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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998 or
------------------
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _________________
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 common stock held by non-affiliates of the
registrant as of February 28, 1999 (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 approximately $6.74 billion.
Shares of common stock outstanding as of February 28, 1999: 241,518,668
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders (to be filed with the Securities and Exchange Commission
on or about April 12, 1999) are incorporated by reference into Part III.
TABLE OF CONTENTS
ITEM (S) PART I PAGE
1. and 2. Business and Properties......................................................................... 1
3. Legal Proceedings............................................................................... 13
4. Submission of Matters to a Vote of Security Holders............................................. 18
Executive Officers of the Registrant............................................................ 18
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 20
6. Selected Financial Data......................................................................... 20
7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 21
7A. Quantitative and Qualitative Disclosures about Market Risk...................................... 42
8. Financial Statements and Supplementary Data..................................................... 44
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 90
PART III
10. Directors and Executive Officers of the Registrant.............................................. 91
11. Executive Compensation.......................................................................... 91
12. Security Ownership of Certain Beneficial Owners and Management.................................. 91
13. Certain Relationships and Related Transactions.................................................. 91
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 91
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 text indicates otherwise.
Unocal is one of the world's largest independent oil and gas exploration and
production companies, with major oil and gas exploration and production
activities in Asia and the United States Gulf of Mexico. Unocal is also a
leading producer of geothermal energy; a provider of electrical power; and a
manufacturer and marketer of nitrogen-based fertilizers, petroleum coke,
graphites and specialty minerals. Other activities include project development,
ownership in proprietary and common carrier pipelines, and the marketing and
trading of hydrocarbon commodities.
STRATEGIC FOCUS
In 1998, Unocal continued to focus on its strategy of growth through crude oil
and natural gas exploration and the pursuit of market-to-resource project
developments with the goal of creating value for its stockholders. Since the
inception of this strategy in 1994, the company has transformed itself in three
distinct phases. First, Unocal sold its low-return refining and marketing
assets to concentrate on its exploration and production operations. Second, the
company has been concentrating its exploration and production activities in
distinct geographic regions where it has a strong competitive advantage, sees a
growing energy market, and has the opportunity to leverage its technical skills,
relationships, and low cost structure. Third, the company's management is
strengthening its focus on the financial returns of its operations in an effort
to maximize values.
In carrying out this strategy, the company has actively managed its portfolio of
assets by divesting its lower-return or non-strategic assets and re-investing in
potentially high-return exploration and production assets primarily in Asia and
the Gulf of Mexico. Activity in 1998 included the divestiture of most of the
company's Canadian properties, the announcement of plans to reorganize or divest
most of the Diversified Business Group's assets, and the acquisition of
additional blocks in the deepwater areas of the Gulf of Mexico, Indonesia and
Gabon. Activity in early 1999 included an agreement for the sale of United
States geothermal assets at The Geysers in Northern California and an agreement
for the exchange of most of the company's Rocky Mountain oil and gas assets.
Unocal's potential growth areas include Indonesia, Thailand, the Gulf of Mexico,
Bangladesh, Brazil, and West Africa. These areas have similar geological
environments that the company understands well. This should allow the company
to leverage its drilling expertise and lower operating costs. Conversely, the
company is withdrawing from non-strategic areas, mostly in Central Asia (except
Azerbaijan), where there are lower potential returns, heightened political
risks, questionable market development, or unacceptable payout timelines.
DEPRESSED COMMODITY PRICES
Crude oil and natural gas prices were severely depressed in 1998. This was
especially true of the company's worldwide average crude oil price, which
finished the year approximately 34 percent below the average for 1997. The
company's worldwide average natural gas price in 1998 was approximately 14
percent below the 1997 average. These depressed prices were primarily the
result of an oversupply of crude oil on world markets, a drop in demand in
Southeast Asia, a warm winter in the Northern Hemisphere, and a build-up of
United States natural gas inventories.
This low commodity price environment produces both challenges and opportunities.
The challenge for the company is to deliver earnings, maintain production, and
maintain a manageable level of debt without
1
sacrificing key growth projects. The company will reduce capital spending over
the short-term, and leverage its strengths to capture the opportunities. Unocal
will focus on its highest-potential growth assets, withdraw from or suspend
projects in other areas, adjust capital expenditures with available cash flows
and implement targeted cost reductions to weather this depressed price
environment.
ASIAN ECONOMIC CRISIS
Unocal has major operations in Thailand and Indonesia, two of the countries
affected by the current economic downturn afflicting Asia. Although the economic
situation in Asia indirectly impacts the company as well as other oil and gas
companies in terms of a worldwide commodity price decline, currently the
company's oil and gas operations in Thailand and Indonesia remain largely
unaffected by the economic crisis.
The primary risks for the company in these countries are foreign currency
fluctuations, declining demand for contractual commodity deliveries, and
political instability. Most of the company's operating revenues are largely
protected from foreign currency fluctuations through existing contracts and, in
Indonesia, oil and liquefied natural gas exports are sold in dollar-based world
markets. In Thailand, increased usage of indigenous natural gas as an
alternative fuel for power generation has kept natural gas demand strong even as
the demand for electricity has declined. To date, no oil and gas production or
sales contracts have been nullified or significantly altered as a consequence of
political turmoil or financial crises in these countries.
The company's geothermal operations agreements at Gunung Salak, in Indonesia,
are also designed to insulate the company from foreign currency fluctuations.
The energy sales agreement calls for payments in U.S. dollars and is guaranteed
by the government of Indonesia. However, only partial payments have been
received. As of December 31, 1998, the company's geothermal operations in
Indonesia had a gross receivable balance of approximately $100 million, most of
which was for steam sales from the Gunung Salak field. The company is
vigorously pursuing collection of the outstanding receivables.
The company has been developing resources and energy projects that have
strengthened Asian economies for more than three decades. The company is
monitoring the crisis and will continue to work closely with host governments
and business associates through this difficult period.
DISPOSITION OF COMPANY ASSETS
In April 1998, the company received shares of common stock and debentures of
Tarragon Oil and Gas Limited (Tarragon) valued at approximately $212 million for
the exchange of its Alberta, Canada, exploration and production assets. In the
third quarter of 1998, the company converted the debentures and common stock to
cash as a result of a tender offer from USX-Marathon for the purchase of
Tarragon's outstanding common stock. The total after-tax gain recorded for
these transactions was $101 million and the proceeds from the sale were $261
million. Also in 1998, the company received proceeds from the sales of its
interests in the Alliance Pipeline project and its Oklahoma oil and gas assets
of $52 million and $34 million, respectively.
In January 1999, the company reached an agreement to sell its interest in a
geothermal steam venture at The Geysers in Northern California for $101 million.
The transaction is expected to close by the end of the first quarter of 1999.
In March 1999, the company signed a letter of intent to trade most of its Rocky
Mountain oil and gas assets for 5.8 million shares of a domestic oil and gas
exploration and production company and $5 million in cash. The total value of
the exchange is approximately $76 million. The exchange is expected to close in
the second quarter of 1999.
2
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 74 and 88, respectively, of this report.
Information regarding oil and gas financial data, oil and gas reserve data and
the related present value of future net cash flows from oil and gas operations
is presented on pages 81 through 87 of this report. During 1998, 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.
EXPLORATION AND PRODUCTION
Unocal's primary activities are oil and gas exploration, development, and
production. Spirit Energy 76, Alaska, New Ventures, and International Operations
conducts the company's exploration and production activities. Spirit Energy 76,
Alaska and International Operations are engaged in the exploration, development,
production, and sale of crude oil and natural gas in ten countries around the
world.
In 1998, the company produced approximately 184 thousand barrels of crude oil
and condensate per day and 1,826 million cubic feet of natural gas per day
primarily from the United States Gulf Coast, Thailand, and Indonesia.
Exploration and production operations accounted for approximately 62 percent of
Unocal's total assets at December 31, 1998. Approximately 49 percent of the
company's exploration and production assets are in the United States.
Unocal has focused its growth efforts on exploration and production projects in
the Gulf of Mexico and Southeast Asia. In addition, Unocal is pursuing
potential high-value, market-to-resource project opportunities in other key
growth areas.
Net Proved Reserves at Year End
Estimated net quantities of the company's proved oil and gas reserves at
December 31, 1998 were as follows:
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Crude oil and condensate - million barrels (a)
United States 184 209 236
Far East 190 158 166
Other International 158 166 111
--------------------------------------------
Worldwide 532 533 513
Natural gas - billion cubic feet (a) (b)
United States 1,941 2,120 2,575
Far East 3,955 4,189 4,057
Other International 226 241 163
--------------------------------------------
Worldwide 6,122 6,550 6,795
(a) Includes host countries' shares under certain
production sharing contracts of:
Crude oil and condensate - million barrels 52 59 70
Natural gas - billion cubic feet 389 444 530
(b) Natural gas is reported on a wet-gas basis.
3
Net Daily Production
Net quantities of crude oil and condensate, natural gas, and natural gas liquid
produced by the company per day were as follows:
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Crude oil and condensate - thousand barrels (a)
United States 73 76 96
Far East 80 95 84
Other International 31 26 27
------------------------------------------
Worldwide 184 197 207
Natural gas - million cubic feet (a) (b)
United States 928 993 1,075
Far East 853 795 669
Other International 45 60 68
------------------------------------------
Worldwide 1,826 1,848 1,812
Natural gas liquids - thousand barrels (c)
United States 14 12 14
Far East 5 6 6
------------------------------------------
Worldwide 19 18 20
(a) Includes host country share in Indonesia of:
Crude oil and condensate - thousand barrels 10 28 28
Natural gas - million cubic feet 49 28 27
(b) Natural gas is reported on a wet gas basis and excludes gas consumed on
lease.
(c) Host country share of natural gas liquids production is
insignificant.
Natural Gas Production Available for Sale
Quantities of natural gas production available for sale were as follows:
Million cubic feet per day 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
United States 758 813 891
International 827 820 705
----------------------------------------------------
Worldwide 1,585 1,633 1,596
Oil and Gas Acreage
As of December 31, 1998, the company's holdings of oil and gas rights acreage
were as follows:
As of December 31, 1998
(thousands of acres)
- -----------------------------------------------------------------------------------------------------------------------------------
Proved Acreage Prospective Acreage
------------------------------------- -------------------------------
Gross Net Gross Net
----------------- ------------- -------------- -----------
United States 852 551 2,691 1,879
Far East 334 242 37,432 20,167
Other International 114 51 13,677 5,014
----------------- ------------- -------------- -----------
Worldwide 1,300 844 53,800 27,060
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Producible Oil and Gas Wells
The approximate numbers of producible wells at December 31, 1998 were as
follows:
As of December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Oil Gas
------------------------------------ --------------------------------
Gross Net Gross Net
----------------- ------------- ------------- -------------
United States 2,736 1,621 974 610
Far East 202 153 705 490
Other International 872 295 34 24
----------------- ------------- ------------- -------------
Worldwide 3,810 2,069 1,713 1,124
The company had 260 gross and 191 net producible wells with multiple
completions.
Drilling in Progress
The numbers of wells in progress at December 31, 1998 were as follows:
As of December 31, 1998
Oil and Gas Wells *
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Net
-------------- ----------------
United States 27 11
Far East 46 25
Other International 3 1
-------------- ----------------
Worldwide 76 37
* Excludes service wells in progress (6 gross, 2 net).
The company had no waterflood projects in progress at December 31, 1998.
Net Oil and Gas Wells Completed and Dry Holes
The following table shows the number of net wells drilled to completion by the
company:
Productive Dry
------------------------------------------------- ----------------------------------------------
1998 1997 1996 1998 1997 1996
------------- ------------ ------------ ------------ ------------ ------------
Exploratory
United States 20 14 13 18 7 11
Far East 15 7 2 13 17 14
Other International 2 1 2 3 1 5
------------- ------------ ------------ ------------ ------------ ------------
Worldwide 37 22 17 34 25 30
Development
United States 76 48 76 2 - 4
Far East 119 124 90 7 1 -
Other International 23 64 26 1 6 2
------------- ------------ ------------ ------------ ------------ ------------
Worldwide 218 236 192 10 7 6
5
UNITED STATES - Spirit Energy 76 is Unocal's United States lower 48 exploration
and production unit. Spirit Energy 76 is active in exploration, development,
and production activities in the onshore, shelf, and deepwater areas of the Gulf
of Mexico region. Onshore operations are located in Texas, Louisiana, Michigan,
New Mexico, Alabama, and Utah. On December 31, 1998, the company sold
substantially all of its oil and gas assets in Oklahoma.
The company's Alaska upstream oil and gas operations are managed by the
Agricultural Products business unit. Most of the natural gas produced by the
company's Alaska fields is used for feedstock at the company's fertilizer
manufacturing facility in Kenai.
The company holds approximately 1,879 thousand net acres of prospective land in
the United States. Nearly 71 percent of the prospective acreage is located
offshore in the Gulf of Mexico. Onshore prospective lands are primarily located
in Alaska, Texas, Colorado, New Mexico, and Louisiana.
The company holds approximately 551 thousand net acres of proved lands in 19
states. Approximately 37 percent of these lands are located offshore in the
Gulf of Mexico. Onshore proved acreage is primarily located in Texas,
Louisiana, Alaska, New Mexico, and Alabama.
Unocal's 1998 United States crude oil was produced from fields in Alaska (40
percent), the offshore Gulf of Mexico (24 percent), Texas (24 percent), and
Louisiana (7 percent). Various other states contributed the remaining amount (5
percent). The company's United States natural gas production in 1998
principally came from fields in the offshore Gulf of Mexico (52 percent),
Louisiana (14 percent), Alaska (14 percent), Texas (9 percent), and New Mexico
(5 percent). Various other states contributed the remaining amount (6 percent).
Unocal has various ownership interests in 13 natural gas processing plants
located near major gas fields in the United States. The company operates six of
these plants, none of which were 100 percent owned. Twelve plants were active
in 1998.
Most of the company's United States crude oil and natural gas production is sold
to the company's Global Trade segment. A small portion is sold to third parties
at spot market prices or under long-term contracts.
Onshore and Shelf Gulf of Mexico
Spirit Energy 76 recorded a 64 percent success rate in its core Gulf of Mexico
shelf exploration program during 1998. The latest discoveries included Mobile
918 No.1 in the Norphlet play offshore Alabama, marking the beginning of a
multi-year drilling program on this trend. The well encountered 250 feet of gas
pay. Production is expected to begin in March 1999 at a gross flow rate of 25
to 35 million cubic feet per day (mmcfd). Spirit Energy 76 is the operator and
has a 45.65 percent working interest.
Another discovery was the West Cameron 278 LeMans well, offshore Louisiana,
which encountered 53 feet of gas pay. The well is planned to be placed on
production in late March 1999 at a rate exceeding 25 mmcfd. Spirit Energy 76 is
the operator with a 70 percent working interest.
During 1998, Spirit Energy 76 had 21 discoveries on the shelf. The company
ended 1998 with an onshore and shelf Gulf of Mexico inventory of more than 130
drilling prospects, about 2 1/2 times the number that Spirit Energy 76 had two
years ago.
Deepwater Gulf of Mexico
In 1998, Spirit Energy 76 acquired interests in 53 additional deepwater tracts
in United States federal lease sales bringing the total inventory of deepwater
Gulf of Mexico blocks in which it has interests to 213. The company currently
has plans to drill or participate in four to six deepwater exploratory wells in
1999.
Spirit Energy 76 is currently participating in two deepwater exploration wells
and expects to spud its first operated well in the second quarter of 1999.
Through its exploration efforts in the Far East, the company
6
has developed cost-effective drilling design and techniques that it believes can
reduce the cost of Gulf of Mexico deepwater exploration wells by 50 percent or
more, compared with conventional drilling approaches.
INTERNATIONAL - Unocal produces oil and gas in nine countries outside of the
United States. The company, through its International Operations and
subsidiaries, currently operates or participates in production operations in
Thailand, Indonesia, Canada, The Netherlands, Azerbaijan, Myanmar, Yemen, the
Democratic Republic of Congo, and Bangladesh. Unocal's international operations
in 1998 accounted for 49 percent of the company's natural gas production and 60
percent of its oil production.
International Operations also includes the exploration activities of the
company's New Ventures group. The New Ventures group is involved in developing
energy projects primarily in Asia, Latin America and West Africa.
Thailand
The company currently operates eleven natural gas and condensate fields in the
Gulf of Thailand with an average 64 percent net working interest. The Thailand
operation, producing since 1981, has drilled over 1,100 wells and has installed
78 platforms in the Gulf of Thailand. The newest offshore Thailand gas field,
Pailin, is expected to commence production in the second half of 1999. The
company had 1,138 employees in its Thailand operations at year-end 1998.
Approximately 91 percent of these employees were Thai nationals.
Gross natural gas production from all the Unocal operated fields averaged nearly
one billion cubic feet per day in 1998, nearly two-thirds of the natural gas
used by Thailand. The natural gas is mainly used in power generation, but also
in the transportation sector and the petrochemical industry. Natural gas
produced by the company yields about one quarter of the electricity consumed in
Thailand. Natural gas production growth in Thailand has averaged 18 percent per
year since 1981 but production is expected to decline in 1999. Gross
condensate production averaged nearly 34 thousand barrels per day in 1998, and
is used as a blending stock in oil refineries, as a chemical solvent, and as a
petrochemical feedstock.
The company sells substantially all of its natural gas production to the
Petroleum Authority of Thailand (PTT) under long-term contracts. The contract
prices are based on formulas that allow prices to fluctuate with market prices
for crude oil and refined products and are indexed to the U.S. dollar. In 1998,
$561 million, or approximately 11 percent, of the company's total external sales
and operating revenues were attributable to PTT. 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 1998, the company, through its
subsidiaries, began initial delivery of gas to Thailand from the Yadana field,
offshore Myanmar. The company's obligation to deliver gas to PTT is limited to
the available economic production from its properties in Thailand and Myanmar.
In 1998, successful delineation wells confirmed the commerciality of the
Pakarang gas field in the Gulf of Thailand. Pakarang is located in concession
block 11, north of Unocal's Erawan field. Also in 1998, the company discovered
another new natural gas field in the Gulf of Thailand. The South Gomin field
lies in concession block 13, southeast of Unocal's Erawan field and south of the
Funan field, which are among the eleven fields in the Gulf of Thailand that are
operated by the company. Both new fields are covered under a company sales
contract with PTT.
In 1998, the company also signed a farm-in agreement with PTT Exploration and
Production Plc covering blocks B-14, B-15, and B-16 on the Thai side of the
Thai-Vietnam overlap area in the Gulf of Thailand. These blocks adjoin the
company's established contract areas in Thailand.
Indonesia
The company currently operates nine producing oil and gas fields offshore East
Kalimantan, including Indonesia's largest offshore oil and gas field, Attaka,
which the company discovered in 1970. Oil
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production from its northern fields is processed at the Santan terminal liquid
extraction plant and the dry gas is transported by pipelines to a fertilizer
plant and liquefied natural gas (LNG) plant, both located nearby at Bontang,
East Kalimantan. LNG is currently sold to Japan, Korea and Taiwan and the
extracted liquefied petroleum gas is exported to Japan. Oil and gas from its
southern fields are sent to the Unocal operated Lawe-Lawe terminal located near
the fields. The stored oil is either exported by tanker or transported by
pipeline to a refinery in Balikpapan owned by Pertamina, the state-owned oil and
gas company. The gas is sent by pipeline to the refinery and utilized as fuel.
Company operated fields averaged gross production of 76 thousand barrels of
crude oil and condensate per day and 337 million cubic feet of natural gas per
day in 1998. The company holds varying interests in more than 5.2 million acres
offshore East Kalimantan.
The discovery in 1998 of a significant new oil field in the deepwater Kutei
Basin area offshore East Kalimantan opens up a new hydrocarbon province for the
company. The first successful exploration well drilled on the Seno prospect,
West Seno #2, is located on the Makassar Strait production-sharing contract
(PSC) area. The latest delineation well on the Seno prospect, West Seno #4,
tested at over 19,000 barrels of oil and 18 million cubic feet of gas per day
from three zones. The company plans on submitting its plan of development to
Pertamina early in the second quarter of 1999.
The company also drilled successful wells in the deepwater Merah Besar
area, in the Kutei Basin, further delineating a 1997 discovery. The wells
encountered shallow gas on the East Kalimantan PSC area. The company plans on
submitting a plan of development to Pertamina for the Merah Besar area. The
Merah Besar area is located on the East Kalimantan PSC and northern portion of
the Makassar Strait PSC and could be developed as a cost-efficient satellite
development to the West Seno field. Production from the West Seno and Merah
Besar fields is expected to begin in 2001.
In Indonesia, the company had 1,476 employees at year-end 1998. Approximately
93 percent were Indonesian nationals.
Myanmar
The company, through subsidiaries, has a 28 percent non-operating interest in a
project to produce natural gas from the Yadana field, offshore Myanmar in the
Andaman Sea, and transport it by pipeline to Thailand for power generation.
Yadana is the first cross-border energy project in Southeast Asia.
The Yadana project included development of the Yadana field (four offshore
platforms with 14 wells) and construction of a pipeline extending from the
offshore field across Myanmar's remote southern panhandle to Ban-I-Trong at the
Myanmar-Thailand border.
The gas will be used to fuel a 2,800-megawatt power plant currently under
construction and to be operated by the Electric Generating Authority of Thailand
at Ratchaburi, located southwest of Bangkok. Limited production began in 1998
and is expected to increase in 1999. Commercial production is beginning later
than originally expected due to construction delays at the power plant.
Vietnam
The company has tested a significant gas discovery in its first exploration well
on Block B offshore southwestern Vietnam. In 1998, two drill stem tests on the
exploration well, B-KL-1X, yielded a combined rate of 52.9 million cubic per day
of gas on the Kim Long prospect. Block B, which contains identified natural gas
prospects, covers more than 1.3 million acres. Unocal has a 45 percent working
interest and is operator.
In 1998, the company increased its acreage position in the Vietnam portion of
the Gulf of Thailand. The company signed an agreement with PetroVietnam, the
Vietnam government's oil and gas company, to acquire more than two million acres
directly north of Block B. The company also acquired exclusive negotiating
rights to Block 52/97, south of Block B, on the Vietnam side of the Thai-Vietnam
overlap area in the Gulf of Thailand.
8
Canada
The company exchanged most of its Alberta, Canada, exploration and production
assets for shares of common stock and debentures of Tarragon, which were
subsequently converted into cash as a result of a tender offer by USX-Marathon.
The company retained its interests in the Aitken Creek Gas Storage Project in
British Columbia, the Cal Ven Pipeline, and oil and gas producing properties
located in Southwest Saskatchewan.
The Netherlands
Average gross oil production in 1998 was approximately eight thousand barrels
per day. Unocal also produced an average 46 million cubic feet of natural gas
per day from the L11/B and Halfweg fields. In total, the company has interests
in seven producing fields.
Azerbaijan
Unocal has a ten percent working interest in the Azerbaijan International
Oil Company (AIOC) consortium that is developing offshore oil reserves in the
Caspian Sea from the Azeri and Chirag fields and the deepwater portions of the
Gunashli field. In 1998, AIOC averaged 48 thousand gross barrels of oil per day
of early production through the northern pipeline route, which connects in
Russia to an existing pipeline system. A western pipeline route from Baku
through Georgia to the Black Sea is now operating.
Yemen
The company has been involved in oil exploration in Yemen since 1987 when
the company signed the East Shabwa Production Sharing Agreement (PSA) with its
co-venturers and the government of Yemen. Gross production started from the
East Shabwa PSA in December 1997, and averaged 16 thousand barrels of oil per
day in 1998. Unocal is a non-operator with 28.57 percent working interest.
Democratic Republic of Congo
The company has been active in the Democratic Republic of Congo (formerly Zaire)
since 1984 when the company acquired a 17.72 percent non-operating working
interest in the rights to explore and produce hydrocarbons in the entire
offshore area of the country. Gross production averaged about 20 thousand
barrels of oil per day from seven producing fields in 1998.
Gabon
Unocal is a member of the Vanco Gabon Group, a consortium of French and U.S. oil
and gas exploration companies that has entered into production-sharing contracts
for two exploration blocks located in deep water offshore Gabon, West Africa.
Unocal holds a 25 percent working interest in the venture. A 3D seismic program
is scheduled to begin in 1999, followed by the drilling of several exploration
wells starting in 2000.
Bangladesh
The company's involvement in the Bangladesh energy sector includes interests in
two PSCs. The PSCs cover Blocks 12, 13 and 14, which total more than three
million acres. The Jalalabad field is being developed on Block 13. Gas began
flowing from the Jalalabad field in February 1999 and will soon increase to 100
million cubic feet per day. The company has a 50 percent working interest in
these blocks.
The Bibiyana field, a major new gas field located on Block 12, was discovered in
the summer of 1998. The Bibiyana discovery is currently being delineated and
appraisal work will continue throughout 1999.
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Brunei
In 1997, the company signed a farm-in agreement covering Blocks A and CD,
offshore Brunei. One well was drilled in late 1997, and drilling is expected to
resume in late 1999 or early 2000. Unocal holds a 50 percent working interest
in both blocks.
Argentina
Unocal has a 47.5 percent and a 50 percent working interest in Blocks CNQ7 and
CNQ7A, respectively, in the Neuquen Basin of Argentina. The company is the
operator for Block CNQ7A.
The company also has a 50 percent working interest in two offshore blocks in the
San Jorge Basin. In 1999, the joint venture plans to evaluate recently acquired
seismic data.
India
Unocal has acquired a 26 percent equity interest in the Hindustan Oil
Exploration Company (HOEC). Unocal also is evaluating the size and commercial
viability of gas resources in Tripura.
Changing political climates and relationships between international oil
companies and host governments in the above-mentioned 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. In addition, circumstances could
arise that may have a material adverse impact on the company's future
operations. These circumstances may include, but not be limited to, further
devaluation of Asian currencies, decreased demand for energy products in areas
where the company has operations, civil unrest, increased inflation and any
prolonged international economic slowdowns.
CRUDE OIL AND NATURAL GAS MARKETING AND TRADING
The company formed the Global Trade segment to consolidate its worldwide crude
oil, condensate and natural gas marketing and trading and commodity risk
management activities. Most of the company's United States crude oil and
natural gas production is sold to the Global Trade segment. Global Trade also
purchases crude oil, condensate and natural gas from the company's joint venture
partners, royalty owners and other unaffiliated oil and gas producers for
resale.
Effective January 1, 1999, the Pipelines business unit, previously part of the
Diversified Business segment, and the Global Trade segment were combined into a
new organization. This new organization will help the company compete more
effectively in the midstream sector by bringing the company's energy trading,
risk management, and asset optimization skills under a single management
structure. Global Trade is responsible for trading and marketing most of the
company's crude oil and gas production worldwide as well as managing the
pipeline and midstream assets. Global Trade also supports the New Ventures
group through a newly formed International Gas Marketing Group, which will focus
on adding value in new markets where the company has or is developing a
presence, and in the company's fuel management and international pipeline
support activities.
GEOTHERMAL AND POWER OPERATIONS
Unocal is a producer of geothermal energy, with more than 30 years experience in
geothermal resource exploration, reservoir delineation, and management. Unocal
also has proven experience in planning, designing, building and operating
private power projects and related project finance and economics.
The company operates major geothermal electricity projects at Tiwi and Mak-Ban
in the Philippines, Gunung Salak in Indonesia, and The Geysers in Santa Rosa,
California. In January 1999, the company
10
reached an agreement to sell its interest in a geothermal steam venture at The
Geysers in Northern California for $101 million. The transaction is expected to
close by the end of the first quarter of 1999.
Philippine Geothermal, Inc. (PGI), Unocal's Philippine subsidiary, entered into
a provisional agreement with National Power Company of the Philippines (NPC) as
a result of arbitration over the service contract renewal. This provisional
agreement was in effect until December 31, 1997, when the arbitration court
issued an interlocutory order requiring both parties to maintain status quo
beyond December 31, 1997. On June 22, 1998, PGI entered into an interim service
agreement with NPC with terms similar to the previous provisional agreement
signed in September 1996 respecting the status quo. For as long as the parties
are negotiating in good faith, the term of the interim service agreement is
open-ended. The term will end six months after either NPC or PGI resumes its
arbitration or court cases. NPC and PGI continue to negotiate in good faith for
a possible settlement.
The company's geothermal reserves and operating data are summarized below:
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Net proved geothermal reserves at year end: (a)
billion kilowatt-hours 157 149 155
million equivalent oil barrels 235 223 232
Net daily production
million kilowatt-hours 21 18 18
thousand equivalent oil barrels 32 27 26
Net geothermal lands in thousand acres
proved 20 16 16
prospective 338 384 384
Net producible geothermal wells 287 241 208
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Includes reserves underlying a service fee arrangement in the Philippines.
DIVERSIFIED BUSINESS GROUP
Agricultural Products
Unocal is a major manufacturer and marketer of nitrogen-based fertilizers
serving the western United States and southeast Asian markets. The company's
primary fertilizer manufacturing plants, located in Kenai, Alaska, supply
nitrogen-based ammonia and urea fertilizer products to export markets in
southeast Asia and to Unocal's West Coast U.S. terminals. Natural gas from the
company's southern Alaska operations is the feedstock for the Kenai facilities.
The company also produces ammonia at its Finley, Washington, facility and
manufactures upgraded nitrogen-based fertilizer products at its Kennewick,
Washington, and West Sacramento, California, facilities.
Carbon and Minerals
The Carbon and Minerals business unit produces and markets petroleum coke,
graphites, 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, owned and
operated by a subsidiary of the company, is located adjacent to the Citgo
refinery in Lemont, Illinois.
The company owns a 75 percent interest in The Needle Coker Company. The
operation produces calcined needle coke at facilities also adjacent to the Citgo
refinery. Needle coke is a high quality petroleum coke used to make graphite
electrodes for the production of steel in electric arc furnaces.
11
Through its wholly-owned subsidiary, Poco Graphite, Inc., the company
manufactures premium graphite and silicon carbide materials for use in
electrodes, semiconductors, biomedical products, and other advanced
technologies.
Unocal's mineral operations are carried out by Molycorp, Inc., a wholly-owned
subsidiary. Molycorp mines, processes, and markets lanthanide and molybdenum
products. Its mines are located in Mountain Pass, California and Questa, New
Mexico. Molycorp also has an interest in Companhia Brasileira de Metalurgia e
Mineracao, a niobium operation in Brazil.
Due to persistent low lanthanide prices, a temporary suspension of all mining
and manufacturing operations occurred at the Molycorp's Mountain Pass,
California facilities in 1998. The suspension of operations will last until
prices improve and resolution of certain regulatory and legal issues occurs.
Also, due to the low molybdenum prices realized during the second half of 1998,
operations at Molycorp's Questa, New Mexico, molybdenum facility were partially
curtailed in January 1999. The mining operations are planned to continue at a
reduced rate with the mill operating periodically, as deemed necessary, to
maintain inventory levels to meet customer demands. This operating plan will
continue until prices improve enough to support full-time operations.
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.
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. In addition, the company holds a 27.75 percent interest in the Trans-
Andean oil pipeline, which transports crude oil from Argentina to Chile. In
December 1998, the company sold its 9.078 percent interest in the Canadian
Alliance Pipeline project.
COMPETITION
The energy resource industry is highly competitive. As an independent oil and
gas company, Unocal competes against integrated companies, independent companies
and individual producers and operators for finding, developing, producing,
transporting, marketing, and trading oil and gas resources. The company
believes that it is in a position to compete effectively. Competition occurs in
bidding for United States prospective leases or international exploration
rights, acquisition of geological, geophysical and engineering knowledge, and
the cost-efficient exploration, development, production, transportation, and
marketing of oil and gas. The future availability of prospective United States
leases is subject to competing land uses and federal, state and local statutes
and policies. The principal factors affecting competition for oil and gas are
sales prices, demand, worldwide production levels, alternative fuels and
government and environmental regulations. The company's geothermal and power
operations are in competition with producers of other energy resources.
EMPLOYEES
As of December 31, 1998, Unocal had 7,880 employees down from 8,394 in 1997. Of
the total Unocal employees at year-end 1998, 575 were represented by various
U.S. labor unions.
GOVERNMENT REGULATIONS
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
12
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 company believes that it can
continue to meet the requirements of existing environmental laws and
regulations.
The company has been a party to a number of administrative and judicial
proceedings under federal, state and local provisions relating to environmental
protection. These proceedings include actions for civil penalties or fines for
alleged environmental violations, permit proceedings including hearing requests
into the issuance or modification of National Pollution Discharge Elimination
System (NPDES) permits, requests for temporary variances from air pollution
regulations for manufacturing and/or production facilities, and similar matters.
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 in Item 7 of this report on pages 35
through 38 and notes 16 and 17 to the consolidated financial statements in Item
8 of this report on pages 65 and 66.
ITEM 3 - LEGAL PROCEEDINGS
There is incorporated by reference the information regarding environmental
remediation reserves in note 16 to the consolidated financial statements in Item
8 of this report on page 65, the discussion thereof in the Environmental Matters
section of Management's Discussion and Analysis in Item 7 of this report on
pages 35 through 38, and the information regarding certain legal proceedings and
other contingent liabilities in note 17 to the consolidated financial statements
in Item 8 of this report on pages 65 and 66. Information with respect to certain
additional legal proceedings is set forth below:
General
1. In April 1995, Atlantic Richfield Company (Arco), Chevron U.S.A., Inc.,
Exxon Corporation, Mobil Oil Corporation, Shell Oil Products Company and
Texaco Refining and Marketing, Inc., filed a lawsuit against the company 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 containing several
patent claims for the composition of reformulated gasolines (Atlantic
--------
Richfield Company, et al. v. Unocal
-----------------------------------
13
Corporation, et al., No. CV-95-2379-RG). The plaintiffs alleged that the
------------------
company's patent was invalid and unenforceable. In the first phase of the
trial, the jury, in October 1997, upheld all of the claims of the patent
and found that Arco and the five other oil companies had infringed the
patent with respect to approximately 29 percent, or 1.2 billion gallons, of
the gasolines produced by them for California markets during the five-month
period ended July 31, 1996. In the subsequent damage phase, the jury, in
November 1997, awarded the company 5.75 cents per infringing gallon, or $69
million for the five-month period. Following a third phase of the trial,
the court, in August 1998, found that the company had not engaged in
alleged "inequitable conduct" in obtaining the patent, with the result that
the patent is valid and enforceable. In September 1998, the court entered a
judgment in favor of the company against the six oil companies for $84
million, including interest and attorneys' fees. The court also ordered an
accounting for infringement by the companies since July 1996, but stayed
the order pending appeal of the judgment. In October 1998, the companies
appealed to the Federal Circuit Court of Appeals in Washington, D.C.
In a related matter, Talbert Fuel Systems Patents Company (Talbert) filed
suit against the company in January 1998, in the U.S. District Court for
the Central District of California, alleging that Talbert had a prior
patent covering reformulated gasolines (Talbert Fuel Systems Patents
----------------------------
Company v. Unocal Corp., Union Oil Company of California and Tosco
------------------------------------------------------------------
Corporation, CV-98-0412). The suit seeks to have Unocal's Patent No.
-----------
5,288,393 invalidated as interfering with Talbert's prior patent and seeks
damages for the company's alleged infringement for the period through March
1997. In December 1998, the court dismissed Talbert's interference claim.
2. In October 1995, the State of Texas and several individuals filed a class
action lawsuit in the District Court of Lee County, Texas (State of Texas,
---------------
et al. v. Amerada Hess Corporation, et al.), alleging that the defendants,
-------------------------------------------
including the company, had engaged in a conspiracy to fix posted prices for
crude oil at artificially low levels and had also discriminated against the
class of Texas royalty owners by purchasing oil "attributable" to the
plaintiff class at prices lower than the prices realized by the defendants
for their own production from the same fields. Since that time, the
company has been named a defendant in ten additional class action lawsuits
alleging oil royalty and working interest underpayments. Eight of these
cases were filed in federal courts in Alabama, Louisiana, Mississippi, and
Texas and subsequently were transferred by The Multi-District Panel to the
U.S. District Court for the Southern District of Texas, Corpus Christi
Division, as MDL-1206. The other three cases remain on file in state
courts in Alabama and Texas.
As a group, the lawsuits allege that crude oil postings have been lower
than true value and assert claims of breach of contract, fraud, conversion,
and violations of federal and state antitrust laws and the federal
Racketeer Influenced and Corrupt Organizations (RICO) statute. Putative
state-wide and nation-wide class representatives seek recovery of
unspecified actual and punitive damages, including treble damages for
antitrust and RICO violations from 1986 forward, as well as attorneys' fees
and costs.
In December 1998, the company and twenty-five other oil companies signed a
supplement to a previously announced settlement agreement in one of the
above-described federal lawsuits (The McMahon Foundation, et al. v. Amerada
-----------------------------------------
Hess Corporation, et al., in the U.S. District Court for the Southern
------------------------
District of Texas). Under this supplemental agreement, the defendants
agreed to pay $164 million to settle all private non-state-wide-entity oil
royalty and working interest claims nation-wide. In December 1998, the
settlement was given preliminary approval by the court. Final approval is
scheduled for consideration in April 1999. Except as noted below, if
finally approved, the settlement will bring to an end all of the class
action litigation described above. The company is aware, however, that
some royalty and working interest owners could elect to opt out of the
settlement.
One of the lawsuits (The State of Texas et al v. Amerada Hess Corporation,
-----------------------------------------------------
et al., in the 53rd District Court of Travis County, Texas), alleges that
------
the underpayment of royalties constituted a violation of the Texas Common
Purchaser Act and seeks recovery of monetary penalties in an unspecified
amount on behalf of the State of Texas and a state-wide class of private
royalty
14
owners. These claims have been excluded from the claims settled in the
McMahon action. The company is vigorously contesting these claims.
-------
In litigation related to the above-described posted price class actions,
various state taxing authorities are pursuing attempts to collect
additional severance taxes on the theory that oil companies have
undervalued the crude oil they produced within those states. To date, two
states have initiated lawsuits. (State of Louisiana and Secretary of the
---------------------------------------
Department of Revenue and Taxation v. Union Oil Company of California, in
----------------------------------------------------------------------
the Fifteenth Judicial Court of Lafayette Parish, Louisiana; and State of
--------
Alabama and State of Alabama Department of Revenue v. Amerada Hess
------------------------------------------------------------------
Corporation, et al., in the Circuit Court of Mobile County, Alabama.) The
--------------------
company believes it has paid all state severance tax obligations correctly
and is vigorously contesting these lawsuits. In the Alabama proceeding,
the trial judge recently granted the defendants' motion to dismiss for the
State of Alabama's failure to follow Alabama laws pertaining to assessment
and collection of state taxes. The company has been informed the State of
Alabama intends to appeal this dismissal.
3. The U.S. Department of Interior Minerals Management Service (MMS) announced
in July 1996 that it would pursue claims against several oil companies for
their alleged underpayment of royalties for crude oil produced from federal
leases in California covering the period from 1980 forward. Following that
announcement, the company has received from the MMS three orders to pay
additional royalties, penalties and interest, covering periods from January
1980 through April 1996 and totaling in excess of $75 million. The company
vigorously disputes the validity of these orders and is pursuing
appropriate administrative appeals. In January 1999, the company filed an
action in the U.S. District Court for the Northern District of Oklahoma
(Union Oil Company of California v. Bruce Babbitt, et al.) seeking a
----------------------------------------------------------
declaratory judgment that the applicable statute of limitations bars
amounts claimed by the MMS for periods prior to July 22, 1991.
4. In March 1998, the company was served with a lawsuit brought by private
plaintiffs on behalf of the United States against the company and numerous
other oil companies (United States, ex rel. Johnson v. Shell Oil Company
----------------------------------------------------
et al., in the U.S. District Court for the Eastern District of Texas,
-------
Lufkin Division). The lawsuit alleges intentional underpayment of
royalties for oil produced from federal and Indian land leases in violation
of the federal False Claims Act (FCA) from 1986 forward. The plaintiffs
seek recovery of unspecified monetary damages, to be trebled as provided by
the FCA, plus attorneys' fees and civil penalties authorized by the act.
On February 12, 1999, the U.S. Department of Justice intervened in the
lawsuit by filing an amended complaint naming the company. The Department
had previously intervened against a number of other defendants. The
company believes its royalty payments on federal and Indian land leases
have been made correctly. Accordingly, it does not believe it engaged in
conduct that violated the FCA and is vigorously contesting this lawsuit.
5. The company was recently made aware that it has been named a defendant in
two additional FCA proceedings brought by private plaintiffs on behalf of
the United States alleging underpayment of royalties on natural gas
production from federal and Indian land leases since the mid-1980's. The
first action (United States, ex rel. Harrold E. (Gene) Wright v. Amerada
----------------------------------------------------------
Hess Corporation, et al., in the U.S. District Court for the Eastern
-------------------------
District of Texas, Lufkin Division) was filed in August 1996 against the
company and 130 other energy industry companies and seeks damages
collectively from all defendants of $3 billion, which, to the extent
awarded, would be trebled under the FCA. The second action (United States,
--------------
ex rel. Jack Grynberg v. Unocal, in the U.S. District Court for the
--------------------------------
District of Wyoming) was filed in September 1997, as one of 77 separate
cases filed by the plaintiff, and seeks damages of approximately $200
million from the company, which, to the extent awarded, would be trebled
under the FCA. To date, the U.S. Department of Justice has not elected to
intervene in either action. The company believes the allegations are
without merit and intends to vigorously defend both cases.
6. Since December 1997, the company has received from the MMS a number of
notices of Preliminary Determination of Underpaid Royalties in connection
with various gas contract settlements entered
15
into by the company during the period 1984 through 1992. The total amount
of the alleged underpaid royalties, together with interest, claimed by the
MMS totals approximately $35 million.
7. In June 1996, the case captioned Aguilar, et al. v. Atlantic Richfield, et
-----------------------------------------
al. (Civil No. 00700810), was filed in the California Superior Court for
------------------------
San Diego County against nine California oil companies, including the
company, which refined and marketed Phase 2 gasoline mandated by the
California Air Resources Board (CARB). The plaintiffs allege that the
defendants conspired to limit the supply and increase the price of CARB
gasoline in violation of California antitrust and unfair competition laws.
The plaintiffs seek treble damages and injunctive relief on behalf of all
purchasers of CARB gasoline at retail since March 1, 1996. In May 1997,
the court certified the case as a class action. In October 1997, the court
granted the defendants' motion for summary judgment. However in January
1998, the court granted the plaintiffs' motion for a new trial, effectively
reversing the earlier grant of summary judgment. The company and its co-
defendants have appealed to the California Court of Appeals the court's
orders which certified the class and granted a new trial.
In February 1998, Unocal and the co-defendants in Aguilar were served with
-------
a new action in the U.S. District Court for the Southern District of
California (Gilley, et al. v. Atlantic Richfield, et al., Case No. 98 CV
--------------------------------------------
0123 BTM (RRB). This case was filed on behalf of a purported class
consisting of lessee gasoline dealers who purchased gasoline at the
wholesale level from the defendants during the period from January 1, 1996
to the present. The complaint alleges that Unocal and the co-defendants
conspired to restrict the supply of CARB gasoline in violation of the
Sherman Act, 15 U.S.C. Section 1. This case is also being vigorously
defended.
8. In September 1996, a criminal investigation was commenced by the Office of
the District Attorney of San Bernardino County, California (District
Attorney), arising from wastewater pipeline incidents occurring at the
Mountain Pass, California, lanthanide facility of the company's Molycorp,
Inc., subsidiary in July and August 1996. Molycorp has been engaged in
extensive settlement negotiations with the District Attorney in an effort
to achieve an appropriate civil resolution of this matter.
In May 1998, the District Attorney filed a civil complaint against Molycorp
in the California Superior Court for San Bernardino County - Barstow
Division for alleged violations of California's Proposition 65 law and
Hazardous Waste Control law (People of the State of California v. Molycorp,
-----------------------------------------------
Inc., No. BCV 03740). In July 1998, an amended complaint was filed,
----
withdrawing the Hazardous Waste Control Law cause of action. The complaint
is now limited to alleged violations of Proposition 65. Molycorp filed its
answer to the complaint in September 1998.
9. The company is a defendant in a lawsuit, filed in October 1996, by
anonymous representatives purportedly on behalf of an alleged class of
plaintiffs consisting of all residents of the Tenasserim region of Myanmar
allegedly affected by alleged acts of mistreatment and forced labor by the
government of Myanmar allegedly in connection with the construction of the
Yadana natural gas pipeline, which transports natural gas from fields in
the Andaman Sea to Thailand through a pipeline crossing Myanmar (John Doe
--------
I, et al. v. Unocal Corp., et al., in the U.S. District Court for the
----------------------------------
Central District of California, Civil No. 96-6959-RAP). Other named
defendants included the French oil company Total S.A., John F. Imle and
Roger C. Beach.
The complaint contains numerous counts and alleges violations of several
U.S. and California laws and U.S. treaties. The plaintiffs seek
compensatory and punitive damages on behalf of the named plaintiffs, as
well as disgorgement of profits. Injunctive and declaratory relief is also
requested on behalf of the named plaintiffs and the alleged class to direct
the defendants to cease payments to the Myanmar government and to cease
participation in the Yadana project.
In March and April 1997, the court granted in part and denied in part the
company's motion to dismiss the action. In its answer to an amended
complaint, the company denied that it was either properly named as a party
or subject to joint venture, partnership or other liability with respect to
16
the Yadana pipeline. In January 1998, the court heard argument on the
class certification question and took the matter under advisement. In
February 1998, the court denied the plaintiffs' motion for a preliminary
injunction. In November 1998, the court dismissed Total as a defendant,
finding that it lacked jurisdiction over that company.
The company has also been served with a lawsuit, filed in September 1996,
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, in the U.S. District Court for the Central
--------------------------
District of California, Civil No. 96-6112-RAP).
The court, in November 1997, granted in part and denied in part the
company's motion to dismiss the action. Among other things, the court's
order dismissed the National Coalition Government of the Union of Burma as
a plaintiff in the action. The remaining plaintiffs thereafter filed a
second amended complaint. In its answer, the company denied that it was
either properly named as a party or subject to joint venture, partnership
or other liability with respect to the Yadana pipeline. In March 1998, the
court entered an order dismissing the Federation of Trade Unions of Burma
as a plaintiff. The remaining plaintiffs have recently filed a motion to
amend further their complaint, seeking to dismiss certain individual
plaintiffs, add other individual plaintiffs and allege with greater detail
the relationship between Unocal and certain of its subsidiaries.
10. In August 1998, a jury hearing the Group 5 trial in Judicial Council
Coordination Proceedings No. 2967 (Lockheed Litigation Cases, in the
-------------------------
California Superior Court for Los Angeles County) awarded approximately
$760 million in punitive damages against five defendants, including the
company. The company's share of the award was $81.3 million. The
defendants supplied petrochemicals to the former Lockheed Corporation
"Skunkworks" plant in Burbank, California. The Group 5 trial involved 42
current and former employees of Lockheed who claimed personal injuries as
the result of exposure to these chemicals. In the compensatory damage
phase of the trial, the company was found liable to eight plaintiffs for a
total of approximately $750,000 as a consequence of its delivery of two
drums of naphtha to the plant in 1984. In November 1998, the court reduced
the punitive damages award by 50 percent. The company and the other
defendants are appealing the judgment to the California Court of Appeal.
The company is highly confident that the punitive damage award will be
substantially reduced or completely reversed.
11. In October 1998, the Attorney General of Hawaii filed an action (Bronster
--------
(State of Hawaii) v. Unocal, et al., in the U.S. District Court for the
------------------------------------
District of Hawaii) on behalf of both the people of Hawaii and the state
itself against the company and six other major Hawaii oil refiners. The
complaint alleges that the defendants conspired to restrict the production
and fix the price of gasoline in violation of the federal Sherman Act and
various state laws. The state seeks damages in an amount exceeding $150
million covering a period starting in 1995, together with civil penalties
in excess of $70 million. If liability were established, the company would
be jointly and severally liable for any damages awarded. If a Sherman Act
violation were found, any damages awarded would be trebled and attorneys'
fees and costs would also be awarded. Any such damages would be allocated
among the defendants according to their respective market shares.
The company and its co-defendants believe that there is no merit to the
Attorney General's claim that there was a conspiracy to fix prices or
restrict the supply of gasoline. Moreover, even if such an agreement did
exist among some of the defendants, the company believes that there is no
evidence linking it to such an agreement. Further, the company believes
that the sale of its marketing and refining assets to Tosco Corporation in
March 1997 would be deemed to constitute an effective withdrawal from any
alleged conspiracy. Pretrial discovery has commenced.
12. In October 1998, a purported class action was filed by direct and indirect
purchasers of diesel fuel in the state of California from March 19, 1996,
through December 1997, against the company and eight other major California
oil refiners (Cal-Tex Citrus Juice, et al. v. Unocal, et al., in the
-----------------------------------------------
California Superior Court for Sacramento County). The complaint alleges
that the defendants conspired to restrict the production and fix the price
of CARB diesel fuel in violation of the California Cartwright
17
and Unfair Competition Acts. The total amount of damages sought by the
plaintiffs is unknown. If liability were established, the company would be
jointly and severally liable for any damages awarded. Any such damages
would be trebled if a Cartwright Act violation were found and attorneys'
fees and costs would also be recoverable. Fluid recovery and cy pres
restitution would be available under the Unfair Competition Act if a
violation of that act were found. Any damages awarded would be allocated
among the defendants according to their market shares.
The company and its co-defendants believe that there is no merit to the
plaintiffs' claim that there was a conspiracy to fix prices or restrict the
supply of CARB diesel fuel. Moreover, even if such an agreement did exist
among some of the defendants, the company believes that there is no
evidence linking it to such an agreement. Further, the company believes
that the sale of its marketing and refining assets to Tosco Corporation in
March 1997 would be deemed to constitute an effective withdrawal from any
alleged conspiracy. Pretrial discovery has commenced.
Certain Additional Environmental Matters Involving Possible Civil Penalties
13. In June 1997, the State of Arizona filed a lawsuit against the company
(State of Arizona v. Union Oil Company of California, Superior Court of
----------------------------------------------------
Maricopa County, No. CV97-10829) alleging that it has not diligently
pursued the investigation of the extent of contamination resulting from a
release of petroleum from underground storage tanks at a service station
formerly operated by the company in Tempe, Arizona. The state has informed
the company that it is seeking civil penalties in excess of $1.5 million,
as well as other payments. The company intends to vigorously contest the
state's allegations.
14. The South Coast Air Quality Management District (SCAQMD) has notified the
company concerning past Notices of Violation and emission fees that remain
outstanding regarding the company's former Los Angeles Refinery Wilmington
and Carson Plants (which were subsequently sold to Tosco Corporation in
March 1997). In the aggregate, penalties concerning these matters could
exceed $100,000. The company is working with the SCAQMD towards a
resolution of these matters.
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
- ------------------------------------------------------------------------------------------------------------------
ROGER C. BEACH, 62 Mr. Beach has been Chairman of the Board since 1995 and Chief
Chairman of the Board and Chief Executive Officer since 1994. He served as President and Chief
Executive Officer Operating Officer from 1992 to 1994.
Director since 1988
Chairman of Executive Committee and
Board and Company Management Committees
- ------------------------------------------------------------------------------------------------------------------
JOHN F. IMLE, JR., 58 Mr. Imle has been Vice Chairman of the Board since March 3, 1999.
Vice Chairman of the Board He served as President from 1994 to March 1999. From 1992 to 1994,
Director since 1988 he served as Executive Vice President and President of the Energy
Member of Board and Company Resources Division, which encompassed the company's worldwide oil,
Management Committees gas, and geothermal businesses.
- ------------------------------------------------------------------------------------------------------------------
18
- ------------------------------------------------------------------------------------------------------------------
TIMOTHY H. LING, 41 Mr. Ling has been Executive Vice President, North American Energy
Executive Vice President, Operations, since March 3, 1999, and Chief Financial Officer since
and North American Energy Operations, October 1997. He was a partner of McKinsey & Company, Inc.
Chief Financial Officer (McKinsey) from 1994 to October 1997 and an employee of the firm
Member of Company Management Committee from 1989 to 1994. From 1990 to 1997, Mr. Ling was a leader of the
McKinsey consulting team working with the company, focusing on
development of the company's new corporate strategies and the
improvement of the company's asset and growth portfolios.
- ------------------------------------------------------------------------------------------------------------------
CHARLES R. WILLIAMSON, 50 Mr. Williamson has been Executive Vice President, International
Executive Vice President, Energy Operations, since March 3, 1999. He served as Group Vice
International Energy Operations President, Asia Operations, from February 1998 to March 1999,
Member of Company Management Committee having previously served as Group Vice President, International
Operations, since 1996. He was Vice President, Planning and
Economics, from 1995 to 1996 and served as Vice President,
Technology, from 1992 to 1994.
- ------------------------------------------------------------------------------------------------------------------
L. E. (ED) SCOTT, 56 Mr. Scott has been Group Vice President of the company's
Group Vice President, Diversified Business Group since 1994. From 1990 to 1994, he was
Diversified Business Group Vice President, Petroleum Supply and Transportation.
- ------------------------------------------------------------------------------------------------------------------
DENNIS P.R. CODON, 50 Mr. Codon has been Vice President, Chief Legal Officer and General
Vice President, Chief Legal Officer Counsel since 1992. He also served as Corporate Secretary from
and General Counsel 1990 to 1996.
- ------------------------------------------------------------------------------------------------------------------
JOE D. CECIL, 50 Mr. Cecil has been Vice President and Comptroller since December
Vice President and Comptroller 1997. From March 1997 to December 1997, Mr. Cecil was Comptroller
of International Operations. He was Comptroller of the 76 Products
Company from 1995 until the sale of the West Coast refining,
marketing and transportation assets in March 1997. From 1994 to
1995, Mr. Cecil was Assistant Comptroller, New Ventures, and from
1992 to 1994, he was Comptroller of the Energy Resources Division.
- ------------------------------------------------------------------------------------------------------------------
JOSEPH A. HOUSEHOLDER, 43 Mr. Householder has been Vice President, Corporate Development
Vice President, Corporate Development, and since December 1997, and was appointed Assistant Chief Financial
Assistant Chief Financial Officer Officer on March 3, 1999. He was Vice President, Tax and
Comptroller, from June 1997 until December 1997. He was Vice
President, Tax, from 1994 until 1997, and General Tax Counsel from
1990 to 1994.
- ------------------------------------------------------------------------------------------------------------------
WILLIAM T. WILSON, 44 Mr. Wilson was named Vice President, Commodity Trading and Risk
Vice President, Commodity Trading and Risk Management, in September 1995, and became President of the newly
Management, and President, Unocal Global formed Unocal Global Trade unit in 1997. In January 1999, the
Trade responsibility for pipelines and related midstream operations was
consolidated into that unit. Mr. Wilson joined the company in
March 1995 as General Manager of Risk Management. From 1990 to
early 1995, he was employed by the British Petroleum Company in
various oil and gas exploration and production management
positions. His last assignment at that company was Manager of
North American Gas Marketing.
- ------------------------------------------------------------------------------------------------------------------
The bylaws of the company provide that each executive officer shall hold
office until the annual organizational meeting of the Board of Directors, to be
held May 24, 1999, and until his successor shall be elected and qualified,
unless he shall resign or shall be removed or otherwise disqualified to serve.
19
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------------------------------------------------------------------------------
1998 Quarters 1997 Quarters
------------------------------------------------- ------------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
------------------------------------------------- ------------------------------------------------
Market price per share
of common stock
- High $ 42 1/8 $ 42 1/8 $38 3/16 $ 37 $45 7/8 $ 44 $45 7/8 $ 45 1/4
- Low $33 1/16 $34 13/16 $30 3/16 $28 5/16 $ 38 $36 1/4 $36 1/8 $37 9/16
--------------------------------------------------- ------------------------------------------------
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 February 28, 1999, the high price per share was $ 28
1/4 and the low price per share was $27 5/8.
Unocal common stock is listed for trading on the New York, Pacific, and Chicago
Stock Exchanges in the United States, and on the Stock Exchange of Switzerland.
The company is in the process of delisting the common stock from the Pacific and
Chicago Stock Exchanges.
As of February 28, 1999, the approximate number of holders of record of Unocal
common stock was 29,329 and the number of shares outstanding was 241,518,668.
Unocal's quarterly dividend declared has been $.20 per common share since the
third quarter of 1993. The company has paid a quarterly dividend for 83
consecutive years.
ITEM 6 - SELECTED FINANCIAL DATA: see page 88.
20
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS IF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the consolidated financial condition
and results of operations of Unocal should be read in conjunction with the
historical financial information provided in the consolidated financial
statements and accompanying notes, as well as the business and property
descriptions in Items 1 and 2. Unless otherwise specified, the following
discussion pertains to the company's continuing operations.
CONSOLIDATED RESULTS
Millions of dollars 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before discontinued operations
and extraordinary item $ 130 $ 669 $ 456
Less: special items (net of tax)
Asset sales 120 43 70
Asset write-downs (65) (43) (46)
Bangladesh well blowout - (8) -
Deferred tax adjustments (29) 207 -
Environmental and litigation provisions (101) (84) (123)
Insurance benefits 56 - -
Restructuring costs (17) - -
UNO-VEN restructuring - 40 -
Other - (1) (7)
- -------------------------------------------------------------------------------------------------------------------------------
Total special items (36) 154 (106)
- -------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings from continuing operations $ 166 $ 515 $ 562
===============================================================================================================================
1998 vs. 1997 - The company's 1998 adjusted after-tax earnings from continuing
operations decreased $349 million, or 68 percent, as compared to 1997, primarily
due to depressed worldwide crude oil and natural gas sales prices. Compared to
1997, the company's worldwide average crude oil sales price decreased by $6.04
per barrel, or 34 percent, and its worldwide average natural gas sales price
decreased by $.32 per thousand cubic feet, or 14 percent. Also contributing to
the decline in adjusted after-tax earnings were lower agricultural products
sales prices, lower United States natural gas and crude oil production,
increased United States dry hole expense, and higher current taxes in Thailand
primarily related to foreign currency fluctuations. Partially offsetting these
negative factors was lower worldwide depreciation expense.
1997 vs. 1996 - The 1997 after-tax earnings from continuing operations reflected
a lower average worldwide crude oil sales price and decreased United States
crude oil and natural gas production. In addition, the 1997 results were
impacted by higher worldwide exploration expense, higher international
depreciation and substantially lower average sales prices for agricultural
products. These conditions were partially offset by a higher average worldwide
natural gas sales price, increased international crude oil and natural gas
production, and lower interest expense.
Revenues
1998 vs. 1997 - The company's 1998 revenues decreased $585 million from 1997,
principally due to lower worldwide crude oil and natural gas sales prices.
Lower agricultural products sales prices and decreased United States natural gas
and crude oil production also contributed to the decline. Partially offsetting
the decrease were increased activities related to the marketing and trading of
crude oil, condensate and natural gas, increased natural gas production in the
Far East, increased crude oil sales in Indonesia, Azerbaijan and Yemen, gains on
certain international and United States asset sales, and a global insurance
recovery related to past environmental remediation issues.
21
1997 vs. 1996 - In 1997, higher revenues primarily were due to increased
activities related to the marketing and trading of crude oil, condensate and
natural gas. Also contributing to increased revenues were higher affiliate
earnings, higher average worldwide natural gas prices, increased international
crude oil and natural gas production and transactions related to the UNO-VEN
restructuring. Partially offsetting these positive factors were lower United
States crude oil, condensate and natural gas production and lower average
worldwide crude oil and condensate prices.
Costs and Other Deductions
Millions of dollars 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Pre-tax costs and other deductions:
Crude oil, natural gas and product purchases $2,165 $2,246 $1,502
Operating expense 1,352 1,389 1,386
Special items:
Environmental and litigation provisions (170) (135) (196)
Other (5) - (11)
-------------------------------------------------------------
Adjusted crude oil, natural gas and product
purchases and operating expense $3,342 $3,500 $2,681
- -----------------------------------------------------------------------------------------------------------------------------------
Selling, administrative and general expense $ 136 $ 107 $ 151
Special item:
Restructuring costs (27) - -
-------------------------------------------------------------
Adjusted selling, administrative and general expense $ 109 $ 107 $ 151
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation, depletion and amortization $ 867 $ 962 $ 914
Special item:
Asset write-downs (95) (69) (75)
-------------------------------------------------------------
Adjusted depreciation, depletion
and amortization expense $ 772 $ 893 $ 839
- -----------------------------------------------------------------------------------------------------------------------------------
Dry hole costs $ 184 $ 110 $ 139
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense $ 177 $ 183 $ 279
- -----------------------------------------------------------------------------------------------------------------------------------
1998 vs. 1997 - Crude oil, natural gas and product purchase expenses were lower
in 1998 principally due to lower worldwide commodity prices. Partially
offsetting this decrease was increased activities related to the marketing and
trading of crude oil, condensate, and natural gas by the company's Global Trade
group.
Dry hole costs increased 67 percent over the 1997 amount due to the company's
expanded exploratory drilling program in 1998, which focused primarily on the
onshore Gulf Coast and offshore Gulf of Mexico areas.
1997 vs. 1996 - In 1997, higher adjusted crude oil, natural gas and product
purchases were primarily due to marketing activities by the company's Global
Trade group and by transactions related to the UNO-VEN restructuring. Lower dry
hole costs during 1997 were due to delays in exploratory drilling. Decreased
interest expense in 1997 was the result of lower debt and increased capitalized
interest.
Restructuring Costs
In response to depressed commodity prices, the company adopted a restructuring
plan during the fourth quarter of 1998 that resulted in the accrual of a $17
million after-tax restructuring charge. This amount included the estimated
costs of terminating approximately 475 employees. The plan involves the
suspension of mining and manufacturing operations at the Mountain Pass,
California, lanthanide facility, a change in mining operations at the Questa,
New Mexico, molybdenum facility, the withdrawal from non-strategic activities in
Central Asia and a reduction in activities of various business units.
22
The restructuring charge was recorded in aggregate in Corporate and Unallocated.
Approximately $4 million and $7 million of the after-tax charge relates to the
Exploration and Production and Diversified Businesses segments, respectively.
Approximately 240 of the affected employees are from the company's mining
operations, 95 are from various exploration and production business units and
140 are support personnel at various locations. At December 31, 1998,
approximately 210 employees were terminated or had received termination notices
as a result of the plan. Cash expenditures related to the restructuring of
approximately $12 million and $4 million are expected for the years 1999 and
2000, respectively.
The company expects the plan to reduce future annualized salaries and benefits
by an estimated $21 million after-tax. In addition, the company is currently
evaluating additional initiatives to improve the efficiency and alignment of
support services to reduce costs. This evaluation could result in another
restructuring program in 1999.
For further information, see note 6 to the consolidated financial statements.
Discontinued Operations
In March 1997, the company completed the sale of its West Coast petroleum
refining, marketing and transportation assets. The results of operations and
assets of the refining, marketing and transportation segment were classified as
discontinued operations. In 1996, the company reported a net loss of $420
million and, in 1997, the company reported an additional $50 million net loss on
these assets. For additional information related to the discontinued operations
see note 8 to the consolidated financial statements.
Extraordinary Item
In 1997, the company recorded a $38 million after-tax charge related to the
purchase of approximately $507 million in aggregate principal amount of three of
its outstanding issues of debt securities. For further information, see note 9
to the consolidated financial statements.
Outlook
Key issues for the company going into 1999 center around the current low
commodity price environment and the economic situation in Asia.
Depressed Commodity Prices
Energy prices were severely depressed in 1998, particularly in the latter part
of the year. This situation has continued into the first quarter of 1999.
These depressed prices are primarily the result of an oversupply of crude oil on
world markets, a drop in demand in Southeast Asia, a warm winter in the Northern
Hemisphere, and a build-up of United States natural gas inventories. The
company's worldwide average crude oil price was 34 percent below the 1997
average and lower than they have been since 1986. The company's worldwide
average natural gas price in 1998 was approximately 14 percent below the 1997
average.
The company believes that commodity prices will continue to be depressed in
1999. The company's annual operating plan for 1999 assumes that its average
sales prices will be slightly lower than in 1998. Actual prices may differ
materially, and the company may adjust its operating activities accordingly.
The company's goal is to operate in the current depressed commodity price
environment without sacrificing growth. The company plans to limit capital
expenditures, implement targeted cost reductions, and withdraw from or suspend
projects in non-strategic or non-core areas while focussing on the highest-value
growth assets and capturing value-adding opportunities. The company intends to
keep the total debt-to-capital ratio in its current range. Current production
levels are expected to be maintained or
23
decline slightly.
In 1999, capital expenditures are expected to be approximately $1.0 billion,
compared to a total of $1.7 billion for 1998. Spending will be focused on a
project-by-project approach, with higher-return growth projects in the company's
core asset areas taking precedence. Specifically, the reduction will be
achieved by a reduction in Gulf of Mexico lease acquisition activity and reduced
capital spending in most project areas except deepwater areas in Indonesia and
in the Gulf of Mexico.
The company has also targeted $150 to $200 million in cash expense reductions
for 1999. The company expects to accomplish this through lower new venture
expenses as a result of a more narrow geographic focus, the deferral of
geological and geophysical activities in selected areas, lower operating costs
due to lower service contractor costs, and lower operating and overhead costs as
a result of a reduced workforce, suspension of certain mining activities, and
other cost-saving initiatives.
The company has withdrawn from or has suspended projects in Central Asia (except
Azerbaijan). Under the current circumstances, the company believes that
projects in these areas may have lower potential returns, heightened political
risk, questionable market development, or unacceptable payout timelines and,
therefore, no longer meet the company's more focused criteria for inclusion in
its portfolio of higher-growth prospects.
In 1999, the company plans to focus on its highest-potential growth areas: the
Gulf of Mexico, Thailand, Indonesia, Bangladesh, Brazil, and West Africa. These
areas are geographically diverse but have similar geological features that the
company understands well, and one which will allow the company to leverage its
drilling expertise.
In a "down cycle", opportunities present themselves that would not otherwise be
available. The company is looking to acquire attractive assets, but only if
they complement its existing portfolio, enhance leverage in selected areas, or
help build scale in places where it wants to grow. In addition, the company is
evaluating opportunities to leverage its exploration acreage for swaps or farm-
ins that have current production and upside growth potential.
Asian Economic Outlook
Much of the company's international activity is centered in Southeast Asia,
where the company has been a major presence for more than 35 years. The region
is going through a difficult economic period at this time. Since the company
began investing in the region, it has weathered many economic downturns. The
company believes that the governments in the region are committed to undertaking
the reforms and restructuring necessary to enable their nations to recover from
the current downturn. Energy development should play an important role in the
region's economic recovery.
Some signs of recovery are becoming apparent in Thailand and Indonesia.
Thailand's recession seems to be easing somewhat, with the baht stabilizing and
interest rates coming down. The nation has worked closely with the
International Monetary Fund and has shown discipline and determination in
adopting economic reforms. The improved picture in Thailand is reflected in
recent gross domestic product (GDP) forecasts. In 1998, Thailand's GDP declined
by eight percent. A recent consensus forecast has GDP remaining flat in 1999.
Forecasters predict the economy could show moderate growth as early as 2000.
This should translate into growth in demand for electricity, which is key to the
company's gas sales in Thailand. (For more information, please refer to the
Outlook section for International Exploration and Production.)
Indonesia continues to face serious economic problems, but conditions may be
stabilizing. Parliament recently passed a political reform package, and new
elections are scheduled for June 1999. Indonesia recognizes that oil and gas
development is critical to the nation's economic recovery. (For more
information, please refer to the Outlook section for International Exploration
and Production.)
24
UNITED STATES EXPLORATION AND PRODUCTION
Included in this category are Spirit Energy 76 and Alaska oil and gas
operations. Spirit Energy 76 is responsible for oil and gas operations in the
Lower 48 United States, with emphasis on the shelf and deepwater areas in the
Gulf of Mexico and on the Permian Basin in West Texas. A substantial portion of
Spirit Energy 76's crude oil and natural gas production is sold to the company's
Global Trade segment. The remainder is sold under contract to third parties,
sold in the spot market or, in the case of Alaska natural gas production, sold
to the company's agricultural products operations.
Millions of dollars 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
After-tax earnings
Spirit Energy 76 $ - $ 191 $ 276
Alaska 6 60 122
- -----------------------------------------------------------------------------------------------------------------------------------
Total after-tax earnings 6 251 398
Less: special items (net of tax)
Asset sales (Spirit Energy 76) (a) 14 7 65
Asset write-downs (Spirit Energy 76) (27) (41) (12)
Asset write-downs (Alaska) (12) - (20)
Litigation (Spirit Energy 76) 7 - -
Other (Spirit Energy 76) - - 4
- -----------------------------------------------------------------------------------------------------------------------------------
Total special items (18) (34) 37
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted after-tax earnings $ 24 $ 285 $ 361
- -----------------------------------------------------------------------------------------------------------------------------------
(a) 1998 includes the sale of the Oklahoma oil and gas properties. 1996
includes the sale of California oil and gas properties.
1998 vs. 1997 - Adjusted after-tax earnings in 1998 decreased by 92 percent from
1997 principally due to lower average crude oil and natural gas sales prices.
The average crude oil sales price declined $5.96 per barrel, or 35 percent, from
1997 while the average natural gas sales price declined $.39 per thousand cubic
feet (mcf), or 17 percent. Additionally, crude oil and natural gas production
declined by an average of three thousand barrels per day and 66 million cubic
feet (mmcf) per day, respectively. The production declines were principally
attributable to the postponement of certain development drilling projects and
natural production declines. Dry hole expense increased by $58 million as a
result of increased exploratory drilling activity in the Gulf of Mexico.
Partially offsetting these negative factors was decreased depreciation expense.
1997 vs. 1996 - Adjusted after-tax earnings for 1997 decreased 21 percent from
the 1996 results primarily due to lower crude oil, condensate and natural gas
production, lower average crude oil and condensate sales prices, and higher
exploration expense. During 1997, crude oil production decreased 20 percent to
approximately 76 thousand barrels per day from 96 thousand barrels per day.
Natural gas production decreased eight percent to 993 mmcf per day from 1,075
mmcf per day. The average crude oil sale price decreased to $17.13 per barrel
in 1997 from $18.51 per barrel in 1996. Exploration expense, excluding dry hole
costs, increased to $