Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 2002
Commission file number 1-16619
KERR-MCGEE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 73-1612389
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
KERR-MCGEE CENTER, OKLAHOMA CITY, OKLAHOMA 73125
(Address of principal executive offices)
Registrant's telephone number, including area code: (405) 270-1313
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------------------ ------------------------
Common Stock $1 Par Value New York Stock Exchange
Preferred Share Purchase Right
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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No ___
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $5.4 billion computed by
reference to the price at which the common equity was last sold as of June 28,
2002, the last business day of the registrant's most recently completed second
fiscal quarter.
The number of shares of common stock outstanding as of February 28, 2003, was
100,373,811.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement for the 2003 Annual Meeting of Stockholders,
which will be filed with the Securities and Exchange Commission within 120 days
after December 31, 2002, is incorporated by reference in Part III of this Form
10-K.
KERR-McGEE CORPORATION
PART I
Items 1. and 2. Business and Properties
GENERAL DEVELOPMENT OF BUSINESS
Kerr-McGee Corporation is an energy and inorganic chemical holding company whose
consolidated subsidiaries, joint venture partners and other affiliates (together
"affiliates") have operations throughout the world. Kerr-McGee affiliates
engaged in the energy business acquire leases and concessions and explore for,
develop, produce and market crude oil and natural gas onshore in the United
States and in the Gulf of Mexico, the United Kingdom and Danish sectors of the
North Sea, China, Australia, Benin, Brazil, Gabon, Morocco, Canada, and Yemen.
Kerr-McGee affiliates engaged in chemical businesses produce and market titanium
dioxide pigment and certain other specialty chemicals, heavy minerals and forest
products.
Kerr-McGee's worldwide businesses are consolidated for financial reporting and
disclosure purposes. Accordingly, the terms "Kerr-McGee," "the company" and
similar terms are used interchangeably in this Form 10-K to refer to the
consolidated group or to one or more of the companies that are part of the
consolidated group.
On August 1, 2001, in connection with its acquisition of HS Resources, Inc., the
company completed a holding company reorganization in which Kerr-McGee Operating
Corporation, which was formerly known as Kerr-McGee Corporation, changed its
name and became a wholly owned subsidiary of the company. Filings and references
in this Form 10-K to the company include business activity conducted by the
current Kerr-McGee Corporation and the former Kerr-McGee Corporation before it
reorganized as a subsidiary of the company and changed its name to Kerr-McGee
Operating Corporation. At the end of 2002, another reorganization took place
whereby among other changes, Kerr-McGee Operating Corporation distributed its
investment in certain subsidiaries (primarily the oil and gas operating
subsidiaries) to a newly formed intermediate holding company, Kerr-McGee
Worldwide Corporation. Kerr-McGee Operating Corporation formed a new subsidiary,
Kerr-McGee Chemical Worldwide LLC and merged into it.
For a discussion of recent business developments, reference is made to
Management's Discussion and Analysis, which discussion is included in Item 7. of
this Form 10-K, and the Exploration and Production and Chemicals discussions
below.
INDUSTRY SEGMENTS
For information as to business segments of the company, reference is made to
Note 27 to the Consolidated Financial Statements, which financial statements are
included in Item 8. of this Form 10-K.
EXPLORATION AND PRODUCTION
Kerr-McGee Corporation owns oil and gas operations worldwide. The company
acquires leases and concessions and explores for, develops, produces and markets
crude oil and natural gas through its various subsidiaries.
- ----------------------
Except for information or data specifically incorporated herein by reference
under Items 10 through 13, other information and data appearing in the company's
2003 Proxy Statement are not deemed to be filed as part of this annual report on
Form 10-K.
Kerr-McGee's offshore oil and gas exploration and/or production activities are
conducted in the Gulf of Mexico, U.K. and Danish sectors of the North Sea,
Australia, Benin, Brazil, China, Canada, Morocco, and Gabon. Onshore exploration
and/or production operations are conducted in the United States, the United
Kingdom, and Yemen. The company also has oil and gas operations in Kazakhstan
that are classified as held for disposal and are presented as discontinued
operations at year-end 2002.
Kerr-McGee's average daily oil production from continuing operations for 2002
was 191,300 barrels, a 1% increase from 2001. Kerr-McGee's average oil price was
$22.04 per barrel for 2002, including the impact of the hedging program,
compared with $22.60 per barrel for 2001.
During 2002, natural gas sales averaged 760 million cubic feet per day, up 28%
from 2001 sales. The 2002 average natural gas price was $2.95 per thousand cubic
feet, compared with $3.83 per thousand cubic feet for 2001.
Worldwide gross acreage at year-end 2002 was 66 million acres, a decrease of 22%
compared with year-end 2001. The decrease resulted primarily from the
divestiture of certain properties in the North Sea, U.S. onshore, Australia,
Indonesia and Ecuador, as well as relinquishment of certain acreage in Gabon,
Brazil, Thailand and Yemen.
Discontinued Operations and Asset Disposals
- -------------------------------------------
During the first and second quarters of 2002, the company approved a plan to
dispose of its exploration and production operations in Kazakhstan, its interest
in the Bayu-Undan project in the East Timor Sea offshore Australia, and its
interest in the Jabung block of Sumatra, Indonesia. These divestiture decisions
were made as part of the company's strategic plan to rationalize noncore oil and
gas properties. The results of these operations have been reported separately as
discontinued operations in the company's Consolidated Statement of Operations
for all years presented, which statement is included in Item 8. of this Form
10-K. In conjunction with the planned disposals, the related assets were
evaluated and impairment losses were recorded for any difference between the
estimated sales price for the operations, less costs to sell, and the
operations' carrying value. Sales of the company's interests in the Bayu-Undan
project and the Sumatra operations were completed during 2002, and an agreement
for the sale of the Kazakhstan operations was announced in February 2003. The
impairment losses and gains on sale are reported as part of discontinued
operations. See Note 20 to the Consolidated Financial Statements included in
Item 8. of this Form 10-K for a discussion of impairment losses and/or gains on
sale of these assets.
Revenues applicable to the discontinued operations totaled $36 million, $72
million and $58 million for 2002, 2001 and 2000, respectively. Pretax income for
the discontinued operations totaled $104 million (including the gains on sale of
$107 million and the impairment loss of $35 million), $52 million and $45
million for the years ended 2002, 2001 and 2000, respectively.
During late 2001 and 2002, certain U.S., North Sea and Ecuador exploration and
production segment assets were identified for disposal as part of the company's
plan to divest noncore properties, as discussed above. In connection with this
recharacterization, the assets were evaluated and determined to be impaired. The
impairment losses reflect the difference between the estimated sales prices for
the individual properties or group of properties, less the costs to sell, and
the carrying amount of the net assets. See Note 20 to the Consolidated Financial
Statements included in Item 8. of this Form 10-K.
Costs Incurred, Results of Operations, Sales Prices, Production Costs and
Capitalized Costs
- -------------------------------------------------------------------------------
Reference is made to Notes 28, 29 and 30 to the Consolidated Financial
Statements included in Item 8. of this Form 10-K. These notes contain
information on the costs incurred in crude oil and natural gas activities for
each of the past three years; results of operations from crude oil and natural
gas activities, average sales prices per unit of crude oil and natural gas, and
production costs per barrel of oil equivalent (BOE) for each of the past three
years; and capitalized costs of crude oil and natural gas activities at December
31, 2002 and 2001.
Reserves
- --------
Kerr-McGee's estimated proved crude oil, condensate, natural gas liquids and
natural gas reserves at December 31, 2002, and the changes in net quantities of
such reserves for the three years then ended are shown in Note 31 to the
Consolidated Financial Statements included in Item 8. of this Form 10-K.
Undeveloped Acreage
- -------------------
As of December 31, 2002, the company had leases, concessions, reconnaissance
permits and other interests in undeveloped oil and gas leases in the Gulf of
Mexico, onshore United States, the United Kingdom and Danish sectors of the
North Sea, and onshore and offshore in other international areas as follows:
Gross Net
Location Acreage Acreage
- -------- --------- ---------
United States -
Offshore 2,780,839 1,524,035
Onshore 1,242,198 875,177
--------- ---------
4,023,037 2,399,212
--------- ---------
North Sea 1,678,991 870,675
--------- ---------
Other international -
Morocco 30,245,687 28,021,741
Australia 10,511,119 4,576,271
Yemen 6,037,418 1,911,849
Canada 3,021,825 2,292,834
Gabon 2,471,052 617,763
Benin 2,459,439 2,459,439
Kazakhstan 1,474,296 1,474,296
China 1,245,162 1,045,699
Brazil 534,981 160,494
---------- ----------
58,000,979 42,560,386
---------- ----------
Total 63,703,007 45,830,273
========== ==========
Developed Acreage
- -----------------
At December 31, 2002, the company had leases and concessions in developed oil
and gas acreage in the Gulf of Mexico, onshore United States, the United Kingdom
sector of the North Sea, and onshore and offshore in other international areas
as follows:
Gross Net
Location Acreage Acreage
- -------- --------- ---------
United States -
Offshore 572,012 267,829
Onshore 1,579,634 997,661
--------- ---------
2,151,646 1,265,490
--------- ---------
North Sea 406,399 109,490
--------- ---------
Other international -
China 70,005 17,151
Kazakhstan 1,000 1,000
--------- ---------
71,005 18,151
--------- ---------
Total 2,629,050 1,393,131
========= =========
Net Exploratory and Development Wells
- -------------------------------------
Domestic and international exploratory and development wells that were completed
as successful or dry holes during the three years ended December 31, 2002, are
as follows:
Net Exploratory (1) Net Development (1)
------------------------------ -----------------------------
Productive Dry Holes Total Productive Dry Holes Total Total
---------- --------- ----- ---------- --------- ----- -----
2002 (2)
United States 4.78 11.10 15.88 186.90 1.37 188.27 204.15
North Sea - 1.84 1.84 8.57 - 8.57 10.41
Other international - 4.23 4.23 .85 - .85 5.08
---- ----- ----- ------ ---- ------ ------
Total 4.78 17.17 21.95 196.32 1.37 197.69 219.64
==== ===== ===== ====== ==== ====== ======
2001
United States 2.39 4.60 6.99 107.29 6.30 113.59 120.58
North Sea - 2.40 2.40 16.08 - 16.08 18.48
Other international - 4.43 4.43 5.25 .30 5.55 9.98
---- ----- ----- ------ ---- ------ ------
Total 2.39 11.43 13.82 128.62 6.60 135.22 149.04
==== ===== ===== ====== ==== ====== ======
2000
United States 1.25 2.75 4.00 34.85 3.09 37.94 41.94
North Sea - 4.66 4.66 8.44 1.85 10.29 14.95
Other international - 3.13 3.13 4.50 .50 5.00 8.13
---- ----- ----- ----- ---- ----- -----
Total 1.25 10.54 11.79 47.79 5.44 53.23 65.02
==== ===== ===== ===== ==== ===== =====
(1) Net wells represent the company's fractional working interest in gross
wells expressed as the equivalent number of full-interest wells.
(2) The 2002 net exploratory well count does not include 2.16 successful net
wells drilled in the United States in 2002 that are currently suspended,
nor does it include 2.45 successful net wells drilled in China or .75
successful net wells drilled in the United States that will not be used for
production.
Wells in Process of Drilling
- ----------------------------
The following table shows the number of wells in the process of drilling and the
number of wells suspended or waiting on completion as of December 31, 2002:
Wells in Process of Wells Suspended or
Drilling Waiting on Completion
--------------------------- ---------------------------
Exploration Development Exploration Development
----------- ----------- ----------- -----------
United States
Gross 5.00 35.00 23.00 9.00
Net 3.04 27.97 11.49 4.46
North Sea
Gross - 1.00 - 2.00
Net - .07 - .22
China
Gross - 1.00 1.00 -
Net - .25 .82 -
Total ---- ----- ----- -----
Gross 5.00 37.00 24.00 11.00
Net 3.04 28.29 12.31 4.68
==== ===== ===== ====
Gross and Net Wells
- -------------------
The number of productive oil and gas wells in which the company had an interest
at December 31, 2002, is shown in the following table. These wells include 422
gross or 335 net wells associated with improved recovery projects and 2,282
gross or 2,156 net wells that have multiple completions but are included as
single wells.
Location Crude Oil Natural Gas Total
- -------- --------- ----------- -----
United States
Gross 2,129 2,928 5,057
Net 1,858 2,259 4,117
North Sea
Gross 273 5 278
Net 46 - 46
China
Gross 24 - 24
Net 6 - 6
Kazakhstan
Gross 15 - 15
Net 8 - 8
Total ----- ----- -----
Gross 2,441 2,933 5,374
Net 1,918 2,259 4,177
===== ===== =====
Crude Oil and Natural Gas Sales
- -------------------------------
The following table summarizes the sales of the company's crude oil and natural
gas production from continuing operations for each of the three years in the
period ended December 31, 2002:
(Millions) 2002 2001(1) 2000(1)
-------- -------- --------
Crude oil and condensate - barrels
United States 29.7 28.4 27.0
North Sea 37.2 37.3 43.1
Other international 2.6 3.4 3.3
-------- -------- --------
69.5 69.1 73.4
======== ======== ========
Crude oil and condensate
United States $ 639.6 $ 625.5 $ 742.6
North Sea 832.8 865.6 1,205.0
Other international 58.4 68.9 85.5
-------- -------- --------
$1,530.8 $1,560.0 $2,033.1
======== ======== ========
Natural gas - Mcf
United States 240.8 194.9 168.9
North Sea 36.7 22.8 25.4
-------- -------- --------
277.5 217.7 194.3
======== ======== ========
Natural gas
United States $ 732.7 $ 777.2 $ 693.7
North Sea 86.4 56.2 58.8
-------- -------- --------
$ 819.1 $ 833.4 $ 752.5
======== ======== ========
(1) Years 2001 and 2000 have been restated to exclude discontinued operations.
Sales of Production
- -------------------
All of the company's crude oil and natural gas is sold at market prices, and the
realized revenue on the physical sale is adjusted for any gains or losses on
hedging contracts. Kerr-McGee has contracted with several energy marketing
companies to sell substantially all of its domestic crude oil and natural gas
production. International crude oil and natural gas are sold both under contract
and through spot market sales in the geographic area of production.
Kerr-McGee's single largest purchaser of natural gas is Cinergy Marketing &
Trading LP, whose purchases are guaranteed by its parent company, Cinergy
Corporation. Additionally, Kerr-McGee maintains a cap on single-customer
exposure through a credit risk insurance policy.
Kerr-McGee's single largest purchaser of crude oil is Texon L.P., whose payments
are guaranteed by letters of credit.
Improved Recovery
- -----------------
As part of the company's strategic plan to rationalize noncore assets,
Kerr-McGee's improved-recovery projects in West Texas and Oklahoma were sold
during 2002. As of December 31, 2002, the company is participating in 22 active
improved-recovery projects located principally in Texas and the United Kingdom
sector of the North Sea. Most of the company's improved-recovery operations
incorporate water injection.
Exploration and Development Activities
- --------------------------------------
Gulf of Mexico:
Since 1947, the Gulf of Mexico has been a focal area for Kerr-McGee and
represented 28% of Kerr-McGee's worldwide crude oil and condensate production
and 36% of its gas sales in 2002. Kerr-McGee is one of the largest independent
producers in the Gulf of Mexico and has significantly expanded its deepwater
exploration, exploitation and production activities in that area as part of its
growth plan. Kerr-McGee's strategy is focused on generating growth from
exploration in deepwater basins, where the company has developed a competitive
advantage through the use of innovative and cost-effective technology.
In 2002, Kerr-McGee was among the most active companies bidding at federal lease
sales. Through its participation in the Central and Western Gulf of Mexico lease
sales, Kerr-McGee acquired an interest in 60 deepwater blocks, or 257,280 net
deepwater acres. Additionally, Kerr-McGee, BHP Billiton and Ocean Energy, Inc.
(Ocean) completed an exploration joint venture in Atwater Valley that added 34
additional blocks to Kerr-McGee's inventory.
During 2002, Kerr-McGee continued drilling under terms of a joint-venture
agreement with Ocean, which covers an area comprised of 181 blocks. Kerr-McGee
and Ocean drilled three exploratory wells in 2002, with Ocean paying a
disproportionate share of the drilling costs to earn its equity interest in the
venture. This arrangement will continue for approximately three additional
years.
In total, Kerr-McGee participated in the drilling of 17 gross exploration and
appraisal wells during 2002 in the deepwater Gulf of Mexico, of which three
exploratory wells were still drilling at year-end. As a result of these efforts,
three new fields were discovered - West Navajo, Northwest Navajo and Vortex.
Appraisal drilling included a successful follow-up well on the Vortex discovery,
as well as two successful appraisal wells at Merganser, a 2001 discovery. The
exploration program continued to include a mix of satellites near existing core
operating areas and larger prospects that would support the development of new
core areas. Exploration drilling activity will continue to increase into 2003.
Kerr-McGee's development activity in the deepwater Gulf of Mexico also continued
at a high level during 2002 in terms of capital outlays, wells drilled and
construction activity. Installations of truss spars were completed at Nansen and
Boomvang during 2002, and significant progress was made on the Gunnison truss
spar. Development drilling for the Gunnison project continued during 2002 and
was completed in January 2003. In addition, Kerr-McGee commissioned construction
of a new spar for the Red Hawk project, and significant drilling and completion
activities occurred at the Nansen, Boomvang, Navajo, Pompano and Northwestern
fields. A summary of these and other major producing fields follows:
Nansen field, East Breaks blocks 602 and 646 (50%): The Nansen field was
sanctioned for development in March 2000, and first production was achieved in
January 2002. Average 2002 gross production was 17,800 barrels of oil per day
and 73 million cubic feet of gas per day. During the fourth quarter of 2002,
gross production increased to an average of approximately 23,000 barrels of oil
per day and 138 million cubic feet of gas per day from seven producing wells.
Ultimately, a total of 12 development wells are expected to be utilized to
produce this field, with nine wells produced from the spar and three wells
produced from a subsea cluster. The remaining five wells are expected to be
completed and begin production during 2003. The capacity of the Nansen spar is
40,000 barrels of oil per day and 200 million cubic feet of gas per day.
Boomvang field, East Breaks blocks 642, 643 and 688 (30%): The Boomvang field
was sanctioned for development in July 2000, and first production was achieved
in June 2002. Average 2002 gross production was 6,400 barrels of oil per day and
76 million cubic feet of gas per day. During the fourth quarter of 2002, gross
production increased to an average of approximately 20,500 barrels of oil per
day and 148 million cubic feet of gas per day from three subsea wells and four
dry-tree wells. The field is being developed with five producing wells located
at the Boomvang spar in block 643 and two subsea clusters to produce the
reserves located in blocks 642 and 688. Completion operations on the remaining
dry-tree well were finished in January 2003. Similar to Nansen, the Boomvang
spar has a capacity of 40,000 barrels of oil per day and 200 million cubic feet
of gas per day.
Navajo field, East Breaks 690 area (50%): The Navajo field cluster is located on
East Breaks blocks 646, 689 and 690. The Navajo discovery well, located in block
690, was drilled in September 2001. Following discovery, the well was tied back
to the Nansen spar located approximately 5 miles to the north. First production
for Navajo was achieved in June 2002, and gross production averaged 48 million
cubic feet of gas per day for the remainder of 2002. Early in 2002, two
additional discoveries, West and Northwest Navajo, were made in the Navajo area.
The two wells will be connected through the Navajo subsea system to the Nansen
spar, and production is expected to commence in the first half of 2003.
Gunnison field, Garden Banks block 668 area (50%): The Gunnison field,
sanctioned for development in October 2001, will incorporate a 98-foot-diameter
truss spar and processing facilities with a capacity of 40,000 barrels of oil
per day and 200 million cubic feet of natural gas per day. The development is
expected to include seven dry-tree wells and three subsea wells. The Gunnison
spar, located in 3,100 feet of water, will be Kerr-McGee's third truss spar in
the deepwater Gulf of Mexico. At year-end, spar construction was 84% complete,
and topsides fabrication was 55% complete. Additional construction activities
were under way for the subsea systems, moorings, risers and export pipelines.
Development drilling activities continued during 2002, and the final development
well was completed in January 2003. First production is anticipated in the first
quarter of 2004.
Red Hawk field, Garden Banks block 877 (50%): Red Hawk, discovered in 2001, was
the first deepwater prospect drilled under the exploration joint venture with
Ocean Energy. Development of Red Hawk was sanctioned in July 2002 utilizing a
new spar design referred to as a cell spar. The cell spar utilizes a smaller
production facility, and lowers the reserve threshold for economic development
of deepwater reservoirs. Located in approximately 5,300 feet of water, the field
will be developed utilizing two subsea development wells that will be tied back
to the cell spar. Development drilling began in the fourth quarter of 2002.
First production is anticipated in the second quarter of 2004, with peak gross
production rates of 120 million cubic feet of gas per day.
Conger field, Garden Banks block 215 (25%): Average 2002 gross production from
the Conger field was 24,600 barrels of oil per day and 95 million cubic feet of
gas per day. First production from the Conger field began in December 2000 from
the first of three subsea wells. The three-well subsea development is the first
multi-well, 15,000-psi subsea development and is located in approximately 1,460
feet of water. One additional well location, a sidetrack of the Garden Banks 215
#6 well, is currently planned for late 2003.
Northwestern field, Garden Banks blocks 200 and 201 (25%): Average 2002 gross
production from the Northwestern field was 66 million cubic feet of gas per day
and 1,500 barrels of oil per day. First production from the Northwestern field
began in November 2000. The field was developed with two subsea wells tied back
to the Kerr-McGee-operated East Cameron 373 platform. In early 2002, drilling of
an additional development well was completed on Garden Banks block 201. The
Garden Banks 201 #1 well was completed and tied back to the existing subsea
system, and production commenced in November 2002.
Baldpate field, Garden Banks block 260 (50%): Average 2002 gross production from
the Baldpate field, including the Penn State subsea satellite wells (50%), was
26,800 barrels of oil per day and 83 million cubic feet of gas per day. The
field is located in 1,690 feet of water and is producing from an articulated
compliant tower. Decline in field production stabilized during 2002, following
anticipated water breakthrough in 2001.
Neptune field, Viosca Knoll block 826 area (50%): Average 2002 gross production
from the Neptune field was 15,700 barrels of oil per day and 25 million cubic
feet of gas per day. The Neptune field was developed utilizing the world's first
production spar.
Pompano field, Viosca Knoll block 989 area (25%): Average 2002 gross production
from the Pompano field was 34,300 barrels of oil per day and 100 million cubic
feet of gas per day. An active completion program in 2002 resulted in production
from two wells, the A-31 well in Viosca Knoll block 989 and the TB-9 well, which
extended field reserves into Mississippi Canyon block 29. Gross production from
the A-31 well peaked in 2002 at 73 million cubic feet of gas per day and 3,200
barrels of oil per day, and the well is currently producing 39 million cubic
feet of gas per day and 1,300 barrels of oil per day. Gross production from the
TB-9 well peaked in 2002 at 5.6 million cubic feet of gas per day and 5,000
barrels of oil per day, and the well is currently producing 3.3 million cubic
feet of gas per day and 1,600 barrels of oil per day.
North Sea:
Kerr-McGee has been active in the North Sea area since 1976. As of December 31,
2002, Kerr-McGee had interests in 20 producing fields in the United Kingdom
sector. In 2002, North Sea production represented 54% of the company's worldwide
crude oil and condensate production and 13% of its gas sales.
Key events for the U.K. operations in 2002 include first production from the
100% Kerr-McGee-operated Tullich field. The field was developed using a subsea
tieback to the Kerr-McGee-operated Gryphon facility, with first oil occurring in
August 2002. First production was also achieved from the nonoperated Maclure
field (33.3%). The field was developed as a subsea tieback to the Gryphon
facility, with first oil occurring in August 2002.
Oil production from both the Tullich and Maclure fields is exported by shuttle
tanker from the Gryphon floating production, storage and offloading (FPSO)
vessel. Gas is piped to the Leadon facility for fuel usage and/or sold from the
St. Fergus terminal.
Kerr-McGee's U.K. operations conducted a significant divesture program in 2002
that covered the northern North Sea assets and various high-cost, low-volume
nonoperated properties. Divestiture of company-operated fields included Ninian,
Murchison, Lyell and Columba. The purchaser assumed all decommissioning
liabilities associated with the divested fields.
In December 2002, after an extensive review and evaluation, an after-tax,
noncash impairment of $335 million was made to the Leadon field. The field had
been producing lower volumes than initially anticipated because of early water
breakthrough and reservoir compartmentalization. To maximize cash flow from the
Leadon field, the company is considering various alternatives, including
continued production using existing infrastructure, a subsea tieback to another
host structure, such as the Kerr-McGee-operated Gryphon facility, or sale of the
asset. The subsea tieback option would allow for redeployment or sale of the
Kerr-McGee Global Producer III, an FPSO vessel launched at Leadon in 2001.
Leadon has produced approximately 8 million barrels of oil equivalent (BOE)
through 2002, and remaining reserves are estimated at about 30 million BOE.
The company's North Sea exploration program included one wildcat well in 2002.
No discoveries were made.
The following is a summary of the company's five key developments in the North
Sea, which contributed approximately 57% of the region's total net production
(Kerr-McGee-operated unless stated otherwise):
Leadon field, block 9/14a, 9/14b (100%): Average 2002 gross production from the
Leadon field was 18,200 barrels of oil per day. The Leadon field is being
produced into an FPSO vessel, and the oil is exported via shuttle tanker.
Harding field, block 9/23b (30%): An additional 5% equity interest in the
nonoperated Harding field was acquired as part of a northern North Sea asset
sale. Average 2002 gross production from the Harding field was 60,600 barrels of
oil per day. The Harding field provides Kerr-McGee with additional
infrastructure in the strategically important Quad 9 area of the North Sea.
Within the same quadrant, Kerr-McGee also has equity interests in the Gryphon,
Leadon, Buckland, Skene, Maclure, Tullich, Blue Sky and Blue Sky 2 fields.
Skene field, block 9/19 (33.3%): The Skene field started production in December
2001. Average 2002 gross field production was 144 million cubic feet of gas per
day and 8,200 barrels of oil per day. The Skene field is being produced by a
subsea tieback to the Beryl Alpha platform. The oil is exported via shuttle
tanker, while the gas is exported via pipeline to the St. Fergus terminal.
Janice field, block 30/17a (75.3%): Average 2002 gross production from the
Janice field was 14,900 barrels of oil per day and more than 1.5 million cubic
feet of gas per day. An additional equity interest of 24.4% was acquired in
2002.
Gryphon area, blocks 9/18a, 9/18b, 9/19 and 9/23a (33.3% - 100%): Average 2002
gross production from the Gryphon area was 20,500 barrels of oil per day and 2.1
million cubic feet of gas per day. The Maclure and Tullich satellites began
production in August 2002. The Gryphon area is produced into an FPSO vessel,
with oil exported via shuttle tanker. Gas is exported to the Leadon facility for
fuel usage and/or sold from the St. Fergus terminal.
U.S. Onshore:
Kerr-McGee is active in the U.S. onshore region with production operations in
Texas, Oklahoma, New Mexico, Louisiana and Colorado. In 2002, onshore production
represented 51% of the company's worldwide gas production and 15% of its oil
production. A major focus in 2002 was the exploitation of undeveloped gas
reserves acquired from HS Resources in 2001. In addition, the company completed
a divestiture program of high-cost, low-margin waterflood properties in 2002.
Following is a summary of key U.S. onshore developments:
Wattenberg field (94%): The Wattenberg gas field is located in the
Denver-Julesberg (D-J) Basin in northeast Colorado. Kerr-McGee gained interest
in the field with the acquisition of HS Resources in 2001. Kerr-McGee's 2002 net
production from this field was 10,450 barrels of oil per day and 178 million
cubic feet of gas per day. In 2002, the company completed nearly 550 development
projects in the field, including deepenings, fracture stimulations,
recompletions and an aggressive infill drilling program. The J Sand infill and
Codell refracture programs continue to supply significant low-risk development
opportunities. In connection with the large number of operational activities,
the company reengineered its stimulation design program and, together with
internal supply-chain initiatives, reduced stimulation costs by as much as 50%.
In addition to the ongoing D-J Basin exploitation program, the company continued
the successful integration of the Wattenberg Gathering System (WGS) into its
operating activities. Kerr-McGee operates more than 3,000 wells in the D-J
Basin, nearly 1,800 of which are connected to WGS. The company-operated
production represents about 70% of the total system throughput of approximately
260 million cubic feet of natural gas per day, 30 million cubic feet of which is
processed at the company's new Ft. Lupton plant.
Flores and Jeffress fields, Starr and Hidalgo counties, Texas (80%): The company
completed 14 new wells and an additional 14 workover projects during 2002. Over
the past three years, a total of 55 wells have been drilled. Kerr-McGee's net
production from both fields for 2002 averaged 2,200 barrels of oil per day and
43 million cubic feet of gas per day.
Chambers County, Texas (75%): Seven new wells and an additional six workover
projects were completed in 2002. Kerr-McGee's net production from the area
during 2002 averaged 900 barrels of oil per day and 20 million cubic feet of gas
per day.
Mocane-Laverne field, Harper and Beaver counties, Oklahoma (60%): Development of
properties acquired from trades in 2000 and 2001 continued. Since 1998, a total
of 54 wells have been drilled, and a 10-well drilling program is currently under
way. In addition, nine workover projects were completed in 2002. Kerr-McGee's
net production for 2002 from the field was 17 million cubic feet of gas per day.
Other International:
In 2002, Kerr-McGee continued its exploration and production efforts in selected
international areas and successfully completed the divestiture of its noncore
interests in Ecuador, Indonesia and the Bayu-Undan project in Australia. The
company currently has an executed purchase and sale agreement in place for the
sale of its operations in Kazakhstan. The sale is expected to close in March
2003.
China
Liuhua 11-1 field, South China Sea (24.5%): Gross production for 2002 was 14,450
barrels of oil per day. One sidetrack and one extended-reach well were completed
in 2002. Two sidetracks and a second extended-reach well are planned for 2003.
Bohai Bay block 04/36 (81.8%): During 2002, Kerr-McGee submitted development
plans to the Chinese government for the CFD 11-1 and 11-2 fields. These plans
are now under consideration for formal project sanction. The project schedule
anticipates first oil in 2004, with development drilling due to start in the
third quarter of 2003. No additional appraisal wells were drilled in 2002 on CFD
11-1 and 11-2 following the two successful appraisal wells completed in 2001.
A new wildcat discovery, CFD 11-3-1, was followed by a successful appraisal well
three miles east of the CFD 11-1 development area, and additional appraisal
drilling is planned for the area. Another discovery well was drilled at CFD
16-1-1 that will be appraised in 2003.
Bohai Bay block 05/36 (50%): During 2002, Kerr-McGee evaluated potential
development options for the CFD 12-1 and 12-1S discoveries, including options to
tie back to the CFD 11-1 discovery in the 04/36 block. Additional exploration
drilling is planned for 2003.
Bohai Bay block 09/18 (100%): This block includes more than 535,000 gross acres
and is located south of Kerr-McGee-operated blocks 04/36 and 05/36. Block 09/18
has similar play concepts as the company's fields and discoveries on blocks
04/36 and 05/36. Seismic data has been acquired, and three exploration wells are
planned for 2003.
Indonesia
The company completed the divestiture of the Jabung block to Petronas Carigali
Overseas Sdn Bhd., a subsidiary of Petroliam Nasional Bhd (PETRONAS), in June
2002.
Ecuador
The company completed the divestiture of its entire equity ownership in Ecuador
to Perenco Ecuador Limited, a subsidiary of Perenco S.A., and Burlington
Resources Oriente Limited, in September 2002. The assets consisted of one
producing license and one license under development.
Kazakhstan
The company executed an agreement with Shell Kazakhstan Development in 2002 for
the sale of its operations in Kazakhstan. The assets consist of one producing
license, one exploration license and an equity ownership in the Caspian Pipeline
Consortium. The sale is expected to close in March 2003.
Australia
Bayu-Undan field (11.2%): The company divested its entire equity ownership in
the Bayu-Undan field in May 2002.
WA 278 (39%): A retention lease application is currently being negotiated with
the Australian government for the areas around Kerr-McGee's Prometheus and
Rubicon successful but presently noncommercial gas discoveries in 2000.
WA 295 (50%): Kerr-McGee operates this 3.5 million-acre block in the Carnarvon
basin. Acquisition of 4,800 kilometers of 2-D seismic data was completed in
2001. A two-well drilling program was initiated in late 2002. The Wigmore
prospect was the first drilled and was unsuccessful. Drilling of a second well
is planned in mid-2003.
WA 301 and 304 (50%), WA 302, 303 and 305 (33.3%): Kerr-McGee has an interest in
6.4 million acres in the deepwater Browse basin. Seismic and geological studies
have been ongoing for two years, in preparation for the initial exploration
well, Maginnis, which began drilling in early 2003.
Benin
Block 4 (70%): Kerr-McGee owns a 70% working interest in 2.5 million acres
offshore Benin. Water depths on this block range from 300 feet to 10,000 feet. A
two-well drilling program was commenced in late 2002 and both wells were dry.
Additional 2-D seismic data is planned for 2003 to evaluate areas not covered by
the current 3-D seismic data. In late 2002, Kerr-McGee and Petronas Carigali
Overseas Sdn Bhd. entered into a partnership on the block.
Brazil
BS-1 (40%): A second exploration well, the Ana prospect, was drilled in 2002.
The well failed to find commercial hydrocarbons, and data collected in the well
condemned several other prospects on the block. As a result, Kerr-McGee elected
to relinquish the acreage in 2002. Kerr-McGee was operator of this 2.2 million
gross acre block.
BM-S-3 (30%): This deepwater Santos basin block covers 1.6 million acres.
Additional analysis was conducted on this block subsequent to the drilling in
BS-1, which is a direct offsetting block. The plays in BM-S-3 became
noncommercial as a result of the drilling activity, and Kerr-McGee elected to
relinquish the acreage in 2002.
BM-ES-9 (30%): This offshore block was acquired in 2001 and extends over 535,000
acres in the Espirito Santo basin in water depths ranging from 4,400 feet to
9,600 feet. During 2002, 3-D seismic data was acquired and is currently being
evaluated.
Gabon
Anton and Astrid Marin blocks (14%): Located offshore along the southern coast
of Gabon, the Anton and Astrid Marin blocks total 3.1 million acres. A four-well
drilling program was completed in late 2001. After evaluating all of the well
and seismic data, Kerr-McGee elected to relinquish the acreage in 2002.
Olonga Marin block (25%): Kerr-McGee and partners plan to conduct seismic
operations after 2003.
Morocco
Cap Draa block (25%): Kerr-McGee and partners have an exploration contract
covering approximately 3 million acres along the deepwater shelf edge offshore
Morocco, in water depths from 650 feet to 6,500 feet. A 3-D seismic acquisition
was completed in 2002 and is currently being evaluated.
Boujdour block (100%): In October 2001, Kerr-McGee acquired a reconnaissance
permit covering approximately 27 million acres offshore Morocco from the
shoreline to a water depth of more than 10,000 feet. A reconnaissance permit
allows Kerr-McGee to perform seismic and related activities for evaluation
purposes. Kerr-McGee completed its acquisition of a large 2-D seismic grid in
January 2003, and the data is currently being evaluated.
Nova Scotia, Canada
EL2383, EL2386, EL2393 and EL 2396 (50%): Kerr-McGee is operator of four
deepwater blocks covering approximately 1.5 million acres located offshore Nova
Scotia, Canada, in water depths ranging from 500 feet to 9,200 feet. A 3-D
seismic survey across two of the blocks was interpreted in 2001. Additional 2-D
seismic data is being acquired outside the area covered by the current 3-D
survey.
EL2398, EL2399 and EL2404 (100%): These blocks, covering more than 1.5 million
acres, are in water depths ranging from 350 feet to 10,000 feet. A regional 2-D
seismic program was interpreted in 2001, and additional 2-D seismic is planned
for 2003.
Thailand
Block W7/38, Andaman Sea (85%): Kerr-McGee was the operator of this 4.9
million-acre block. The license for this block expired in March 2002, and the
company no longer has an interest in Thailand.
Yemen
Block 50 (47.5%): Kerr-McGee and Nexen (operator) farmed out a portion of their
interest to Petronas Carigali Overseas Sdn Bhd. in 2002. Terms call for Petronas
to pay a disproportionate share of costs for seismic data and an exploratory
well, which will be drilled in 2003. Upon completion of the farm-in obligation,
Kerr-McGee's interest will be reduced to 31.7%.
CHEMICALS
Kerr-McGee Corporation's chemical operations consist of two segments (pigment
and other) that produce and market inorganic industrial chemicals, heavy
minerals and forest products through its subsidiaries Kerr-McGee Chemical LLC,
KMCC Western Australia Pty. Ltd., Kerr-McGee Pigments GmbH, Kerr-McGee Pigments
International GmbH, Kerr-McGee Pigments Limited, Kerr-McGee Pigments (Holland)
B.V. and Kerr-McGee Pigments (Savannah) Inc. Many of these products are
manufactured using proprietary technology developed by the company.
Industrial chemicals include titanium dioxide, synthetic rutile, manganese
dioxide and sodium chlorate. Heavy minerals produced are ilmenite, natural
rutile, leucoxene and zircon. Forest products operations treat railroad
crossties and other hardwood products and provide other wood-treating services.
On December 16, 2002, the company announced plans to exit the forest products
business due to the strategic focus on the growth of the core businesses, oil
and gas exploration and production and the production and marketing of titanium
dioxide pigment. The company took an after-tax charge of $15 million for plant
and equipment impairment and decommissioning expenses.
In January 2003, Kerr-McGee announced a plan to close its synthetic rutile plant
in Mobile, Alabama, by year-end 2003. This plant closure is another step in the
company's plan to enhance its operating profitability. The Mobile plant
processes and supplies a portion of the feedstock for the company's titanium
dioxide pigment plants in the United States. Through Kerr-McGee's ongoing
supply-chain initiatives, the company now can purchase the feedstock more
economically than it can be manufactured at the Mobile plant. As a result of
these steps, the company anticipates significant savings.
During March 2003, the company announced the temporary shutdown of the Mobile
synthetic rutile plant due to imposition of a new, much lower limit for one
effluent impurity effective March 1, 2003. This limit did not exist previously
under the plant's operating permit. The synthetic rutile plant will remain shut
down until Kerr-McGee is confident it can meet this new permit condition.
Titanium Dioxide Pigment
- ------------------------
The company's primary chemical product is titanium dioxide pigment (TiO2), a
white pigment used in a wide range of products, including paint, coatings,
plastics and paper. TiO2 is used in these products for its unique ability to
impart whiteness, brightness and opacity.
Titanium dioxide pigment is produced in two crystalline forms - rutile and
anatase. The rutile form has a higher refractive index than anatase titanium
dioxide, providing better opacity and tinting strength. Rutile titanium dioxide
products also provide a higher level of durability (resistance to weathering).
In general, the rutile form of titanium dioxide is preferred for use in paint,
coatings, plastics and inks. Anatase titanium dioxide is less abrasive than
rutile and is preferred for use in fibers, rubber, ceramics and some paper
applications.
Titanium dioxide is produced using one of two different technologies, the
chloride process and the sulfate process, both of which are used by Kerr-McGee.
Because of market considerations, chloride-process capacity has increased to a
substantially higher level than sulfate process capacity over the past 20 years.
The chloride process currently makes up about 60% of total industry capacity.
The company produces TiO2 pigment at six production facilities. Three are
located in the United States, the others in Australia, Germany and the
Netherlands. The chloride process accounts for approximately 74% of the
company's production capacity. The following table outlines the company's
production capacity by location and process.
TiO2 Capacity
As of January 1, 2003
(Gross tonnes per year)
Facility Capacity Process
- -------- -------- -------
Hamilton, Mississippi 200,000 Chloride
Savannah, Georgia 91,000 Chloride
Kwinana, Western Australia (1) 95,000 Chloride
Botlek, Netherlands 62,000 Chloride
Uerdingen, Germany 105,000 Sulfate
Savannah, Georgia 54,000 Sulfate
-------
Total 607,000
=======
(1) The Kwinana facility is part of the Tiwest Joint Venture, in which the
company owns a 50% interest.
The company owns a 50% interest in a joint venture that operates an integrated
TiO2 project in Western Australia (the Tiwest Joint Venture). The venture
consists of a heavy-minerals mine, a mineral separation facility, a synthetic
rutile facility and a titanium dioxide plant.
Heavy minerals are mined from 21,037 acres leased by the Tiwest Joint Venture.
The company's 50% interest in the properties' remaining in-place proven and
probable reserves is 5.7 million tonnes of heavy minerals contained in 195
million tonnes of sand averaging 2.9% heavy minerals. The valuable heavy
minerals are composed of 61% ilmenite, 10.3% zircon, 4.5% natural rutile and
3.4% leucoxene, with the remaining 20.8% of heavy minerals presently having no
value.
Heavy-mineral concentrate from the mine is processed at a 750,000 tonne-per-year
dry separation plant. Some of the recovered ilmenite is upgraded at a nearby
synthetic rutile facility, which has a capacity of 200,000 tonnes per year.
Synthetic rutile is a high-grade titanium dioxide feedstock. Synthetic rutile
from the Tiwest Joint Venture provides feedstock to a 95,000 tonne-per-year
titanium dioxide plant located at Kwinana, Western Australia. Production of
ilmenite, synthetic rutile, natural rutile and leucoxene in excess of the Tiwest
Joint Venture's requirements is purchased by Kerr-McGee as part of the feedstock
requirement for its TiO2 business under a long-term agreement executed in
September 2000.
Information regarding heavy-mineral reserves, production and average prices for
the three years ended December 31, 2002, is presented in the following table.
Mineral reserves in this table represent the estimated quantities of proven and
probable ore that, under presently anticipated conditions, may be profitably
recovered and processed for the extraction of their mineral content. Future
production of these resources depends on many factors, including market
conditions and government regulations.
Heavy-Mineral Reserves, Production and Prices
---------------------------------------------
(Thousands of tonnes) 2002 2001 2000
- ---------------------------- ----- ----- -----
Proven and probable reserves 5,700 5,800 6,700
Production 289 280 293
Average market price (per tonne) $150 $143 $145
The company also operates a synthetic rutile production facility located in
Mobile, Alabama. This facility, with an annual production capacity of 200,000
tonnes per year, provides a portion of the feedstock for the company's titanium
dioxide business. As previously noted, the company has announced its plans to
close the Mobile facility by the end of 2003, and the plant is temporarily shut
down due to a new operating permit restriction.
Titanium-bearing ores used for the production of TiO2 include ilmenite, natural
rutile, synthetic rutile, titanium-bearing slag and leucoxene. These products
are mined and processed in many parts of the world. In addition to ores
purchased from the Tiwest Joint Venture, the company obtains ores for its TiO2
business from a variety of suppliers in the United States, Australia, Canada,
South Africa, Norway and Ukraine. Ores are generally purchased under multi-year
agreements.
The global market in which the company's titanium dioxide business operates is
highly competitive. The company actively markets its TiO2 utilizing primarily
direct sales but also through a network of agents and distributors. In general,
products produced in a given market region will be sold there to minimize
logistical costs. However, the company actively exports products, as required,
from its facilities in the United States, Europe and Australia to other market
regions.
Titanium dioxide applications are technically demanding, and the company
utilizes a strong technical sales and services organization to carry out its
marketing efforts. Technical sales and service laboratories are strategically
located in major market areas, including the United States, Europe and the
Asia-Pacific region. The company's products compete on the basis of price and
product quality, as well as technical and customer service. World demand for
titanium dioxide is expected to increase 4% in 2003.
Stored Power
- ------------
The company owns a 50% interest in AVESTOR, a joint venture formed in 2001 to
produce and commercialize a solid-state lithium-metal-polymer (LMP) battery.
Applications for this battery include telecommunications stand-by power, utility
peak shaving, electric vehicles and hybrid electric vehicles. The first
commercial LMP battery is specifically designed for the telecommunications
market and is superior to lead-acid battery technology in both performance and
life. In 2002, a 120-megawatt-hour LMP production facility was built and
commissioned at Boucherville, Quebec. Production rates are expected to increase
throughout 2003 to the rated capacity.
Other Products
- --------------
The chemical - other operating unit consists of the company's electrolytic
operations and forest products business.
Electrolytic Products - Plants at the company's Hamilton, Mississippi, complex
include a 130,000 tonne-per-year sodium chlorate facility. Sodium chlorate is
used in the environmentally preferred chlorine dioxide process for bleaching
pulp. Sodium chlorate demand in the United States is expected to increase
approximately 2% to 3% per year in the near term as the pulp and paper industry
recovers and completes conversion to the chlorine dioxide process. The company's
share of the U.S. market is about 8%.
The company operates facilities at Henderson, Nevada, producing electrolytic
manganese dioxide and boron trichloride. Annual production capacity is 26,500
tonnes for manganese dioxide and 340,000 kilograms for boron trichloride. Boron
trichloride is used in the production of pharmaceuticals and in the manufacture
of semiconductors.
Manganese dioxide is a major component of alkaline batteries. The company's
share of the North American manganese dioxide market is approximately one-third.
Increased demand is being driven by the need for alkaline batteries for portable
electronic devices.
As part of the company's strategic decision to focus on the titanium dioxide
pigment business, the company continues to investigate divestiture options for
the electrolytic business.
Forest Products - The principal product of the forest products business is
treated railroad crossties. Other products include railroad crossing materials,
bridge timbers and utility poles. The company's six wood-treating plants are
located along major railways in Madison, Illinois; Indianapolis, Indiana;
Columbus, Mississippi; Springfield, Missouri; The Dalles, Oregon; and Texarkana,
Texas. In October 2002, the Indianapolis, Indiana, plant ceased operations, and
plant dismantlement was initiated. The company has announced the planned closing
of the Madison, Columbus, Springfield and Texarkana plants by the end of 2003.
The Dalles plant is a leased facility, and the company's options at the site
include continuation of operations for the term of the lease or sale. The lease
expires November 30, 2004.
For more information regarding the company's plan to exit the forest products
business and for information as to the chemical - other operating unit's
revenues and operating profit (loss) for the three-year period ended December
31, 2002, reference is made to Notes 10 and 27 to the Consolidated Financial
Statements included in Item 8. of this Form 10-K.
OTHER
Research and Development
- ------------------------
The company's Technical Center in Oklahoma City performs research and
development in support of existing businesses and for the development of new and
improved products and processes. The primary focus of the company's research and
development efforts is on the titanium dioxide business. A separate dedicated
group at the Technical Center performs research and development in support of
the company's electrolytic businesses.
Employees
- ---------
On December 31, 2002, the company and its affiliates had 4,470 employees.
Approximately 984, or 22% of these employees, were represented by chemical
industry collective bargaining agreements in the United States and Europe.
Competitive Conditions
- ----------------------
The petroleum industry is highly competitive, and competition exists from the
initial process of bidding for leases to the sale of crude oil and natural gas.
Competitive factors include finding and developing petroleum reserves, producing
crude oil and natural gas efficiently, transporting the produced crude oil and
natural gas, and developing successful marketing strategies. Many of the
company's competitors have substantially larger financial resources, staffs and
facilities than Kerr-McGee, which test Kerr-McGee's ability to compete with
them.
The titanium dioxide pigment business is highly competitive. The number of
competitors in the industry has declined due to recent consolidations, and this
trend is expected to continue. Significant consolidation among the consumers of
titanium dioxide has also taken place over the past five years and is expected
to continue. Worldwide, Kerr-McGee is one of only five producers that own
proprietary chloride process technology to produce titanium dioxide pigment.
Cost efficiency and product quality as well as technical and customer service
are key competitive factors in the titanium dioxide business.
It is not possible to predict the effect of future competition on Kerr-McGee's
operating and financial results.
GOVERNMENT REGULATIONS AND ENVIRONMENTAL MATTERS
General
- -------
The company's affiliates are subject to extensive regulation by federal, state,
local and foreign governments. The production and sale of crude oil and natural
gas are subject to special taxation by federal, state, local and foreign
authorities and regulation with respect to allowable rates of production,
exploration and production operations, calculations and disbursements of royalty
payments, and environmental matters. Additionally, governmental authorities
regulate the generation and treatment of waste and air emissions at the
operations and facilities of the company's affiliates. At certain operations,
the company's affiliates also comply with certain worldwide, voluntary standards
such as the ISO 9002 for quality management and ISO 14001 for environmental
management standards developed by the International Organization for
Standardization, a nongovernmental organization that promotes the development of
standards and related activities and serves as an external oversight for quality
and environmental issues.
Environmental Matters
- ---------------------
Federal, state and local laws and regulations relating to environmental
protection affect almost all company operations. These laws require the
company's affiliates to remove or mitigate the effects on the environment of the
disposal or release of certain chemical, petroleum, low-level radioactive and
other substances at various sites. Operation of pollution-control equipment
usually entails additional expense. Some expenditures to reduce the occurrence
of releases into the environment may result in increased efficiency; however,
most of these expenditures produce no significant increase in production
capacity, efficiency or revenue.
During 2002, direct capital and operating expenditures related to environmental
protection and cleanup of existing sites totaled $59 million. Additional
expenditures totaling $128 million were charged to environmental reserves. While
it is difficult to estimate the total direct and indirect costs to the company
of government environmental regulations, the company presently estimates that in
2003 it will incur $33 million in direct capital expenditures, $35 million in
operating expenditures and $100 million in expenditures charged to reserves.
Additionally, the company estimates that in 2004 it will incur $17 million in
direct capital expenditures, $20 million in operating expenditures and $100
million in expenditures charged to reserves.
The company and its affiliates are parties to a number of legal and
administrative proceedings involving environmental matters and/or other matters
pending in various courts or agencies in the United States and other
jurisdictions. These include proceedings associated with facilities currently or
previously owned, operated or used by the company's affiliates and/or their
predecessors, and include claims for personal injuries and property damages. The
current and former operations of the company's affiliates also involve
management of regulated materials and are subject to various environmental laws
and regulations. These laws and regulations obligate the company's affiliates to
clean up various sites at which petroleum and other hydrocarbons, chemicals,
low-level radioactive substances and/or other materials have been disposed of or
released. Some of these sites have been designated Superfund sites by the U.S.
Environmental Protection Agency (EPA) pursuant to the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) and are
listed on the National Priority List (NPL).
The company provides for costs related to environmental contingencies when a
loss is probable and the amount is reasonably estimable. It is not possible for
the company to reliably estimate the amount and timing of all future
expenditures related to environmental matters because, among other reasons:
o some sites are in the early stages of investigation, and other sites may
be identified in the future;
o cleanup requirements are difficult to predict at sites where remedial
investigations have not been completed or final decisions have not been
made regarding cleanup requirements, technologies or other factors that
bear on cleanup costs;
o environmental laws frequently impose joint and several liability on all
potentially responsible parties, and it can be difficult to determine
the number and financial condition of other potentially responsible
parties and their respective shares of responsibility for cleanup costs;
o environmental laws and regulations are continually changing, and court
proceedings are inherently uncertain;
o unanticipated construction problems and weather conditions can hinder
the completion of environmental remediation;
o the inability to implement a planned engineering design or use planned
technologies and excavation methods may require revisions to the design
of remediation measures, which delay remediation and increase its costs;
and
o the identification of additional areas or volumes of contamination and
changes in costs of labor, equipment and technology generate
corresponding changes in environmental remediation costs.
The company believes that currently it has reserved adequately for the
reasonably estimable costs of contingencies. However, additions to the reserves
may be required as additional information is obtained that enables the company
to better estimate its liabilities, including any liabilities at sites now under
review. The company cannot now reliably estimate the amount of future additions
to the reserves. Additionally, there may be other sites where the company has
potential liability for environmental-related matters but for which the company
does not have sufficient information to determine that the liability is probable
and/or reasonably estimable. The company has not established a reserve for such
sites.
For an expanded discussion of environmental matters, see "Item 3. Legal
Proceedings," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Note 16 to the Consolidated Financial
Statements contained in Item 8. to this Form 10-K.
RISK FACTORS
In addition to the risks identified in Management's Discussion and Analysis
included in Item 7. of this Form 10-K, investors should consider carefully the
following risks.
Volatile Product Prices and Markets Could Adversely Affect Results
- ------------------------------------------------------------------
The company's results of operations are highly dependent upon the prices of and
demand for oil and gas and the company's chemical products. Historically, the
markets for oil and gas have been volatile and are likely to continue to be
volatile in the future. Accordingly, the prices received by the company for its
oil and gas production are dependent upon numerous factors that are beyond its
control. These factors include, but are not limited to, the level of ultimate
consumer product demand, governmental regulations and taxes, the price and
availability of alternative fuels, the level of imports and exports of oil and
gas, actions of the Organization of Petroleum Exporting Countries, the political
and economic uncertainty of foreign governments, international conflicts and
civil disturbances, and the overall economic environment. Any significant
decline in prices for oil and gas could have a material adverse effect on the
company's financial condition, results of operations and quantities of reserves
recoverable on an economic basis. Demand for titanium dioxide is dependent on
the demand for ultimate products utilizing titanium dioxide pigment. This demand
is generally dependent on the condition of the economy. The profitability of the
company's products is dependent on the price realized for them, the efficiency
of manufacturing costs, and the ability to acquire feedstock at a competitive
price. Should the industries in which the company operates experience
significant price declines or other adverse market conditions, the company may
not be able to generate sufficient cash flow from operations to meet its
obligations and make planned capital expenditures. In order to manage its
exposure to price risks in the sale of oil and gas, the company may from time to
time enter into commodities contracts to hedge a portion of its crude oil and
natural gas sales volume. Any such hedging activities may prevent the company
from realizing the benefits of price increases above the levels reflected in
such hedges.
State and Local Regulation of Oil and Gas Development and Surface Development
Conflicts Could Adversely Affect Results
- -------------------------------------------------------------------------------
State regulatory authorities have established rules and regulations governing,
among other things, permits for drilling and production, operations, performance
bonds, reports concerning operations, discharge, disposal and other
waste-related permits, well spacing, unitization and pooling of operations,
taxation, and environmental and conservation matters. In general, these measures
make oil and gas development more difficult, and their application to the
company's operations could adversely affect its results of operations.
Failure to Fund Continued Capital Expenditures Could Adversely Affect Results
- -----------------------------------------------------------------------------
The company expects that it will continue to make capital expenditures for the
acquisition, exploration and development of oil and gas reserves. If its
revenues substantially decrease as a result of lower oil and gas prices or
otherwise, the company may have a limited ability to expend the capital
necessary to replace its reserves or to maintain production at current levels,
resulting in a decrease in production over time. Historically, the company has
financed expenditures for the acquisition, exploration and development of oil
and gas reserves primarily with cash flow from operations and proceeds from debt
and equity financings, asset sales, and sales of partial interests in foreign
concessions. Management believes that the company will have sufficient cash flow
from operations, available drawings under its credit facilities and other debt
financings to fund capital expenditures. However, if the company's cash flow
from operations is not sufficient to satisfy its capital expenditure
requirements, there can be no assurance that additional debt or equity financing
or other sources of capital will be available to meet these requirements. If the
company is not able to fund its capital expenditures, its interests in some
properties may be reduced or forfeited, and its future cash generation may be
materially adversely affected as a result of the failure to find and develop
reserves.
Oil and Gas Reserve Information Is Estimated
- --------------------------------------------
The proved oil and gas reserve information included in this Form 10-K represents
estimates. These estimates are based primarily on reports prepared by the
company's geologists and engineers. Petroleum engineering is a subjective
process of estimating underground accumulations of oil and gas that cannot be
measured in an exact manner. Estimates of economically recoverable oil and gas
reserves and of future net cash flows necessarily depend on a number of variable
factors and assumptions, including:
o historical production from the area compared with production from other
similar producing areas;
o the assumed effects of regulations by governmental agencies;
o assumptions concerning future oil and gas prices; and
o assumptions concerning future operating costs, severance and excise
taxes, development costs, and workover and remedial costs.
Because all reserve estimates are to some degree subjective, each of the
following items may differ materially from those assumed in estimating reserves:
o the quantities of oil and gas that are ultimately recovered;
o the production and operating costs incurred;
o the amount and timing of future development expenditures; and
o future oil and gas sales prices.
Furthermore, different reserve engineers may make different estimates of
reserves and cash flows based on the same available data. The company's actual
production, revenues and expenditures with respect to reserves will likely be
different from estimates, and the differences may be material. The discounted
future net cash flows included in this Form 10-K should not be considered as the
current market value of the estimated oil and gas reserves attributable to the
company's properties. As required by the SEC, the estimated discounted future
net cash flows from proved reserves are generally based on prices and costs as
of the date of the estimate, while actual future prices and costs may be
materially higher or lower. Actual future net cash flows also will be affected
by factors such as:
o the amount and timing of actual production;
o supply and demand for oil and gas;
o increases or decreases in consumption; and
o changes in governmental regulations or taxation.
In addition, the 10% discount factor, which is required by the SEC to be used to
calculate discounted future net cash flows for reporting purposes, is not
necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with the company or the oil and
gas industry in general.
Kerr-McGee Operates in Foreign Countries and Will Be Subject to Political,
Economic and Other Uncertainties
- -------------------------------------------------------------------------------
The company conducts significant operations in foreign countries and may expand
its foreign operations in the future. Operations in foreign countries are
subject to political, economic and other uncertainties, including:
o the risk of war, acts of terrorism, revolution, border disputes,
expropriation, renegotiation or modification of existing contracts,
import, export and transportation regulations and tariffs;
o taxation policies, including royalty and tax increases and retroactive
tax claims;
o exchange controls, currency fluctuations and other uncertainties arising
out of foreign government sovereignty over the company's international
operations;
o laws and policies of the United States affecting foreign trade, taxation
and investment; and
o the possibility of being subject to the exclusive jurisdiction of
foreign courts in connection with legal disputes and the possible
inability to subject foreign persons to the jurisdiction of courts in
the United States.
Foreign countries have occasionally asserted rights to land, including oil and
gas properties, through border disputes. If a country claims superior rights to
oil and gas leases or concessions granted to the company by another country, the
company's interests could be lost or decrease in value. Various regions of the
world have a history of political and economic instability. This instability
could result in new governments or the adoption of new policies that might
assume a substantially more hostile attitude toward foreign investment. In an
extreme case, such a change could result in termination of contract rights and
expropriation of foreign-owned assets. This could adversely affect the company's
interests. The company seeks to manage these risks by, among other things,
concentrating its international exploration efforts in areas where the company
believes that the existing government is favorably disposed towards U.S.
exploration and production companies.
Oil and Gas Operations Involve Substantial Costs and Are Subject to Various
Economic Risks
- -------------------------------------------------------------------------------
The company's oil and gas operations are subject to the economic risks typically
associated with exploration, development and production activities. In
conducting exploration and development activities, the presence of unanticipated
pressure or irregularities in formations, miscalculations or accidents may cause
the company's exploration, development and production activities to be
unsuccessful. This could result in a total loss of the company's investment in a
particular property. If exploration efforts in a country are unsuccessful in
establishing proved reserves and exploration activities cease, the amounts
accumulated as unproved costs would be charged against earnings as impairments.
In addition, the cost and timing of drilling, completing and operating wells is
often uncertain.
Competition is Intense
- ----------------------
The exploration and production business and the titanium dioxide pigment
business are each highly competitive. Many of the company's competitors have
substantially larger financial resources, staffs and facilities than Kerr-McGee,
which test Kerr-McGee's ability to compete with them.
AVAILABILITY OF REPORTS
Effective January 1, 2003, Kerr-McGee made available at no cost on its Internet
website, www.kerr-mcgee.com, its Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports as
soon as reasonably practicable after the company electronically files or
furnishes such reports to the Securities and Exchange Commission (SEC).
Interested parties should refer to the Investor Relations link on the company's
website. Reports on Forms 10-Q and 10-K are available for all 2001 and 2002
filings and Current Reports on Form 8-K are available for all filings subsequent
to January 1, 2003.
Item 3. Legal Proceedings
A. In 2001, the company's chemical affiliate (Chemical) received a Notice of
Violation (NOV) from EPA, Region 9. The NOV claims that Chemical has been in
continuous violation of the Clean Air Act new source review requirements
applicable to the construction in 1994 and continued operation of an open hearth
furnace at its Henderson, Nevada, facility. Chemical operated the open hearth
furnace in compliance with state-issued permits and believes that the NOV is
without substantial merit. Chemical is vigorously defending against the claims
made in the NOV and believes that any fines and penalties related to the NOV
will not have a material adverse effect on the company.
B. In December 2001, Kerr-McGee North Sea (U.K.) Limited received a notice of
violation of the Prevention of Oil Pollution Act 1971 and of the Merchant
Shipping (Oil Pollution Preparedness, Response and Cooperation Convention)
Regulations 1998 from authorities in Scotland. This matter is currently pending
in the Sheriff Court, Aberdeen, Scotland, and concerns a subsea pipeline leak
associated with the company's North Sea Hutton facility. The company is
vigorously defending the matter and believes that any fines and penalties will
not have a material adverse effect on the company.
C. In 2002, Tiwest Pty Ltd, an Australian joint venture that produces titanium
dioxide and in which Chemical indirectly has a 50% interest, received a
complaint and notice of violation from the Department of Environmental Waters
and Catchment Protection in Western Australia alleging violations of the
Environmental Protection Act (1986). This matter concerns an alleged chlorine
release at the facility. Tiwest is vigorously defending the proceeding, which is
pending in the Court of Petty Sessions, Perth, Western Australia. As currently
filed, the maximum fine is $625,000 (Australian dollars), but the liability of
the joint venture and the amount of any monetary fine are uncertain.
D. For a discussion of other legal proceedings and contingencies, reference is
made to (1) the Environmental Matters section of Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7.
and (2) Note 16 to the Consolidated Financial Statements included in Item 8. of
this Form 10-K, both of which are incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
None submitted during the fourth quarter of 2002.
Executive Officers of the Registrant
The following is a list of executive officers, their ages, and their positions
and offices as of March 15, 2003:
Name Age Office
- ------------------ --- -------------------------------------------------
Luke R. Corbett 56 Chief Executive Officer since 1997. Chairman of
the Board since May 1999 and from 1997 to February
1999. President and Chief Operating Officer from
1995 until 1997.
Kenneth W. Crouch 59 Executive Vice President since March 2003. Senior
Vice President from 1996 to 2003. Senior Vice
President, Exploration and Production Operations,
from 1998 to 2003. Senior Vice President,
Exploration from 1996 to 1998.
David A. Hager 46 Senior Vice President, Exploration and Production
Operations, since March 2003. Vice President of
Exploration and Production, 2002 to 2003. Vice
President of Gulf of Mexico and Worldwide
Deepwater Exploration and Production, 2001 to
2002; Vice President of Worldwide Deepwater
Exploration and Production, 2000 to 2001; Vice
President of International Operations, 2000;
previously Vice President of Gulf of Mexico
operations. Joined Sun Oil Co., predecessor of
Oryx Energy Company, in 1981.
Gregory F. Pilcher 43 Senior Vice President, General Counsel and
Corporate Secretary since July 2000. Vice
President, General Counsel and Corporate Secretary
from 1999 to 2000. Deputy General Counsel for
Business Transactions from 1998 to 1999.
Associate/Assistant General Counsel for Litigation
and Civil Proceedings from 1996 to 1998.
Carol A. Schumacher 46 Senior Vice President of Corporate Affairs since
February 2002. Prior to joining the company in
2002, served as Vice President of Public Relations
for The Home Depot, Executive Vice President and
General Manager for Atlanta office of Edelman
Worldwide and Executive Vice President of Cohn &
Wolfe, a division of Young & Rubicam, Inc.
Robert M. Wohleber 52 Senior Vice President and Chief Financial Officer
since December 1999. Prior to joining the company
in 1999, served as Executive Vice President and
Chief Financial Officer of Freeport-McMoRan
Exploration Company, President and Chief Executive
Officer of Freeport-McMoRan Sulfur and Senior Vice
President of Freeport-McMoRan Gold and Copper
Corporation.
W. Peter Woodward 54 Senior Vice President since 1997. Senior Vice
President of Marketing for Kerr-McGee Chemical
from 1996 to 1997.
George D. Christiansen 58 Vice President, Safety and Environmental Affairs,
since 1998. Vice President, Environmental
Assessment and Remediation, from 1996 to 1998.
Fran G. Heartwell 56 Vice President of Human Resources since March
2003; Director of Human Resources, Kerr-McGee Oil
& Gas, from September 2002 to January 2003; Vice
President of Human Resources and Administration,
Oryx Energy Company, from 1995 until the 1999
merger of Oryx and Kerr-McGee.
J. Michael Rauh 53 Vice President since 1987. Controller since
January 2002. Treasurer from 1996 to 2002.
John F. Reichenberger 50 Vice President, Deputy General Counsel and
Assistant Secretary since July 2000. Assistant
Secretary and Deputy General Counsel from 1999 to
2000. Deputy General Counsel from 1998 to 1999.
Associate General Counsel from 1996 to 1999.
Elizabeth T. Wilkinson 45 Vice President and Treasurer since November 2002.
Previously Assistant Treasurer-Corporate Finance,
GlobalSantaFe Corporation (Global Marine Inc.
until 2001 merger); Manager of Planning and
Analysis from 1998 to 1999 and Manager of Budgets
and Planning from 1994 to 1998, Global Marine Inc.
There is no family relationship between any of the executive officers.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Statements in this Form 10-K regarding the company's or management's intentions,
beliefs or expectations, or that otherwise speak to future events, are
"forward-looking statements" within the meaning of the U.S. Private Securities
Litigation Reform Act of 1995. Future results and developments discussed in
these statements may be affected by numerous factors and risks, such as the
accuracy of the assumptions that underlie the statements, the success of the oil
and gas exploration and production program, drilling risks, the market value of
Kerr-McGee's products, uncertainties in interpreting engineering data, demand
for consumer products for which Kerr-McGee's businesses supply raw materials,
the financial resources of competitors, changes in laws and regulations, the
ability to respond to challenges in international markets, including changes in
currency exchange rates, political or economic conditions, trade and regulatory
matters, general economic conditions, and other factors and risks discussed
herein and in the company's other SEC filings. Actual results and developments
may differ materially from those expressed or implied in this Form 10-K.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Information relative to the market in which the company's common stock is
traded, the high and low sales prices of the common stock by quarters for the
past two years, and the approximate number of holders of common stock is
furnished in Note 33 to the Consolidated Financial Statements, which note is
included in Item 8. of this Form 10-K.
Quarterly dividends declared totaled $1.80 per share for each of the years 2002,
2001 and 2000. Cash dividends have been paid continuously since 1941 and totaled
$181 million in 2002, $173 million in 2001 and $166 million in 2000.
For information required under Item 201(d) of Regulation S-K related to the
company's securities authorized for issuance under equity compensation plans,
reference is made to Item 12. of this Form 10-K.
Item 6. Selected Financial Data
Information regarding selected financial data required in this item is presented
in the schedule captioned "Nine-Year Financial Summary" included in Item 8. of
this Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Overview
Kerr-McGee Corporation is one of the largest U.S.-based independent oil and gas
exploration and production companies and the world's third-largest producer and
marketer of titanium dioxide pigment. The company's assets total approximately
$10 billion, and proved oil and gas reserves are approximately 1 billion barrels
of oil equivalent. The equity production capacity for titanium dioxide pigment
is 560,000 tonnes per year. For 2002, revenues from continuing operations
totaled $3.7 billion, of which $2.5 billion (68%) was generated by the company's
oil and gas exploration and production operations and $1.2 billion (32%) was
generated by the company's chemical operations.
- --------------------------------------------------------------------------------
Operating Environment and Outlook
Oil and Gas Exploration and Production
While the 2002 financial results are disappointing, Kerr-McGee has started 2003
in a stronger position as a result of its program to sell noncore and
higher-cost oil and gas assets. These sales yielded proceeds of approximately
$760 million during 2002, and completion of additional transactions is expected
in 2003. The proceeds have enabled the company to reduce total debt by 15% from
the 2001 year-end level. Kerr-McGee's goal is to reduce its
debt-to-capitalization ratio below 50%. As the company benefits from the sale of
the higher-cost fields and ramps up production from efficient new deepwater
projects, lifting costs are expected to decline by approximately 20% per barrel
of oil equivalent.
The volatility of crude oil and natural gas prices has a significant impact on
the profitability of Kerr-McGee's oil and gas exploration and production
business. While financial instruments and marketing arrangements have the
potential to dampen this volatility in certain circumstances, the uncertainty
surrounding commodity markets, directly affected by geopolitical issues and
global economies, must be analyzed in projecting future sales environments. To
provide greater predictability of cash flow necessary to fund exploration and
capital programs, the company hedged about 40% of its 2002 production and
currently has hedged approximately half of its 2003 production.
The oil and gas industry operated in an environment of uncertainty during 2002.
The effects of the September 2001 terrorist attack still lingered in the global
economy, with discernible global consequences. Concerns about possible military
action in the Middle East set in early in the year. Venezuela dealt with
political strife that began in 2001 and led to a general strike in 2002. Despite
early expectations, the U.S. economy did not experience the recovery anticipated
early in the year, and financial markets were impacted by a series of corporate
scandals. The resulting commercial environment and price volatility profoundly
impacted investment decisions by the oil and gas industry.
The U.S. petroleum market began the year with ample inventories carried over
from 2001. The price of crude oil hovered near $20 per barrel. Reacting to weak
prices due to sluggish demand, OPEC and significant non-OPEC producers cut back
production effective January 1, 2002. Geopolitical uncertainties, combined with
the surprisingly high quota compliance by OPEC and non-OPEC producers (and their
agreement to extend the quota reduction into the second quarter) supported oil
price recovery. By the end of the first quarter, the well-referenced West Texas
Intermediate (WTI) spot price for crude oil had surpassed $25 per barrel.
After reaching the top of the average range during the first quarter, crude oil
inventories in the U.S. began to slide in April, reflecting the effect of the
production cuts. As the U.S. entered the summer driving season, a self-imposed
30-day delivery cutoff by Iraq increased market tension. Crude oil stocks began
a steep decline, reaching the lower level of the historical average range by the
end of August. Tightening of demand/supply market fundamentals as well as
geopolitical events caused late-year upward pressure on the crude oil market.
Tropical storms also influenced crude oil markets, causing U.S. crude oil stocks
to briefly decline to historically low levels. The spot price of WTI soared
above $30 per barrel. U.S. crude oil stocks increased in the fourth quarter,
tracking at the lower end of the historical average range. By the end of the
year, when crude oil imports declined again due to the strike in Venezuela, the
WTI spot price briefly climbed over $32 per barrel.
Reacting to an economy characterized by uncertainty, caution and concern over
investment risk, U.S. oil consumption rose only slightly on the strength of
continued increases in transportation sector use. OPEC discipline, a perceived
premium associated with the possibility of war in the Middle East and low levels
of crude oil stocks (the lowest in five years) added near-term upward pressure
to cyclical demand.
Natural gas pricing also demonstrated strong upward movement during the year.
Natural gas prices are driven by weather, pipeline capacity, storage (capacity
and management) and supply reliability. The increase in natural gas prices was
partially due to the competitive fuel prices and the evident decline of
production in North America. Market signals require time to develop a supply
response. Strong downward pressure on natural gas prices through 2001, plus the
relatively full levels of natural gas storage at the end of the heating season,
contributed to uncertainty that translated into unexpectedly low drilling
activity as the year progressed. Reference New York Mercantile Exchange (NYMEX)
gas prices began the year at $2.75 per million British thermal units (MMBtu),
declined to about $2/MMBtu during February when storage levels were relatively
high, and rose to $3.50/MMBtu by the end of the first quarter. After trending
lower through the summer, prices began to reflect anticipated heating season
loads and declining deliverability, climbing steadily to $4.80/MMBtu by
year-end.
The upstream oil and gas environment at the end of 2002 was nearly the reverse
of that which characterized the beginning of the year. Oil prices were
relatively high, natural gas prices were extremely strong and natural gas demand
appeared to be rising, but drilling activity, which increased slowly during the
year, did not yet reflect levels that historically have been characteristic of
periods during which there is investment in new supply. Due to global economic
conditions, mixed signals from the marketplace, and numerous regulatory and
financial uncertainties, the level of concern that permeated the early part of
the year progressed to an investment climate of extreme caution. Diligence in
investment - choosing only the most value-added opportunities - replaced an
industry quest for increased exploration investment. In this environment of
market volatility and uncertainty, budget discipline and flexibility in
near-term spending are high priorities.
Kerr-McGee's growth strategy for its exploration and production operating unit
is focused primarily on the deepwater Gulf of Mexico and selected international
basins. In addition, the company will continue to pursue opportunities in the
U.K. North Sea, U.S. onshore, Gulf of Mexico shelf and China. The company
expects to build growth through the drill bit and to seek strategic partnerships
and acquisitions.
Chemicals
In the global titanium dioxide pigment industry, the company is the
third-largest producer and marketer and one of five companies that own chloride
technology. The chloride process produces a pigment with optical properties
preferred by the paint and plastics industries. In early 2003, chloride
technology accounted for about 74% of the company's pigment production capacity.
The remaining capacity is sulfate-process production.
Titanium dioxide is a "quality-of-life" product, and its consumption follows
general economic trends. Since a low point in the business cycle was experienced
in the winter of 2001, economic growth indicators associated with pigment demand
improved at a moderate pace. This strengthening demand for the company's pigment
products supported price increases throughout 2002.
Modest growth in the U.S. economy is expected to continue in 2003, bolstered by
strong automotive and construction markets. Further supporting this outlook are
recent early signals of a rebound in business confidence. Outside the U.S.,
moderate growth in the Euro-zone and Japanese gross domestic products is
expected to continue. In Southeast Asia, where growth is well in excess of other
regions, significant progress has been made toward trade facilitation in the
area of customs and through elimination of technical barriers.
The Kerr-McGee chemical operating unit's strategy focuses on technology
improvements and cost control. This includes an integrated portfolio of supply
chain initiatives, continuous improvement and technology-based efficiency
programs. Accordingly, operating results should improve with the success of
these initiatives as well as the price increases that began in 2002 and are
expected to continue through 2003. During 2003, the company will continue its
low-cost plant capacity expansions in line with market growth. The company also
remains focused on exiting noncore businesses within its chemical operations,
while growing new opportunities aligned with its core competencies.
New opportunities for capitalizing on the company's experience are carefully
considered. One such opportunity is AVESTOR. This joint venture with
Hydro-Quebec, one of North America's largest utilities, was formed in 2001 to
produce a revolutionary lithium-metal-polymer battery. Commercial sales will
begin in 2003 with batteries that increase the reliability of telecommunication
networks during power outages. Work is under way on future applications,
including peak-power shaving and use in electric and hybrid electric vehicles.
The company is committed to growing this business and expects to invest an
additional $50 million in the joint venture in 2003.
In January 2003, Kerr-McGee announced a plan to close its synthetic rutile plant
in Mobile, Alabama, by year-end 2003. This plant closure is another step in the
company's plan to enhance its operating profitability. The Mobile plant
processes and supplies a portion of the feedstock for the company's titanium
dioxide pigment plants in the United States. Through Kerr-McGee's ongoing supply
chain initiatives, the company now can purchase the feedstock more economically
than it can be manufactured at the Mobile plant. As a result of these steps, the
company anticipates significant savings.
During March 2003, the company announced the temporary shutdown of the Mobile
synthetic rutile plant due to imposition of a new, much lower limit for one
effluent impurity effective March 1, 2003. This limit did not exist previously
under the plant's operating permit. The synthetic rutile plant will remain shut
down until Kerr-McGee is confident it can meet this new permit condition.
- --------------------------------------------------------------------------------
Results of Consolidated Operations
Net income (loss) and per-share amounts for each of the years in the three-year
period ended December 31, 2002, were as follows:
(Millions of dollars,
except per-share amounts) 2002 2001 2000
- ------------------------- ----- ---- ----
Net income (loss) $(485) $486 $842
Net income (loss) per share -
Basic (4.84) 5.01 9.01
Diluted (4.84) 4.74 8.37
The major variances in net income on an operating unit basis (after income
taxes) are outlined in the table below. The variances in individual line items
in the Consolidated Statement of Operations are explained in the section that
follows.
Favorable (Unfavorable)
Variance
------------------------
2002 2001
Versus Versus
(Millions of dollars) 2001 2000
- --------------------- ----- -----
Exploration and production net operating profit $(850) $(346)
Chemical - pigment net operating profit 25 (82)
Chemical - other net operating profit (4) (22)
Net interest expense (56) 4
Other income/expense (202) 105
Discontinued operations 96 5
Cumulative effect of accounting change 20 (20)
----- -----
Net income $(971) $(356)
===== =====
The majority of the 2002 decline in exploration and production net operating
profit resulted from asset impairments of $561 million and the deferred tax
effect of $132 million for the 33% increase in the U.K. corporate tax rate for
oil and gas companies. The remaining $157 million decrease is due principally to
higher lease operating expense, shipping and handling expense, depreciation and
depletion, and exploration expense.
The improvement in chemical's pigment net operating profit in 2002 is
principally the result of higher pigment sales volumes and lower average
per-unit production costs. Higher interest expense in 2002 is due to
significantly higher average debt outstanding and lower capitalized interest,
partially offset by a lower overall average interest rate.
The negative variance for other income/expense is mainly due to the 2001
adoption of the Financial Accounting Standards Board's (FASB) Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133), as
amended, that allowed the company to reclassify 85% of the Devon Energy
Corporation (Devon) shares owned to "trading" from the "available for sale"
category of investments. This resulted in a $118 million net unrealized gain on
the stock being recognized in income as of January 1, 2001, with a corresponding
reduction in other comprehensive income where the unrealized gain had previously
been recorded. Additionally, a 2002 net-of-tax litigation provision of $47
million and after-tax foreign currency losses of $33 million contributed to the
other income/expense variance for 2002 versus 2001.
Discontinued operations for all three years resulted from the company's decision
in early 2002 to dispose of its exploration and production interests in
Indonesia and Kazakhstan and its interest in the Bayu-Undan project in the East
Timor Sea offshore Australia. These divestiture decisions were made as part of
the company's strategic plan to rationalize noncore oil and gas properties. All
periods presented have been restated to reflect these interests as discontinued
operations in the financial statements.
The cumulative effect of the change in accounting principle is the result of the
company's adoption of FAS 133 in 2001. This standard required the recording of
all derivative instruments as assets or liabilities, measured at fair value.
Kerr-McGee recorded the fair value of all its outstanding foreign currency
forward contracts and the fair value of the options associated with the
company's debt exchangeable for stock (DECS) of Devon presently owned by the
company. The net effect of recording these fair values resulted in a $20 million
decrease in income as a cumulative effect of a change in accounting principle
and a $3 million reduction in equity (other comprehensive income) for the
foreign currency contracts designated as hedges.
The 2001 decrease in exploration and production net operating profit primarily
was due to significantly lower average sales prices and volumes for crude oil
and natural gas, the Hutton U.K. North Sea asset impairment in 2001 and higher
exploration, gas gathering, pipeline and transportation expenses. The decline in
2001 net operating profit from chemicals resulted mainly from lower pigment
sales prices and volumes, the 2001 provisions for closure of the pigment plant
in Belgium, asset impairments, severance and other costs. The 2001 other
income/expense variance was mainly the result of the $118 million unrealized
gain on Devon stock reclassified to the "trading" category of investments,
discussed above.
- --------------------------------------------------------------------------------
Statement of Operations Comparisons
Sales (Billions of dollars) 2002 2001 2000
- --------------------------- ---- ---- ----
Oil and gas and pigment sales $3.7 $3.6 $4.1
increased in 2002 compared
with 2001.
The increase in 2002 sales primarily was due to a full year of revenues from the
Rocky Mountain region compared with only five months in 2001 following the
acquisition of HS Resources, combined with the favorable impact of higher
pigment sales volumes, partially offset by the recognition of lower revenues
from properties divested during 2002. The decrease in 2001 revenues compared
with 2000 was due primarily to a decrease in crude oil and pigment sales prices
and volumes, partially offset by five months of revenues from the Rocky Mountain
region. These variances are discussed in more detail in the segment discussion
that follows.
Costs and operating expenses increased $241 million in 2002 from the 2001 level,
resulting principally from higher gas marketing and pipeline costs of $105
million (full year of Rocky Mountain operations in 2002 versus five months in
2001), higher lease operating expenses of $80 million (higher crude oil and
natural gas production volumes) and higher pigment production cost of $91
million (increased pigment production volumes). The 2001 costs and operating
expenses increased $44 million over 2000, principally due to costs for closing
the pigment plant in Belgium, discontinuation of manganese metal production at
Hamilton, Mississippi, and the write-down of certain pigment inventories.
Selling, general and administrative expenses for 2002 increased $85 million
primarily as a result of the $72 million reserve for litigation established
mainly in connection with certain forest products litigation in Mississippi,
Louisiana and Pennsylvania. These lawsuits are discussed in Note 16 to the
financial statements. The 2001 selling, general and administrative expenses
increased $31 million over the 2000 expenses. This increase resulted principally
from the acquisition of HS Resources in August 2001, completion of the
integration of the two chemical plants acquired in the second quarter of 2000,
higher costs for information technology projects, higher incentive compensation
based on 2000 performance and higher chemical warehousing costs due to higher
inventory levels.
Shipping and handling expenses for 2002, 2001 and 2000 were $125 million, $111
million and $98 million, respectively. The 2002 increase is primarily due to
higher costs for shipping product from the new deepwater fields in the Gulf of
Mexico, including Nansen, Boomvang and Navajo, and higher costs in the Rocky
Mountain region due to the inclusion of the first full year of costs related to
the former HS Resources operations. The 2001 increase was due to higher natural
gas sales volumes, mainly from five months of Rocky Mountain sales and increased
transportation costs in the North Sea.
Depreciation and depletion expense totaled $774 million in 2002, $713 million in
2001 and $678 million in 2000. The 2002 increase was due to higher depreciation
and depletion for the Rocky Mountain region of $75 million (full year of
expense) and for the U.K. region of $11 million (mainly due to a full year of
expense on the Leadon and Skene fields, partially offset by having no
depreciation on certain assets while they were held for sale). Partially
offsetting these increases was lower expense in the U.S. offshore region of $24
million due to normal declines in production and held-for-sale properties, which
more than offset the impact of production from the Nansen, Boomvang and Navajo
fields. The 2001 increase was due to a $16 million charge for discontinued
capital projects and write-off of certain assets no longer used in the pigment
operations, the acquisition of HS Resources in August 2001, the oil and gas
production mix in the other regions, and a full year of depreciation for the two
chemical plants acquired in the second quarter of 2000.
Asset impairments totaled $828 million in 2002 and $76 million in 2001. These
impairments were due to certain assets that were no longer expected to recover
their net book values through future cash flows. The impairments in 2002
included $541 million for the Leadon field in the North Sea. The field had been
producing lower volumes than initially anticipated due to water breakthrough and
reservoir compartmentalization. The company conducted additional drilling and
field performance analysis during the third and fourth quarters of 2002, and
after considering various alternatives for the field, the asset was written down
to its fair value based on expected future cash flows. The impairment assumes
the tieback of all subsea wells to other fixed infrastructure in the area
(possibly the Kerr-McGee-operated Gryphon field), allowing the company to
monetize the Leadon state-of-the-art floating facility by marketing it as a
development option for another discovery. Should the company be unsuccessful in
marketing the Leadon vessel or unable to tie the field back to other existing
infrastructure, Kerr-McGee would expect to continue with the Leadon vessel in
place and produce from the existing wells until they are fully depleted. In
addition, the company impaired to fair market value certain northern North Sea
and U.S. onshore and offshore noncore exploration and production assets
identified in early 2002 for divestiture totaling $176 million. Impairments
totaling $105 million for several older Gulf of Mexico shelf properties and
certain other North Sea fields were also recorded, primarily due to the
write-down of underlying oil and gas reserves. Additionally, a $6 million asset
impairment was recognized in connection with the company's planned shutdown of
the forest products operations. The 2001 impairments were comprised of a $47
million write-down associated with the shut-in of the North Sea Hutton field and
$29 million for certain chemical facilities in Belgium and the U.S.
Exploration costs were $273 million, $210 million and $169 million for 2002,
2001 and 2000, respectively. The 2002 increase was due to higher dry hole costs
of $41 million, mainly in the deepwater area of the Gulf of Mexico and in the
North Sea, higher nonproducing leasehold amortization of $11 million, and higher
geophysical costs of $5 million. The $41 million increase in 2001 was primarily
the result of higher planned exploratory drilling in Brazil, Gabon, Australia
and China, higher geophysical costs, principally from the HS Resources
acquisition, and higher amortization of nonproducing leaseholds. During 20