments is 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. Also included is the
Unocal Pipeline Company, a wholly owned subsidiary of Unocal, which holds a 1.36
percent participation interest in the TransAlaska Pipeline System (TAPS). TAPS
transports crude oil from the North Slope of Alaska to the port of Valdez in
Alaska. During 1996, the company acquired a 30 percent interest in the
Transandean oil pipeline. This pipeline transports crude oil from Argentina to
Chile.
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, through subsidiaries, 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. PDV America Corp. is a wholly owned
indirect subsidiary of PDVSA.
In December 1996, the company signed a letter of intent to restructure the
UNO-VEN partnership. Under the terms of the proposed agreement, the refining
and marketing assets of UNO-VEN, together with substantially all of its non-
environmental liabilities, would be distributed to an affiliate of the partner.
UNO-VEN would become 100 percent owned by the company.
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.
In the Agricultural Products business, the key competitive factors for the
company's ammonia, urea and fertilizer products are prices, cost and
availability of natural gas and other raw materials.
11
EMPLOYEES
As of December 31, 1996, Unocal had 11,658 employees compared to 12,509 in
1995. The decrease principally reflects the impact of asset sales and a two-
year restructuring program. The number of employees will continue to decrease
in 1997 due to the sale of the refining, marketing and transportation assets,
which had approximately 3,100 employees at year-end 1996. Of the total Unocal
employees at year-end 1996, 2,015 were represented by various labor unions
(1,256 employees were from the refining, marketing and transportation segment).
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 75 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. 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 continued to impact 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.
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 gasoline 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 gasoline became 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 company believes it can continue to meet substantially all the
requirements of existing environmental laws and regulations. The impact of
these laws and regulations upon Unocal will be reduced after the sale of the
company's West Coast refining, marketing and transportation assets, although the
company will retain certain responsibilities related to environmental laws and
regulations that affected the operation of these assets prior to the close of
the sale.
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
12
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 environment-related capital
expenditures, charges to earnings and possible future environmental exposure,
see Item 3 - Legal Proceedings below, the Environmental Matters section of
Management's Discussion and Analysis under Item 7 of this report and Note 19
to the Consolidated Financial Statements under Item 8 of this report.
ITEM 3 - LEGAL PROCEEDINGS
There is incorporated by reference the information regarding environmental
remediation reserves in Note 18 to the Consolidated Financial Statements on page
55, the discussion thereof in the Environmental Matters section of Management's
Discussion and Analysis, on pages 26 through 29, and the information regarding
certain legal proceedings and other contingent liabilities in Note 19 to the
Consolidated Financial Statements on pages 55 through 57 of this report.
(1) The matter previously reported and described as People of the State of
----------------------
California v. Unocal Corporation, et al., Superior Court of Ventura County,
----------------------------------------
Civil No. 152925, was settled, and the company paid $26,000 to the County
of Ventura on February 17, 1996.
(2) The matter previously reported and described as an administrative
compliance order issued by the U.S. Minerals Management Service (MMS) and
assessing the company approximately $21 million in royalty fees and
interest associated with Federal Energy Regulatory Commission Order No. 94
was settled as part of an overall settlement of several outstanding issues
between the company and the MMS.
(3) The matter previously reported and described as a notice of alleged
violations from the U.S. Environmental Protection Agency (EPA), Region IX,
relating to New Source Performance Standards at the Los Angeles Refinery -
Carson Plant was settled without the payment of any penalty.
(4) The matter previously reported and described as an administrative complaint
issued by the EPA 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 Inventory Update Rule
was settled by the company's agreement to pay $60,000.
(5) The matter previously reported and described as claims made by the District
Attorney's office for purported environmental violations involving various
underground storage tanks, product lines and monitoring systems for Unocal
branded service stations in Santa Barbara County, California, was settled
on December 5, 1996. The company paid $108,106 in civil penalties and
$19,894 in administrative and investigative costs to the County of Santa
Barbara.
(6) Atlantic Richfield Company, Chevron U.S.A., Inc., Exxon Corporation, Mobil
Oil Corporation, Shell Oil Products Company and Texaco Refining and
Marketing, Inc. have filed a lawsuit against the company in the U.S.
District Court for the Central District of California regarding U.S.
Letters Patent No. 5,288,393 issued to the company and covering several
patent claims for the composition of reformulated gasoline (Atlantic
--------
Richfield Company, et al. v. Unocal Corporation, et al, No. CV-95-2379-RG).
------------------------------------------------------
The plaintiffs allege that the company's patent is invalid and
unenforceable, and 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.
Trial is likely to commence in July 1997.
(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 and, as discussed in Note
19
13
to the Consolidated Financial Statements, have filed over 50 lawsuits
alleging that they or their property were adversely affected by the
releases.
Region 9 of the EPA issued an Administrative Complaint proposing penalties
of $489,800 for the company's failure to make timely notifications of the
Catacarb releases and subsequent hydrogen sulfide releases in September
1994. Settlement of this matter has been completed, subject to delivery of
final documentation.
(8) Citizens for a Better Environment, et al. v. Union Oil Company of
-----------------------------------------------------------------
California, No C94-0712, filed in the U.S. District Court for the Northern
----------
District of California, alleges that as of February 28, 1994, the company's
San Francisco refinery was in violation of the selenium limit in its
National Pollution Discharge Elimination System permit. Unocal 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. Unocal's motion to dismiss the
Citizens action was denied by the trial court. The Ninth Circuit Court of
--------
Appeals affirmed the trial court's decision. Unocal's Petition for Writ of
Certiorari to the U.S. Supreme Court was denied, and the case will now
proceed to a trial in the District Court.
(9) In September 1994, the California Regional Water Quality Control Board
issued a Cleanup or Abatement Order relating to prior 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 California Superior Court for the County of San
Luis Obispo 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 for several
years regarding the hydrocarbon presence in this location, and with
property owners. Various related civil suits have been filed or
threatened.
(10) In March 1994, a civil suit seeking various forms of penalties, restitution
and remediation regarding contamination at the Guadalupe oil field on the
central coast of California 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 of 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 and
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 interest, costs, and reasonable attorney
fees. Several related follow-on private 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.
(11) On October 23, 1995, the State of Texas and several individuals filed a
lawsuit in the District Court of Lee County, Texas (State of Texas, et al.
----------------------
v. Amerada Hess, et al., 21st Judicial District Court, No. 10,652). The
----------------------
suit was filed by the County Attorney and also as a class action on behalf
of all Texas residents. The allegations are that the defendants engaged in
a conspiracy to fix "posted prices" for crude oil and also discriminated
against the class by purchasing oil "attributable" to the plaintiff class
at prices lower than the prices realized from defendants' own production in
the same fields. Plaintiffs seek civil penalties, actual and
14
statutory damages, costs and attorneys' fees. The State seeks civil
penalties in its sovereign capacity. Other lawsuits containing similar
allegations might be filed in other states.
A similar lawsuit was filed in Cameron Parish, Louisiana, and seeks to
recover under paid royalties under the Louisiana Mineral Code. The
plaintiff, Cameron Parish School Board, filed the lawsuit on behalf of
itself and a class consisting of all entities and persons to whom
defendants have underpaid royalties since January 1, 1986, (Cameron Parish
--------------
School Board, et al. v. Texaco, et al., Cameron Parish, Louisiana, 38th JDC
---------------------------------------
#10-14264).
Another complaint alleging an unreasonable restraint of trade was filed in
U.S. District Court for the Southern District of Texas, Houston Division,
on April 10, 1996 (The McMahon Foundation, et al. v. Amerada Hess et al.,
-----------------------------------------------------
including Unocal Corporation and Union Oil Company of California, Civil No.
H-96-1155). Plaintiffs seek to represent a nationwide class consisting of
private owners of royalty and working interests in the United States. They
allege that the defendants purchase most of the crude oil produced on
private lands in the U.S. and that since October 1986, the defendants have
agreed, combined and conspired to set and have paid artificially low prices
for crude oil and purchased from leases in which the purported class
members own interests. Plaintiffs seek treble damages and attorneys' fees.
(12) On August 12, 1996, the Office of the Attorney General for the State of
Illinois announced its intention to seek approximately $2.1 million in
civil penalties for Unocal's alleged failure to comply with the State's
environmental statute and Air Pollution regulations since January 1992 at
the company's Carbon Plant in Lemont, Illinois. The company is presently
negotiating with the Attorney General's office.
(13) The company has been served with a lawsuit which is purportedly brought by
unidentified representatives on behalf of an alleged class of plaintiffs
consisting of all residents of the Tenasserim region of Myanmar allegedly
affected by the defendants' alleged acts of mistreatment and forced labor,
and by a California resident, Louisa Benson, who claims that the defendants
have engaged in unfair business practices. (John Doe, et al. and Louise
---------------------------
Benson v. Unocal Corp., et al., U.S. District Court for the Central
-----------------------------
District of California, Civil No. 96-6959-LGB, filed October 3, 1996).
Defendants include Total S.A., the Myanma Oil and Gas Enterprise, the State
Law and Order Restoration Council (SLORC) of Myanmar, John F. Imle and
Roger C. Beach.
Plaintiffs' claims are based on the company's joint venture activities in
Myanmar for the exploration for and production of natural gas in the
Andaman Sea and shipment of that gas to Thailand through a pipeline
crossing Myanmar (the Yadana project). The complaint contains numerous
counts and alleged violations of several U.S. and California laws and U.S.
treaties. Plaintiffs seek compensatory and punitive damages on behalf of
the purported class, and Louisa Benson seeks disgorgement of profits.
Injunctive and declaratory relief is also requested to direct defendants to
cease payments to SLORC and to cease participation in the Yadana project.
The company was also served with a lawsuit making similar claims but
without the class action allegations (National Coalition Government of the
-------------------------------------
Union of Burma, et al. v. Unocal Inc. and the Yadana Natural Gas Project,
------------------------------------------------------------------------
U.S. District Court for the Central District of California, Civil No. 96-
6112-RAP, filed September 3, 1996).
(14) On February 9, 1996, Bridas Corporation filed a petition in the District
Court of Fort Bend County, Texas, alleging that 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). Plaintiff alleges that as a result of 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. Plaintiff maintains the Yashlar field has
natural gas reserves of 27 trillion cubic feet and that it is entitled to
70 percent of such reserves. Bridas also claims it has lost the
opportunity to participate in a Turkmenistan-Pakistan pipeline project.
Plaintiff seeks unspecified actual damages as well as punitive damages,
plus interest at the highest lawful rate. Defendants attempt to remove the
case to the U.S. District Court, Southern District of Texas, was
unsuccessful and proceedings are continuing in the Fort Bend County Court,
where a trial date has tentatively been set for November 1997.
15
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME, AGE AND PRESENT
POSITIONS WITH UNOCAL BUSINESS EXPERIENCE DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------
ROGER C. BEACH, 60 Mr. Beach has been Chairman of the Board since
Chairman of the Board and 1995 and Chief Executive Officer since 1994. He
Chief Executive Officer served as President and Chief Operating Officer
Director since 1988 from 1992 to 1994. Mr. Beach was President of
Chairman of Management and the Unocal Refining & Marketing Division from
Executive Committees 1986 to 1992, and from 1987 to 1992 also served
as Senior Vice President of the company.
- -------------------------------------------------------------------------------
JOHN F. IMLE, JR., 56 Mr. Imle has been President since 1994. He is
President responsible for corporate strategic planning and
Director since 1988 for all major new ventures and business
Member of Management development activities worldwide. From 1992 to
Committee 1994, he 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, 50 Mr. Schmale has been Chief Financial Officer
Chief Financial Officer since 1994. He served as Senior Vice President
Director since 1991 from 1988 to 1994. Mr. Schmale was President of
Member of Management the Petroleum Products & Chemicals Division
Committee (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, 51 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 of 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, 45 Mr. Schanck has been Group Vice President and
Group Vice President and President of Spirit Energy 76, the company's
President, Spirit Energy 76 U.S. Lower 48 oil and gas business unit, since
August 1996. He had been Group Vice President,
Oil and Gas Operations, from 1994 to 1996. From
1992 to 1994, he was Vice President, Worldwide
Exploration, of the Energy Resources Division.
From 1989 through 1991, he was President of
Unocal Canada Limited.
- -------------------------------------------------------------------------------
L. E. (ED) SCOTT, 54 Mr. Scott has been Group Vice President of the
Group Vice President, company's Diversified Business Group since 1994.
Diversified Business Group From 1990 to 1994, he was Vice President,
Petroleum Supply and Transportation. From 1986
to 1990, he served as Vice President, Crude
Supply.
- -------------------------------------------------------------------------------
CHARLES R. WILLIAMSON, 48 Mr. Williamson has been Group Vice President,
Group Vice President, International Operations, since August 1996. He
International Operations had been Vice President, Planning and Economics
from 1994 to 1995. He served as Vice President,
Technology, from 1992 to 1994 and in various
managerial positions prior to 1992.
- -------------------------------------------------------------------------------
16
- -------------------------------------------------------------------------------
DENNIS P.R. CODON, 48 Mr. Codon has been Vice President, General
Vice President, General Counsel and Chief Legal Officer since 1992. He
Counsel and was also Corporate Secretary from 1990 to 1996.
Chief Legal Officer He served as Deputy General Counsel in 1990 and
various other positions in the Law Department
prior thereto.
- -------------------------------------------------------------------------------
CHARLES S. McDOWELL, 55 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 2, 1997 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
1996 Quarters 1995 Quarters
---------------------------------------------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
- -----------------------------------------------------------------------------------------------------------------------------------
Market price per share of common stock
- High $34 $34-1/2 $ 37-3/8 $ 42-1/8 $ 29-1/8 $30-1/8 $ 30-1/2 $ 29-7/8
- Low 27-3/4 29-5/8 30-1/2 35-1/2 25-1/4 27-5/8 26-7/8 24-3/4
Cash dividends paid per share of common stock 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20
- -----------------------------------------------------------------------------------------------------------------------------------
Prices in the foregoing table are from the New York Stock Exchange Composite
Transactions listing. On March 17, 1997, the high price per share was $39-1/2
and the low price per share was $38-7/8.
Unocal common stock is listed for trading on the New York, Pacific and Chicago
Stock Exchanges in the United States, and on the Stock Exchanges of Singapore
and Switzerland.
As of March 17, 1997, the approximate number of holders of record of Unocal
common stock was 32,629 and the number of shares outstanding was 250,086,778.
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
81 consecutive years.
ITEM 6 - SELECTED FINANCIAL DATA - see page 75.
18
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unocal explores for, develops, produces and markets crude oil and natural gas
resources around the world, with its largest operations in the Gulf Coast region
of the United States and in Southeast Asia. In addition, Unocal is the world's
leading geothermal energy producer and manufactures and markets nitrogen-based
fertilizers, petroleum coke, graphites, solvents and specialty minerals.
The following discussion and analysis of the consolidated results of
operations and financial condition of Unocal should be read in conjunction with
the historical financial information provided in the Consolidated Financial
Statements and accompanying Notes.
CONSOLIDATED RESULTS
Millions of Dollars 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
After-tax earnings from continuing operations
before cumulative effect of accounting change $456 $249 $110
Cumulative effect of accounting change - - (277)
----------------------------------------
After-tax earnings (loss) from continuing operations $456 $249 $(167)
Special items:
Cumulative effect of accounting change - - (277)
Impairment of long-lived assets (SFAS No. 121) (46) (53) -
Litigation (59) (37) (41)
Environmental remediation provisions (64) (26) (111)
Sale of California oil and gas properties 65 - -
Settlement of Federal leases 7 18 -
Write-downs of assets - (12) (24)
Asset sales 5 70 7
Mesa Petroleum settlement - - 24
Other (14) 2 (8)
- ------------------------------------------------------------------------------------------------------------------
Total special items (106) (38) (430)
- ------------------------------------------------------------------------------------------------------------------
After-tax earnings from continuing operations
excluding special items $562 $287 $263
After-tax earnings (loss) from discontinued operations (420) 11 14
Special items:
Loss on disposal (491) - -
Other 5 1 (23)
- ------------------------------------------------------------------------------------------------------------------
After-tax earnings from discontinued
operations excluding special items 66 10 37
Total after-tax earnings from operations excluding special items $628 $297 $300
- ------------------------------------------------------------------------------------------------------------------
1996 VS 1995
During 1996, the company built on its operational strengths by selling assets
that had historically low returns and by increasing capital spending in
international areas in which the company has a strong competitive position.
Unocal completed the sale of its California oil and gas properties and entered
into agreements to sell its West Coast refining, marketing and transportation
assets. The results of operations for the West Coast refining, marketing and
transportation segment are presented as discontinued operations.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Unocal's 1996 adjusted after-tax earnings from continuing operations reflected
higher average sales prices for worldwide crude oil and condensate and for
natural gas, increased foreign natural gas production, and increased production
and sales volumes for agricultural products. Partially offsetting these
positive factors were lower worldwide crude oil production and lower
agricultural products sales prices.
1995 VS 1994
During 1995, adjusted after-tax earnings from continuing operations reflected
higher worldwide average crude oil sales prices and higher average sales prices
for agricultural products. Partially offsetting these positive factors were
lower production for worldwide crude oil and geothermal steam and lower average
sales prices for natural gas.
OTHER SPECIAL ITEMS FROM CONTINUING OPERATIONS
In the preceding table, the Other category of special items from continuing
operations for 1996 primarily consisted of a $7 million restructuring provision
and a $6 million receivable write down. For 1995, the category included a $34
million benefit from a bankruptcy settlement with Columbia Gas Transmission
Corporation, an $18 million charge for a deferred tax adjustment and a $14
million receivable write down. For 1994, the amount consisted primarily of a
$15 million restructuring provision and a $9 million benefit related to the
lease cancellation on the former Unocal headquarters building in downtown Los
Angeles.
REVENUES
Total revenues from continuing operations were $5.3 billion in 1996, $4.4
billion in 1995 and $4.3 billion in 1994. The increase in 1996 from 1995 was
primarily due to higher worldwide crude oil and natural gas sales prices and
increased natural gas production and agricultural products sales volumes. The
increase in 1995 from 1994 was largely due to higher agricultural products
average sales prices and gains on sales of assets.
COSTS AND OTHER DEDUCTIONS (PRETAX)
Millions of Dollars 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Costs and other deductions from continuing operations:
Crude oil and product purchases $1,502 $ 979 $1,064
Operating expense 1,386 1,302 1,366
Special items:
Environmental provision (103) (41) (179)
Litigation provision (93) (60) (65)
Other (11) - -
- -------------------------------------------------------------------------------------------------------------------
Crude oil and product purchases and operating expense
from continuing operatons excluding special items $2,681 $2,180 $2,186
- -------------------------------------------------------------------------------------------------------------------
Selling, administrative and general expense $ 151 $ 151 $194
Special items:
Other - - (24)
- -------------------------------------------------------------------------------------------------------------------
Selling, administrative and general expense from
continuing operations excluding special items $ 151 $ 151 $170
- -------------------------------------------------------------------------------------------------------------------
20
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Millions of Dollars 1996 1995 1994
- ----------------------------------------------------------------------------------------------
Depreciation, depletion and amortization $914 $911 $811
Special items:
Impairment of long-lived assets (75) (87) -
Write-downs of assets - (19) (38)
- ----------------------------------------------------------------------------------------------
Total depreciation, depletion and
amortization excluding special items $839 $805 $773
Dry hole costs $139 $61 $84
Interest expense $279 $291 $275
- ----------------------------------------------------------------------------------------------
The higher adjusted crude oil and product purchases and operating expense for
1996 were principally due to increased expense for crude oil and product
purchases resulting from higher average crude oil prices. Comparing years 1996
and 1995 to 1994, the company's continued cost reduction efforts resulted in an
average decrease of 11 percent in selling, administrative and general costs.
In 1996, dry hole costs were higher primarily due to increased exploratory
drilling in the United States. Reduced worldwide exploratory drilling in 1995
resulted in lower dry hole costs.
During 1996, the company reduced interest expense as a result of paying down
debt. The company's interest expense was higher by six percent in 1995 due
principally to increased borrowing to fund the 1995 capital program.
EXPLORATION AND PRODUCTION
This business segment explores for, and produces and markets crude oil,
condensate, natural gas and natural gas liquids.
Millions of Dollars 1996 1995 1994
- -------------------------------------------------------------------------------------------
After-tax earnings $728 $421 $378
Special items:
Impairment of long-lived assets (32) (53) -
Environmental provision - - (16)
Sale of California oil and gas properties (a) 65 - -
Settlement of Federal leases 7 18 -
Write-downs of assets - (8) (15)
Asset sales 42 35 3
Columbia gas settlement - 34 -
Other (4) - -
- -------------------------------------------------------------------------------------------
Total special items 78 26 (28)
- -------------------------------------------------------------------------------------------
After-tax earnings excluding special items $650 $395 $406
- -------------------------------------------------------------------------------------------
(a) Net of provision for environmental remediation of $10 million.
During 1996, this business segment reported a 65 percent increase in adjusted
after-tax earnings primarily due to strong worldwide crude oil and natural gas
prices, higher foreign natural gas production and increased demand for fuel
during the winter months.
1996 VS 1995
Increases in the average worldwide sales price for crude oil and condensate
contributed significantly to improved earnings. The average worldwide sales
price for crude oil and condensate increased $3.80 per barrel (or
21
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
25 percent) and the average worldwide sales price for natural gas increased $.55
per mcf (or 32 percent) above the 1995 levels.
In 1996, foreign natural gas production increased 11 percent, principally due
to improved production levels in Thailand, Indonesia and the Netherlands.
Worldwide crude oil production averaged 206,600 barrels per day compared to
240,400 in 1995. This decrease of 14 percent was primarily due to lower
domestic production resulting from the sale of California oil and gas properties
and natural production declines.
1995 VS 1994
During 1995, the company experienced 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 compared to 259,800 in 1994. The
decrease was mainly due to natural production declines and the sale of domestic
properties.
GEOTHERMAL OPERATIONS
This business segment explores for, and produces and sells geothermal
resources used to generate electricity.
Millions of Dollars 1996 1995 1994
- ----------------------------------------------------------------------------------------------
After-tax earnings (loss) ($55) $26 $32
Special items:
Impairment of long-lived assets (14) - -
Asset sales (57) 7 -
Other 2 - -
- ----------------------------------------------------------------------------------------------
Total special items (69) 7 -
- ----------------------------------------------------------------------------------------------
After-tax earnings excluding special items $14 $19 $32
- ----------------------------------------------------------------------------------------------
1996 VS 1995
During 1996, the company experienced higher development, exploratory and dry
hole expenses principally in Indonesia. In addition, earnings were adversely
impacted due to a contract dispute between the Philippine Geothermal, Inc.
subsidiary and the Philippine National Power Corporation. Partially offsetting
these negative factors were a 12 percent increase in steam generation, primarily
due to the use of discount pricing at The Geysers in Northern California and
electrical generation expansion at Mak-Ban in the Philippines.
1995 VS 1994
The decrease in 1995 adjusted after-tax earnings was the result of lower
steam production at The Geysers in Northern California and at the Tiwi
facilities in the Philippines. 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 lower production at the Tiwi
facilities was due to typhoon damage sustained in 1995. 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 operate two 55-megawatt power generating
plants.
DIVERSIFIED BUSINESS GROUP
The Agricultural Products business unit manufactures and markets nitrogen-
based products for wholesale agricultural and industrial markets supplying the
western United States and the Pacific Rim. The Carbon and Minerals business
unit produces and markets petroleum coke, graphites, solvents and specialty
minerals. The Pipelines business unit principally includes the company's equity
interests in petroleum pipeline companies. The Other category includes the
company's equity interest in The UNO-VEN Company.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Millions of Dollars 1996 1995 1994
- ------------------------------------------------------------------------------------------
After-tax earnings:
Agricultural Products $98 $74 $29
Carbon and Minerals 47 52 42
Pipelines 69 66 56
Other 14 9 14
- ------------------------------------------------------------------------------------------
Total 228 201 141
Special items:
Agricultural Products (Asset sales) - 4 2
Carbon and Minerals (Litigation) (1) - -
Pipelines (Asset sales) 9 - -
- ------------------------------------------------------------------------------------------
Total special items 8 4 2
- ------------------------------------------------------------------------------------------
After-tax earnings excluding special items $220 $197 $139
- ------------------------------------------------------------------------------------------
1996 VS 1995
The Agricultural Products business unit's adjusted after-tax earnings for 1996
were 40 percent higher due to increased sales and production volumes primarily
resulting from the startup of the Finley, Washington ammonia plant. In
addition, maintenance expenses were lower in 1996 than in 1995. The higher 1995
expenses were the result of the Finley plant start-up and scheduled maintenance
at the Kenai, Alaska ammonia plant. Partially offsetting these positive factors
were lower sales prices for ammonia and urea.
During 1996, the Carbon and Minerals business unit's adjusted after-tax
earnings decreased principally due to higher mining expenses and lower solvent
margins. The increased mining expenses were primarily the result of the start-
up of the Questa molybdenum mine.
1995 VS 1994
In 1995, the Agricultural Products business unit benefited from significant
increases in ammonia and urea product sales prices because of higher demand in
international markets. This was partially offset by higher raw material and
manufacturing costs, due to the start-up expenses associated with the Finley
plant, and scheduled maintenance at the Kenai plant.
In 1995, the Carbon and Minerals business unit benefited from higher petroleum
coke and lanthanide earnings.
CORPORATE AND UNALLOCATED
Corporate expense includes general corporate overhead, the New Ventures group
and other unallocated costs. Net interest expense represents interest expense,
net of interest income and capitalized interest. The New Ventures group pursues
foreign business development opportunities. During 1996, the New Ventures
group's infrastructure projects included proposed oil and gas pipelines from
Turkmenistan to Pakistan, an equity joint venture in Zhangjiagang, China to
construct a liquefied petroleum gas terminal, and the acquisition of a 30
percent interest in the Transandean oil pipeline. For 1995 and 1994, the New
Ventures group's infrastructure project costs were not significant. The Other
category principally includes real estate businesses and miscellaneous expenses
associated with assets sold or being phased-out.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Millions of Dollars 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
After-tax earnings effect:
Administrative and general expense ($79) ($84) ($70)
Net interest expense (175) (178) (174)
Environmental and litigation expense (143) (92) (186)
New Ventures (23) - -
Other (25) (45) (11)
- --------------------------------------------------------------------------------------------------------
Total (445) (399) (441)
Special items:
Environmental and litigation provisions (122) (63) (138)
Tax adjustments (Other) - (18) -
Receivable write-down (Other) (6) (14) -
Write-downs of assets (Other) - (4) (9)
Asset sales (Other) 11 24 2
Mesa settlement (Other) - - 24
Restructuring costs (A&G) - - (15)
UOC lease termination (Other) - - 9
Miscellaneous (Other) (6) - -
- --------------------------------------------------------------------------------------------------------
Total special items (123) (75) (127)
- --------------------------------------------------------------------------------------------------------
After-tax earnings effect excluding special items ($322) ($324) ($314)
- --------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
In December 1996, the company signed a definitive agreement for the sale of
substantially all of its West Coast petroleum refining, marketing and
transportation assets (discussed on pages 32 through 33). The results of
operations and assets of the refining, marketing and transportation segment have
been classified as discontinued operations. For summary financial statements
and other detailed financial information see Note 3.
FINANCIAL CONDITION
Millions of Dollars 1996 1995 1994
- --------------------------------------------------------------------------------------------
Current ratio (a) 2.0 1.2 1.2
Total debt $3,058 $3,706 $3,466
Convertible preferred securities $ 522 $ - $ -
Stockholders' equity $2,275 $2,930 $2,815
Capitalization $5,855 $6,636 $6,281
Total debt/capitalization 52% 56% 55%
Floating-rate debt/total debt 17% 24% 25%
- --------------------------------------------------------------------------------------------
(a) 1996 includes net assets of discontinued operations.
Cash flow from operating activities, including discontinued operations and
working capital and other changes, was $1,684 million in 1996, $1,277 million in
1995 and $1,299 million in 1994. The 1996 amount reflects higher commodity
prices and increased natural gas production and agricultural products sales.
These benefits were partially offset by increased working capital requirements.
Cash flow from operating activities for 1995 included $200 million of proceeds
from the sale of trade receivables (see Note 25), $71 million from the Columbia
Gas settlement and $34 million for the settlement of Federal leases. These
benefits were more than offset by temporary working capital changes. The 1994
operating 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.
During 1996, the company generated $609 million in pre-tax proceeds from
sales of assets. The 1996 amount included $472 million in proceeds from the
sale of California oil and gas properties, $28 million from the sale of
24
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
geothermal assets, and $23 million from the sale of exploration blocks in the
North Sea. Proceeds from asset sales in 1995 amounted to $204 million,
primarily from the sale of miscellaneous oil and gas properties and the
company's Process, Technology and Licensing business. Proceeds from sales of
assets in 1994 totaled $156 million, principally from the sale of oil and gas
properties.
In 1996 and 1995, the company also generated approximately $33 million and $55
million, respectively, in cash from the sale of its common stock, primarily
through the exercise of employee stock options and the Dividend Reinvestment and
Common Stock Purchase Plan.
In September 1996, the company exchanged 10,437,873 new 6-1/4 percent Trust
convertible preferred securities of Unocal Capital Trust for 9,352,962 shares of
Unocal's outstanding $3.50 convertible preferred stock. On September 11, 1996,
the company called the 897,038 unexchanged shares of $3.50 convertible preferred
stock for redemption. All of the unexchanged shares of preferred stock were
converted into Unocal common stock by the October 11, 1996 redemption date (see
Note 20).
The company's total debt at year-end 1996 decreased $648 million from year-end
1995, to $3,058 million. The decrease was primarily due to retirement of a $175
million Swiss Franc bond issue and a reduction of commercial paper borrowings.
Funding for debt retirements primarily consisted of proceeds from asset sales.
For 1997, the company expects cash generated from operational earnings and
asset sales to be adequate to meet its operating requirements, capital spending
and dividend payments. The company expects to use a portion of the proceeds
from the sale of the West Coast refining, marketing and transportation assets to
reduce debt by approximately $800 million and to repurchase up to $400 million
of common stock. In addition, the company has substantial borrowing capacity to
meet unanticipated cash requirements. At December 31, 1996, the company had
approximately $1.3 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.
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.
At year-end 1996 such contracts covered less than one percent of the company's
annual oil and gas production.
CAPITAL EXPENDITURES FOR CONTINUING OPERATIONS
Estimated
Millions of Dollars 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Exploration and Production
Domestic $ 330 $ 418 $ 497 $486
Foreign 735 509 353 310
- -------------------------------------------------------------------------------------------------------
Total 1,065 927 850 796
Geothermal Operations 110 114 51 35
Diversified Business Group
Agricultural Products 20 12 55 8
Carbon and Minerals 26 16 12 8
Pipelines 8 54 5 5
Corporate and Unallocated
New Ventures 60 5 6 12
Other 51 46 58 41
- -------------------------------------------------------------------------------------------------------
Total $1,340 $1,174 $1,037 $905
- -------------------------------------------------------------------------------------------------------
25
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Capital spending in 1996 on foreign oil and gas exploration and production
increased 44 percent from 1995 reflecting increased expenditures in Thailand,
Indonesia, Myanmar, and Azerbaijan. Capital spending on geothermal energy
projects in 1996 primarily focused on development work at the Salak field on the
island of Java and exploration drilling on the island of Sumatra, in Indonesia.
Capital spending in 1997 will focus on the development of overseas oil, gas
and geothermal projects, particularly in Myanmar, Thailand, Indonesia and
Azerbaijan. The sale of the West Coast refining, marketing and transportation
assets will enable the company to shift capital spending to higher return
projects, with 67 percent of total planned capital spending directed to Asian
projects.
In 1997, the foreign exploration and production group's capital spending plan
will increase 44 percent from the 1996 level. A major focus of this spending
will be the Yadana field development offshore Myanmar and the related pipeline
project. This natural gas project is expected to be in operation by mid-1998.
In Thailand, the company plans to develop the Plamuk gas field, discovered in
1996, and extend development of its existing fields to increase natural gas
production when a second pipeline to shore and related facilities become fully
operational in the second quarter of 1997. In Indonesia, the company plans to
further develop new oil and gas reserves offshore East Kalimantan and to
accelerate its successful exploratory drilling program by drilling 30
exploratory wells in known producing basins during 1997. Other important
projects are in the Caspian Sea, offshore Azerbaijan. Unocal is a member of two
international consortia that are moving forward with development programs in
this oil rich area.
The United States Lower 48 accounts for 88 percent of the 1997 domestic
capital budget, as the company's new business unit, Spirit Energy 76, focuses on
development of key natural gas projects.
The 1997 capital expenditures for the Geothermal Operations segment are
expected to approximate the 1996 level, focusing on projects in Indonesia. The
company expects to accelerate development of resource production facilities at
the Salak field and to conduct additional exploration at the Sarulla contract
area on the island of Sumatra. The company has a 50 percent interest in a joint
venture that is building and will operate three power plants at the Salak field
that will utilize its steam production.
The decrease in the Agricultural Products business unit's capital spending in
1996 reflects reduced expenditures due to the startup of the Finley, Washington
ammonia manufacturing plant in 1995. The planned increase in capital spending
for the Carbon and Minerals business unit in 1997 is due to capital requirements
for its lanthanides operations in Mountain Pass, California. The Pipelines
business unit's capital expenditures in 1996 included miscellaneous upgrades to
existing facilities and acquisition of a 30 percent interest in the Transandean
oil pipeline, which transports crude oil from Argentina to Chile.
ENVIRONMENTAL MATTERS
The company continues to incur 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.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Estimated
Millions of dollars 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Environment-related capital expenditures
Continuing operations $36 $15 $33 $37
Discontinued operations $10 $57 $197 $193
- ---------------------------------------------------------------------------------------------------------
Environment-related capital expenditures include additions and modifications
to company facilities to mitigate and/or eliminate emissions and waste
generation. Most of these capital expenditures are required to comply with
federal, state and local laws and regulations. The decrease in 1996 capital
expenditures for discontinued operations reflects the completion of major
modifications to the company's refineries to manufacture cleaner burning
reformulated gasoline for the California market. These modifications were
performed between 1993 and 1995 at a cost of approximately $400 million.
Amounts charged to earnings for environment-related expense were $230 million
in 1996, $170 million in 1995 and $370 million in 1994. Environmental expenses
include remediation costs and operating, maintenance and administrative costs
related to environmental compliance. These expenses include provisions for
future remediation costs that were identified during the company's on-going
review of its environmental obligations. In 1996, these provisions consisted
primarily of remediation costs for active company facilities, the Guadalupe oil
field, the Avila Beach site and sold California oil and gas properties. The
provisions for these sites are discussed in more detail below.
At December 31, 1996, the company's reserves for environmental remediation
obligations totaled $250 million, of which $73 million was included in other
current liabilities. The total amount is grouped into the following five
categories:
Year-end
Millions of Dollars 1996
- ---------------------------------------------------------------------
Superfund and similar sites $27
Former company-operated sites 26
Company facilities sold with
retained liabilities 60
Inactive or closed company facilities 77
Active company facilities 60
- --------------------------------------------------------------------
Total reserves $250
- --------------------------------------------------------------------
SUPERFUND AND SIMILAR SITES
At year-end 1996, Unocal received notification from the U.S. Environmental
Protection Agency that the company may be a potentially responsible party (PRP)
at 39 sites and may share certain liabilities at these sites. In addition,
various state agencies and private parties had identified 37 other similar PRP
sites that may require investigation and remediation. Of the total, the company
has denied responsibility at five sites and at another eight sit