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, 2003
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. [ ]
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 $4.5 billion computed by
reference to the price at which the common equity was last sold as of June 30,
2003, 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 27, 2004, was
101,373,405.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement for the 2004 Annual Meeting of Stockholders,
which will be filed with the Securities and Exchange Commission within 120 days
after December 31, 2003, 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 sector of the
North Sea and China. The company also holds exploration licenses and concessions
in Australia, Benin, Bahamas, Brazil, Gabon, Morocco, Western Sahara, Canada,
the Danish and Norwegian sectors of the North Sea, 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 financial information as to business segments of the company, reference is
made to Note 28 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 affiliates.
Kerr-McGee's offshore oil and gas exploration and production activities are
conducted in the U.S. Gulf of Mexico, Alaska, the U.K. sector of the North Sea
and China. Oil and gas exploration activities are also conducted in Australia,
Benin, Brazil, Canada, Morocco, Western Sahara, Gabon, Yemen, Bahamas, and the
Danish and Norwegian sectors of the North Sea. Onshore exploration and
production operations are conducted in the United States and the United Kingdom.
- --------------------------------------------------------------------------------
Except for information or data specifically incorporated herein by reference
under Items 10 through 14, other information and data appearing in the company's
2004 Proxy Statement are not deemed to be filed as part of this annual report on
Form 10-K.
- --------------------------------------------------------------------------------
Kerr-McGee's average daily oil production from continuing operations for 2003
was 150,200 barrels, a 21% decrease from 2002. This decrease in production
volume is largely the result of a divestiture program initiated during 2002 and
subsequently completed in 2003. After adjusting for divestitures, the 2003 oil
production volume was relatively consistent compared with 2002. Kerr-McGee's
average oil price was $26.04 per barrel for 2003, including the impact of
hedges, compared with $22.04 per barrel for 2002.
During 2003, natural gas sales volume averaged 726 million cubic feet per day,
down 4% from 2002. This decrease is also partly the result of the divestiture
program discussed above. On a divestiture-adjusted basis, 2003 gas sales were
down about 2% compared with 2002. The 2003 average natural gas price was $4.37
per thousand cubic feet, including the impact of hedges, compared with $2.95 per
thousand cubic feet in 2002.
Worldwide gross acreage at year-end 2003 was almost 72 million acres, an
increase of 8% compared with year-end 2002. The increase resulted primarily from
the acquisition of acreage in the Bahamas, offset by divestitures of certain
properties in Kazakhstan and the North Sea.
Discontinued Operations and Asset Disposals
- -------------------------------------------
During 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. Sales of
the company's interests in the Bayu-Undan project and the Sumatra operations
were completed during 2002, and the sale of its operations in Kazakhstan was
completed in March 2003. The Kazakhstan assets consisted of one producing
license, one exploration license and an equity ownership in the Caspian Pipeline
Consortium.
Revenues applicable to the discontinued operations totaled $6 million, $36
million and $72 million for 2003, 2002 and 2001, respectively. Pretax income for
the discontinued operations totaled nil, (including a loss on sale of $6
million), $104 million (including gain on sale of $107 million and a loss on
sale of $35 million) and $52 million for the years ended 2003, 2002 and 2001,
respectively.
In addition, certain individually insignificant properties for which operations
and cash flows were not clearly distinguishable from the company's operations
were identified for disposal during 2003. These properties included the
company's interest in the Liuhua field in the South China Sea and selected other
noncore, high-cost properties in the U.S onshore and Gulf of Mexico regions.
These decisions were made as part of the company's strategic plan to rationalize
noncore oil and gas properties, as well as the company's ongoing efforts to
maintain its high-quality asset portfolio. Asset disposals completed in 2003,
including the Kazakhstan operations, resulted in the sale of approximately 41
million equivalent barrels, or 4% of proved reserves.
Costs Incurred, Results of Operations, Sales Prices, Lifting Costs and
Capitalized Costs
- --------------------------------------------------------------------------------
Reference is made to Notes 29, 30 and 31 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,
lifting 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, 2003 and 2002.
Reserves
- --------
Kerr-McGee's estimated proved crude oil, condensate, natural gas liquids and
natural gas reserves at December 31, 2003, and the changes in net quantities of
such reserves for the three years then ended are shown in Note 32 to the
Consolidated Financial Statements included in Item 8. of this Form 10-K.
Estimates of total proved reserves filed with or included in reports to any
other Federal authority or agency during 2003, if any, are within 5% of amounts
shown in this filing.
Undeveloped Acreage
- -------------------
As of December 31, 2003, 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, Danish and Norwegian sectors
of the North Sea; offshore China; and onshore and offshore in other
international areas, as follows:
Gross Net
Location Acreage Acreage
- -------- ---------- ----------
United States -
Offshore 3,107,918 1,799,541
Onshore 1,565,728 1,083,999
---------- ----------
4,673,646 2,883,540
---------- ----------
North Sea 783,927 368,773
---------- ----------
China 1,686,987 1,487,524
---------- ----------
Other international -
Morocco/Western Sahara 30,245,687 28,021,741
Australia 10,652,553 6,371,482
Yemen 6,037,418 1,911,849
Canada 3,021,825 1,778,128
Gabon 2,471,052 617,763
Benin 2,459,439 1,721,607
Bahamas 6,488,680 6,488,680
Brazil 534,981 267,491
---------- ----------
61,911,635 47,178,741
---------- ----------
Total 69,056,195 51,918,578
========== ==========
Developed Acreage
- -----------------
At December 31, 2003, the company had leases and concessions in developed oil
and gas acreage in the Gulf of Mexico, onshore United States and the United
Kingdom sector of the North Sea, as follows:
Gross Net
Location Acreage Acreage
- -------- ---------- ----------
United States -
Offshore 566,650 264,498
Onshore 1,594,403 1,087,793
---------- ----------
2,161,053 1,352,291
---------- ----------
North Sea 405,427 135,539
---------- ----------
Total 2,566,480 1,487,830
========== ==========
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, 2003, are
summarized in the following tables.
Net Exploratory (1) Net Development (1)
-------------------------------- --------------------------------
Productive Dry Holes Total Productive Dry Holes Total Total
---------- --------- ----- ---------- --------- ----- -----
2003 (2)
United States 6.7 11.0 17.7 241.6 1.0 242.6 260.3
North Sea - 1.0 1.0 2.1 .1 2.2 3.2
Other international - 5.0 5.0 .7 - .7 5.7
--- ---- ----- ----- --- ----- -----
Total 6.7 17.0 23.7 244.4 1.1 245.5 269.2
=== ==== ===== ===== === ===== =====
2002
United States 4.8 11.1 15.9 186.9 1.4 188.3 204.2
North Sea - 1.9 1.9 8.6 - 8.6 10.5
Other international - 4.2 4.2 .8 - .8 5.0
--- ---- ----- ----- --- ----- -----
Total 4.8 17.2 22.0 196.3 1.4 197.7 219.7
=== ==== ===== ===== === ===== =====
2001
United States 2.4 4.6 7.0 107.3 6.3 113.6 120.6
North Sea - 2.4 2.4 16.1 - 16.1 18.5
Other international - 4.4 4.4 5.2 .3 5.5 9.9
--- ---- ----- ----- --- ----- -----
Total 2.4 11.4 13.8 128.6 6.6 135.2 149.0
=== ==== ===== ===== === ===== =====
(1) Net wells represent the company's fractional working interest in gross
wells expressed as the equivalent number of full-interest wells.
(2) The 2003 net exploratory well count does not include 8.6 successful net
wells drilled in the United States or 1.2 successful net wells drilled in
the North Sea that are currently suspended, nor does it include 4.3
successful net wells drilled in China, 1.4 successful net wells drilled in
the North Sea or 6.0 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 awaiting completion as of December 31, 2003:
Wells in Process of Wells Suspended or
Drilling Awaiting Completion
-------------------------- --------------------------
Exploration Development Exploration Development
----------- ----------- ----------- -----------
United States
Gross 3.0 8.0 30.0 25.0
Net 1.5 7.5 17.2 19.7
North Sea
Gross - - 2.0 2.0
Net - - 1.2 .2
China
Gross - 6.0 - -
Net - 2.4 - -
Total
--- ---- ---- ----
Gross 3.0 14.0 32.0 27.0
=== ==== ==== ====
Net 1.5 9.9 18.4 19.9
=== ==== ==== ====
Gross and Net Wells
- -------------------
The number of productive oil and gas wells in which the company had an interest
at December 31, 2003, is shown in the following table. These wells include 96
gross or 17.4 net wells associated with improved recovery projects, and 2,356
gross or 2,278.7 net wells that have multiple completions but are included as
single wells.
Location Crude Oil Natural Gas Total
- -------- --------- ----------- -----
United States
Gross 1,765 3,051 4,816
Net 1,513 2,448 3,961
North Sea
Gross 266 5 271
Net 49 - 49
Total
----- ----- -----
Gross 2,031 3,056 5,087
===== ===== =====
Net 1,562 2,448 4,010
===== ===== =====
Crude Oil and Natural Gas Sales
- -------------------------------
The following table summarizes the sales of the company's crude oil and natural
gas sales from continuing operations for each of the three years in the period
ended December 31, 2003:
(Millions) 2003 2002 2001
- ---------- -------- -------- --------
Crude oil and condensate - barrels
United States 27.9 29.7 28.4
North Sea 26.1 37.2 37.3
China .8 1.2 1.4
Other international - 1.4 2.0
-------- -------- --------
54.8 69.5 69.1
======== ======== ========
Crude oil and condensate sales revenues (1)
United States $ 728.4 $ 639.6 $ 625.5
North Sea 673.9 832.8 865.6
China 23.2 29.5 30.3
Other international - 28.9 38.6
-------- -------- --------
$1,425.5 $1,530.8 $1,560.0
======== ======== ========
Natural gas - Mcf
United States 229.5 240.8 194.9
North Sea 35.4 36.7 22.8
-------- -------- --------
264.9 277.5 217.7
======== ======== ========
Natural gas sales revenues (1)
United States $1,046.9 $ 732.7 $ 777.2
North Sea 109.3 86.4 56.2
-------- -------- --------
$1,156.2 $ 819.1 $ 833.4
======== ======== ========
(1) Includes the results of the company's hedging program, which began in 2002.
Product Sales and Marketing
- ---------------------------
The company's crude oil and natural gas is sold at prevailing market prices, and
the realized revenue on the physical sale is adjusted for any gains or losses on
hedging contracts.
The company markets all of its crude oil under a combination of spot and term
contracts to refiners, marketers and end-users under market-reflective prices.
Kerr-McGee's single largest purchaser of crude oil during 2003 was BP PLC,
accounting for approximately 31% of total crude oil sales and 21% of total crude
oil and natural gas sales. The creditworthiness of each successful bidder is
reviewed prior to delivery of product.
Kerr-McGee's single largest purchaser of domestic natural gas is Cinergy
Marketing & Trading LLC, whose purchases are guaranteed by its parent company,
Cinergy Corporation. Purchases by Cinergy represented approximately 68% of total
gas sales and 30% of total crude oil and natural gas sales for 2003.
Additionally, Kerr-McGee manages its single-customer exposure through a credit
risk insurance policy.
Marketing of the company's domestic natural gas from the Wattenberg field,
located in northeastern Colorado, is facilitated through its subsidiary,
Kerr-McGee Energy Services Corporation (KMES). KMES is primarily engaged in the
sale of the company's equity gas production. KMES sells natural gas to a number
of customers in the Denver, Colorado, market adjacent to the company's
Wattenberg field. To fulfill its direct sales obligations and to fully utilize
its contracted transportation capacity, KMES also purchases and markets
nonequity natural gas.
North Sea natural gas is sold both under contract and through spot market sales
in the geographic area of production.
Improved Recovery
- -----------------
As part of the company's strategic plan to rationalize noncore, high-cost
assets, Kerr-McGee's improved-recovery projects in Texas were sold during 2003.
As of December 31, 2003, the company participated in 17 active improved-recovery
projects located in the United Kingdom sector of the North Sea. Most of these
improved-recovery operations incorporate water injection.
Exploration and Development Activities
- --------------------------------------
Gulf of Mexico:
Kerr-McGee has been one of the pioneering exploration companies in the Gulf of
Mexico since 1947, when the company drilled the first successful well out of the
sight of land. This tradition has continued with the advancement of technology
and the pursuit of oil and gas farther offshore and in deeper water. To achieve
and maintain its competitive advantage, Kerr-McGee has continued to utilize new,
cost-efficient production and drilling technology, allowing the company to
explore for new oil and gas resources in water depths of almost 10,000 feet.
Kerr-McGee was the first company to utilize floating production spar technology
in the Gulf of Mexico in 1997 for its Neptune development at Viosca Knoll block
826. Kerr-McGee has continued to advance this technology through utilization of
improved truss spar designs for its developments at the Nansen, Boomvang and
Gunnison discoveries, which were sanctioned for development in 2000 and 2001.
Kerr-McGee sanctioned the Red Hawk development in 2002, which will use a new
cell spar design. New technology, such as the cell spar, lowers the reserve
threshold for economic development of deepwater reservoirs, allowing the company
to exploit new resources cost effectively.
In 2003, Gulf of Mexico production represented 38% of the company's worldwide
crude oil and condensate production and 38% of its natural gas sales. The Gulf
of Mexico represents about 35% of Kerr-McGee's total worldwide proved reserves.
Kerr-McGee is one of the largest independent exploration and production
companies operating in the Gulf of Mexico, with leases covering almost 3.7
million gross acres. In 2003, Kerr-McGee maintained its position as the largest
independent leaseholder in the deepwater Gulf of Mexico with almost 480
deepwater blocks. The company believes this extensive acreage holding provides a
significant competitive advantage in its effort to maintain and develop a
high-quality prospect inventory.
In 2003, Kerr-McGee was an active explorer in the Gulf of Mexico, participating
in the drilling of 37 gross exploration wells, with 25 of those in water depth
greater than 1,000 feet. The prospects were a mixture of near-field wildcats,
appraisal wells and deeper pool tests, as well as larger new-field wildcat
prospects that would require the installation of new infrastructure for
development. Successful wells were drilled in Breton Sound, Main Pass, Garden
Banks 197 and 216, East Breaks 598 and 686, Ewing Bank 1006, Viosca Knoll 990,
and at the Constitution prospect in Green Canyon 679/680.
During 2003, Kerr-McGee continued drilling under terms of a joint-venture
agreement with Devon Energy (following the merger of Ocean Energy with Devon),
which covers an area comprised of 181 blocks. Kerr-McGee and Devon drilled three
exploratory wells in 2003, with Devon paying a disproportionate share of the
drilling cost to earn its equity interest in the venture. Two of these wells
were unsuccessful, and the third (Yorktown prospect in Mississippi Canyon block
886) was temporarily suspended during the year. The company plans to resume
drilling on this prospect in 2004. The joint-venture arrangement with Devon will
continue for approximately two more years.
The majority of geological and geophysical expenditures in 2003 were focused on
acquiring regional 3-D seismic data and on the continued development of a
high-potential prospect inventory. Much of the geologic section above salt has
been heavily explored in the Gulf of Mexico, and numerous subsalt trends are
emerging through industry activity. In 2003, Kerr-McGee also focused on
acquisition of geophysical data aimed at developing subsalt prospects. This data
is currently being used to build the company's prospect inventory in this new
play.
In 2003, Kerr-McGee continued to capitalize on its appraisal and development
expertise in the Gulf of Mexico, resulting in a new development project at its
Constitution discovery in Green Canyon block 679/680. During 2003, a second
exploration test and discovery were made on the Constitution prospect. This was
followed by a successful appraisal program, which led to sanctioning of the
Constitution development in January 2004. Development of infrastructure for the
Constitution discovery will provide a new operating hub for Kerr-McGee, and
additional drilling opportunities in this area are being evaluated for the 2004
exploration program.
Kerr-McGee's development activity in the deepwater Gulf of Mexico also continued
at a high level during 2003 in terms of capital outlay, wells drilled and
construction activity. Installation of a truss spar was completed at Gunnison
during 2003, and significant progress was made on the Red Hawk cell spar
construction. Subsea wells were completed for Gunnison, Red Hawk, East Breaks
598, East Breaks 686 and Viosca Knoll 869 (Triton) during 2003. In addition,
Kerr-McGee finalized plans for construction of a new truss spar for the
Constitution project. Well completion activities at the Nansen and Boomvang
fields were also completed during the year. A summary of these and other major
producing fields, including Kerr-McGee's working interest, 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 2003 gross production was 26,000 barrels of oil per day
and 140 million cubic feet of gas per day. Completion activities concluded in
August 2003, and the completion rig was demobilized. The Nansen field has nine
dry-tree producers and three subsea wells tied back to the spar from a subsea
cluster.
Boomvang field, East Breaks (EB) 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 2003 gross production was 33,200 barrels of oil
per day and 158 million cubic feet of gas per day. Completion activities
concluded at Boomvang in March 2003, and the completion rig was demobilized from
the spar. The Boomvang field has five dry-tree producers and three subsea wells
tied back to the spar from two subsea clusters. During 2003, a development well
was drilled on EB 688 and was completed in the fourth quarter of 2003. This well
will begin production in early 2004 from one of the existing subsea clusters.
Two exploration wells were successfully drilled on Kerr-McGee leases adjacent to
the Boomvang field in 2003. EB 686 (42%) and EB 598 (50%) have been completed
and will be tied back to the Boomvang spar in 2004. The EB 686 well will be tied
back through an existing subsea cluster and pipeline system, while EB 598 will
be tied back to the spar through a new subsea pipeline and cluster system. The
EB 598 well will share the new subsea system with another successful exploration
well previously drilled on EB 599.
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 completed
and tied back to the Nansen spar located approximately 5 miles to the north.
First production from Navajo was achieved in June 2002. Two previously drilled
exploration wells were completed and began production through the Navajo subsea
system in 2003. Gross production from Navajo, West Navajo and Northwest Navajo
wells averaged 47 million cubic feet of gas per day and 4,200 barrels of oil per
day in 2003.
Gunnison field, Garden Banks block 668 area (50%): The Gunnison field,
sanctioned for development in October 2001, incorporates a 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 includes seven
dry-tree wells and three subsea wells. The Gunnison spar, located in 3,100 feet
of water, is Kerr-McGee's third truss spar in the deepwater Gulf of Mexico.
Development during 2003 included the final development well drilled in January
2003 and completion of the three subsea wells prior to the installation of the
spar. First production was achieved in December 2003 from the three subsea
wells. By year-end 2003, the average gross production rate was about 3,600
barrels of oil per day and 125 million cubic feet of gas per day. Gross
production is expected to peak at 30,000 barrels of oil per day and 180 million
cubic feet of gas per day by year-end 2004.
Red Hawk field, Garden Banks block 877 (50%): Development of Red Hawk, a 2001
discovery, was sanctioned in July 2002 utilizing a new spar design referred to
as a cell spar. Located in approximately 5,300 feet of water, the field will be
developed using two subsea development wells that will be tied back to the cell
spar. Development drilling was completed in the first quarter of 2003, and the
two wells were completed during the summer of 2003. At year-end 2003,
construction of the cell spar and production facilities was more than 75%
complete. First production is anticipated in mid-2004, with peak gross
production rates estimated at 120 million cubic feet of gas per day.
Neptune field, Viosca Knoll block 826 (50%): Average 2003 gross production from
the Neptune field was 14,000 barrels of oil per day and 23 million cubic feet of
gas per day. Production from the Neptune field began in March 1997 from the
world's first floating production spar. Presently there are 12 dry-tree wells
and three subsea satellite wells producing through the Neptune spar. A fourth
subsea well (Viosca Knoll 869 No. 1) was drilled and completed in late 2003,
with first production expected in early 2004.
Conger field, Garden Banks block 215 (25%): Average 2003 gross production from
the Conger field was 28,500 barrels of oil per day and 90 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, a sidetrack of the Garden Banks 215 No. 6
well, was completed in late 2003 and was producing 6,600 barrels of oil per day
and 20 million cubic feet of gas per day at year-end.
Baldpate field, Garden Banks block 260 (50%): Average 2003 gross production from
the Baldpate field, including the Penn State subsea satellite wells, was 20,100
barrels of oil per day and 40 million cubic feet of gas per day. The field is in
1,690 feet of water and is producing from an articulated compliant tower. A
successful exploration well was drilled in late 2003 in Garden Banks 216 (Penn
State) and was completed at year-end. This well will be tied back to the
existing Penn State subsea system, with first production scheduled for early
2004.
Pompano field, Viosca Knoll block 989 area (25%): Average 2003 gross production
from the Pompano field was 23,500 barrels of oil per day and 55 million cubic
feet of gas per day. One well was drilled in the Pompano field during 2003 and
was successfully brought on-line in early July 2003 at a production rate of 5
million cubic feet of gas per day.
North Sea:
Kerr-McGee has been active in the North Sea area since 1976. As of December 31,
2003, Kerr-McGee had interests in 20 producing fields in the United Kingdom
sector. In 2003, North Sea production represented 48% of the company's worldwide
crude oil and condensate production and 13% of its gas sales. The North Sea
represents about 27% of Kerr-McGee's total worldwide proved reserves.
During 2003, the company launched a six-well North Sea exploration and appraisal
program with the drilling of five operated wells and one nonoperated well. Four
of these wells were successful. In addition, the company was successful in the
United Kingdom 21st Licence Round with the awards of block 21/4b, licence P.1104
(100%, operator); block 30/7b, licence P.1123 (100%, operator); and block
16/13b, license P.1094 (50%, operator).
Business development initiatives during 2003 to strengthen the North Sea core
area included acquiring an 85% interest and operatorship of block 30/14 and a
39.9% interest in Norwegian block 1/5. Kerr-McGee also acquired a 30%
nonoperated interest in block 30/13 area C. These blocks contain known
hydrocarbon discoveries which the company believes may have future appraisal or
development potential. In addition, Kerr-McGee increased its equity holding in
the operated Gryphon field (9/18a, 9/18b) by acquiring an additional 25%
interest, increasing Kerr-McGee's total equity interest to 86.5%.
During 2003, production began on the Braemar field, in which Kerr-McGee has a 5%
interest. The field was developed using a subsea tieback to the East Brae field
(7.3% Kerr-McGee interest). First oil on Braemar occurred in September 2003.
Average gross production in 2003 from first oil was 3,900 barrels of oil per day
and 55.6 million cubic feet of gas per day.
The following is a summary of the company's five key developments in the North
Sea. These developments contributed approximately 76% of total net North Sea
production.
Gryphon area, blocks 9/18a, 9/18b, 9/19 and 9/23a (Maclure field 33.3%, Gryphon
field 86.5%, South Gryphon field 89.9% and Tullich field 100%): Average 2003
gross production from the Gryphon area was 29,400 barrels of oil per day and
10.5 million cubic feet of gas per day. The Maclure and Tullich subsea
satellites began production in August 2002. The Gryphon area is produced into a
floating production, storage and offloading (FPSO) vessel, with oil exported via
shuttle tanker. Gas is exported to the Leadon facility for fuel usage and/or
sold on the spot market via the St. Fergus terminal. An additional 25% equity
interest was acquired in the Gryphon field in 2003.
Janice field, block 30/17a (75.3%): Average 2003 gross production from the
Janice field was 12,100 barrels of oil per day and 1 million cubic feet of gas
per day.
Leadon field, block 9/14a and 9/14b (100%): Average 2003 gross production from
the Leadon field was 10,700 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%): Average 2003 gross production from the Harding
field was 48,900 barrels of oil per day. The Harding field provides Kerr-McGee
with additional infrastructure in the strategically important quadrant 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 began production in December
2001. Average 2003 gross field production was 135 million cubic feet of gas per
day and 6,500 barrels of oil per day. The Skene field is being produced through
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.
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 2003, U.S. onshore
production represented 49% of the company's worldwide gas production, 13% of its
oil production, and 34% of total proved reserves.
Following is a summary of key U.S. onshore developments:
Wattenberg field (94%): The Wattenberg gas field is located in the
Denver-Julesburg (DJ) basin in northeast Colorado. Kerr-McGee's 2003 net
production from this field was 10,400 barrels of oil per day and 184 million
cubic feet of gas per day. During 2003, the company completed nearly 500
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 addition, significant success was achieved in 2003 by
performing a third fracture stimulation operation, or "tri-frac," on existing
Codell producers. Likewise, initial results indicated a 50-well pilot infill
drilling program in the Codell was highly successful, leading to substantial new
exploitation opportunities in the field.
In support of the ongoing DJ basin exploitation program, the company continued
the successful integration of the Wattenberg Gathering System into its operating
activities. During 2003, one new compressor was added, bringing the total system
horsepower to 65,000. This addition, combined with several modifications to
existing compressor units, reduced the overall pipeline system pressure by 10%
and reduced production downtime associated with pipeline pressure variations.
Kerr-McGee operates more than 3,100 wells in the DJ basin, nearly 2,100 of which
are connected to the Wattenberg Gathering System. The company-operated
production represents about 70% of the total system throughput of approximately
255 million cubic feet of natural gas per day, 30 million cubic feet of which is
processed at the company's Ft. Lupton plant.
Flores and Jeffress fields, Starr and Hidalgo counties, Texas (80%): The company
completed nine new wells and an additional 31 workover projects during 2003.
More than 60 wells have been drilled since 2001. Kerr-McGee's 2003 net
production from both fields averaged 2,200 barrels of oil per day and 41 million
cubic feet of gas per day.
Rincon field, Starr County, Texas (40%): Kerr-McGee acquired this interest in
2003. The company initiated a development drilling program at year-end 2003 in
this field, which is expected to continue to enhance its position in South
Texas.
Chambers County, Texas (75%): Four new wells and an additional 15 workover
projects were completed in 2003. Kerr-McGee's net production from the area
during 2003 averaged 1,000 barrels of oil per day and 20 million cubic feet of
gas per day.
Kerr-McGee participated in eight exploratory wells during 2003 in the Northern
Rockies area. This activity included five wells in the northeastern Colorado
Niobrara play, one in western Colorado and two in southwest Wyoming. Production
has been established from the western Colorado well, and development drilling is
planned for 2004. The Wind River basin well in central Wyoming was being
completed at year-end 2003. Three discoveries in the northeastern Colorado
Niobrara play were successful and are currently under evaluation. Further
exploration activity is planned for 2004 in four prospect areas, including
additional wells in both the Wind River basin and the northeastern Colorado
Niobrara prospects.
Kerr-McGee signed a participation agreement with Armstrong Oil and Gas on
December 24, 2003, to jointly explore areas of the prolific Alaska North Slope.
Kerr-McGee acquired a 70% working interest in eight leases totaling
approximately 12,000 acres off the Alaska coast, northwest of Prudhoe Bay.
Kerr-McGee will operate the leases and spud an exploratory well during February
2004. The agreement includes the right to acquire an interest in 13 additional
leases in the area, totaling 54,000 acres.
China:
Bohai Bay block 04/36 (81.8% contractor interest): During 2003, Kerr-McGee
gained government approval for the development of the CFD 11-1 and CFD 11-2
fields. Development drilling began in November 2003 on CFD 11-1. Both platform
jackets and pipelines have been installed. Construction of the topsides for both
jackets has progressed, and installation is planned in the second quarter of
2004. Construction of the FPSO was initiated in 2003 and is progressing as
planned. First production is expected in late 2004 following offshore
installation of the Single Point Mooring system and the FPSO. Also during 2003,
Kerr-McGee was granted a two-year extension by the China National Offshore Oil
Company (CNOOC) for the third exploration phase of the 04/36 Block concession.
The extension runs through September 2005.
Exploration efforts continued during 2003 with the discovery of the CFD 11-5 and
CFD 11-6 fields. The results of CFD 11-5, along with the results of the adjacent
CFD 11-3 area, are being integrated into a formal report on Oil In Place (OIP)
for submission to the Chinese government by the end of the first quarter of
2004. The CFD 11-3 area was discovered in 2002 and is located approximately 3
kilometers from the CFD 11-1 FPSO. Evaluation of resource potential was
initiated for the CFD 11-6 field, which is located approximately 15 kilometers
from the FPSO. A combined OIP report for the CFD 11-6 field in 04/36 and the CFD
12-1/12-1S field in 05/36 is in progress. Appraisal wells drilled in 2003 on the
CFD 16-1 and CFD 2-1 discoveries were unsuccessful; however, CFD 16-1 is still
under evaluation.
Bohai Bay block 05/36 (50% contractor interest): Two appraisal wells were
successfully drilled in the CFD 12-1/12-1S field during 2003. Two wildcat
exploration wells drilled during the year were unsuccessful. Evaluation of a
combined development program to include the CFD 12-1 and CFD 12-1S fields as
well as the CFD 11-6 field in 04/36 is ongoing. New prospects are being
evaluated for drilling in 2004.
Bohai Bay block 09/18 (100% contractor interest): The first exploration phase
has been extended from September 2003 to September 2004. The 2003 exploration
program included one wildcat well for phase one, which was unsuccessful. Two
exploration wells are planned for 2004 on this 550,000-acre block.
Bohai Bay block 09/06 (100% contractor interest): The company signed a new
exploration contract in August 2003 for this 440,000-acre block in Bohai Bay
adjacent to the other concessions operated by Kerr-McGee. Seismic data have been
purchased, including 146 square kilometers of 3-D and 2,220 kilometers of 2-D
data. Additional data purchase and geological and geophysical evaluation are in
progress.
Liuhua field, South China Sea (24.5% contractor interest): Gross production for
2003 was 9,200 barrels of oil per day. One sidetrack and one extended-reach well
were drilled in 2003. The company completed the divestiture of its Liuhua
interest in July 2003.
Other International:
Australia
WA 278P (39%): At year end, a retention lease application was being negotiated
with the Australian government for the areas around Kerr-McGee's Prometheus and
Rubicon wells. These wells, drilled in 2000, successfully encountered natural
gas but were considered noncommercial.
WA 295 (50%): Kerr-McGee operated this 3.5 million-acre block in the Carnarvon
basin. Acquisition of 4,800 kilometers of 2-D seismic data was completed in
2001, and a two-well drilling program was initiated in late 2002. The first well
of the program was unsuccessful, and the company's obligation to drill the
second well was eliminated through negotiation with the Australian government.
The block was surrendered in October 2003.
WA 301, 302, 303, 304 and 305 (50%): Kerr-McGee has an interest in 6.4 million
acres in the deepwater Browse basin. The first exploration well, Maginnis, was
drilled early in 2003 and was unsuccessful. Kerr-McGee has successfully
renegotiated and entered into phase two of exploration, and has acquired a new
3-D seismic survey over a portion of two blocks.
WA 337 (100%) and WA 339 (50%): In early 2003, Kerr-McGee acquired an interest
in 2.3 million acres in the deepwater Perth basin. Seismic acquisition began
over both blocks in late 2003.
EPP 33 (100%): In late 2003, Kerr-McGee was awarded an interest in 1.35 million
acres in the deepwater Otway basin.
Bahamas
On June 25, 2003, Kerr-McGee signed an exploration contract (100%) on 6.5
million acres in northern Bahamian waters, 90 miles east of the Florida coast.
Water depths range from 650 feet to 7,000 feet. Kerr-McGee began a speculative
seismic acquisition program in late 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 initiated in late 2002, and both wells found
noncommercial amounts of hydrocarbons. Acquisition of additional 2-D seismic
data was completed in 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. The joint venture entered the next
three-year phase of exploration in August 2003.
Brazil
BM-ES-9 (50%): 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. Kerr-McGee plans to drill one well on the block in 2004.
BM-C-7 (33 1/3%): In December 2003, Kerr-McGee acquired an interest in the
BM-C-7 block in the Campos basin, subject to government approvals. In 2004,
Kerr-McGee expects to participate in one exploratory well on this 161,000-acre
block in approximately 400 feet of water. EnCanBrasil operates the block with 66
2/3% interest.
Gabon
Olonga Marin block (25%): Kerr-McGee and partners conducted seismic operations
in 2003. The company intends to relinquish its acreage when the first
exploration period expires in March 2004.
Morocco and Western Sahara
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 ranging from 650 feet to 6,500 feet. A 3-D seismic
acquisition was completed in 2002 and is currently being evaluated. Kerr-McGee
plans to participate in the drilling of one exploratory well in 2004. In
February 2004, the company executed a farm-out agreement with Shell, reducing
its interest in this block to 11.25%.
Boujdour block (100%): In October 2001, Kerr-McGee acquired a reconnaissance
permit covering approximately 27 million acres offshore Western Sahara 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
early 2003. A new seismic and drop core survey will begin in early 2004.
Nova Scotia, Canada
EL2383, EL2386, EL2393 and EL2396 (50%): Kerr-McGee is operator of four
deepwater blocks covering approximately 1.5 million acres 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 (66 2/3%), EL2399 (100%) and EL2404 (50%): These Kerr-McGee operated
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 data was acquired in 2003.
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 of the farm-out
arrangement called for Petronas to pay a disproportionate share of forward costs
for seismic data and exploratory wells. The company intends to relinquish its
interest in block 50 in April 2004.
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 affiliates Kerr-McGee Chemical LLC,
KMCC Western Australia Pty. Ltd., Kerr-McGee Pigments GmbH, Kerr-McGee Pigments
International GmbH, Kerr-McGee Pigments Ltd., Kerr-McGee Pigments (Holland) B.V.
and Kerr-McGee Pigments (Savannah) Inc. Many of the pigment products are
manufactured using proprietary chloride technology developed by the company.
Industrial chemicals include titanium dioxide, synthetic rutile, manganese
dioxide, boron 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. Four of the company's five wood-treatment facilities were
closed during 2003 and the fifth will cease operations by the end of 2004.
During 2003 and 2002, the company took after-tax charges of $9 million and $15
million, respectively, for plant and equipment impairment, decommissioning and
environmental expenses.
In June 2003, Kerr-McGee closed its synthetic rutile plant in Mobile, Alabama.
This plant closure was another step in the company's plan to enhance its
operating profitability. The Mobile plant processed and supplied a portion of
the feedstock for the company's titanium dioxide pigment plants in the United
States. Through ongoing supply-chain initiatives, Kerr-McGee can now purchase
the feedstock more economically than it could be manufactured at the Mobile
plant. In connection with the shutdown, the company took an after-tax charge of
$30 million for severance, accelerated depreciation and other decommissioning
expenses during 2003. As a result of these steps, the company anticipates
significant savings.
In July 2003, the company filed an anti-dumping action against low-priced
electrolytic manganese dioxide (EMD) illegally imported into the U.S. and
temporarily idled the Henderson, Nevada, EMD manufacturing facility due to the
impact of these imports on market conditions. Partly as a result of the
anti-dumping petition, demand for U.S. EMD products increased and the plant
resumed operations in December 2003. The company withdrew the anti-dumping
petition in February 2004, but will continue to monitor market conditions.
In January 2004, the company announced the temporary idling of its sulfate
process titanium dioxide pigment production train at the Savannah manufacturing
facility, which is one of two sulfate process trains operated by the company
worldwide. Production is expected to resume as market conditions improve.
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, paper and specialty applications. 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 during the past 20
years. The chloride process currently makes up about 60% of total industry
capacity and accounts for approximately 76% of the company's gross production
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 following table outlines the company's production capacity by
location and process.
TiO2 Capacity
As of January 1, 2004
(Gross tonnes per year)
Facility Capacity Process
- -------- -------- --------
Hamilton, Mississippi 225,000 Chloride
Savannah, Georgia 110,000 Chloride
Kwinana, Western Australia (1) 100,000 Chloride
Botlek, Netherlands 72,000 Chloride
Uerdingen, Germany 107,000 Sulfate
Savannah, Georgia 54,000 Sulfate
-------
Total 668,000
=======
(1) The Kwinana facility is part of the Tiwest Joint Venture, in which the
company owns a 50% undivided interest.
The company owns a 50% undivided 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 minerals separation facility, a
synthetic rutile plant and a titanium dioxide plant.
Heavy minerals are mined from 8,513 hectares (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 6 million tonnes of heavy minerals contained in
215 million tonnes of sand averaging 2.8% heavy minerals. The valuable heavy
minerals are composed of 61% ilmenite, 4.5% natural rutile, 3.4% leucoxene and
10% zircon, with the remaining 21.1% of heavy minerals having no significant
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 220,000 tonnes per year.
Synthetic rutile is a high-grade titanium dioxide feedstock. The Tiwest Joint
Venture provides synthetic rutile feedstock to a 100,000 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 sold to third parties, as well as to Kerr-McGee as
part of its feedstock requirement for TiO2 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, 2003, 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) 2003 2002 2001
- --------------------------------------------------------------------------------
Proven and probable reserves 5,970 5,700 5,800
Production 294 289 280
Average market price (per tonne) $152 $150 $143
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, India and Ukraine. Ores are generally purchased under
multiyear 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.
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.
Compared with traditional lead-acid batteries, AVESTOR's no-maintenance battery
offers superior performance at one-third the size, one-fifth the weight and two
to four times the life. The batteries also provide an environmentally preferred
alternative since they contain no acid or liquid that may spill or leak. The
AVESTOR joint venture began battery sales in late 2003 from its plant near
Montreal and expects to increase production during 2004. Initial battery sales
and customer feedback indicate strong demand in the telecommunications industry,
the initial target market. Battery quality and performance will be carefully
monitored and evaluated as production rates increase. Development of AVESTOR
batteries for industrial, utility and electric vehicle markets is under way.
Other Products
- --------------
The other segment within the chemical operations consists of the company's
electrolytic operations and forest products business.
Electrolytic Products - Plants at the company's Hamilton, Mississippi, complex
include a 135,000 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 operates facilities at Henderson, Nevada, producing electrolytic
manganese dioxide and boron trichloride. Annual production capacity is 29,500
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.
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. As previously discussed, the company is in the
process of closing its plants and exiting the forest products business. Only one
of the company's five wood-treating plants, located in The Dalles, Oregon,
remained in operation at December 31, 2003. The Dalles plant is a leased
facility, and the company will continue operations at the plant for the term of
the lease, which expires November 30, 2004.
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 battery materials business.
Employees
- ---------
On December 31, 2003, the company and its affiliates had 3,915 employees.
Approximately 1,025, or 26%, 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 during 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 ISO 9002 for quality management and ISO 14001 for environmental
management, which are standards developed by the International Organization for
Standardization, a nongovernmental organization that promotes the development of
standards 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. Under these laws, the company's
affiliates are or may be required to obtain or maintain permits and/or licenses
in connection with their operations. In addition, 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 2003, direct capital and operating expenditures related to environmental
protection and cleanup of existing sites totaled $37 million. Additional
expenditures totaling $104 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
2004 it will incur $13 million in direct capital expenditures, $10 million in
operating expenditures and $98 million in expenditures charged to reserves.
Additionally, the company estimates that in 2005 it will incur $5 million in
direct capital expenditures, $4 million in operating expenditures and $66
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, some of which 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 contained, 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 remediation activities vary significantly in duration, scope and cost from
site to site depending on the mix of unique site characteristics,
applicable technologies and regulatory agencies involved;
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, as well as enforcement policies, are
continually changing, and the outcome of court proceedings and discussions
with regulatory agencies 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 reserves 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 on 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 depend on numerous factors that are beyond its control.
These factors include, but are not limited to, the domestic and foreign supply
of oil and natural gas, 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, weather conditions, and the overall economic environment. A
sustained decline in prices for oil and gas could have a material adverse effect
on the company's financial condition, revenues, results of operations, cash
flows and quantities of reserves recoverable on an economic basis.
Demand for titanium dioxide depends on the demand for finished products that use
titanium dioxide pigment. This demand generally depends on the condition of the
economy. The profitability of the company's products depends on the price
realized for them, the efficiency of manufacturing processes, 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.
Failure to Fund Continued Capital Expenditures Could Decrease Production Over
Time and Adversely Affect Results
- --------------------------------------------------------------------------------
Maintaining the company's current level of oil and gas reserves requires the
successful exploration and development and/or acquisition of oil and gas
producing properties. As such, the company expects to 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 other factors, 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. Failure to find and
develop reserves may have a material adverse effect on the company's ability to
generate future cash flows.
Oil and Gas Reserve Information Is Estimated, and Material Inaccuracies in
Assumptions and/or Estimates Could Adversely Affect Results
- --------------------------------------------------------------------------------
The proved oil and gas reserve information included in this Form 10-K is
estimated. These estimates are based primarily on reports prepared by the
company's geologists and engineers. Petroleum reserve estimation is a subjective
process of estimating underground accumulations of oil and gas that cannot be
measured in a direct or exact manner. Estimates of economically recoverable oil
and gas reserves and associated 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 U.S. Securities and Exchange Commission
(SEC), the estimated discounted future net cash flows from proved reserves are
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.
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.
The Company's Debt Level May Limit Its Financial Flexibility
- ------------------------------------------------------------
The company incurs debt from time to time in connection with the financing of
company operations, acquisitions, recapitalizations and refinancings. The level
of the company's debt could have several important effects on future operations,
including, among others: a portion of the company's cash flow from operations
will be applied to the payment of principal and interest on the debt and will
not be available for other purposes; credit-rating agencies have changed, and
may continue to change, their ratings of the company's debt and other
obligations, which in turn impacts the costs, terms and conditions and
availability of financing; covenants contained in the company's existing and
future debt arrangements will require the company to meet financial tests that
may affect its flexibility in planning for and reacting to changes in its
business, including possible acquisition opportunities; the company's ability to
obtain additional financing for working capital, capital expenditures,
acquisitions, general corporate and other purposes may be limited or burdened by
increased costs or more restrictive covenants; the company may be at a
competitive disadvantage to similar companies that have less debt; and the
company's vulnerability to adverse economic and industry conditions may
increase.
Many of the Company's Competitors Have Greater Resources, Which Could Make It
Difficult For The Company to Compete In Its Industries
- --------------------------------------------------------------------------------
The oil and gas business and the titanium dioxide pigment business are each
highly competitive. The company competes with major integrated and other
independent oil and gas companies for the acquisition of oil and gas leases and
other properties; for the equipment and personnel required to explore, develop
and produce from those properties; and in the marketing of oil and natural gas
production. Likewise, the company competes with chemical companies in the
development, production and marketing of titanium dioxide. Many of the company's
competitors have substantially larger financial resources, staffs and facilities
than Kerr-McGee, which may give them a competitive advantage when responding to
market conditions and capitalizing on operating efficiencies.
Oil and Gas Operations Involve Substantial Operating and Economic Risks
- -----------------------------------------------------------------------
Drilling for oil and gas involves numerous risks, including the risk that the
company will not encounter commercially productive oil or gas reservoirs. The
costs of drilling, completing and operating wells are often uncertain, and
drilling operations may be curtailed, delayed or canceled as a result of a
variety of factors, including: unexpected drilling conditions; unanticipated
pressure or geologic irregularities; equipment failures or accidents;
miscalculations; fires, explosions, blow-outs and surface cratering; marine
risks such as currents, capsizing, collisions and hurricanes; other adverse
weather conditions; and shortages or delays in the delivery of equipment. This
could result in a total loss of the company's investment in a particular
property. If certain exploration efforts are unsuccessful in establishing proved
reserves and exploration activities cease, the amounts accumulated as unproved
property costs would be charged against earnings as impairments.
While all drilling, whether developmental or exploratory, involves these risks,
exploratory drilling involves greater risks of dry holes or failure to find
commercial quantities of hydrocarbons. As a part of its strategy, the company
explores for oil and gas offshore, often in deep water or at deep drilling
depths, where operations are more difficult and costly than on land or than at
shallower depths and in shallower waters. Deepwater operations generally require
a significant amount of time between a discovery and the time that the company
can produce and market the oil or gas, increasing both the operational and
financial risks associated with these activities. In addition, because a high
percentage of the company's capital budget is devoted to higher-risk exploratory
projects, it is likely that the company will continue to experience significant
exploration and dry hole expenses.
Kerr-McGee May Not Be Insured Against All Operating Risks to Which Its Business
Is Exposed
- --------------------------------------------------------------------------------
As protection against financial loss resulting from operating hazards, the
company maintains insurance coverage, including certain physical damage,
comprehensive general liability and worker's compensation insurance. However,
because of deductibles and other limitations, the company is not fully insured
against all risks in its business. The occurrence of a significant event against
which the company is not fully insured could have a material adverse effect on
its results of operations and/or financial position.
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 stable and favorably disposed towards
U.S. exploration and production companies.
Regulation of Chemical Manufacturing Operations, Oil and Gas Development and
Surface Development Conflicts Could Adversely Affect Results
- --------------------------------------------------------------------------------
Regulatory authorities have established rules and regulations governing, among
other things, the operation of chemical manufacturing facilities, 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, surface use of properties where the
company has mineral interests, taxation, and environmental and conservation
matters. The company's continued compliance with amended, new or more stringent
requirements, as well as stricter interpretations of existing requirements, may
require the company to make material expenditures or subject the company to
liabilities beyond that which is currently anticipated. In addition, any failure
by the company to comply with existing or future laws could result in civil or
criminal fines and other enforcement actions.
Kerr-McGee Is Subject to Significant Environmental Compliance and Remediation
Costs That Can Adversely Affect the Cost of Doing Business
- --------------------------------------------------------------------------------
As more fully detailed below in Item 7, Management's Discussion and Analysis,
the company's plants and operations are subject to numerous laws and regulations
relating to the protection of the environment. The company has incurred, and
will continue to incur, substantial operating, maintenance, remediation and
capital expenditures as a result of these laws and regulations. The company's
continued compliance with amended, new or more stringent requirements, as well
as stricter interpretations of existing requirements, may require the company to
make material expenditures or subject the company to liabilities beyond that
which is currently anticipated. In addition, any failure by the company to
comply with existing or future laws could result in civil or criminal fines and
other enforcement actions.
The Company Is Subject to Lawsuits and Claims
- ---------------------------------------------
A number of lawsuits and claims are pending against the company, some of which
seek large amounts of damages. Although management believes that none of them
will have a material adverse effect on the company's financial condition or
liquidity, litigation is inherently uncertain, and the lawsuits and claims could
have a material adverse effect on the company's results of operations for the
accounting period or periods in which one or more of them might be resolved
adversely.
AVAILABILITY OF REPORTS AND GOVERNANCE DOCUMENTS
Kerr-McGee makes 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 SEC. Interested parties should refer to the Investor Relations
link on the company's website. In addition, the company's Code of Business
Conduct and Ethics, Code of Ethics for The Chief Executive Officer and Principal
Financial Officers, Corporate Governance Guidelines and the charters for the
Board of Directors' Audit Committee, Executive Compensation Committee, Finance
Committee, and Nominating and Corporate Governance Committee, all of which were
adopted by the company's Board of Directors, can be found on the company's
website under the Corporate Governance link. The company will provide these
governance documents in print to any stockholder who requests them. Any
amendment to, or waiver of, any provision of the Code of Ethics for the Chief
Executive Officer and Principal Financial Officers and any waiver of the Code of
Business Conduct and Ethics for directors or executive officers will be
disclosed on the company's website under the Corporate Governance link.
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 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 defended the proceeding in the Court of Petty
Sessions, Perth, Western Australia, and expects a decision in the matter around
the end of the first quarter. 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.
C. On December 15, 2003, the District Court of Rotterdam, Netherlands,
determined that Kerr-McGee Pigments (Holland) B.V., an affiliate of the company,
had violated regulations imposed by the Netherlands Environmental Management
Act. The violations primarily relate to the failure to notify authorities of the
release of process gases from the affiliate's facility in Botlek, Netherlands,
as required by the facility's environmental permit. The Court imposed a fine of
(euro)80,000, which concludes the case.
D. On January 7, 2004, the United States filed a civil lawsuit in the U.S.
District Court for the District of Oregon against Kerr-McGee Chemical Worldwide
LLC and two other private parties in connection with the remediation of
contaminated materials at the White King/Lucky Lass uranium mines in Lakeview,
Oregon. The mines were owned and operated by a predecessor of Kerr-McGee
Chemical Worldwide LLC and are currently designated as a Superfund site. The
lawsuit seeks reimbursement of Forest Service response costs, an injunction
requiring compliance with an Administrative Order issued to the private parties
regarding cleanup of the site, and civil penalties for alleged noncompliance
with the Administrative Order. The company expects all legal proceedings to be
stayed pending discussions to resolve outstanding issues. The company believes
that the litigation will not have a material adverse effect on the company.
E. On September 8, 2003, the Environmental Protection Division of the Georgia
Department of Natural Resources (EPD) issued a unilateral Administrative Order
to Kerr-McGee Pigments (Savannah) Inc., claiming that the Savannah plant
exceeded emission allowances provided for in the facility's Title V air permit.
The EPD is seeking monetary penalties of approximately $178,000. The company
appealed the order on October 8, 2003, which stayed the effectiveness of the
order. Meanwhile, the company is vigorously defending against the claims made in
the order and believes that any penalties related to them will not have a
material adverse effect on the company.
F. 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 2003.
Executive Officers of the Registrant
The following is a list of executive officers, their ages, and their positions
and offices as of March 1, 2004:
Name Age Office
- ----------------------- --- --------------------------------------------
Luke R. Corbett 57 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 60 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 47 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 47 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,
1998 to 2001; Executive Vice President and
General Manager, Atlanta office of Edelman
Worldwide, 1997 to 1998; and Executive Vice
President of Cohn & Wolfe, a division of
Young & Rubicam, Inc.
Robert M. Wohleber 53 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 55 Senior Vice President since 1997. Senior
Vice President of Marketing for Kerr-McGee
Chemical from 1996 to 1997.
George D. Christiansen 59 Vice President, Safety and Environmental
Affairs, since 1998. Vice President,
Environmental Assessment and Remediation,
from 1996 to 1998.
Fran G. Heartwell 57 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 54 Vice President since 1987. Controller since
January 2002 and 1987 to 1996. Treasurer
from 1996 to 2002.
John F. Reichenberger 51 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 46 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 Private Securities
Litigation Reform Act of 1995. These forward-looking statements include those
statements preceded by, followed by or that otherwise include the words
"believes," "expects," "anticipates," "intends," "estimates," "projects,"
"target," "budget," "goal," "plans," "objective," "outlook," "should," or
similar words. In addition, any statements regarding possible commerciality,
development plans, capacity expansions, drilling of new wells, ultimate
recoverability of reserves, future production rates, future cash flows and
changes in any of the foregoing are forward-looking statements. 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 in areas where Kerr-McGee operates,
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 34 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 2003,
2002 and 2001. Cash dividends have been paid continuously since 1941 and totaled
$181 million in 2003, $181 million in 2002 and $173 million in 2001.
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 "Ten-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 has three reportable business
segments, oil and gas exploration and production, production and marketing of
titanium dioxide pigment (chemical - pigment), and production and marketing of
other chemicals (chemical - other). The company's assets total approximately $10
billion. Proved oil and gas reserves are approximately 1 billion barrels of oil
equivalent and the company's equity production capacity for titanium dioxide
pigment is 618,000 tonnes per year. For 2003, revenues from continuing
operations totaled $4.2 billion, of which $2.9 billion (69%) was generated by
the company's oil and gas exploration and production operations and $1.3 billion
(31%) was generated by the company's chemical operations. Revenues for the
exploration and production operations are generated primarily from the sale of
crude oil and natural gas, as well as marketing revenues associated with the
company's sale of nonequity gas. Revenues for the company's chemical operations
are generated from the sale of titanium dioxide pigment and other chemical
products. An overview of each operating unit and certain other economic
considerations are included below to provide background for the various
discussions that will follow in Management's Discussion and Analysis of
Financial Condition and Results of Operations (MD&A). A detailed discussion of
each operating unit's business and properties is included in Items 1. and 2. of
this Form 10-K.
Exploration and Production - The company's exploration and production business
is primarily focused on finding and developing new oil and gas reserves. The
success of the company depends heavily on a successful exploration program. As a
benchmark, the company works to replace at least 100% of its production each
year through a combination of its drilling and development programs and tactical
acquisitions. During 2003, Kerr-McGee replaced 135% of its 2003 worldwide
production from continuing operations, of which 105% resulted from replacement
through the company's exploration program. Kerr-McGee has established a
competitive average finding, development and acquisition cost of $7.19 per
barrel of oil equivalent (BOE) and annual average production replacement of 192%
over the past five years, and remains focused on adding value to its reserve
base. The company faces many challenges in executing a successful exploration
program, including obtaining accurate and reliable geological and geophysical
data, understanding reservoir complexity, and inherent risks associated with
deepwater exploration, among others. Consequently, a portion of the company's
total exploration costs is dry hole cost for unsuccessful drilling activity. The
company works to mitigate these risks by attracting and retaining talented
exploration and engineering personnel with wide ranging experience in its core
exploration areas. The company utilizes advanced technology to maximize the
impact of its exploration efforts including both extensive geological and
geophysical data acquisition and analysis as well as state-of-the-art
visualization interpretation techniques. In addition, Kerr-McGee maintains an
extensive world-wide acreage position which the company believes provides it
with a significant competitive advantage in its effort to maintain and develop a
high-quality prospect inventory. The company believes its prospect inventory is
a key component in mitigating the inherent risk of its exploration program.
In addition, profitability and cash flows for exploration and production
operations are heavily dependent on market prices for crude oil and natural gas,
as well as production costs, taxation levels and other operating costs. To
mitigate uncertainties related to commodity price fluctuations, the company
hedged the sales price of a substantial portion of its 2003 oil and gas sales.
The company has entered into additional hedge contracts for 2004 to maximize the
predictability of its cash flows. In addition to hedging, the company monitors
its cost performance in an effort to maximize overall profitability and ensure
its ability to compete within the industry. In 2003, the company completed a
major divestiture program which was partially directed at reducing the overall
production cost of its asset portfolio. Completion of this program contributed
to a 12% reduction in the company's per unit production costs. Changes in
operating costs from year to year are discussed in the Segment Operations
section below.
While the company's drilling program and subsequent development of successful
projects generally yield attractive economic returns, they do require a
substantial capital commitment. An overview of historical capital spending, as
well as a discussion of the 2004 capital spending budget, major projects and
exploratory drilling program are included in the Capital Spending section of
MD&A below. On an ongoing basis, the carrying values of the company's oil and
gas properties are evaluated for recoverability relative to their future cash
flows. Likewise, reservoir performance and reserve quantities are periodically
reviewed. Negative revisions to reserve quantities or negative changes in the
market prices of crude oil and natural gas can adversely affect the company's
estimates of future cash flows and may result in asset impairments. Because of
the large capital investment required to develop oil and gas fields and the
uncertain mineral resources associated with each field, asset impairment
evaluations are common in the oil and gas industry and are indicative of
projects for which previous capital investments are no longer recoverable under
current economic conditions. Such impairments may occur in the future; however,
the company cannot predict the timing or magnitude of future asset impairment
charges.
Chemical - The chemical operating unit has focused its strategy on its titanium
dioxide pigment operations. As part of this strategic decision, the company
continues to investigate divestiture options for the electrolytic business and
plans to exit the forest products business by the end of 2004 when the lease on
its only facility still in operation expires.
The profitability of the company's pigment operations is tied to consumption of,
and demand for, titanium dioxide pigment, which generally follow global economic
trends (discussed in the Operating Environment and Outlook section below). The
profitability of the company's pigment operations also depends on the company's
ability to manage operating costs. As part of its efforts to manage operating
costs, the company closed its synthetic rutile plant in Mobile, Alabama, in June
2003. The Mobile plant supplied a portion of the feedstock for the company's
pigment plants in the United States; however, through ongoing supply-chain
initiatives, feedstock can now be purchased more economically than it could be
manufactured at the Mobile plant. In connection with the shutdown, the company
recorded after-tax charges of $30 million for severance, accelerated
depreciation and other decommissioning expenses during 2003.
Chemical is working on technological advancements that will allow it to add
plant capacity with low-cost expansions to take advantage of future market
growth. As a result of these efforts, production began through a new
high-productivity oxidation line at the Savannah, Georgia, chloride process
pigment plant in January 2004. This new technology is expected to result in
low-cost, incremental capacity increases through modification of existing
chloride oxidation lines and should allow for improved operating efficiencies
through simplification of hardware configurations and reduced maintenance
requirements.
Based on the future outcome of these technological advancements, the company may
need to review its existing configuration at the Savannah plant to optimize the
plant's resources in relation to capacity requirements. The company will
evaluate the performance of the new high-productivity line, analyze the
implications on the capacity of existing assets and have a plan for
reconfiguration, if any, by the latter part of 2004. If the new
high-productivity line performs as expected, the outcome of this review may
result in the redeployment of certain assets to alternate uses and/or the need
to idle certain other assets. If this occurs, the future useful life of such
assets may be adjusted, resulting in the acceleration of depreciation expense.
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