LYONDELL CHEMICAL CO - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended December 31, 1999

[_] Transition Report Pursuant to Section 13 or 15(D) of the Securities
Exchange Act of 1934

Commission File No. 1-10145

LYONDELL CHEMICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 95-4160558
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYEE IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

1221 MCKINNEY STREET,
SUITE 700, HOUSTON, TEXAS 77010
(Address of principal executive offices) (ZIP CODE)

Registrant's telephone number, including area code: (713) 652-7200

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
Common Stock ($1.00 par value) New York Stock Exchange
Preferred Share Purchase Rights New York 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 the 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. [_]

There were 117,559,003 shares of the registrant's common stock outstanding on
March 1, 2000. The aggregate market value of the voting stock held by non-
affiliates of the registrant on March 1, 2000 based on the closing price on the
New York Stock Exchange composite tape on that date, was $1,039,058,366.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant's definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1999
(incorporated by reference under Part III).

PART I

ITEMS 1 AND 2. BUSINESS AND PROPERTIES

Lyondell Chemical Company ("Lyondell" or the "Company") is a global chemical
company with leading producer positions in all of its major products and low
cost operations. Lyondell is vertically integrated into its key raw materials
through its equity ownership in Equistar Chemicals, LP, LYONDELL-CITGO Refining
LP and Lyondell Methanol Company, L.P.

Lyondell manufactures and markets a variety of intermediate and performance
chemicals, including propylene oxide ("PO"), polyether polyols, propylene glycol
("PG"), propylene glycol ethers ("PGE"), butanediol ("BDO"), toluene
diisocyanate ("TDI"), styrene monomer ("SM"), and tertiary butyl alcohol ("TBA")
and its derivative, methyl tertiary butyl ether ("MTBE"), which are collectively
known as the Company's intermediate chemicals and derivatives business.

The Company owns 41% of Equistar Chemicals, LP, a Delaware limited partnership
("Equistar"), which operates petrochemicals and polymers businesses. Equistar's
petrochemicals business manufactures and markets olefins, oxygenated chemicals,
aromatics and specialty products. Equistar's olefins are ethylene, propylene and
butadiene and its oxygenated chemicals include ethylene oxide ("EO"), ethylene
glycol ("EG"), ethanol and MTBE. Equistar's aromatics are benzene and toluene.
Equistar's polymers business manufactures and markets polyolefins, including
high density polyethylene ("HDPE"), low density polyethylene ("LDPE"), linear
low density polyethylene ("LLDPE"), polypropylene and performance polymers.
Equistar's performance polymers include enhanced grades of polyethylene such as
wire and cable resins, and polymeric powders.

The Company also owns 58.75% of LYONDELL-CITGO Refining LP, a Delaware limited
partnership ("LCR"), which produces refined petroleum products, including
gasoline, low sulfur diesel, jet fuel, aromatics and lubricants ("lube oils").
LCR sells its principal refined products primarily to CITGO Petroleum
Corporation ("CITGO").

In addition, the Company owns 75% of Lyondell Methanol Company, L.P., a Texas
limited partnership ("LMC"), which produces methanol.

DEVELOPMENT OF BUSINESS

Lyondell has been a leader in the ongoing restructuring of the chemical
industry, taking a series of steps to reposition and strengthen its business
portfolio over the past several years.

In July 1993, the Company contributed to LCR the Company's refining business,
including its Houston, Texas refinery (the "Refinery"), its lube oil blending
and packaging plant in Birmingport, Alabama and working capital. The Company
retained an approximately 90% interest in LCR, while CITGO held the remaining
approximately 10% interest. Following completion of a major upgrade project at
the Refinery in the first quarter of 1997, the Company's interest in LCR was
reduced to 58.75%. On December 31, 1998, LCR converted from a Texas limited
liability company to a Delaware limited partnership.

In May 1995, the Company acquired Occidental Chemical Corporation's
("Occidental Chemical") ALATHON(R) HDPE business. Assets involved in this
acquisition included resin production facilities in Matagorda and Victoria,
Texas, related research and development activities and the rights to the
ALATHON(R) trademark.

In December 1996, the Company formed LMC with MCN Investment Corporation
("MCNIC"), a division of MCN Corporation, to own the Company's 248 million
gallons per year methanol plant. Under the terms of the agreement, MCNIC
purchased a 25% interest in the methanol plant. Lyondell retained a 75% interest
and serves as managing partner. Since December 1997, Equistar has served as the
operator of LMC.

In December 1997, following approval by the stockholders of each company,
Lyondell and Millennium Chemicals Inc. ("Millennium") combined most of their
petrochemicals and polymers businesses to form Equistar. Lyondell contributed
substantially all of the assets comprising its petrochemicals and polymers
business segments,

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as well as a $345 million note, in exchange for a 57% interest in Equistar.
Equistar also assumed $745 million of Lyondell's debt. Millennium contributed
substantially all of the assets composing its olefins, ethyl alcohol,
polyethylene, polypropylene and performance polymers businesses, which had been
held in Millennium Petrochemicals Inc. ("Millennium Petrochemicals"), a wholly
owned subsidiary of Millennium. In exchange, Millennium received a 43% interest
in Equistar, Equistar repaid $750 million of debt due to Millennium from its
contributed businesses and Millennium retained $250 million of its accounts
receivable.

In May 1998, Lyondell and Millennium expanded Equistar with the addition of
the ethylene, propylene, EO, EG and other EO derivatives businesses (the
"Occidental Contributed Business") of Occidental Chemical Corporation, a
subsidiary of Occidental Petroleum Corporation ("Occidental"). This addition
included two olefins plants, a plant that produces EO and EO derivatives,
including EG, and Occidental's 50% interest in a joint venture with E.I. DuPont
de Nemours and Company ("DuPont"), which operates an EO/EG plant. Occidental
also contributed more than 950 miles of owned and leased pipelines located on
the Gulf Coast of the United States and the lease of a Lake Charles, Louisiana
olefins plant. Equistar assumed approximately $205 million of Occidental's debt.
Equistar and Occidental also entered into a long-term agreement for Equistar to
supply the ethylene requirements for Occidental's chlorovinyls business. In
June 1998, Equistar borrowed approximately $500 million of additional debt and
distributed cash of approximately $420 million to Occidental and $75 million to
Millennium. Following the May 1998 transaction, Lyondell owns 41% of Equistar,
and Millennium and Occidental each own 29.5%. Millennium has publicly announced
its intention to sell its interest in Equistar and is actively seeking qualified
buyers. There can be no assurance that any such sale will be consummated, but
the Company does not expect any such sale to affect Equistar's operations or
results.

In July 1998, Lyondell completed the acquisition (the "ARCO Chemical
Acquisition") of all the outstanding shares of ARCO Chemical Company ("ARCO
Chemical"), the world's largest producer of PO and a leading worldwide producer
of polyether polyols, PG, PGE, TDI, SM, and MTBE. The ARCO Chemical Acquisition
was financed through a bank credit agreement providing for aggregate borrowings
of up to $7 billion (the "Credit Facility"). The acquired business is referred
to as "ARCO Chemical" for actions or events prior to the ARCO Chemical
Acquisition.

In November 1999, Lyondell reached a definitive agreement to sell its
worldwide polyols business to Bayer AG of Germany ("Bayer") for $2.45 billion.
Bayer will also receive an ownership interest in certain of Lyondell's U.S. PO
operations through formation of a joint venture to produce PO. The Lyondell
Board of Directors and the Supervisory Board of Bayer have approved the
agreement, and the companies have received regulatory clearance in Europe and
the United States. Lyondell expects that the transaction will close on or about
April 1, 2000. In addition, as part of the transaction, Lyondell and Bayer
agreed to pursue a joint venture for the construction of PO-11, a previously
announced worldscale propylene oxide/styrene monomer plant in Europe.

Lyondell was incorporated under the laws of Delaware in 1985. Its principal
executive offices are located at 1221 McKinney Street, Suite 700, Houston, Texas
77010 (Telephone: (713) 652-7200).

STRATEGY

Lyondell's goal is to create maximum value for its shareholders. The Company
intends to achieve this goal by focusing on three key strategic drivers:
optimizing our business operations to attain first quartile profit margin
performance; reducing debt to regain the financial flexibility needed to pursue
growth and industry restructuring opportunities; and growing those businesses in
which we have sustainable competitive advantages.

OPTIMIZING BUSINESS OPERATIONS

Having accumulated a wide range of assets through acquisitions and
partnerships over the past three years, Lyondell is aggressively optimizing the
performance of its businesses in terms of cost structure, competitive advantage
and service to customers. The Company is taking actions to capture the cost
benefits resulting from economies of scale and vertical integration. We are
successfully reducing costs by completing the cost reduction programs in place
at Lyondell, Equistar and LCR. We are also realizing identified synergies and
revenue enhancements across Lyondell's business portfolio by optimizing
manufacturing operations, using more efficient

3

purchase and distribution practices and reducing overhead and staffing. These
opportunities have been enhanced by the agreement between Lyondell and Equistar
to utilize shared services over a broad range of manufacturing and supply chain
functions, as well as legal, finance, human resources and other corporate
functions. Lyondell's commitment to operational excellence and achievements in
meeting environmental, health and safety targets have also reduced costs through
improved plant reliability, reduced maintenance requirements and increased
employee productivity. Continual cost reduction is a fundamental philosophy that
the Company believes is a critical component of its success.

The Company's strategy is to invest only in businesses that are, or have the
potential to be, in the top quartile of profit margin performance per unit of
product sold. Assets that cannot achieve that criterion are candidates for
eventual consolidation or rationalization. Four polymer reactors at the La
Porte, Texas facility were mothballed in the first quarter of 2000, while a top
quartile production line at Matagorda was added in 1999. These actions, along
with the 1999 sale of the concentrates and compounds business, are examples of
Equistar's long-term asset optimization strategy.

With the acquisition of ARCO Chemical, Lyondell became one of the world's
largest producers of propylene oxide, with the leading low-cost technology.
One of the major markets for PO is the production of polyols. In November 1999,
Lyondell announced that it will sell its polyols business, together with an
ownership interest in its PO business, to Bayer AG, one of the world's premier
urethanes manufacturers. While this business could have met the Company's first
quartile profit margin performance criterion, the value that the Company is
receiving from Bayer is greater than what Lyondell could have achieved
participating separately in that business. Lyondell expects this strategic
move will strengthen its global PO position. The combination of Lyondell's
polyols business into Bayer's existing polyols business will accelerate the
growth of the overall polyols market due to Bayer's complementary businesses,
resulting in the optimal utilization of Lyondell's PO assets.

Lyondell believes that e-commerce will have an impact on the chemical industry
and is in the process of developing an e-commerce strategy that addresses the
Company's sales and procurement processes. Lyondell recently announced its
selection of an e-business provider to connect 150 of the Company's remote
inventory locations and establish online connections with several core motor
freight carriers, thus enabling traditional paper-based transactions to be
conducted electronically over the Internet. Lyondell expects its proposed
advances in this area will lower its costs and enable it to be more responsive
to customer needs and servicing.

FINANCIAL FLEXIBILITY

Lyondell's objective is to return to an investment grade credit rating as
soon as practical by continuing to reduce debt and improving the credit position
of the Company. The Company believes an investment grade rating will provide
the appropriate financial flexibility to timely pursue opportunities to increase
shareholder value. The Bayer transaction, expected to close on or about April
1, 2000, represents a significant step toward this goal. This transaction will
enable the Company to pay down more than $2 billion in debt and will be
accretive to earnings and cash flow in the first year.

The Company achieved another key step towards improving the balance sheet in
May 1999 with the successful $4.1 billion debt and equity offering. This
refinancing raised $736 million in new equity, paid down $690 million in debt,
extended remaining loan maturities and fixed interest rates on $2.4 billion of
long-term debt, thereby reducing the Company's exposure to rising interest
rates.

PROFITABLE GROWTH

Lyondell's strategy for growth is to invest only in those businesses where we
have sustainable competitive advantages based on proprietary technology, leading
market positions, leading product positions and cost advantages.

PO AND DERIVATIVES. Lyondell intends to maintain its leadership position in
PO and its key derivatives, including BDO, PG and PGE, through targeted
expansions and the continued development of new products. Construction of a new
BDO plant at the site of Lyondell's PO manufacturing facility at Botlek in the
Netherlands will begin in 2000 with start up scheduled for early 2002. Utilizing
Lyondell's proprietary PO-based technology, the

4

new facility, with expected annual BDO capacity of 280 million pounds,
represents an expansion of the use of PO in faster growth markets. Lyondell
believes that, integrated with its leading PO technology, this facility will be
one of the lowest cost BDO plants in the world. Additionally, Lyondell and Bayer
will jointly pursue the construction of PO-11, a worldscale propylene
oxide/styrene monomer plant in Europe, using Lyondell's leading, low-cost
technology.

PETROCHEMICALS. Equistar is one of the world's largest producers of olefins
with seven plants located in the U.S. Gulf Coast and Midwest regions and an
extensive pipeline distribution network system. Olefins, primarily ethylene and
propylene, are the key building block chemicals upon which many plastics and
synthetic materials are based. Equistar's strategy is to drive its plants
toward first quartile profit margin performance by, among other things,
exploiting its superior feedstock flexibility and optimizing co-product
recovery. Additionally, new technologies are being evaluated that could improve
margins through utilizing alternative feedstocks. Also, Equistar intends to
maintain its strong olefins merchant sales position. With its extensive
pipeline distribution system, large plant operations base and broad customer
base, Equistar intends to grow to meet the increasing market needs. Equistar
has been a leader in developing innovative supply options to meet these
requirements.

POLYMERS. Equistar is one of the largest North American producers of polymer
resins, which are used by its customers to make plastic films as well as blow
molded and extruded plastics of all kinds. Equistar's strategy is to focus its
resources and target expansion in high growth markets for polymer resins where
Equistar has a sustainable competitive advantage and leading market and
technology positions such as wire and cable resins and polyethylene films and
molded products. Equistar also intends to continue to improve its cost position
and efficiency by utilizing its large asset base to optimize production and
differentially grow in key markets. Equistar is actively pursuing new
technologies in its polymers business that would create opportunities for higher
margins. With its broad customer base and product line, excellent process
technology and product development capability, and emerging catalyst development
opportunities, Equistar intends to grow in its targeted areas to meet the
growing market needs.

REFINING. As a result of Lyondell's recent actions to reposition its business
portfolio, the strategic importance of LCR is reduced, although it continues to
be a significant source of cash flow. Lyondell's objectives with respect to its
interest in LCR are to maximize value from the business while accelerating cash
flows. LCR will continue to focus on improving the cost position and
reliability of the refinery by implementing further cost reduction and
reliability improvement programs. Two projects begun in 1999 - a centralized
control room and a cogeneration facility - should produce significant efficiency
improvements and cost reductions following their completion, scheduled for 2001.

SUMMARY

To achieve its strategic objectives, Lyondell has:

. Completed acquisitions, such as ARCO Chemical and the ALATHON(R) high density
polyethylene business, where the characteristics of the acquired business
give us long-term sustainable competitive advantages;

. Divested businesses that do not fit our core competencies and have greater
value to others, such as the polyols business and Equistar's concentrates and
compounds business; and

. Built alliances, such as Equistar and the transaction with Bayer, which can
effectively reduce costs, leverage scale efficiencies and provide unique
growth opportunities to the benefit of the owners.

Lyondell intends to continue to use these approaches and others to implement
its strategy with the goal of creating value for our shareholders.

SUMMARY DESCRIPTION OF BUSINESS SEGMENTS

For the year ended December 31, 1997, the Company reported its results of
operations in three segments: petrochemicals; polymers; and refining. Following
the ARCO Chemical Acquisition in July 1998, the Company added intermediate
chemicals and derivatives as a reportable segment, with the operations of the
acquired business

5

forming that segment. The Company's petrochemicals and polymers segments are
conducted through Equistar, and the Company's refining segment is conducted
through LCR. The methanol business conducted through LMC is not a reportable
segment for financial disclosure purposes.

THE COMPANY'S BUSINESS

The following chart shows the organization of Lyondell, as well as 1999 sales
revenues for Lyondell and each of its joint ventures. Sales revenue for
Lyondell and its subsidiaries represent the sales revenue of the businesses
acquired in the ARCO Chemical Acquisition.

[Chart Appears here showing: 1999 consolidated pro forma sales revenue
(excluding revenues of Equistar, LCR and Lyondell Methanol) of $3.7 billion for
Lyondell and Subsidiaries and the primary products of Lyondell's Intermediate
Chemicals and Derivatives Business: Lyondell's equity investments in each of
Equistar (41 percent), LCR (58.5 percent) and Lyondell Methanol (75 percent);
the 1999 sales revenues of each of Equistar, LCR and Lyondell Methanol, which
were $5.4 billion, $2.6 billion and $95 million, respectively; and the primary
products of each of the petrochemical, polymers, refining and methanol business]

Sales revenues shown above include sales to affiliates. For additional segment
information for each of the years in the three-year period ended December 31,
1999, see Notes 4, 5 and 22 of Notes to Consolidated Financial Statements.

6

INTERMEDIATE CHEMICALS AND DERIVATIVES

OVERVIEW

Lyondell is a leading global manufacturer and marketer of intermediate
chemicals and performance chemical products used in a broad range of consumer
goods. The segment's core product is PO, which is produced through two distinct
technologies based on indirect oxidation processes that yield co-products. One
process yields TBA as the co-product; the other yields SM as the co-product. The
two technologies are mutually exclusive, necessitating that a manufacturing
facility be dedicated either to PO/TBA or to PO/SM. The intermediate chemicals
and derivatives segment also manufactures numerous derivatives of PO and TBA.
Among these are polyols, PG, PGE and BDO, derivatives of PO, and MTBE, a
principal derivative of TBA. This segment also manufactures and markets TDI.

In North America, the Company produces PO, TBA, PG and PGE at its Bayport,
Texas plants; PO, SM, MTBE, polyols and BDO at its Channelview, Texas plants
(one of the PO/SM plants, PO/SM II, being held through a joint venture, and the
other being wholly owned); polyols at its South Charleston and Institute, West
Virginia plants; and isocyanates at its Lake Charles, Louisiana plant. In
Europe, the Company produces PO, TBA, PG and MTBE at plants in Rotterdam, The
Netherlands, and Fos-sur-Mer, France; PGE at its Rotterdam plant; and polyols at
the Fos-sur-Mer plant and at a plant in Rieme, Belgium. In the Asia Pacific
region, the Company has a 50% interest in the joint venture Nihon Oxirane Co.,
Ltd. ("Nihon Oxirane"), which operates a PO/SM plant in Chiba, Japan. The
Company produces polyols at majority-owned plants in Kaohsiung, Taiwan and
Anyer, West Java, Indonesia. In Europe, the Company also obtains TDI through
tolling and market-based supply agreements with Rhodia. In December 1999, the
Company negotiated contracts for the construction of a new BDO facility in
Rotterdam, with a 280 million pound annual capacity and expected startup in
early 2002.

The Company estimates, based in part on published data, that worldwide demand
for PO was approximately 9.2 billion pounds in 1999. Approximately 90% of that
volume was consumed in the manufacture of three families of PO derivative
products: polyols, PG and PGE. The remainder is consumed in the manufacture of a
growing segment of performance products, including BDO and its derivatives. The
Company sells less than one billion pounds of its annual capacity of PO and
consumes the rest in the production of derivatives. PO that is not internally
consumed is sold in the merchant market.

Polyols and TDI are combined in the production of urethanes for products such
as automotive seating and home furnishings.

Styrene monomer is a commodity chemical produced and traded worldwide for
commodity and specialty polymer applications, such as polystyrene and polyester
resins, as well as various uses in the rubber industry. Based on published data,
worldwide demand in 1999 was approximately 43 billion pounds.

PG is principally used to produce unsaturated polyester resins. PG is also
used in certain food, cosmetic and pharmaceutical applications and in automotive
coolants and aircraft deicers. PGE are used as high performance solvents.

BDO and its derivatives are utilized in the production of engineering
plastics, pharmaceuticals, personal care products, fibers and high performance
coatings.

Lyondell converts most of its TBA to isobutylene, which is reacted with
methanol to produce MTBE, an oxygenated gasoline blending component that
increases octane and reduces automotive emissions. Worldwide demand for MTBE in
1999 was approximately 459,000 barrels per day, based on published data. This
demand had increased over the past several years as a result of the Clean Air
Act Amendments of 1990 (the "Clean Air Act Amendments"), state and local
regulations and the need for incremental octane in gasoline in the United States
and other countries. In the United States, the Clean Air Act Amendments set
minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not
meeting specified air quality standards. However, while studies by federal and
state agencies and other organizations have shown that MTBE is safe for use in
gasoline and is effective in reducing automotive emissions, the presence of MTBE
in some water supplies in California and other states due to gasoline

7

leaking from underground storage tanks and in surface water from recreational
water craft has led to public concern that MTBE may contaminate drinking water
supplies, and thereby result in a possible environmental risk.

Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict or
ban the use of MTBE. At the state level, the State of California has initiated
action, pursuant to an Executive Order of the Governor and supported by recent
legislation, to begin the process of reducing or limiting the use of MTBE by
December 31, 2002. Such action, to be effective, would require (i) a waiver of
the oxygenate mandate for California, (ii) Congressional action in the form of
an amendment to the Clean Air Act or (iii) California refiners to replace MTBE
with another oxygenate such as ethanol, a more costly and less widely available
additive. At the federal level, a blue ribbon panel appointed by the U.S.
Environmental Protection Agency (the "EPA") issued its report on July 27, 1999,
which recommended, among other things, reducing the use of MTBE in gasoline. The
EPA has recently announced its intent to seek legislative changes from Congress
to give EPA authority to ban MTBE over a three-year period. Such action would
only be granted through amendments to the Clean Air Act. Additionally, the EPA
is seeking a ban of MTBE utilizing rulemaking authority contained in the Toxic
Substance Control Act. It would take at least three years for such a rule to
issue. These initiatives or other governmental actions could result in a
significant reduction in Lyondell's MTBE sales. The Company has developed
technologies to convert TBA into alternate gasoline blending components should
it be necessary to reduce MTBE production in the future.

In addition, the Company has a take-or-pay MTBE sales contract with
Atlantic Richfield Company ("ARCO"), which contributes significant pre-tax
margin. If such legislative initiatives were enacted, ARCO has indicated that it
might attempt to invoke a force majeure provision in the ARCO contract in order
to reduce the contract quantities of MTBE it purchases or to terminate the
contract. The Company would vigorously dispute such action. The contract has an
initial term expiring December 31, 2002 and provides for formula-based prices
that are currently significantly above spot market prices for MTBE. A
significant reduction in the Company's sales under the ARCO contract could have
a negative impact on the Company's results of operations and cash flows.

In Europe, MTBE is expected to benefit from new legislation in the 15-nation
European Union. The so-called "Auto/Oil Legislation" aimed at reducing air
pollution from vehicle emissions was enacted in 1998, and refineries have
increased consumption of MTBE to meet the new blending requirements. Several
European authorities, most notably in Denmark, have investigated possible MTBE
contamination of groundwater and have determined that the primary issue is to
control leaking underground storage tanks. While these authorities are
continuing to monitor governmental findings and actions in the United States, no
restrictive action with respect to MTBE is currently planned.

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The following table outlines the intermediate chemicals and derivatives
segment's primary products, annual processing capacity as of January 1, 2000,
and the primary uses for such products. Unless otherwise specified, annual
processing capacity was calculated by estimating the number of days in a typical
year a production unit of a plant is expected to operate, after allowing
downtime for regular maintenance, and multiplying that number by an amount equal
to the unit's optimal daily output based on the design raw material mix. Because
the processing capacity of a production unit is an estimated amount, actual
production volumes may be more or less than capacities set forth below.
Capacities shown include 100% of the capacity of joint venture facilities.

PRODUCT ANNUAL CAPACITY Primary Uses
- ------------------------------------------ ----------------------- -------------------------------------------------------

Propylene Oxide (PO) 3.87 billion pounds PO is a key component of polyols, PG, PGE and BDO.

Polyols 1.47 billion pounds(a) Polyols are combined with isocyanates to produce
flexible foam for automotive seating and home
furnishings, coatings, adhesives, sealants and
elastomers.

Toluene Diisocyanate (TDI) 514 million pounds(b) TDI is combined with polyols to produce flexible foam
for automotive seating and home furnishings.

Propylene Glycol (PG) 960 million pounds PG is used to produce unsaturated polyester resins for
bathroom fixtures and boat hulls; lower toxicity
antifreeze, coolants and aircraft deicers; and
cosmetics and cleaners.

Propylene Glycol Ethers (PGE) 300 million pounds PGE are used as lower toxicity solvents for paints,
coatings and cleaners.

Butanediol (BDO) 120 million pounds BDO is used in the manufacture of engineering resins,
films, personal care products, pharmaceuticals,
coatings, solvents and adhesives.
Methyl Tertiary Butyl 897 million gallons MTBE is a gasoline component for reducing emissions in
Ether (MTBE) (58,500 barrels/day) reformulated gasolines and enhancing octane value.

Styrene Monomer (SM) 3.65 billion pounds SM is used to produce plastics, such as expandable
polystyrene for packaging, foam cups and containers,
insulation products and durables and engineering
resins.

_________________
(a) Lyondell's polyols business will be sold to Bayer on or about April 1,
2000.

(b) Includes 264 million pounds processed by Rhodia at its plants in Lille and
Pont de Claix, France. Lyondell is entitled to 100% of this output
pursuant to the combination of a tolling agreement and a resale agreement
with Rhodia.

RAW MATERIALS

The principal hydrocarbon raw materials purchased by the intermediate
chemicals and derivatives segment are propylene, butanes, ethylene, benzene and
methanol. The market prices of these raw materials historically have been
related to the price of crude oil and its principal refinery derivatives and
natural gas liquids. These materials are available in bulk quantities via
pipeline or marine vessels. The segment's raw materials requirements are
purchased from numerous suppliers in the United States and Europe, with which
the Company has established contractual relationships, as well as in the spot
market.

The Company's raw material suppliers include Equistar, which is a leading
producer of propylene, ethylene and benzene and is expected to be the major
supplier of these raw materials to Lyondell's U.S. business in 2000. See Note 4
of Notes to Consolidated Financial Statements.

The intermediate chemicals and derivatives segment is a large volume consumer
of isobutane for chemical production. The Company has invested in facilities, or
entered into processing agreements with unrelated third

9

parties, to convert the widely available commodity, normal butane, to isobutane.
The Company is also a large consumer of oxygen for its PO/TBA plants at Bayport,
Texas, Rotterdam, The Netherlands, and Fos-sur-Mer, France.

In order to assure adequate and reliable sources of supply at competitive
prices and rates, the Company is a party to long-term agreements and other
arrangements with suppliers of raw materials, products, industrial gas and other
utilities.

MARKETING AND SALES

In 1999, most of the segment's revenues were derived from sales to, or
processing agreements with, unrelated third parties. Over the past three years,
no single unrelated third party customer, nor any related party customer,
accounted for more than 10% of total revenues in any one year.

The intermediate chemicals and derivatives segment delivers products through
sales agreements, processing agreements and spot sales as well as product swaps.
It purchases SM and limited amounts of MTBE for resale to the extent that
customer demand for these co-products exceeds its production. Production levels
for co-products are based upon the demand for PO and the market economics of the
co-products.

The segment has a number of multi-year PO processing (or tolling) and sales
agreements. This reflects an effort to mitigate the adverse impact of
competitive factors and economic business cycles on demand for the segment's PO.
The segment is also a party to a number of multi-year SM sales and processing
agreements and MTBE sales agreements.

Lyondell sells most of its SM production into the United States merchant
market and to selected export markets through sales or tolling agreements. The
SM processing agreements also include long-term processing agreements providing
for the delivery of fixed annual quantities of SM. See "Joint Ventures and
Other Agreements." As of December 31, 1999, the Company had over 1.1 billion
pounds of SM capacity, or 30% of its worldwide capacity, covered by long-term
processing arrangements.

In addition to the ARCO contract, the Company also sells its MTBE production
under market-based sales agreements and in the spot market.

The majority of the segment's PO derivatives are sold through market-based
sales contracts under annual or multi-year arrangements.

The segment's sales are made through Company marketing and sales personnel and
through distributors and independent agents located in the Americas, Europe and
the Asia Pacific region. Through centralization of certain sales and order
fulfillment functions in regional customer service centers located in Houston,
Texas, Rotterdam, The Netherlands and Singapore, the Company has reduced its
sales office infrastructure for this segment around the world, while maintaining
service to its worldwide customer base. Lyondell also has long-term contracts
for distribution and logistics to insure reliable supply to its customers.

For data relating to foreign operations, see Note 22 of Notes to Consolidated
Financial Statements.

JOINT VENTURES AND OTHER AGREEMENTS

As part of the PO production joint venture with Bayer ("PO Joint Venture"),
Lyondell will contribute its Channelview, Texas PO/SM I plant and its Bayport,
Texas PO/TBA plant to the PO Joint Venture. Each of Lyondell and Bayer will
take its share of the PO produced. Bayer is expected to use its share of PO as
feedstock for its polyols business, including that to be acquired from Lyondell
in the pending sale. Under the terms of operating and logistics agreements,
Lyondell will operate the PO Joint Venture plants and will arrange and
coordinate the logistics of PO delivery on a worldwide basis.

10

Lyondell's PO/SM II plant at the Channelview, Texas complex that was completed
in 1992 is owned by the Company together with third-party equity investors.
The Company retains a majority interest in the PO/SM II plant and is the
operator of the plant. A portion of the SM output of the PO/SM II plant is
committed to the third-party investors under long-term processing agreements. As
of December 31, 1999, 1.1 billion pounds per year of the PO/SM II plant's
existing SM capacity was committed under such arrangements.

The Company has a 50% equity interest in Nihon Oxirane, a joint venture with
Sumitomo Chemical Co., Ltd. and Showa Denko K.K. Since 1976, Nihon Oxirane has
operated a PO/SM plant in Chiba, Japan.

In January 1995, ARCO Chemical entered into a tolling agreement and a resale
agreement with Rhodia covering the entire TDI output of Rhodia's two plants in
France, which have a combined annual capacity of approximately 264 million
pounds. This TDI is marketed principally in Europe, the Middle East, Africa and
Asia.

COMPETITION AND INDUSTRY CONDITIONS

Competition within the intermediate chemicals and derivatives segment of the
chemical industry is significant and is based on a variety of factors, including
quality, product price, reliability of supply, technical support, customer
service and potential substitute materials. Profitability in this segment is
affected by the worldwide level of demand along with vigorous price competition
which may intensify due to, among other things, new industry capacity. Demand is
a function of economic growth in the United States and elsewhere in the world,
which fluctuates. It is not possible to predict accurately the changes in raw
material costs, market conditions and other factors that will affect industry
margins in the future. Capacity share figures for the segment and its
competitors, discussed below, are based on completed production facilities and,
where appropriate, include the full capacity of joint-venture facilities and
certain long-term supply agreements.

The Company's major worldwide PO competitors are Dow Chemical Company
("Dow") and Shell Chemical Company ("Shell"). Dow's operations are based on
chlorohydrin technology. Shell utilizes a proprietary PO/SM technology. Based on
published data relating to the PO market, the Company believes it has 35%, Dow
has 32% and Shell has 6% of the total worldwide capacity for PO.

As part of the Bayer transaction, Lyondell and Bayer agreed to pursue a joint
venture for the construction of PO-11 in Europe with an expected startup in
2003. Shell and BASF AG ("BASF"), through their joint venture, Basell,
commenced operation in October 1999 of a PO/SM plant in the Netherlands, using
Shell technology. Shell and BASF, as 50-50 partners, have also broken ground
for the construction of a PO/SM plant in Singapore, which is scheduled for start
up in the last half of 2002. In addition, Repsol Quimica, S.A. plans to start
up a PO/SM plant in Spain in 2000, using technology for the production of PO and
SM originally licensed from ARCO Chemical. Expansions by Erdoelchemie, a joint
venture between BP Amoco Chemical Company ("BP Amoco") and Bayer, in Europe and
SK Oxychemical in South Korea are also planned. As a result of these capacity
increases, the Company expects PO capacity in the near term to increase more
rapidly than PO demand, especially in Europe. The Company also expects
increasing integration to occur as current merchant-market buyers, such as Bayer
and BASF, establish their own sources of PO supply.

The Company competes with many polyols producers worldwide, including Dow,
Bayer, BASF and Shell. Based on published data, Dow is believed to have 25% of
worldwide polyols capacity while the Company is believed to have 16%.
Lyondell's polyols business will be sold to Bayer.

The Company both manufactures and has long-term tolling agreements for TDI.
The Company competes with many TDI producers worldwide, including Bayer and
BASF. Based on published data, Bayer is believed to have 21% of worldwide TDI
capacity while the Company is believed to have 15%.

The Company competes with many MTBE producers worldwide, the most significant
of which is Saudi Basic Industries Corp. ("SABIC"). Based on published data,
SABIC is believed to have 12% of the total worldwide capacity for MTBE. The
Company believes it has 10% and that Equistar has an additional 3% of worldwide
MTBE capacity. MTBE also faces competition from substitute products such as
ethanol as well as other octane components.

11

The Company competes with several SM producers worldwide; among them are
Shell, Dow and BASF. Based on published data, Shell and the Company are each
believed to have 7% of total worldwide SM capacity.

PROPERTIES

The Company leases its corporate offices located in Houston, Texas. As part
of the ARCO Chemical Acquisition, Lyondell acquired ARCO Chemical's headquarters
office and research facility in Newtown Square, Pennsylvania, which is leased
from ARCO. The Company's European headquarters are located in leased facilities
in Maidenhead, England, and its Asia Pacific headquarters are located in leased
facilities in Hong Kong. The non-U.S. regional service centers are located in
leased facilities in Rotterdam, The Netherlands and Singapore.

Depending on location and market needs, the Company's production facilities
can receive primary raw materials by pipeline, railcar, truck, barge or ship and
can deliver finished products in drums or by pipeline, railcar, truck, barge,
isotank or ship. The Company charters ships, owns and charters barges and leases
isotanks and railcars for the dedicated movement of products between plants,
products to customers or terminals, or raw materials to plants, as necessary.
The Company leases liquid and bulk storage and warehouse facilities at terminals
in the Americas, Europe and the Asia Pacific region. In the Rotterdam outer
harbor area, the Company owns and operates an on-site butane storage tank,
propylene spheres, pipeline connections and a jetty that accommodates deep-draft
vessels.

The principal manufacturing facilities of the segment are set forth below. All
of these facilities are wholly-owned by Lyondell unless otherwise noted. The
polyols facilities are being sold to Bayer.

LOCATION PRINCIPAL PRODUCTS
- --------------------------------------------------------------- --------------------------------

Bayport (Pasadena), Texas............................... PO, PG, PGE, TBA, isobutylene
Channelview, Texas(1)................................... PO, polyols, BDO, SM, MTBE
Lake Charles, Louisiana................................. TDI
Institute and South Charleston, West Virginia(2)........ polyols
Rieme, Belgium.......................................... polyols
Fos-sur-Mer, France..................................... PO, PG, polyols, TBA, MTBE
Botlek, Rotterdam, The Netherlands...................... PO, PG, PGE, TBA, MTBE,
isobutylene
Anyer, West Java, Indonesia............................. polyols
Chiba, Japan(3)......................................... PO, SM
Kaohsiung, Taiwan(4).................................... polyols

________
(1) Third-party investors hold a minority ownership interest in the PO/SM II
plant at the Channelview facility.

(2) The Company's plants in South Charleston and Institute, West Virginia are
situated on leased land.

(3) The PO/SM plant located in Chiba, Japan is owned by Nihon Oxirane, a joint
venture in which the Company holds a 50% interest through a subsidiary.

(4) The Taiwan plant is owned by Lyondell Taiwan Co., Ltd., a Taiwan company in
which the Company, through a subsidiary, has a majority interest.

RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS

The Company possesses a body of patented and unpatented technology and trade
secrets relating to its products, processes and the design and operation of its
plants, all of which are valuable to the intermediate chemicals and derivatives
segment. Lyondell has several patents and patent applications pending for
inventions resulting from its research relating to new PO processes for
producing propylene oxide without co-products. Lyondell believes that
implementation of this technology would reduce the cost of manufacturing PO and
eliminate the production of less valuable co-products.

The Company does not believe that the loss of any individual patent or trade
secret would have a material adverse effect on its intermediate chemicals and
derivatives business. The basic patents relating to the Company's PO/SM and
PO/TBA co-product technologies have expired. However, the technology is not
readily licensable, and Lyondell's experience and know-how in this area provide
it with a significant competitive advantage over others trying to replicate the
technology.

12

The principal research and development facility for the segment is located in
Newtown Square, Pennsylvania, with technical centers in South Charleston, West
Virginia, Villers Saint Paul, France, and Singapore. The Company's research and
development expenditures on a pro forma basis for the ARCO Chemical Acquisition
for 1999, 1998, and 1997 were $58 million, $65 million, and $82 million,
respectively.

EMPLOYEE RELATIONS

On December 31, 1999, Lyondell had approximately 3,700 full-time employees,
with approximately 16% of the domestic employees represented by labor unions.
Lyondell also uses the services of independent contractors in the routine
conduct of its business. In connection with a November 1999 agreement with
Equistar to expand the scope of shared administrative services ("Shared Services
Agreement"), approximately 460 persons who had been employed by Equistar in the
areas of information technology, human resources, materials management and raw
material supply, customer supply chain, accounting, facility services, and legal
became employees of Lyondell effective January 1, 2000. The Company believes
its relations with its employees are good.

EQUISTAR CHEMICALS, LP

MANAGEMENT OF EQUISTAR

Equistar is a limited partnership organized under the laws of the State of
Delaware. Lyondell owns its interest in Equistar through two wholly owned
subsidiaries, one of which serves as a general partner of Equistar and one of
which serves as a limited partner. Similarly, Millennium owns its interest in
Equistar through two wholly owned subsidiaries, one a general partner and one a
limited partner. Occidental owns its interest in Equistar through three wholly
owned subsidiaries, one a general partner and two limited partners. Lyondell
holds a 41% interest, and Millennium and Occidental each hold a 29.5% interest
in Equistar. The Amended and Restated Partnership Agreement of Equistar (the
"Equistar Partnership Agreement") governs, among other things, ownership, cash
distributions, capital contributions and management of Equistar. Millennium has
publicly announced its intention to sell its 29.5% interest in Equistar and is
actively seeking qualified buyers. There can be no assurance that any such sale
will be consummated, but the Company does not expect any such sale to affect
Equistar's operations or results.

The Equistar Partnership Agreement provides that Equistar is governed by a
Partnership Governance Committee, consisting of nine representatives, three
appointed by each general partner. Matters requiring unanimous agreement by the
representatives of Lyondell, Millennium and Occidental include changes in the
scope of Equistar's business, the five-year strategic plan (and annual updates
thereof), the sale or purchase of assets or capital expenditures of more than
$30 million not contemplated by the strategic plan, investments by Equistar's
partners over certain amounts, merging or combining with another business and
certain other matters. All decisions of the Partnership Governance Committee
that do not require unanimity among Lyondell, Millennium and Occidental may be
made by Lyondell's representatives alone. The day-to-day operations of Equistar
are managed by the executive officers of Equistar. Dan Smith, the Chief
Executive Officer of Lyondell, also serves as Chief Executive Officer of
Equistar.

AGREEMENTS BETWEEN LYONDELL AND EQUISTAR

Lyondell and Equistar entered into an agreement on December 1, 1997, providing
for the transfer of assets to Equistar. Among other things, such agreement sets
forth representations and warranties by Lyondell with respect to the transferred
assets and requires indemnification by Lyondell with respect thereto. Such
agreement also provides for the assumption by Equistar of, among other things,
third party claims that are related to certain pre-closing contingent
liabilities that are asserted prior to December 1, 2004, to the extent the
aggregate thereof does not exceed $7 million, third party claims related to pre-
closing contingent liabilities that are asserted for the first time after
December 1, 2004, certain obligations for indebtedness, liabilities for products
sold after December 1, 1997, regardless of when manufactured, and certain long
term liabilities. Millennium Petrochemicals and affiliates of Occidental (the
"Occidental Subsidiaries") entered into similar agreements with Equistar with
respect to the transfer of their respective assets and Equistar's assumption of
liabilities.

13

Also in connection with the formation of Equistar, Lyondell contributed a
promissory note for $345 million payable to Equistar, which Lyondell repaid with
proceeds of the Credit Facility in July 1998.

If Lyondell, Millennium or Occidental or any of their affiliates desire to
initiate or pursue an opportunity to undertake, engage in, acquire or invest in
a business or activity or operation within the scope of the business of
Equistar, such opportunity must first be offered to Equistar. Equistar has
certain options to participate in the opportunity, but if it determines not to
participate, the party offering the opportunity is free to pursue it on its own.
If the opportunity within Equistar's scope of business constitutes less than 25%
of an acquisition that is otherwise not within the scope of its business,
Lyondell, Millennium or Occidental, as the case may be, may make such
acquisition, provided that the portion within the scope of Equistar's business
is offered to Equistar pursuant to the foregoing provisions.

During 1998 and 1999, Lyondell had provided certain administrative services to
Equistar, including certain legal, risk management and treasury services, tax
services and employee benefit plan administration, and Equistar provided
services to Lyondell in the areas of health, safety and environmental, human
resources, information technology and legal. As a consequence of these services,
Equistar made a monthly payment to Lyondell as described in Note 4 of Notes to
Consolidated Financial Statements. In November 1999, Lyondell and Equistar
announced that they would utilize shared services over a broader range,
including information technology, human resources, materials management and raw
material supply, customer supply chain, health, safety and environmental,
engineering and research and development, facility services, legal, accounting,
treasury, internal audit, and tax. Effective January 1, 2000, employee-related
and indirect costs will be allocated between the two companies in the manner
prescribed in the Shared Services Agreement while direct third party costs,
incurred exclusively for either Lyondell or Equistar, would be charged directly
to that entity. Equistar and Millennium Petrochemicals are also parties to a
number of agreements for the provision of services, utilities and materials from
one party to the other at common locations, principally LaPorte, Texas and
Cincinnati, Ohio. Pursuant to a Transition Services Agreement that terminated
on June 1, 1999, an affiliate of Occidental also provided services to Equistar,
including services related to accounting, payroll, office administration,
marketing, transportation, purchasing and procurement, management, human
resources, customer service, technical services and others. Equistar is now
handling these functions directly or through the Shared Services Agreement with
Lyondell.

Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries each
entered into a Master Intellectual Property Agreement with Equistar. The Master
Intellectual Property Agreements provide for (i) the transfer of certain
intellectual property of Lyondell, Millennium Petrochemicals and the Occidental
Subsidiaries related to the businesses each contributed to Equistar, (ii)
certain rights and licenses to Equistar with respect to intellectual property
retained by Lyondell, Millennium Petrochemicals or the Occidental Subsidiaries
that was not solely related to the business of Equistar but is useful in such
business and (iii) certain rights and licenses from Equistar to Lyondell,
Millennium Petrochemicals and the Occidental Subsidiaries, respectively, with
respect to intellectual property transferred to Equistar that Lyondell,
Millennium Petrochemicals and the Occidental Subsidiaries may use with respect
to their other businesses.

Lyondell, Millennium, Occidental and certain of its affiliates and Equistar
are parties to an Amended and Restated Parent Agreement dated as of May 15,
1998, which provides that, among other things, each of Lyondell, Millennium and
an Occidental affiliate guarantees the performance by their respective
subsidiaries under various agreements entered into in connection with the
formation of Equistar, including the Equistar Partnership Agreement and the
asset transfer agreements providing for the transfer of assets by Lyondell,
Millennium Petrochemicals and the Occidental Subsidiaries, respectively, to
Equistar.

PETROCHEMICALS

OVERVIEW

Petrochemicals are fundamental to many segments of the economy, including the
production of consumer products, housing components, automotive products and
other durable and nondurable goods. Equistar produces a variety of
petrochemicals, including olefins, oxygenated chemicals, aromatics and specialty
products, at twelve facilities located in six states. Olefins include ethylene,
propylene and butadiene. Oxygenated chemicals include EO,

14

EG, ethanol and MTBE. Aromatics produced are benzene and toluene. Equistar's
petrochemical products are used to manufacture polymers and intermediate
chemicals, which are used in a variety of consumer and industrial products.
Ethylene is the most significant petrochemical in terms of worldwide production
volume and is the key building block for polyethylene and a large number of
other chemicals, plastics and synthetics. With the strong growth of end-use
products derived from ethylene during the past several decades, especially as
plastics have developed into low-cost, high-performance substitutes for a wide
range of materials such as metals, paper and glass, U.S. ethylene consumption
has grown by an average annual rate of approximately 4%.

The Chocolate Bayou, Corpus Christi and two Channelview, Texas olefins plants
use petroleum liquids, including naphtha, condensates and gas oils (collectively
"Petroleum Liquids"), to produce ethylene. Assuming the co-products are
recovered and sold, the cost of ethylene production from Petroleum Liquids
historically has been less than the cost of producing ethylene from natural gas
liquids, including ethane, propane and butane (collectively, "NGLs"). The use
of Petroleum Liquids results in the production of a significant amount of co-
products such as propylene, butadiene, benzene and toluene, and specialty
products, such as dicyclopentadiene ("DCPD"), isoprene, resin oil,
piperylenes, hydrogen and alkylate. Based upon independent third-party surveys,
management believes that its Channelview facility is the lowest production cost
olefins facility in the United States. Equistar's Morris, Illinois, Clinton,
Iowa, Lake Charles, Louisiana and LaPorte, Texas plants are designed to use
primarily NGLs, which produce primarily ethylene with some co-products such as
propylene. A comprehensive pipeline system connects the Gulf Coast plants with
major olefins customers. Raw materials are sourced both internationally and
domestically and are shipped via vessel and pipeline.

Equistar produces EO and its primary derivative, EG, at facilities located at
Pasadena, Texas and through a 50/50 joint venture with E.I. DuPont de Nemours
and Company in Beaumont, Texas. The Pasadena facility also produces other
derivatives of EO, principally ethers and ethanolamines. EG is used in
antifreeze and in polyester fibers, resins and films. Ethylene oxide and its
derivatives are used in many consumer and industrial end uses, such as
detergents and surfactants, brake fluids and polyurethane foams for seating and
bedding.

Equistar produces synthetic ethyl alcohol at its Tuscola, Illinois plant by a
direct hydration process that combines water and ethylene. Equistar also owns
and operates facilities in Newark, New Jersey and Anaheim, California for
denaturing ethyl alcohol by the addition of certain chemicals. In addition, it
produces small volumes of diethyl ether, a by-product of its ethyl alcohol
production, at Tuscola. These ethyl alcohol products are ingredients in various
consumer and industrial products as described more fully in the table below.

The following table outlines Equistar's primary petrochemical products, annual
processing capacity as of January 1, 2000, and the primary uses for such
products. Unless otherwise specified, annual processing capacity was calculated
by estimating the number of days in a typical year that a production unit of a
plant is expected to operate, after allowing for downtime for regular
maintenance, and multiplying that number by an amount equal to the unit's
optimal daily output based on the design raw material mix. Because the
processing capacity of a production unit is an estimated amount, actual
production volumes may be more or less than the capacities set forth below.
Capacities shown include 100% of the capacity of Equistar, of which the Company
owns 41%.

15

PRODUCT Annual Capacity Primary Uses
- --------- --------------- -------------

OLEFINS:
- -------

Ethylene 11.5 billion pounds Ethylene is used as a raw material to manufacture polyethylene,
EO, ethanol, ethylene dichloride and ethylbenzene.

Propylene 5.0 billion pounds (a) Propylene is used to produce polypropylene, acrylonitrile and
propylene oxide.

Butadiene 1.2 billion pounds Butadiene is used to manufacture styrene-butadiene rubber and
polybutadiene rubber, which are used in the manufacture of
tires, hoses, gaskets and other rubber products. Butadiene is
also used in the production of paints, adhesives, nylon
clothing, carpets and engineered plastics.

OXYGENATED PRODUCTS:
- --------------------

Ethylene Oxide (EO) 1.1 billion pounds ethylene EO is used to produce surfactants, industrial cleaners,
oxide; 400 million pounds are cosmetics, emulsifiers, paint, heat transfer fluids and ethylene
pure ethylene oxide glycol (polyester fibers and film, polyethylene terephthalate
("PET") resin and antifreeze).

Ethylene Glycol (EG) 1 billion pounds EG is used to produce polyester fibers and film, PET resin, heat
transfer fluids, paint and automobile antifreeze.

Ethylene Oxide 225 million pounds EO derivatives are used to produce paint and coatings, polishes,
Derivatives solvents and chemical intermediates.

MTBE 284 million gallons MTBE is an octane enhancer and clean fuel additive in
(18,500 barrels/day)(b) reformulated gasoline.

AROMATICS:
- ---------

Benzene 300 million gallons Benzene is used to produce styrene, phenol and cyclohexane.
These products are used in the production of nylon, plastics,
rubber and polystyrene. Polystyrene is used in insulation,
packaging and drink cups.

Toluene 66 million gallons Toluene is used as an octane enhancer in gasoline, as a chemical
feedstock for benzene production, and a core ingredient in TDI,
a compound in urethane production.

SPECIALTY PRODUCTS:
- -------------------

Dicyclopentadiene 130 million pounds DCPD is a component of inks, adhesives and polyester resins for
(DCPD) molded parts such as tub and shower stalls and boat hulls.

Isoprene 145 million pounds Isoprene is a component of premium tires, adhesive sealants and
other rubber products.

Resin Oil 150 million pounds Resin oil is used in the production of hot-melt-adhesives, inks,
sealants, paints and varnishes.

Piperylenes 100 million pounds Piperylenes are used in the production of adhesives, inks and
sealants.

Hydrogen 44 billion cubic feet Hydrogen is used by refineries to remove sulfur from process gas
in heavy crude oil.

Alkylate 337 million gallons(c) Alkylate is a premium blending component used by refiners to
meet Clean Air Act standards for reformulated gasoline.

Ethyl Alcohol 50 million gallons Ethyl alcohol is used in the production of solvents as well as
household, medicinal and personal care products.

Diethyl Ether 5 million gallons Diethyl ether is used in laboratory reagents, gasoline and
diesel engine starting fluid, liniments, analgesics and
smokeless gunpowder.

__________
(a) Does not include refinery-grade material or production from the product
flexibility unit at Equistar's Channelview facility, which can convert
ethylene and other light petrochemicals into propylene. This facility has a
current annual processing capacity of one billion pounds per year of
propylene.

(b) Includes up to 44 million gallons/year of capacity operated for the benefit
of LCR.

(c) Includes up to 172 million gallons/year of capacity operated for the benefit
of LCR.

16

RAW MATERIALS AND ETHYLENE PURCHASES

The raw materials cost for olefins production is generally the largest
component of total cost for the petrochemicals business. Olefins plants with the
flexibility to consume a wide range of raw materials are able to maintain higher
profitability during periods of changing energy and petrochemicals prices than
olefins plants that are restricted in their raw material processing capability,
assuming the co-products are recovered and sold. The primary raw materials used
in the production of olefins are Petroleum Liquids (also referred to as "heavy
raw materials") and NGLs (also referred to as "light raw materials").
Petroleum Liquids have had a historical cost advantage over NGLs such as ethane
and propane, assuming the co-products are recovered and sold. For example, using
Petroleum Liquids typically generates between one and four cents additional
margin per pound of ethylene produced compared to using ethane. Equistar has the
capability to realize this margin advantage at the Channelview, Corpus Christi
and Chocolate Bayou facilities. This cost advantage is expected to continue due
to the significantly higher capital cost for plants with the capability to
process both heavy raw materials (Petroleum Liquids) and their resulting co-
products in contrast to processing light raw materials (NGLs).

The Channelview facility is uniquely flexible in that it can process 100%
Petroleum Liquids or up to 80% NGLs. The Corpus Christi plant can process up to
70% Petroleum Liquids or up to 70% NGLs, subject to the availability of NGLs.
The Chocolate Bayou facility processes 100% Petroleum Liquids. Equistar's four
other olefins facilities currently process only NGLs. Equistar's LaPorte
facility can process heavier NGLs, such as butane and natural gasoline.

The majority of Equistar's Petroleum Liquids requirements are purchased via
contractual arrangement from a variety of third-party domestic and foreign
sources. Equistar also purchases a minimal amount of Petroleum Liquids on the
spot market from third-party domestic and foreign sources. Equistar purchases
NGLs from a wide variety of domestic sources. Equistar obtains a portion of its
olefins raw material requirements from LCR at market-related prices.

In addition to producing its own ethylene, Equistar assumed certain agreements
of an affiliate of Millennium for the purchase of ethylene from Gulf Coast
producers at market prices. Ethylene purchase obligations under the assumed
contracts will decline at the end of 2000, although Equistar currently intends
to continue purchasing ethylene from third party sources as needed to meet its
requirements.

MARKETING AND SALES

Ethylene produced by the LaPorte, Morris and Clinton facilities is generally
consumed as raw material by the polymers operations at those sites. Ethylene and
propylene produced at the Channelview, Corpus Christi, Chocolate Bayou and Lake
Charles olefins plants are generally distributed by pipeline or via exchange
agreements to Equistar's Gulf Coast polymer and ethylene oxide glycol facilities
as well as to Equistar's affiliates and third parties. As of January 1, 2000,
approximately 80% of the ethylene produced by Equistar was consumed internally
or sold to Equistar's affiliates at market-related prices.

With respect to sales to third parties, Equistar sells a majority of its
olefins products to customers with whom Lyondell and Occidental have had long-
standing relationships. Sales to third parties generally are made under written
agreements that typically provide for: monthly negotiation of price; customer
purchase of a specified minimum quantity; and three- to six-year terms with
automatic one- or two-year term extension provisions. Some contracts may be
terminated early if deliveries have been suspended for several months. No single
unrelated third party customer accounted for more than 10% of total segment
revenues in 1999.

Ethylene oxide and ethylene glycol are sold under long-term contracts of three
to five years' duration to third-party customers, with pricing negotiated on a
quarterly basis to reflect market conditions. Glycol ethers are sold primarily
into the solvent and distributor markets under one-year contracts at market
prices, as are ethanolamines and brake fluids. Ethanol and ethers are sold to
third-party customers under one-year contracts at market prices.

17

Equistar licenses MTBE technology under a license from an affiliate of
Lyondell and sells a significant portion of MTBE produced at one of its two
Channelview units to Lyondell at market-related prices. The production from the
second unit is consumed by LCR for gasoline blending. MTBE produced at Chocolate
Bayou is sold to third parties at market-related prices.

Equistar sells most of its aromatics production under contracts that have
initial terms ranging from two to three years and that typically contain
automatic one-year term extension provisions. These contracts generally provide
for monthly or quarterly price adjustments based upon current market prices.
Aromatics produced by LCR, with the exception of benzene, are marketed by
Equistar for LCR under contracts with similar terms to Equistar's own. Benzene
produced by LCR is sold directly to Equistar at market-related prices.

Most of the ethylene and propylene production of the Channelview, Chocolate
Bayou, Corpus Christi and Lake Charles facilities is shipped via a 1,430-mile
pipeline system which has connections to numerous Gulf Coast ethylene and
propylene consumers. This pipeline system, some of which is owned and some of
which is leased by Equistar, extends from Corpus Christi to Mont Belvieu to Port
Arthur, Texas as well as around the Lake Charles, Louisiana area. In addition,
exchange agreements with other olefins producers allow access to customers who
are not directly connected to Equistar's pipeline system. Some propylene is
shipped by ocean-going vessel. Ethylene oxide is shipped by railcar, and its
derivatives are shipped by railcar, truck, isotank or ocean-going vessel.
Butadiene, aromatics and other petrochemicals are distributed by pipeline,
railcar, truck, barge or ocean-going vessel.

COMPETITION AND INDUSTRY CONDITIONS

The basis for competition in Equistar's petrochemicals products is price,
product quality, product deliverability and customer service. Equistar competes
with other large domestic producers of petrochemicals, including BP Amoco,
Chevron Chemical Company ("Chevron"), Dow , Exxon Mobil Chemical Company ("Exxon
Mobil"), Huntsman Chemical Company, Phillips Petroleum Company ("Phillips"),
Shell and Union Carbide Corporation. Industry consolidation, including the
combination of British Petroleum and Amoco, Exxon and Mobil, the pending
combination of Union Carbide and Dow and the recently announced petrochemicals
combination by Chevron and Phillips, has concentrated the industry in fewer,
although larger and stronger, competitors.

The combined rated capacity of Equistar's olefins units at January 1, 2000 was
approximately 11.5 billion pounds of ethylene per year or approximately 17% of
total North American production capacity. Based on published rated production
capacities, Equistar believes it is the largest producer of ethylene in North
America. North American ethylene rated capacity at January 1, 2000 was
approximately 67 billion pounds per year. Of the total ethylene production
capacity in the United States, approximately 95% is located along the Gulf
Coast.

Petrochemicals profitability is affected by the level of demand for
petrochemicals and derivatives, along with vigorous price competition among
producers which may intensify due to, among other things, the addition of new
capacity. In general, demand is a function of economic growth in the United
States and elsewhere in the world, which fluctuates. Capacity additions in
excess of annual growth also put pressure on margins. It is not possible to
predict accurately the changes in raw material costs, market conditions and
other factors that will affect petrochemical industry margins in the future.

The petrochemicals industry historically has experienced significant
volatility in capacity utilization and profitability. Producers of olefins
primarily for merchant supply to unaffiliated customers typically experience
greater variations in their sales volumes and profitability when industry supply
and demand relationships are at extremes in comparison to more integrated
competitors, i.e., those with a higher proportion of captive demand for olefins
derivatives production. Equistar currently consumes or sells to its partners'
downstream derivatives facilities approximately 80% of its ethylene production,
which has the effect of reducing volatility.

Equistar's other major commodity chemical products also experience cyclical
market conditions similar to, although not necessarily coincident with, those of
ethylene.

18

POLYMERS

OVERVIEW

Through facilities located at ten plant sites in four states, Equistar's
polymers segment manufactures a wide variety of polyolefins, including
polyethylene, polypropylene and various performance polymers.

Equistar currently manufactures polyethylene using a variety of technologies
at six facilities in Texas and at its Morris, Illinois and Clinton, Iowa
facilities. The Morris and Clinton facilities are the only polyethylene
facilities located in the Midwest and enjoy a freight cost advantage over Gulf
Coast producers in delivering products to customers in the Midwest and on the
East Coast of the United States. Polyethylene is used in a wide variety of
consumer products, packaging materials and industrial applications.

Equistar produces performance polymer products, which include enhanced grades
of polyethylene and polypropylene, at several of its polymers facilities. The
Company believes that, over a business cycle, average selling prices and profit
margins for performance polymers tend to be higher than average selling prices
and profit margins for higher-volume commodity polyethylenes. Equistar also
produces wire and cable resins and compounds at Morris, Illinois, LaPorte,
Texas, Tuscola, Illinois and Fairport Harbor, Ohio. Wire and cable resins and
compounds are used to insulate copper and fiber optic wiring in power,
telecommunication, computer and automobile applications. Equistar's Morris,
Illinois and Pasadena, Texas facilities manufacture polypropylene using
propylene produced as a co-product of Equistar's ethylene production as well as
propylene purchased from third parties. Polypropylene is sold for various
applications in the automotive, housewares and appliance industries. Equistar
sold its concentrates and compounds business, including its facilities in
Crockett, Texas and Heath, Ohio, in April 1999.

The following table outlines Equistar's polymers and performance polymers
products, annual processing capacity at January 1, 2000, and the primary uses
for such products. Unless otherwise specified, annual processing capacity was
calculated by estimating the number of days in a typical year that a production
unit of a plant is expected to operate, after allowing for downtime for regular
maintenance, and multiplying that number by an amount equal to the unit's
optimal daily output based on the design raw material mix. Because the
processing capacity of a production unit is an estimated amount, actual
production volumes may be more or less than the capacities set forth below.
Capacities shown include 100% of the capacity of Equistar, of which the Company
owns 41%.

19

PRODUCT Annual Capacity Primary Uses
- ------------------------------------------- ----------------------- -------------------------------------------------------------

High density polyethylene (HDPE) 3.6 billion pounds HDPE is used to manufacture grocery, merchandise and trash
(a) (b) bags; food containers for items from frozen desserts to
margarine; plastic caps and closures; liners for boxes of
cereal and crackers; plastic drink cups and toys; dairy
crates; bread trays and pails for items from paint to
fresh fruits and vegetables; safety equipment such as hard
hats; house wrap for insulation; bottles for
household/industrial chemicals and motor oil;
milk/water/juice bottles; and large (rotomolded) tanks for
storing liquids like agricultural and lawn care chemicals.

Low density polyethylene (LDPE) 1.7 billion pounds (b) LDPE is used to manufacture food packaging films; plastic
bottles for packaging food and personal care items; dry
cleaning bags; ice bags; pallet shrink wrap; heavy-duty
bags for mulch and potting soil; boil-in-bag bags;
coatings on flexible packaging products; and coatings on
paper board such as milk cartons. Specialized forms of
LDPE are Ethyl Methyl Acrylate ("EMA"), which provides
adhesion in a variety of applications, and Ethylene Vinyl
Acetate ("EVA"), which is used in foamed sheets,
bag-in-box bags, vacuum cleaner hoses, medical tubing,
clear sheet protectors and flexible binders.

Linear low density polyethylene (LLDPE) 1.1 billion pounds LLDPE is used to manufacture garbage and lawn-leaf bags;
housewares; lids for coffee cans and margarine tubs; and
large (rotomolded) toys like outdoor gym sets.

Polypropylene 680 million pounds Polypropylene is used to manufacture fibers for carpets,
rugs and upholstery; housewares; automotive battery cases;
automotive fascia, running boards and bumpers; grid-type
flooring for sports facilities; fishing tackle boxes; and
bottle caps and closures.

Wire and Cable (c) Wire and cable resins and compounds are used to insulate
Resins and Compounds copper and fiber optic wiring in power, telecommunication,
computer and automobile applications.

Polymeric Powders (c) Polymeric powders are component products in structural and
bulk molding compounds, parting agents and filters for
appliance, automotive and plastics processing industries.

Polymers for Adhesives, Sealants and (c) Polymers are components in hot-metal-adhesive formulations
Coatings for case, carton and beverage package sealing, glue
sticks, automotive sealants, carpet backing and adhesive
labels.

Reactive Polyolefins (c) Reactive polyolefins are functionalized polymers used to
bond non-polar and polar substrates in barrier food
packaging, wire and cable insulation and jacketing,
automotive gas tanks and metal coating applications.

Liquid Polyolefins (c) Liquid polyolefins are a diesel fuel additive to inhibit
freezing.

_______________
(a) Includes a 480-million-pound HDPE resin expansion project at the Matagorda
facility which commenced operation in October 1999. Also includes the
impact of idling a single gas-phase reactor at the Port Arthur facility
effective March 31, 1999, which resulted in a decrease in capacity of 300
million pounds in 1999. Additionally, includes the impact of shutting down
two slurry reactors at the LaPorte, Texas facility effective April 30,
1999, resulting in a decrease of 100 million pounds in 1999.

(b) In the first quarter of 2000, Equistar idled two slurry reactors with a
total capacity of 300 million pounds per year of HDPE. Additionally two
autoclave reactors with annual capacity of 60 million pounds of LDPE were
idled. All of this capacity is at the LaPorte, Texas facility. These
actions are part of Equistar's asset optimization strategy.

20

(c) These are enhanced grades of polyethylene and are included in the capacity
figures for HDPE, LDPE and LLDPE above, as appropriate.

RAW MATERIALS

With the exception of the Chocolate Bayou polyethylene plant, Equistar's
polyethylene and polypropylene production facilities can receive their ethylene
and propylene directly from Equistar's petrochemical facilities via Equistar's
olefins pipeline system or from on-site production. The polyethylene plants at
Chocolate Bayou, LaPorte, Port Arthur and Pasadena, Texas are pipeline-connected
to third parties and can receive ethylene via exchanges or purchases. The
polypropylene facility at Morris, Illinois also receives propylene from a third
party.

MARKETING AND SALES

Equistar's polymers products are primarily sold to an extensive base of
established customers. Approximately 30% of these customers have term
contracts, typically having a duration of one to three years. The remainder is
generally sold without contractual term commitments. In either case, in most of
the continuous supply relationships, prices are subject to change upon mutual
agreement between Equistar and the customer. No single unrelated third party
customer accounted for more than 10% of total segment revenues in 1999.

Polymers are primarily distributed via railcar. Equistar owns or leases,
pursuant to long-term lease arrangements, approximately 9,500 railcars for use
in its polymers business. Equistar sells its polymers products in the United
States and Canada primarily through its own sales organization. It generally
engages sales agents to market its products in the rest of the world.

COMPETITION AND INDUSTRY CONDITIONS

The basis for competition in Equistar's polymers products is price, product
performance, product quality, product deliverability and customer service.
Equistar competes with other large producers of polymers, including Chevron ,
Dow , Eastman Chemical Company, Exxon Mobil , Formosa Plastics, Huntsman
Chemical Company, Phillips , Solvay Polymers, Total Fina, Union Carbide
Corporation and Westlake Polymers. Industry consolidation, including the 1998
combination of British Petroleum and Amoco, the 1999 combinations of Exxon and
Mobil and of Total and Fina, and the pending combination of Union Carbide and
Dow, has concentrated the industry in fewer, although larger and stronger,
competitors. Polymers profitability is affected by the worldwide level of
demand for polymers, along with vigorous price competition which may intensify
due to, among other things, new domestic and foreign industry capacity. In
general, demand is a function of economic growth in the United States and
elsewhere in the world, which fluctuates. It is not possible to predict
accurately the changes in raw material costs, market conditions and other
factors which will affect polymers industry margins in the future.

Based on published rated industry capacities, Equistar is the second largest
producer of polyethylene in North America and is a leading domestic producer of
polyolefins powders, compounds, wire and cable resins, and polymers for
adhesives. The combined rated capacity of Equistar's polyethylene units as of
January 1, 2000 was approximately 6.45 billion pounds per year or approximately
17% of total industry capacity in North America. There are approximately 19
other North American producers of polyethylene, including Chevron Chemical
Company, Dow , Exxon Mobil, Phillips, Solvay Polymers and Union Carbide
Corporation. Equistar's polypropylene capacity, 680 million pounds per year as
of January 1, 2000, represents approximately 4.5% of the total North American
polypropylene capacity. There are approximately 14 other North American
competitors in the polypropylene business, including BP Amoco, Exxon Mobil,
Montell Polyolefins, BV and Total Fina.

21

PROPERTIES AND EMPLOYEE RELATIONS

Equistar's principal manufacturing facilities and principal products are set
forth below. All of these facilities are wholly owned by Equistar unless
otherwise noted.

LOCATION PRINCIPAL PRODUCTS
- ---------------------------------------- ----------------------------------------------------------------

Beaumont, Texas(a)...................... EG
Channelview, Texas(b)................... Ethylene, Propylene, Butadiene, Benzene, Toluene, DCPD,
Isoprene, Resin Oil, Piperylenes, Alkylate and MTBE
Corpus Christi, Texas................... Ethylene, Propylene, Butadiene and Benzene
Chocolate Bayou, Texas(c)............... HDPE
Chocolate Bayou, Texas(c)(d)............ Ethylene, Propylene, Butadiene, Benzene, Toluene, DCPD,
Isoprene, Resin Oil and MTBE
LaPorte, Texas (e)...................... Ethylene, Propylene, LDPE, LLDPE, HDPE and Liquid Polyolefins
Matagorda, Texas........................ HDPE
Pasadena, Texas(f)...................... EO, EG and Other EO Derivatives
Pasadena, Texas(f)...................... Polypropylene and LDPE
Port Arthur, Texas(e)................... LDPE and HDPE
Victoria, Texas(d)...................... HDPE
Lake Charles, Louisiana(g).............. Ethylene, and Propylene
Morris, Illinois........................ Ethylene, Propylene, LDPE, LLDPE and Polypropylene
Tuscola, Illinois....................... Ethyl Alcohol, Diethyl Ether, Wire and Cable Resins and
Compounds and Polymeric Powders
Clinton, Iowa........................... Ethylene, Propylene, LDPE and HDPE
Fairport Harbor, Ohio(g)................ Wire and Cable Resins and Compounds
Anaheim, California..................... Denatured Alcohol
Newark, New Jersey...................... Denatured Alcohol

_____________
(a) The Beaumont facility is owned by PD Glycol, a partnership owned 50% by
Equistar and 50% by E.I. DuPont de Nemours and Company.
(b) The Channelview facility has two ethylene processing units. Lyondell
Methanol owns a methanol plant located within the Channelview facility on
property Lyondell Methanol leases from Equistar. A third party owns and
operates a facility on land leased from Equistar that is used to purify
hydrogen from Lyondell Methanol's methanol plant. Equistar also operates a
styrene maleic anhydride unit and a polybutadiene unit which are owned by a
third party and are located on property leased from Equistar within the
Channelview facility.
(c) Millennium and Occidental each contributed a facility located in Chocolate
Bayou. These facilities are not on contiguous property.
(d) The land is leased, and the facility is owned.
(e) A substantial portion of the HDPE capacity of the Port Arthur facility was
idled on March 31, 1999. Additional HDPE and LDPE capacity at the LaPorte
facility was idled in the first quarter of 2000.
(f) Occidental and Lyondell each contributed facilities located in Pasadena.
These facilities are primarily on contiguous property, and Equistar plans
to operate them as one site to the extent practicable. These facilities are
operated in conjunction with the LaPorte facility.
(g) The facilities and land are leased.

Equistar also owns a storage facility, a brine pond and a tract of vacant land
in Mont Belvieu, Texas, located approximately 15 miles east of the Channelview
facility. Storage capacity for up to approximately 13 million barrels of NGLs,
ethylene, propylene and other hydrocarbons is provided in salt domes at the Mont
Belvieu facility. There are an additional 3 million barrels of ethylene and
propylene storage operated by Equistar on leased property in Markham, Texas.

Equistar uses an extensive olefins pipeline system, some of which it owns and
some of which it leases, extending from Corpus Christi to Mont Belvieu to Port
Arthur and around the Lake Charles area. Equistar owns other pipelines in
connection with its Tuscola, Chocolate Bayou, Matagorda, Victoria, Corpus
Christi and LaPorte

22

facilities. Equistar owns and leases several pipelines connecting the
Channelview facility, the Refinery and the Mont Belvieu storage facility; these
pipelines are used to transport feedstocks, butylenes, hydrogen, butane, MTBE
and unfinished gasolines. Equistar also owns a barge docking facility near the
Channelview facility capable of berthing eight barges and related terminal
equipment for loading and unloading raw materials and products. Equistar owns or
leases pursuant to long-term lease arrangements approximately 11,400 railcars
for use in its business.

Equistar sub-leases its executive offices and corporate headquarters from
Lyondell in downtown Houston. In addition, Equistar owns facilities which house
the Morris and Cincinnati research operations. Equistar also leases sales
facilities and leases storage facilities, primarily in the Gulf Coast area, from
various third parties for the handling of products.

As of December 31, 1999, Equistar employed approximately 4,500 full-time
employees. Equistar also uses the services of independent contractors in the
routine conduct of its business. Approximately 280 hourly workers are covered by
collective bargaining agreements. In connection with the Shared Services
Agreement, approximately 460 persons who had been employed by Equistar in the
areas of information technology, human resources, materials management and raw
material supply, customer supply chain, accounting, facility services, and legal
became employees of Lyondell effective January 1, 2000. Equistar believes that
its relations with its employees are good.

RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS

Equistar maintains a significant research and development facility in
Cincinnati, Ohio. Equistar has additional research facilities in Morris,
Illinois, Matagorda, Texas and Plano, Texas. Equistar's research and development
expenditures for 1999, 1998, and the period December 1, 1997 (inception) through
December 31, 1997 were $42 million, $40 million, and $3 million, respectively.

The Channelview facility employs proprietary technology owned by Lyondell to
convert ethylene and other light petrochemical streams into propylene.
Consistent with its strategy, Equistar is conducting a research project to
investigate alternative olefin feedstocks for use at the Channelview, Chocolate
Bayou and/or Corpus Christi facilities. These alternative olefin feedstocks
could significantly lower costs and provide an additional competitive advantage
at these facilities.

Recent polymers industry announcements relate to the development of single-
site catalysts. Successful development and commercialization of these catalysts
are expected to result in enhanced polymer properties and higher margin
products. Equistar is conducting research and developing several non-
metallocene single-site catalysts (STARTM catalysts) for use in the production
of polyolefins resins. Equistar has several patents and patent applications
pending in connection with research and development efforts in this area.
Equistar does not believe that the loss of any individual patent or trade secret
would have a material adverse effect on its petrochemicals or polymers
businesses.

Equistar uses numerous technologies in its operations, many of which are
licensed from third parties. Significant licenses held by Equistar include the
BP Amoco fluid bed polyethylene process for the production of both LLDPE and
HDPE, the Unipol process for the production of LLDPE, and certain other licenses
for the production of EO, EG, polyethylene and polypropylene. Equistar is not
dependent on the retention of any particular license, and it believes that the
loss of any individual license would not have a material adverse effect on its
operations.

Equistar acquired rights to numerous recognized brand names from Lyondell and
Millennium Petrochemicals in connection with its formation, including
ALATHON(R), KromaLon(R), Petrothene(R), Ultrathene(R), Vynathene(R) and
Microthene(R). Equistar's rights to use these trademarks are perpetual as long
as Equistar actively uses the trademarks. Equistar is not dependent upon any
particular trademark, and it believes the loss of any individual trademark would
not have a material adverse effect on its operations.

23

LYONDELL-CITGO REFINING LP

OVERVIEW

Lyondell participates in petroleum refining through an equity interest in LCR.
Lyondell holds a 58.75% interest and CITGO holds a 41.25% interest in LCR. LCR
owns and operates the Refinery which is located on the Houston Ship Channel in
Houston, Texas. The Refinery is a full conversion refinery designed to run extra
heavy (17 degree API), high sulfur crude oil which is less expensive than other
grades of crude. Processing extra heavy, high sulfur crude oil in significant
quantities requires a refinery with extensive coking, catalytic cracking,
hydrotreating and desulfurization capabilities, i.e., a "complex refinery."
The Refinery's complexity enables it to operate in full conversion mode
producing a slate of products that is approximately 95% high value, clean
products (most refineries produce 70% or less of high value, clean products such
as gasoline and diesel). In addition, the Refinery's complexity allows it to
produce most of these clean products as premium grades such as reformulated
gasoline, jet fuel, low sulfur diesel and aromatics chemicals. The Refinery's
products include conventional and reformulated gasoline, low sulfur diesel, jet
fuel, aromatics, lubricants (industrial lubricants, white oils and process
oils), carbon black oil, sulfur, residual fuel and petroleum coke. The aromatics
chemicals produced by the Refinery are benzene, toluene, orthoxylene and
paraxylene. These products are sold to intermediate chemicals and polyester
intermediate manufacturers and are ultimately used in clothing, soft drink
bottles and drink cups, audio and video tapes, and resins.

LCR was formed in 1993 to upgrade the Refinery's ability to process
substantial additional volumes of lower cost, extra heavy, higher margin crude
oil. An upgrade project completed in 1997 (the "Upgrade Project") increased
the extra heavy crude oil processing capability of the Refinery from 130,000
barrels per day of 22 degree API gravity crude oil to approximately 260,000
barrels per day of 17 degree API gravity crude oil. The 17 degree API gravity
crude oil is more viscous and dense than traditional crude oil and contains
higher concentrations of sulfur and heavy metals, making it more difficult to
refine into gasoline and other high value fuel products but less costly to
purchase. The Upgrade Project also included expansion of the Refinery's
reformulated gasoline and low sulfur diesel production capability.

The Upgrade Project, which cost approximately $1.1 billion, was funded through
a combination of approximately $485 million in capital contributions to LCR by
CITGO (including cash contributions for financing costs and reinvestment of
operating cash distributions), a $450 million construction loan credit facility
(the "Construction Facility") provided by a group of banks, and $166 million
and $16 million in subordinated loans to LCR from Lyondell and CITGO,
respectively.

In exchange for CITGO's Upgrade Project capital contributions, together with
an additional $130 million in equity contributions CITGO had previously made to
LCR, CITGO's participation interest in LCR increased effective April 1, 1997,
and is currently 41.25%. CITGO has a one-time option expiring September 30, 2000
to increase its participation interest in LCR up to 50% by making an additional
equity contribution.

The following table outlines LCR's primary products, annual rated capacity as
of January 1, 2000, and the primary uses for such products.

24

PRODUCT RATED CAPACITY (A) PRIMARY USES
- ------------------------------- ---------------------------- --------------------------------------------------------------

Gasoline (b).................. 120,000 barrels per day Automotive fuel
Diesel (#2 Distillate)(b)..... 75,000 barrels per day Fuel for diesel cars and trucks
Jet Fuel (b).................. 22,000 barrels per day Aviation fuel
Benzene(c).................... 50 million gallons per year Nylon for clothing and consumer items; polystyrene for
insulation, packaging and drink cups
Toluene (d)................... 37 million gallons per year Gasoline component and chemical feedstock for producing
benzene
Paraxylene (d)................ 400 million pounds per year Polyester fibers for clothing and fabrics, PET soft drink
bottles and films for audio and video tapes
Orthoxylene (d)............... 270 million pounds per year Plasticizer in products such as rainwear, shower curtains,
toys and auto upholstery and an intermediate in paints and
fiberglass
Lube Oils (b)................. 4,000 barrels per day Automotive and industrial engine and lube oils, railroad
engine additives and white oils for food-grade applications

__________
(a) Unless otherwise specified, represents rated capacity at January 1, 2000.
The term "rated capacity," as used in this table, is calculated by
estimating the number of days in a typical year that a production unit of a
plant is expected to operate, after allowing for downtime for regular
maintenance, and multiplying that number by an amount equal to the unit's
optimal daily output based on the design feedstock mix. Because the rated
capacity of a production unit is an estimated amount, the actual production
volumes may be more or less than the rated capacity. Capacities shown
include 100 percent of the capacity of LCR, of which the Company owns 58.75
percent.
(b) Produced by LCR and sold to CITGO.
(c) Produced by LCR and sold to Equistar.
(d) Produced by LCR and marketed for LCR by Equistar.

MANAGEMENT OF LCR

LCR is a limited partnership organized under the laws of the state of
Delaware, following its conversion from a Texas limited liability company
effective December 31, 1998. Lyondell owns its interest in LCR through two
wholly owned subsidiaries, one of which serves as a general partner and one of
which serves as a limited partner. Similarly, CITGO, which is a wholly owned
subsidiary of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company
of the Republic of Venezuela, owns its interest in LCR through two wholly owned
subsidiaries, a general partner and a limited partner.

LCR is governed by a Limited Partnership Agreement (the "LCR Partnership
Agreement"), which provides for, among other things, the ownership and cash
distribution rights of the partners. The LCR Partnership Agreement also provides
that LCR is managed by a Partnership Governance Committee, which is composed of
six representatives, three appointed by each general partner. Actions requiring
unanimous consent of the representatives include amendment of the LCR
Partnership Agreement, borrowing money, delegations of authority to committees,
certain purchase commitments and capital expenditures. The day-to-day operations
of the Refinery are managed by the executive officers of LCR as appointed by the
Partnership Governance Committee.

AGREEMENTS BETWEEN LYONDELL OR CITGO AND LCR

LCR is a party to a number of agreements with Lyondell and CITGO. Under the
terms of a long-term product sales agreement ("Products Agreement"), CITGO
purchases from LCR substantially all of the refined products produced at the
Refinery. Lyondell currently performs administrative services for LCR pursuant
to an Administrative Services Agreement, which is renegotiated annually. Under
the terms of sales agreements, CITGO purchases all of the lubricant products
manufactured by LCR. In conjunction therewith, CITGO operates LCR's Birmingport,
Alabama lubricants plant.

25

AGREEMENTS BETWEEN EQUISTAR AND LCR

Prior to the formation of Equistar, Lyondell was a party with LCR to multiple
agreements designed to preserve much of the synergies between the Refinery and
the Channelview petrochemicals facility. Such agreements were assumed by
Equistar from Lyondell effective December 1, 1997. Economic evaluations at the
Channelview facility and the Refinery are based on sending products to the
highest-value disposition, which may be local use, use at the other site, or
third party sales. Certain Refinery products (propane, butane, low-octane
naphthas, heating oils, and gas oils) can be used as raw materials for olefins
production, and certain Channelview facility olefins by-products can be
processed by the Refinery into gasoline. Butylenes from the Refinery are tolled
through the Channelview facility for the production of alkylate and MTBE for
gasoline blending. Hydrogen from the Channelview facility is used at the
Refinery for sulfur removal and product stabilization.

In accordance with a marketing service agreement, Equistar currently serves as
LCR's sole agent to market aromatics products produced by LCR. In addition,
under a long-term agreement, Equistar and LCR perform certain manufacturing
services for one another.

RAW MATERIALS

In 1993, LCR entered into a long-term crude supply agreement ("Crude Supply
Agreement") with Lagoven, S.A., now known as PDVSA Petroleo y Gas S.A. ("PDVSA
Oil"), an affiliate of CITGO. A substantial amount of the crude oil used by LCR
as a raw material for the Refinery is purchased under the Crude Supply
Agreement. Both PDVSA Oil and CITGO are direct or indirect wholly owned
subsidiaries of PDVSA.

Under the Crude Supply Agreement, PDVSA Oil is required to sell, and LCR is
required to purchase, 230,000 barrels per day of extra heavy crude oil, which
constitutes approximately 88% of the Refinery's refining capacity of 260,000
barrels per day of crude oil. In late April 1998, LCR received notification
from PDVSA Oil that it would reduce allocations of crude oil on the grounds of
announced OPEC production cuts. LCR began receiving reduced allocations of
crude oil from PDVSA Oil in August 1998, amounting to 195,000 barrels per day in
that month. LCR was advised by PDVSA Oil in May 1999 of a further reduction in
the allocations of crude oil supplied under the Crude Supply Agreement to
184,000 barrels per day, effective May 1999. On several occasions since then,
PDVSA Oil has further reduced crude oil deliveries, although it has made
payments in partial compensation for such reductions.

The Crude Supply Agreement incorporates formula prices to be paid by LCR for
the crude oil supplied based on the market value of a slate of refined products
deemed to be produced from each particular crude oil or feedstock, less: (i)
certain deemed refining costs, adjustable for inflation and energy costs; (ii)
certain actual costs; and (iii) a deemed margin, which varies according to the
grade of crude oil or other feedstock delivered. Although the Company believes
that the Crude Supply Agreement reduces the volatility of LCR's earnings and
cash flows, the Crude Supply Agreement also limits LCR's ability to enjoy higher
margins during periods when the market price of crude oil is low relative to
then current market prices for refined products. In addition, if the actual
yields, costs or volumes of the LCR refinery differ substantially from those
contemplated by the Crude Supply Agreement, the benefits of this agreement to
LCR could be substantially different, and could result in lower earnings and
cash flow for LCR. Furthermore, there may be periods during which LCR's costs
for crude oil under the Crude Supply Agreement may be higher than might
otherwise be available to LCR from other sources. A disparate increase in the
price of crude oil relative to the prices for its products, such as was
experienced in 1999, has the tendency to make continued performance of its
obligations under the Crude Supply Agreement less attractive to PDVSA Oil.

The Crude Supply Agreement, which expires on December 31, 2017, provides that
Lyondell controls all of LCR's decisions and enforcement rights in connection
with the Crude Supply Agreement so long as PDVSA has a direct or indirect
ownership interest in LCR.

There are risks associated with enforcing the provisions of contracts with
companies such as PDVSA Oil that are affiliates of a foreign sovereign nation.
All of the crude oil supplied by PDVSA Oil under the Crude Supply Agreement is
produced in the Republic of Venezuela, which has experienced economic
difficulties and attendant social and political changes in recent years. It is
impossible to predict how governmental policies may change under the current or
any subsequent Venezuelan government. In addition, there are risks associated
with enforcing

26

judgments of United States courts against entities whose assets are located
largely outside of the United States and whose management does not reside in the
United States. Although the parties have negotiated alternative arrangements in
the event of certain force majeure conditions, including Venezuelan governmental
or other actions restricting or otherwise limiting PDVSA Oil's ability to
perform its obligations, any such alternative arrangements may not be as
beneficial to LCR as the Crude Supply Agreement.

PDVSA has announced that it intends to renegotiate the crude supply agreements
that it has with all third parties, including LCR. In light of PDVSA's announced
intent, there can be no assurance that PDVSA Oil will continue to perform its
obligations under the Crude Supply Agreement. However, they have confirmed that
they expect to honor their commitments if a mutually acceptable restructuring of
the Crude Supply Agreement is not achieved. The Company and PDVSA have had
discussions covering both a restructuring of the Crude Supply Agreement and a
broader restructuring of the LCR partnership. These discussions are continuing,
although no assurance can be given that changes in either arrangement will
occur.

If the Crude Supply Agreement is modified or terminated or this source of
crude is otherwise interrupted, LCR could experience significantly lower
earnings and cash flows. Depending on then current market conditions, any
breach or termination of the Crude Supply Agreement could adversely affect LCR,
since LCR would have to purchase all of its crude oil feedstocks in the merchant
market, which could subject LCR to significant price fluctuations. There can be
no assurance that alternative crude oils with similar margins would be available
for purchase by LCR.

MARKETING AND SALES

The Refinery produces gasoline, low sulfur diesel, jet fuel, aromatics,
lubricants and certain industrial products. On a weekly basis, LCR evaluates and
determines the optimal product output mix for the Refinery, based on spot market
prices and conditions. Under the Products Agreement, CITGO is obligated to
purchase and LCR is required to sell 100% of the gasoline, jet fuel, heating
oil, diesel fuel, coke and sulfur produced by the Refinery. CITGO purchases
these products at prices based on industry benchmark indexes. For example, the
price for gasoline is based on prices published by Platts Oilgram, an industry
trade publication. The Products Agreement provides that Lyondell controls all of
LCR's material decisions and enforcement rights in connection with the Products
Agreement so long as CITGO has a direct or indirect ownership interest in LCR.
The Products Agreement expires on December 31, 2017.

COMPETITION AND INDUSTRY CONDITIONS

All of LCR's gasoline, low sulfur diesel, jet fuel, and lube oils are sold to
CITGO.

The refining business tends to be volatile as well as cyclical. Crude oil
prices, which are impacted by worldwide political events and the economics of
exploration and production in addition to refined products demand, are the
largest source of this volatility. Demand for refined products is influenced by
seasonal and short-term factors such as weather and driving patterns, as well as
by longer term issues such as energy conservation and alternative fuels.
Industry refined products supply is also dependent on industry operating
capabilities and on long-term refining capacity trends. However, management
believes that the combination of the Crude Supply Agreement and the Products
Agreement has the effect of stabilizing earnings and cash flows and reducing the
market-driven aspects of such volatility.

With a capacity of approximately 260,000 barrels per day, the Company believes
that the Refinery is North America's largest full conversion (i.e., non-asphalt
producing) refinery capable of processing 100% 17 API crude oil.

Among LCR's refining competitors are major integrated petroleum companies and
domestic refiners that are owned by or affiliated with major integrated oil
companies. Based on published industry data, as of January 1, 2000, there were
153 crude oil refineries in operation in the United States, and total domestic
refinery capacity was approximately 16.5 million barrels per day. During 1999,
LCR processed an average of 239,000 barrels per day of crude oil or over 1% of
domestic capacity.

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PROPERTIES

LCR owns the real property, plant and equipment which comprise the Refinery,
located on approximately 700 acres in Houston, Texas. Units include a fluid
catalytic cracking unit, cokers, reformers, crude distillation units, sulfur
recovery plants and hydrodesulfurization units, as well as a lube oil
manufacturing plant and an aromatics recovery unit. LCR also owns the real
property, plant and equipment which comprise a lube oil blending and packaging
plant in Birmingport, Alabama. LCR owns a pipeline used to transport gasoline,
kerosene and heating oil from the Refinery to the GATX Terminal located in
Pasadena, Texas to interconnect with common carrier pipelines.

EMPLOYEE RELATIONS

At December 31, 1999, LCR employed approximately 1,100 full-time employees.
LCR also uses the services of independent contractors in the routine conduct of
its business. Approximately 650 hourly workers are covered by a collective
bargaining agreement between LCR and the Paper, Allied-Industrial, Chemical and
Energy Workers International Union (formerly the Oil, Chemical and Atomic
Workers Union), which expires in January 2002. LCR believes that relations with
its employees are good.

LYONDELL METHANOL COMPANY, L.P.

OVERVIEW

Lyondell produces methanol through its 75% interest in LMC, of which Lyondell
serves as the managing partner. The remaining 25% interest in LMC is held by
MCNIC. Effective December 1, 1997, Equistar began serving as the operator of LMC
pursuant to an operating agreement with LMC. LMC owns a methanol plant located
within the Channelview facility. The methanol plant is a heat-integrated plant,
which includes extraction capabilities for co-products such as hydrogen and fuel
oil.

Methanol is used to produce MTBE and a variety of chemical intermediates,
including formaldehyde, acetic acid and methyl methacrylate. These intermediates
are used to produce bonding adhesives for plywood as well as polyester fibers
and plastics. Other end uses include solvents and antifreeze applications. LMC
is advantageously located near its Gulf Coast customer base.

MANAGEMENT OF LYONDELL METHANOL

LMC is a limited partnership organized under the laws of the State of Texas.
Lyondell owns its interest in LMC through two wholly owned subsidiaries, one of
which serves as a general partner and the managing partner of LMC and one of
which serves as a limited partner. Similarly, MCNIC owns its interest in LMC
through two wholly owned subsidiaries, one a general partner and one a limited
partner.

AGREEMENTS BETWEEN EQUISTAR AND LYONDELL METHANOL

Certain agreements entered into by Lyondell and LMC were assigned to Equistar
effective December 1, 1997. Equistar acts as operator of LMC pursuant to an
operating agreement with LMC. In addition, Equistar sells natural gas to LMC and
markets LMC's product pursuant to agreements with LMC. LMC also leases from
Equistar the real property on which its methanol plant is located.

RAW MATERIALS

LMC's plant processes natural gas as its primary raw material. Equistar is
connected to a diverse natural gas supply network, and it purchases natural gas
for use as fuel at its Channelview facility and sells natural gas to LMC as a
raw material for the methanol plant.

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MARKETING AND SALES

LMC sells all of its methanol output to Equist