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Shell Oil Company 1987 Annual Repor i LAM 022346 ABS-005973 m ' ' ' ':^:;;^'i^'.'::: i3'rr^rr::^f^V-^:^"J^ V^ ' , -r-;;?vf.\-ff-'.- ^> :"'? ' v \. /, v v -i**. hell Oil is a leading American oil, gas and petrochemical company, dedicated to excellence and to serving the needs of customers. Our record of success is based on the skills of our employees, strong financial resources, leadership in innovative technology and proven business strategies. ' 'tf. y'/v.< LAM 022347 f ABS-005974 "V: ' :y'it-sV>-.-r President's Letter Highlights Improved net income to $1.23 bil lion, up 39 percent over 1986. Maintained a strong cash flow, which enabled us to pursue strate gic investments, build financial strength and maintain dividends. Increased total liquids and gas reserves 3.3 percent to an 18-year high, by replacing 40 percent more than we produced in 1987. Increased chemical earnings to $416 million, a record for the sec ond year in a row. Continued our leadership posi tion in domestic refining and marketing earnings, with net income of $224 million. Continued to reduce costs and improve productivity company wide. John F. Bookout A Strong Performance I am pleased to report that 1987 was a year of significant achieve ment and strong competitive per formance for our company. Shell Oil's average crude oil prices exceeded those of the pre vious year for the first time in six years, and led to a substantial recov ery in exploration and production earnings. This, together with strong chemical results, more than offset a decline in refining and marketing earnings. We held oil and gas produc tion almost level with the previous year and again more than replaced annual production with new reserves. Oil and Chemical Prod ucts continued to achieve sales vol ume gains, while all three major business functions generated sub stantial surplus cash beyond their immediate needs. Staying on Course Our progress and solid perfor mance in 1987 reinforce my confi dence that we chose the right course 10 years ago. We determined in 1978 that for the balance of the century, our future lay primarily in our three major businesses: a world wide exploration and production business largely focused on domes tic opportunities, a regionally cen tered domestic refining and marketing business, and a predomi nantly domestic chemical business. We adopted financial goals and stra tegic objectives, set guidelines for a maximum prudent investment pro gram, and told shareholders where we were headed and why. Since then, our goals and strate gies have stood the tests of a tripling of oil prices and their subse quent collapse, requiring only finetuning. Our focus remains primarily on areas of technological or market strength in our mainline busi nesses, where we believe returns will be the greatest Meeting Challenge Our principal corporate goal remains to achieve the highest sus tainable rate of growth in real (infla tion adjusted) net income. From the time we set goals in 1978, we have met our long-term minimum target of 5 percent average annual increase in real net income, on a cumulative basis. Over the last 10 years, we have averaged a 15 per cent return on equity, which is another long-term minimum finan cial target LAM 022348 ABS-005975 2 The business environment of the past several years has not been con ducive to attaining these two goals on an annual basis, however, we have maintained highly competitive . . js. Ten years ago. Shell Oil maxed sixth in worldwide net income, compared with major U.S.-based domestic and interna tional competitors. Over the last five years, our average earnings have ranked third among this group. Our operations generated funds of 83.4 billion in 1987, once again enabling us to fund investments and dividends, while reducing debt /.Iding to borrowing power. Capiuii and exploration spending in 1987 totaled 82.6 billion, including 82.0 billion for exploration, develop ment and acquisition of energy resources, mostly domestic oil and gas. In 1988, we are planning to spend about 83.3 billion, some 82.4 billion of it for exploration and production. We also continue to strengthen - '-alance sheet Long-term obliga- as a percent of total capitaliza tion decreased in 1987 for the eighth consecutive year, to 15.1 per cent the lowest level since 1964. That ratio peaked at 36.8 percent in 1979 with the purchase of Belridge Oil Company in California. Thus, with a strong cash flow and our bor rowing capacity restored, we are in excellent financial condition to capi1' ''r.c on attractive investment .... ^rtunities. Progress Toward Objectives We continue to make significant progress toward the four principal operating objectives that support our corporate financial goals. r-cploration and Production -- h: . 987 -- for the seventh year in the past nine -- we met our main operating objective of more than replacing annual oil and gas pro duction with new reserves, profitably. We added proved domes tic liquids and gas reserves equal to 133 percent of production for the year, at a cost of 83.77 per equiva lent barrel. From 1978 through 1987, we replaced 133 percent of the domestic reserves we produced at a cost of 85.98 per barrel, remain ing a leader in the domestic industry. A decade ago, our domestic reserves stood at 2.96 billion bar rels of crude oil equivalent By yearend 1987, they had grown by 33 percent to 3.95 billion barrels, increasing during the past year alone by more than 100 million bar rels. Over this same 10-year period, our domestic oil and gas production grew by 6 percent Based on available data, our reserve position over the 1978-86 period increased from 8 percent of the total for Shell Oil and its major competitors to 12 percent, while our production share rose from 10 percent to nearly 12 percent Our exploration and production business is based on three primary technological strengths, supported by highly focused research. We remain industry leaders in all of them. They are: Enhanced oil recovery, espe cially steam injection at Belridge and in other heavy oil fields of Cal ifornia, and carbon dioxide injec tion for light oil production in West Texas, Mississippi and Louisiana; Seismic technology, particularly in the Gulf of Mexico, Michigan and selected major onshore and off shore frontier plays; and Offshore engineering, concen trated in the Gulf of Mexico, and more recently at water depths greater than 1,500 feet Focusing our program through these technologies has led to many competitive advantages. These include geographical concentration, improved productivity, and the acqui sition of strategic producing proper ties where we can add value through the use of these technolo gies. In the past 10 years, more than 60 percent of Shell Oil's total exploration and production expendi tures of 825.2 billion has been directly linked to these three technologies. These technical strengths have guided our producing property acqui sition and sales program over the past decade. During that period, we acquired 37 new fields and increased our working interest through 276 purchases, while sell ing interests in 620 fields. This net ted us 1.2 billion barrels of proved reserves in strategic properties -- either with enhanced oil recovery potential and/or located in fields we already operate. The net cost 84.8 billion or 83.93 per barrel The Belridge purchase accounted for about 60 percent of our acquisi tion spending over the period, and is a good example of our technical strength in enhanced oil recovery. Since the purchase in 1979, we have more than tripled production there to some 130,000 barrels per day currently. Shell Oil is now the largest producer by thermal tech niques, with over 36 percent of the U.S. total. Our international subsidiary, Pecten, continued to grow in 1987, with a record net production of 58,000 equivalent barrels per day. A potentially commercial discovery in LAM 022349 ABS-005976 3 Syria, along with initiation of an off shore natural gas development in Brazil, highlighted a successful year. Contributing to our international production are our Peace River tar sands project in Canada and conven tional production from fields in Cameroon, Malaysia, New Zealand and Syria We currently have active exploration programs in 10 countries. Refining and Marketing -- Our objective here is to maintain leader ship in financial performance, while producing surplus cash and contributing to the company's real net income growth. In 1987, we con tinued our leadership in domestic earnings with 6224 million. Shell Oil has ranked first or second in domestic refining and marketing net income in eight of the past 10 years. In 1987, this segment pro duced 6176 million in surplus cash after funding capital expenditures. The business has generated 61.6 bil lion in surplus cash over the past 10 years. Our basic strategies are: Dedication to product quality, brand image and superior service to our customers; Achieving the most efficient utili zation of our manufacturing facili ties, with continued emphasis on lowering unit refining fixed and variable costs and improving return on investment; and Concentrating on strategic markets where we are advantaged. Basic to this strategy is the contin ued upgrading of our service station network through moderniza tion and selective acquisitions. These strategies have been work ing well. Refined product sales vol umes were up 15 percent in 1987, and have risen 60 percent since 1983. Shell owned and leased sta tions improved efficiency for the eighth consecutive year, reaching sales of 116,000 gallons per month per service station, while station count decreased 13 percent over tips eight-year period. Gasoline sales volumes through service sta tions rose 8 percent in 1987, com pared with an estimated 2 percent for the industry. Based on data through nine months, we were the nation's top gasoline marketer for the second year in a row. Chemical -- Another record year for net income and sales volumes in 1987 kept us on track toward our objective of leading the chemical segment of the oil industry infinan cial performance, while generating surplus cash and providing real net income growth. We had a strong competitive performance, and the segment generated 6433 million in surplus cash above capital expen ditures. The strategies, which are the basis of this strong performance, are: Emphasizing businesses which offer growth potential and sustain able competitive advantage built on technology, cost and market positions. These businesses include detergents, polymers, catalysts and advanced composites; and Restructuring or withdrawing from businesses in which we have no competitive advantage, in order to improve asset profitability. Through this strategic thrust, we are positioned to benefit from the improved business conditions in the chemical industry. Over the past five years, we have concentrated on businesses with sustainable competitive advantage and have increased sales volumes by over 30 percent, while costs and expenses have decreased by more than 20 percent Our restructuring continued in 1987 with the sale of vinyl chloride monomer production facilities and selected polypropylene assets. We will continue to examine businesses critically to ensure we have competitive advantage. Research -- Our Research organi zation has long been the principal source of proprietary technolog}7. Tied closely to business strategies and opportunities, our research objective is to improve profitability by maintaining our position at the leading edge ofexploration and pro duction technology; by discovering, developing and improving prod ucts and processes; and by creat ing long-term growth opportunities in areas where we have technologi cal expertise. In our Products and Research organizations, the formal quality improvement process we began implementing four years ago has pro duced cost savings and productivity benefits, while enabling us to better meet customer requirements. Deregulation For more than a decade now, there has been a focus on deregula tion throughout many areas of the U.S. economy, reflecting a clear change in attitudes towards govern ment's involvement in trade and commerce. LAM 022350 ABS-005977 4 Deregulation -- most notably in the telephone, financial, transporta tion and energy industries -- appears to have given consumers a bn'.'.dly increased variety of goods and services at lower prices. In our own industry, the long, but still incomplete, process of decon trolling natural gas began with pas sage of the Natural Gas Policy Act in 1978. Then, in 1981, President Reagan lifted price and allocation controls on crude oil and petroleum products. It is the interaction of pro ducers and consumers responding to market incentives that has m..cd us a long way from the energy crisis of the 1970s. It would be counterproductive for the industry and the country if this trend were reversed by increased government involvement in the form of trade barriers. What we as a nation do need is to remove the self-imposed impedi ments to efficient development of on r oil and gas production capacity. ! 1 . .akes no sense to have a Wind! fail Profits Tax diminishing the pro- ! jected profitability of every oil play j the industry considers. It makes even less sense that the Windfall ; Profits Tax be applied to enhanced j oil recovery, considering that if this : technology enabled industry to ; recover only 10 percent of the oil normally left in the ground, the ; nation's current oil reserves could ..bled. Delays continue in the leasing of federal lands, which have the poteni tial for slowing the rate of decline in ! U.S. oil production. Successful resoj lution of this issue would permit I development of these national j resources, which are so important j to America's economic interest i We also need to complete the deregulation of natural gas prices. Price levels in some natural gas fields are still below world energy price levels, reducing industry's eco nomic incentive to maintain, much less develop these fields. Many of these ideas were pro posed by the Administration as long as seven years ago. They are not a prescription for energy selfsufficiency, nor should they be taken as an argument for special treatment for the oil industry. But the best response to any market adversities in the future will come from competitive market pricing, unencumbered by restrictive govern ment policy. Positioned For The Future During the past 10 years, while our strategies have been in place, we have observed a continually changing competitive landscape. Over this period, the U.S. oil indus try has experienced unprecedented price volatility, highly competitive markets, and substantial restructur ing through acquisitions, joint ven tures and other arrangements. Cunentiv, there is speculation about further entry into the domes tic market by producer countries looking for secure downstream out lets for their own production. With the continuing potential for excess crude supply worldwide, the likeli hood for at least the near term is vol atility at price levels lower than the first part of the decade. We remain confident that Shell Oil Company will continue to be strongly positioned, both financially and operationally, in this highly com petitive environment Our innova tive technology and adaptable strategies, coupled with a strong resource base, place us on a firm foundation as we move forward. The challenge in the years ahead is to continue to execute our successful strategies in a fashion that recog nizes and meets these changing bus iness conditions. Since Shell Oil's beginnings in America three-quarters of a century ago, our mission has been to pro vide quality products and services at competitive prices, with the help of innovative technologies provided by our own research. In carrying out this role, we recognize an obliga tion to operate responsibly -- provid ing safe workplaces, protecting the environment, promoting and adher ing to nondiscriminatory employ ment practices, and participating in the affairs of communities where we have facilities and operations. We also maintain open communica tions with employees, governments, news media and the public, and take an active part in the public pro cess that establishes laws and regulations. We take pride in the dedication and accomplishments of Shell Oil employees , whose talents and perse verance over the years have brought us to a position of leadership and respect in our industry and nation. And we look forward to their achieve ments in a future that we believe will be as bright as our past John F. Bookout President and Chief Executive Officer March 15, 1988 LAM 022351 ABS-005978 5 Segment Highlights Millions of doBars, except where noted Oil and Gas Exploration & Production Segment Net Income Capital Expenditures Exploratory Expenditures Net Crude Oil and Natural Gas Liquids Produced (thousands of barrels daily) Net Natural Gas Produced (millions of cubic feet daily) Other Segment Net Income Capital Expenditures Coal Sales (millions of short tons) 1987 $ 733 $1,491 $ 401 612 1,821 $ 44 $ 93 16 1986 $ 427 $1,761 $ 493 622 1,816 S 24 $ 27 9 Key Results Oil and gas exploration and produc tion earnings recovered from the depressed levels of1986, rising 71 per cent to $733 million in 1987. The increase primarily reflected higher crude oil prices. accounting for 58 percent of our 1987 domestic crude oil and condensate production. Natural gas production rose slightly, the fourth consecutive annual increase. LAM 022353 We continued our active exploration program, highlighted in 1987 by dis coveries in Syiia and Michigan. For the fifth consecutive year, we increased our proved oil and gas reserves, replacing 140 percent ofpro duction on a crude oil equivalent basis in 1987. Crude oil and condensate produc tion declined slightly, following seven consecutive years of increase. Produc tion from enhanced recovery opera tions continued to increase, Shell Oil continued an active exploration and production program in 1987, spending 81.9 billion to find, acquire and develop oil and gas reserves, down from 1986 expendi tures of 82.3 billion. The decrease was due partly to fewer property acquisition opportu nities. Our 1987 spending included 80.7 billion for oil and gas exploration, with about 51 percent in the lower 48 states offshore and 32 percent in the U.S. onshore. Develop ment expenditures and producing property acquisitions totaled 81.2 billion, almost entirely in the U.S. We remained among the industry leaders in seismic surveying activity, deploying an average of 18 seismic crews during the year, including 15 in the U.S. We also main tained one of the most active drilling pro grams in the U.S., participating in 72 net exploratory wells and 1,194 net develop ment wells. We had another outstanding year in reserve additions. Proved domestic reserve additions, including acquisitions, sales and exchanges, were 354 million barrels of crude oil, condensate and natural gas liq- ABS-005980 7 d\ iarf/c portion of our domestic onshore cxjtioration is concentrated in Michigan, where ire hare Steen active since the ifSGOs. tn l#87* our eight tritdcais in central and western Michigan resulted in three discoveries. uids and 409 billion cubic feet of natural gas, resulting in replacement of 133 percent of our 1987 U.S. production on a crude oil equivalent basis. Additions to proved for eign reserves were 13 million barrels of crude oil, condensate and natural gas liq uids, and 150 billion cubic feet of natural gas, equal to 340 percent of 1987 foreign production on the same basis. Our average cost of adding proved domes tic oil and gas reserves, including property acquisitions and exchanges, was 33.77 per equivalent barrel. It has averaged 35.57 per barrel over the past five years. We continued our cost control programs that were initiated in 1986. Production expenses, excluding Windfall Profit Tax, were 24 percent less in 1987 than in 1985, on a per barrel equivalent basis. Shell Oil's average domestic crude oil price rose to 315.51 per barrel in 1987 from 313.20 in 1986. Natural gas prices averaged 31-87 per thousand cubic feet, down from 32.15. With the continued deregulation ofthe nat ural gas industry, free-market forces are com ing back into play. In 1987, Shell Oil responded to the resulting opportunities by Total Production and Reserve Additions Millions of barrels crude oil equivalent1________________ 5QQ. 400 300 200 100 r. '83 '84 '85 '86 '87 Production x Reserve additions2 'Gas converted to oil by using 5 6MCF per bariet 'Net additions to proved foreign and domestic reserves. strengthening its natural gas marketing orga nization and marketing essentially all avail able natural gas production during the year. Our hallmarks in exploration and produc tion include leading technological skills in seismic methods, enhanced oil recovery, and offshore exploration and production. During 1987, we continued to concentrate our activities in regions where we can employ these skills to competitive advan tage, primarily in the Gulf of Mexico, Califor nia, Texas and Michigan. Domestic Offshore Shell Oil's domestic offshore oil and conden sate production averaged 136,000 barrels per day in 1987, compared with 141,000 barrels per day in the prior year. Domestic offshore natural gas production was 1,074 million cubic feet per day, up from 1,051 mil lion in 1986. Most of our domestic offshore production was in the Gulf of Mexico. Gulf of Mexico -- Shell Oil continues o be a leading producer in the Gulf of Mexi.o. The Gulf accounted for about 49 percent of our 1987 exploration expenditures, as we focused on lease acquisition opportunities and extended our deep-water drilling program. During the year, we acquired interests in 165 tracts in the Gulf, with our share of win- ABS-005981 8 gailar. uc- n te for- len- s ) ic ^4 . mil- lore 5 to dco. tof j .e i ningbids coming to 8110 million. Our 1987 lease acquisitions represented the most acreage acquired by Shell Oil in the Gulf in any year since the open lease sale concept was introduced in 1983. . 'rilled 23 exploratory wells in the Gun'during 1987, including two in water depths exceeding 1,500 feet Five other deep water wells were in progress or being evalu ated at year-end. In June, we drilled a well on Atwater Valley Block 471 in 6,794 feet of water, a Gulf water depth record. Late in the year, at Mississippi Canyon Block 657, we extended our exploration program to even deeper waters when we began drilling in 7,520 feet, a world record. Results of our deep-water drilling program, which will con- :: 1988, are currently being analyzed l ^ dopment of project Bullwinkle, Green Canyon Block 65, continued on schedule toward the mid-1988 installation of a plat form in 1,350 feet of water. This will be the world's tallest offshore fixed structure, sur passing Shell Oil's Cognac platform, also in the Gulf. Production from Bullwinkle is fore cast to peak at about 44,000 barrels of oil and 100 million cubic feet of natural gas per day in 1992. This venture is 100 per cent owned by Shell Oil. Alas'!-.-' -- We continue to believe the Alas;:.. ;cier holds potential for discovery oflarge, profitable oil accumulations. Dur ing 1987, we conducted extensive seismic programs and other studies in preparation for lease sales in the Beaufort and Chukchi Seas, scheduled for the first half of 1988. California -- Our production off the Southern California coast averaged 17,000 barrels of crude oil per day, compared with 18,000 barrels per day in 1986. During the year we increased our interest in 10 tracts in the Santa Maria Basin and acquired one addition: - net We also became operator of four units involving 18 tracts in the basin. Domestic Onshore Shell Oil's domestic onshore oil and condensate production averaged 352,000 barrels per day in 1987, 72 percent of our domes tic total. Major oil production was in Califor nia and West Texas and along the Gulf -oast. Onshore natural gas production was 722 million cubic feet per day, 40 percent of our domestic total Major gas production areas were the Gulf Coast, South Texas and Michigan. Onshore exploration activities are focused on areas where we believe we can apply our advanced seismic technology to competitive advantage in seeking large oil and gas discoveries. During 1987 we were active in 10 plays, primarily in Michigan, along the Gulf Coast, and in the Columbia Basin in Washington and the Mogollon Pla teau in New Mexico. Approximately 51 percent of our domes tic onshore exploration program was devoted to two major opportunities in Michi gan: the reef play in the northern and west- Shell Oil luts one-third of industry's lenses in deep water in the Gulf of Mexico. The semi-submersible Zone Barnes* shown \here* and the Discoverer Seven Seas drill ship* together enable us to explore this extensive leasehold win' ABS-005982 9 This gas processing plant near Rase City. Michigan is the first in a nor generation of modern fully automated Shell Oil installations of its type* Operations can he monitored and controlled remotely hy satellite communications. em part of the state and our newer deep gas play in central Michigan. In 1987, we drilled eight wildcats in central and western Michigan and made three discoveries, which are currently being evaluated. We also began our first production in the Michi gan Central Basin, from the Rose City Field. Development of this field will continue in 1988. Enhanced Recovery Enhanced oil recovery is a major Shell Oil success story, accounting for 58 percent of our domestic crude oil and condensate pro duction in 1987, compared with 34 percent a decade earlier. We continue to invest heav ily in projects employing these techniques, expanding their use and improving their effectiveness. About 22 percent of Shell Oil's $1.9 billion exploration and produc tion program in 1987 was allocated to enhanced recovery operations, including steam injection, carbon dioxide (COg) flood ing and water injection. To improve the recovery of heavy oil, steam is injected into the reservoir, heating the crude which becomes less viscous and can be pumped to the surface. Steam injec tion techniques, employed primarily in Cali- Domestic Crude Oil and Condensate Production Thousands of barrets daily 500 - / 4J3Q. t '50 '60 70 '80-87 Primary recovery B Enhanced recovery fomia, accounted for 35 percent of Shell Oil's domestic crude oil and condensate pro duction in 1987. At our Belridge Field in California, the oil production rate averaged 126,000 barrels per day in 1987, up from 121,000 in 1986. The production rate at Belridge has more than tripled since we acquired these proper ties in 1979. COg injection accounted for over 9,00 - net barrels per day of crude oil production in 1987 and is expected to play an increasing role in the future. Shell Oil is a leader in the use of COg to increase the recovery of light crude, with projects in West Texas, Missis sippi and Louisiana COg gas is injected into the reservoir, dissolving in and dislodg ing some of the remaining oil and driving it toward producing wells. t Early in 1988, we completed the exten- ' sion of our COg pipeline from Missis-'Dpi | to the Weeks Island Field in South i isi- j ana. Injection of COg at Weeks Island is | scheduled to begin in mid-1988. f LAM 022356 10 4 fcBS-005983 l ~ ir i--iiTi~g Upgrading Producing Properties 91 million gross acres, including 61 million Shell Oil maintains an active program to acres in the Middle Amazon Basin of BraziL upgrade its domestic producing properties We participated in drilling 55 gross explora through acquisitions, sales and exchanges. tory and development wells, compared with This effort is aimed at increasing operating 42 in 1986. efficie:. " and making more effective use In Brazil, we reached agreement with the of our resources. Purchases are focused pri government oil company to develop a gas dis marily in fields where we can apply our tech covery in the Merluza Field, offshore Sao nical skills in enhanced recovery or where Paulo. we can increase our ownership share. Discussions continued with the Chinese In 1987, we acquired our initial interest national oil company regarding commercial in two fields and increased our ownership The tVfTOir/;onc* development of the 1985 South China Sea position in 40 others. We invested 8154 mil coal production ami oil discovery. lion to acquire properties and generated preparation In October, we resumed working-interest 8113 million through the disposition of interests in 79 fields. The program, which in 1987 included a major property exchr r ' resulted in a net addition to provea .^serves of 106 million barrels on a crude oil equivalent basis. complex in iTest Virginia produces more than 4 million tons of loic~sulfur bituminous coal per j/ear. The complex participation in Syria after the State Depart ment rescinded its request that U.S. compa nies discontinue oil operations. Earlier in the year, we had resigned as operator there in response to the State Department's request Production at the Deir Ez Zor region of eastern Syria reached 83,000 bar Foreign can load unit train.* rels per day at year-end 1987, of which Shell Oil was active in 13 foreign countries of up to 110 cars in Shell Oil's share was 12,000 barrels per in 1987 and had exploratory rights to about four hours. day. A new central production facility was completed in December, and five new fields have been brought on stream. During the year, we also had other potentially commer cial discoveries in both the Deir Ez Zor and Ash Sham permit areas. Our net foreign crude oil production, including equity interest averaged 54,000 barrels a day in 1987, up from 51,000 in 1986. Major oil production was in Came o- roon, Malaysia and Syria Net foreign natu ral gas production, primarily in New )il Zealand, averaged 24 million cubic feet a day, compared with 25 million in 1986. 5. At year-end, thermally enhanced produc tion from the Peace River tar sands project :r- in Canada was about 7,000 barrels of heavy crude oil per day. Production is expected to reach 10,000 barrels per day by the end of m 1988. Shell Oil holds a 50-percent interest <3 in this project ie t Coal Shell Oil has become one of the 10 largest producers of coal in the U.S. following the g- division of the assets of Massey Coal Com it pany, in which a Shell Oil subsidiary was a partner. As a result of this transaction in July, we assumed direct ownership of min ing facilities in Kentucky and West Virginia and two East Coast shipping terminals. These properties are currently producing at an annual rate of about 10 million tons. Sales from the balance of our coal proper ties, in Ohio, Illinois and Wyoming, were 11.4 million tons in 1987, a 31-percent increase from 1986. LAM 022357 ABS-005984 11 Segment Highlights Millions of dollars, except where noted Products Segment Net Income Oil Products Chemical Products Capital Expenditures Oil Products Chemical Products Refinery Processing Intakes (thousands of barrels daily) Refined Products Sold (thousands ol barrels daily) Automotive Gasoline Jet Fuel All Other Products Total Refined Products Sold Chemical Products Sold 1987 1986 $ 224 $ 416 $ 351 $ 163 v 1,019 v 693 167 492 1,352 $11,429 $ 3,498 $ 319 $ 342 $ 342 $ 95 975 620 135 418 1,173 $ 9,109 $ 3216 Key Results Chemical Products earnings increased 22 percent to a record $416 million, as we continued to rank as one of the top profit performers among our major chemical competi tors. Results improved for most prod uct lines. Chemical Products sales were a rec ord $3,498 million. We continued our leadership posi tion in domestic refining-marketing earnings with net income of 0224 million. Oil Products sales volumes rose 15 percent, led by the fifth consecutive year of increased gasoline sales. Significant productivity improve ments were achieved throughout our Products operations, as total Prod ucts sales increased 21 percent while fixed costs remained flat LAM 022359 Oil Products For the refining-marketing industry, 1987 was a difficult year characterized by a contin ued worldwide excess of refining capacity and increased raw material costs, compared with 1986. Our Oil Products organization main tained its strong financial performance rela tive to major competitors in 1987. Overall, our strategic approach continues to empha size product quality, customer service and highly efficient operations. Our gasoline strategies focus on modem, high-volume ser vice stations in those metropolitan areas where we have the greatest logistical and marketing strengths. ABS-005986 A high-efficiency tte-mtxing unit, being installed at our Hirer, Illinois Manufacture ing Complex, will increa.se our produc- lion capacity and improve our compet itive position in V. lubricating oil*. \ The new unit is scheduled for startup in HISS. Oil Product Sales Thousands of barrels daily -L- . 500 250 '83 '84 '85 '86 '87 0 Automotive Gasoline Jet Fuel All Other Products Reflecting the success of this approach, Shell Oil became the leading gasoline marke ter in the nation in 1986, and industry data through nine months indicate we main tained that position in 1987. We once again achieved higher sales vol umes and significant improvements in pro ductivity and efficiency, partially offsetting the squeeze on profit margins. Our gasoline sales volumes through all sendee stations were up 8 percent in 1987, compared to an estimated 2 percent for the industry. In owned and leased stations, aver- age monthly sales per station were 116,000 gallons, also up 8 per cent -- the eighth con secutive year of higher per-station sales. Moreover, we continued to improve ov : product mix with increased sales of higheroctane, higher-margin gasolines. In most regions, we market 92 octane SU 2000 super unleaded, 87 octane RU 2000 regu lar unleaded and an 89 octane leaded gaso line. Late in 1987, in selected test markets we increased to 93 the octane level of SU 2000, introduced a new 89 octane SR 2000 super regular unleaded and dis continued the sale of leaded gasoline. We place great emphasis on product qual ity as a centerpiece of our marketing p >grams. Shell unleaded gasolines contain a patented additive package that meets or exceeds the requirements of modem engines by reducing engine knock, unclog ging fuel injectors and controlling deposits in the fuel inlet system. We are stressing a premier relationship ( ABS-005987 14 LAM 022360 I Average Monthly Gasoline Sales Per Service Station* Thousands ot Gallons/Month 110 100 90 80 70 60 Station Count 50 __ a 5.500 5.000 4.500 4.000 3.500 ____ 0 '83 '84 `85 '86 '87 *Owned and leased service stations with customers. In 1987, we introduced a new nationwide program, "Experience the Difference'^, focused on assuring that the needs of every Shell Oil customer are met courteously and promptly by service station dealers, managers and employees. Our credit card program remains one of the largest and most active in the domestic petroleum industry, and we continue to dis tinguish ourselves from the competition by promoting gasoline sales at the same price, cash or credit In 1987, we introduced a new Shell Oil credit card for commercial accounts, offering driver convenience, effi cient vehicle expense management and a variety of billing options. Another key Shell Oil strength is our strong relationship with dealers and jobbers -- a relationship we value highly and work diligently to improve. Sales in product categories other than gas oline continued to increase in 1987. Higher aviation fuel sales volumes primar ily reflected increased sales to commercial airlines. Sales also increased for kerosene, heating and diesel oils as well as for heavy fuel oils. Oil Products capital expenditures totaled 8351 million, with a major focus on cost reduction, productivity improvement and environmental conservation. Included were funds for an ongoing program to upgrade pro cess control systems in our refineries, thereby reducing costs and improving prod uct yields. Capital projects also included the installa tion of a new catalytic de-waxing unit at Wood River, Illinois. This high-efficiency unit, scheduled to'come on stream in 1988, will significantly enhance our production capability and competitive position in lubri cating oils. This gasoline delivery truck incorportttes the latest Shell Oil graphic design. Attractive, modern graphics are a key element in our efforts to attain rntwimum safety and customer satisfaction. LAM 022361 ABS-005988 15 tiiffh-st rcngt It fibergbiss composites for const ruetion is one of the new business opportunities for our subsidiary* Morrison Molded Filter (Hass Company* Fiberghtss is used increasingly. for instance* on offshore facilities* such as the tleck of this well bay on a platform in the Gulf of Mexico* Fiberglass weighs SO percent tess than steel and resists salt water corrosion* Chemical Products Earnings of our Chemical Products seg ment were the best in its history, reflecting favorable market conditions as well as the successful implementation of our strategies. These strategies are aimed at obtaining max imum cash flow from commodity busi nesses and selectively expanding those businesses where we believe we have a sus tainable competitive advantage. Earnings were strong in our base chemi cals business, primarily olefins and aromat ics, as supply and demand for these chemicals came into balance for the first time in nearly a decade. We benefited from our position as a low-cost producer of ethy lene and other base chemicals, which are building blocks used to manufacture a wide variety of industrial and consumer goods. In addition, our catalysts and polymers segments achieved record results, the latter highlighted by record volumes in polypropy lene, polybutylene, elastomers, resins and bisphenol-A. Detergent and ethylene oxide products rep resent one of our most important chemical businesses, contributing to the stability of our overall chemical earnings. Shell Oil detergent alcohol derivatives are key compo nents of many of today's household deter Chemical Sales Millions of dollars_______ 3.600 '83 '84 '85 '86 '87 Primaries (olefins, aromatics) Intermediates & solvents Q Polymers Agricultural chemicals & other gent powders and liquids. We entered this product area in the mid-1960s and have built a fully integrated business based on proprietary technologies. To support our continued growth in deter gent alcohols, we are building a major addi tion to our linear higher olefins unit at Geismar, Louisiana Scheduled to come on stream in early 1989, the addition is based on the second generation of the Shell Higher Olefin Process (SHOP), an advanced proprietary technology that pro vides cost-effective, high-purity feedstocks for our detergent materials and olefins for other businesses. The performance of our Saudi Arabia pet rochemical joint venture with Saudi Basic Industries improved substantially in 1987. This improvement was due to operating efiiciences and a more favorable worldwide market for the facility's products -- caustic soda, ethylene dichloride, styrene and crude industrial ethanol. During 1987, we sold our vinyl chlori le monomer production facilities in Deer Park, Texas, in line with our strategic thrust toward higher growth specialty areas where we have a competitive advantage. LAM 022362 16 abS-0059B9 Lute in the year, we sold our Woodbury, .\cw Jersey polypropylene plant Shell Oil remains committed to the polypropylene bus iness, with long-term strengths tied to our Norco, Louisiana polypropylene operation utilizing the proprietary SHAC catalyst und to a hi Hr successful polypropylene joint venuu . iacility at Seadrift, Texas. Based on unique Shell Oil catalysis tech nology, the Seadrift joint venture concluded six licensing arrangements with other manu facturers in 1987. Advantages relating to this technology in terms of product quality and lower operating and capital costs indi This placard attached to shipments from our tVarie^d. Ohio Chemical Plant asfes if ice are meeting customer requirements* it typifies the commitment to quality improvement in our Products organization. cate the potential for more licensing arrange ments as the worldwide polypropylene industry modernizes and expands its capacity. Chemical Products capital expenditures in 1987 were S163 million. New Business Opportunities In pursuit of new profitable growth opportu nities, we continue to invest in a number of ventures that are small and still in the devel opment stagebut offer significant long-term potential. These ventures are directed toward developing technologically innova tive products that bring Shell Oil closer to end-users. Included are ventures that are developing and marketing new polymeric products for food packaging, automotive, aerospace and construction applications, as well as ven tures involved in catalyst products and ser vices. In 1987, we completed and successfully started up a Shell Coal Gasification Process demonstration plant at Deer Park, Texas. We will test various grades of coal for use in the process. Shell Oil's biotechnology subsidiary, Triton Biosciences, Inc., is focused on prod ucts for the treatment and diagnosis of cancer and serious viral diseases. Limited clinical trials of Betaseron, a patented form of interferon made through recombi nant DNA techniques, continue to show promise. In the diagnostics segment, through a joint venture, Triton is develop ing systems which will automate diagnostic tests performed in hospital laboratories. Quality Improvement Process Throughout our Products organizations, Shell Oil's Quality Improvement Process is the cornerstone of our ongoing efforts to assure that the requirements of customers, both interned and external, are met This pro cess was introduced in 1984 and, by mid-1988, every employee in our Products businesses will have undergone training in the fundamentals of quality improvement The quality improvement process stresses a philosophy of doing each job right the first time, encouraging employees to find ways to perform their work better and eliminate waste and inefficiency. Among its many benefits, the quality pro cess has already resulted in significant cost reductions by improving productivity and reducing off-specification product LAM 022363 ABS-005990 17 This researcher is measuring the flow ofgasoline through an automobile engine injector. This is typical of the continued testing of our products to improve their performance and make sure they meet the needs of our customers In close cooperation with Shell Oil operat ing units, our research staff continually seeks new ways to apply technology in sup port of business objectives. Research programs are directed toward four major goals: maintaining Shell Oil's position at the leading edge of exploration and production technology; discovering, developing and improving oil and chemical products; improving Shell Oil's manufactur ing and conversion processes; and identify ing and developing new long-term opportunities for Shell Oil in areas related to its technological skills. In 1987, we spent 8232 million on research activities. In addition to our own research programs. Shell Oil and a company affiliated with the Royal Dutch/Shell Group of Companies have an arrangement where by each can share in the costs and results of certain research performed by the other. We continue to emphasize research pro ductivity to obtain more benefit for each dol lar spent A significant effort is devoted to adapting Shell Oil's Quality Improvement Process to many activities in our research organization. This has resulted in such improvements as (1) significandy increased output of market development products from pilot plants, and (2) reduced time and effort for the development of certain perfor mance products based on customer requirements. Finally, we continue to invest in state-of-the-art instrumentation and infor mation technology. Exploration and Production Exploration research is focused primarily on developing improved concepts and tools for evaluating unproven areas with oil and gas potential. A major effort is directed to new seismic methods and data processing techniques to better analyze and interpret data from greater subsurface depths, from complex geological structures and from fron tier areas. New analytical techniques and tools continue to provide better geologic information about how oil and gas are trapped in rock formations. The major thrusts of production research are to develop effective, economical meth ods for recovering mote oil and gas from known reservoirs and to find ways to reduce drilling and production costs. We continue to improve our enhanced recovery techniques, including steam injection and carbon dioxide flooding, while also pursu ing the development of new enhanced recov ery methods. As promising methods evolve, LAM 022365 f.eS'00 19 they are field tested to determine commer cial opportunities. Additionally, we are pur suing advanced technolog}', including production and transportation systems, that would be needed for economic development of deep-water discoveries in the Gulf of Mexico. Products We have focused our research funding in promising areas of Shell Oil's chemical busi nesses, where research and technology are critical to new product development Results of this effort in 1987 included a new series of high-performance epoxy res ins for making advanced aircraft compo nents and a new series of resins for laminating computer circuit boards. Another major focus is the development of improved catalysts. In Oil Products, we maintain an active pro gram of developing proprietary additives to improve the performance of Shell Oil gaso lines and motor oils. An improved additive package was introduced during 1987 to Ke continue to develop the Shell Coni Gasijlctit ion Process* and during the past gear completed a demonstration plant at Deer Park. Texas. The process offers co mm ere* ia Ug promising and environmentally s<und method (o coni'crt <1 variety of coats into gas for fuel to generate electric power or for use as a feedstock to manufacture hydrocarbon or petrochemical products. enhance the effectiveness of Shell unleaded gasolines in maintaining fuel injector per formance. Shell's premium quality motor oil. Fire & Ice 2000 High Performance 10W30, was improved in 1987 to meet the most stringent American Petroleum Inst tute requirements for use in modem automo tive engines. Key attributes are low temperature startability, high temperature wear protection, fuel economy and engine cleanliness. We are also seeking reductions in Oil Products manufacturing and logistical costs. The first phase of a new logistics and process control system, to optimize the scheduling of feedstock inputs and refined products manufacture, was installed in Shell Oil's eastern U.S. refining network. Emerging Businesses and Exploratory Research These programs, aimed at leading Shell Oil into new business opportunities, cover such areas as coal gasification, biotechnol ogy and exploratory chemistry. 20 ABS-005993 lam 022366 ...-.-I;.-. - ,;:.i; -V.; .. / Vi -v ::T//,;:?. -- \ 'i u4^. :^%&4'::^:'c-' ;V:.vv "< -.---' ..,;cv.v- tPe--: ySK'v ' gs^.---. ".' . (SS-*3...^V-j? LAM 022367 ABS-005994 21 EiSSSB Management's Discussion and Analysis of r- VFinancial CorKiition and[Results of Operations/ ' $589 million lower than in' 1985. The improvement in funds pro vided from operations in 1987 was relatively smaller when com pared with the improvement in earnings' as earnings reflected , . v Key Financial Results > : ;< '? . .' ' ' I'; ./^--Earnings forj 987 were $1,230 million, compared with $883 / ^ fr* CCJVmillion irt IQQC r *" tower non^cash charges for write-offs and deferred taxes. In addi tion, dividends from equity companies were tower.S-/ v- / The improvement in 1987 earnings over 1986 was due mainly to higher average crude oil prices' Domestic'crude oil i ; prices for 1987 averaged $15.51 per barrel, compared with : in 1987, compared with 6.2 percent in 1986 a $13.20 per barrel in 1986. However,'year-end 1987 average crude oil prices had declined about $3.00 per barrel from the --Funds provided from operations (net income plus deprecia tion, deferred taxes and other non-cash items) were $3,407 mil lion, compared with $3,531 million in 1986 and $3,927 million in peak reached at mid-year. At the end of 1987, average prices remained above 1986 levels, but were significantly below levels which existed prior to the sharp declines in early 1986. ; : Domestic crude oil prices in 1985 averaged $24.55 per barrel. rr- ; 1985.. %/ ; \ -. ';,/.// = \. /... . . . : The benefit to 1987 earnings of higher crude oil prices was _ //-Revenues for 1987 were $212 billion, an increase of 22 per partly offset by tower natural gas prices! Natural gas prices in',/ cent over .1986, and 4 percent over 1985. ' " /:'-_ /-._' 1987 averaged $1.87 per thousand cubic feet a decline from r --Shareholder's equity at the end of 1987 increased to $14.8 bil lion from $14.3 billion a year earlier and $14.1 billion at the end ' of 1985..//^:./ /-/-/> / // /}/'; $2.15 per thousand cubic feet in 1986 and $2.80 per thousand cubic feet in 1985. Production during 1987 for both crude oil and natural gas remained at essentially the 1986 levels which/ were about 9 percent higher than 1985 production/ ; -Long-term obligations as a percent of capitalization declined Operating, exploration and dry hole costs in 1987 declined to 15.1 percent at the end of .1987, down from 16.0 percent at compared with 1986, and were significantly below 1985 costs. year-end 1986 and 17.9 percent at the end of 1985. These obli Although write-offs were lower in 1987 when'.compared with . gations were reduced by $113 million in 1987. 1986, both years were higher than 1985 due to increased pro duction levels and a greater asset base. Gains on property Oil and Gas Exploration and Production . .. sales in 1987 were $45 million, $92 million in 1986 and $88 mil ; Oil and Gas Exploration and Production earnings were $733 . lion in 1985. : ' /--/. / million in 1987. This represented a $306 million increase over Earnings in 1986 also included a gain of $62 million from the / . 1986 earnings of $427 million but was $697 million less than sale of certain Canadian interests to Shell Canada Limited, 0 1985 earnings of $1,430 million. Funds provided from operations while 1985 included a $108 million benefit from settlements asso-'4' in 1987 were $2,366 million, $91 million higher than in 1986 but ciated with renegotiations of certain natural gas contracts. - Consolidated Net Income (Millions of dollars) Consolidated Revenues (Billions of dollars) Shareholder's Equity {Billions ol dollars) Average Prices of Domestic Crude Oil Production (Dollars per barren `-'5 18 500 !_ '83 '84 >,'85 >'86 ./87 !\%. '83 .'84 -. '85 '86 '87 '83 '84 '85 '86 '87 '83 .'84 '85 '86 '87 LAM 022368 ' ABS-005995 ^ I 400 Exploration costs, incjudirjg dry hole ^write-offs, were down 19 Prcent from 1986_and 40_percent from 1985. Reduced seismic I^s^ooo''^reactivities and loy^r dry h^el^^w^e^ejnajor^^^contiib'utors^':>:M "^^s^to the d^ine from j 986,"v^il^t|^e^&me factors, is well as >S4 ,{_h ;v_': lower costs,`contributed to ^udioh^from 1985.^fe.- . ; ^ moo- SncxttEartksnjxjste'jwere$1,491 mil- 'Yi ?.i|i:Jion in 1987, slightly betow^986;-Jhesi'costs in.1987 were .y~ v ;7 $216 million more thah 'ih^9^,'primanly .due to the higher pro;i4i^5u5iHiirririn leupt arwl a nroatpr a<te i'83 : CnjSe'OifProduction'^.Total net'caid^ viiith $1,76rmto_j^19^an3^$2jBi5'miffion'in'l986. 1987 of 542,000 barrels'per'day,'including equity pnxJuctioa^^'Jlie decrease from .1986 reflected lower spending for producing yqsclown 8,000 barrels per day from 1986 but was up 40,000 y ; property acquisitions, lower capitalized interest and generally barrels per day over 1985. lower drilling costs,"partially offset by increased spending for ^Domestic net production averaged 488,000 barrels per day in ' new leases, primarily in the Gulf of Mexico. These same factors 1987. a 2 percent decrease from 1986 levels, but 5 percent v were the main reasons for the decrease from the 1985 level than in 1985. In 1987, normal production declines in var and, in addition, expenditures for new leases were less than in ious fields were partially offset by increased production in Califor 1985 due to a lower average cost per acre. .. nia Most of the increases for both years over 1985 production A program of upgrading our domestic oil and gas assets were from fields in California and Texas. :: through selective purchases and sales of properties was contin \ Foreign net crude oil production, including our share of equity ued for the fourth year. Acquisitions continued to be concen production, was 54,000 barrels per day in 1987, up 3,000 trated in areas having enhanced recovery potential and fields barrels per day from 1986 and 15,000 barrels per day over where Shell Oil already owns an interest This program, which *1985 levels. in 1987 also included a major property exchange, resulted in a net increase in proved reserves in 1987 of 106 million barrels of Gas Production -- Average net natural gas production of crude oil equivalent Capital expenditures for producing property 1,821 million cubic feet per day in 1987 increased marginally purchases in 1987 were $154 million, compared with $353 mil from the 1986 level of 1,816 million cubic feet per day. Sales lev lion and $975 million in the prior two years. Property sales in 1987 were maintained in a weak market through an totaled $113 million in 1987 compared with $186 million in 1986 V4Vactive marketing program. Production in both years increased 9 w;percent over 1985. and $233 million in 1985. Hydrocarbon Reserves -- Shell Oil's replacement of hydrocar Natural Gas Liquids -- Net natural gas liquids production in bon reserves through discoveries, extensions, improved recov ';1.987 was 70,000 barrels per day, down 2,000 barrels per day ery techniques, net property purchases/sales/exchanges, and 11986, but 3,000 barrels per day higher than in 1985. The revisions to prior estimates in 1987 was 140 percent of produc 7 average natural gas liquids price of $1126 per barrel was tion for the year. This was up from the 120 percent in 1986 and . percent higher than in 1986, but 33 percent less than in 1985. about the same as 1985's 143 percent We drilled 1,291 net wells in 1987, compared with 1,514 in 1986 and 1,067 in 1985. VPsts and Expenses -- Production costs, exclusive of Windfall The increases in 1987 and 1986 over 1985 drilling were i ft Tax, for both 1987 and 1986 were down 19 percent and primarily for supplemental recovery projects in California..; . ' 4 LAM 022369 ABS-005996 23 Oil Products Net Income ' (Millions of dollars) i 1l 300 200 . ; Oil Products x Capital Expenditures ' (Millions of dollars) 1 " 450 _____ I M 300 100 1111 . '83 '84 '85 . '86 '87 150 Mil '83 '84 '85 '86 '87 Refined Product Prices --' Average refined products selling prices increased 4 cents per gallon from 1986 but were signifi* cantly below levels experienced in 1985. Price increases overjT 1986 occurred in most refined product categories. Average autoxj motive gasoline prices for 1987 were up 5 cents from 1986, buiil down 25 cents from 1985. . Jet fuel prices for 1987 were up 3 cents per gallon from 1986, but down 25 cents from 1985. Kerosene, heating and dieQ sel oils prices increased 8 cents and decreased 24 cents in the] comparative periods. Capital Expenditures -- Capital spending for Oil Products was] $351 million in 1987, $342 million in 1986, and $496 million in 'M 1985. The high level of 1985 expenditures included service sta-J tion acquisitions, principally in the Northeast Oil Products . Oil Products segment earnings of $224 million in .1987 decreased $95 million from 1986 earnings of $319 million and $45 million from 1985 earnings of $269 million. Funds provided from operations of $527 million in 1987 decreased $158 million from 1986's $685 million and $95 million from 1985's $622 mil- Chemical Products ; . - Chemical Products net income for 1987 was a record $416 i million, compared with $342 million in 1986 and $96 million in *8 1985. Funds provided from operations in 1987 were $596: million, compared with $671 million in .1986 and $352 million injj 1985. Earnings in 1987 benefited from improvements in non cash items, mainly higher equity income and lower write-offs, -jf xf In 1987, the benefits of increased refined product sales vol-.v which did not have a similar effect on funds provided from ; times and higher selling' prices were more than offset by higher operations. ^A' raw material costs. Lower margins, particularly during the first .. The 1987 earnings resulted from improved margins, primarilyl ; in the'second half of the year, and substantial volume gains. >S|| The 1986 period benefited from"a $120million gain from the 3 sale of Shell Oil's agricultural chemical business; while a tax jfM Refined Product Sales Volumes'-- Total 1987 refined ;.... adjustmentTwhicri was substantially smaller, benefited 1987.: " t product sales volumes increased 179,000 barrels per day to -T x 1,352,000 barrels per day,' an increase of 15 percent over 1986 . and 42 percent over 1985. Volumes were up in most product x LAM 022370 lines, including automotive gasoline, jet fuel, and kerosene, heat- ing and diesel oils. ; ': .S:;:: Automotive gasoline sales volumes in 1987 increased 12 per-, cent over 1986 and 35 percent over 1985, reflecting,' in part, con Chemical Products Net Income : (Millions of dollars) " Chemical Products Capital Expenditures (Millions of dollars) "* * ~ tinued favorable customer response to SU 2000 super ; ' unleaded and RU 2000 regular unleaded gasolines, which 7.--% were' introduced in 1984.. Volumes through'service stations in -`T T' >1987 were up 8 percent over 1986 and 23 percent over 1985 ;.. .. . Sales in the jnter-refirier market accounted for most of the `- -;.remaining'increases.>! ;' ... '^x.' Sales ' volumes* of jet fuel were up 24 percent over both 1986 ^and 1985. Shell Oil continues to be a leading supplier to the corn er ^},mercial.aviatidnM and an active'supplier to the military.'; .. Kerosene' heating and diesel oils sales volumes were"up.30.'. 'percent [over J 986 as'a result'of increased sales from Gulf /i-' l&x&S Coast'arid West Coast r -t '*, ill H . v,x'360 ; * - 240* '120 T'cr 180 L"_1 . -120 60 $ 0. 0599,7 ^ commodity"chemicals as increased sales prices, due -y ;-^\;Jzatibh'declinedi(to.15;i_psrcefrt^_th^Td.of_19871rc|ompared primarily to strong markets, more'than offset higher feedstock S,^;'with 16.0 percenfat the end of 1986Hrid 17.9 percent in 1985. ' costs. i Results of our Saudi Arabian petrochemical venture improved .^Shareholder's.Equityj7-6Shareholder's 'equity increased $530 -- ---* - -- 1 ^million inJ987/and $183 million in.1986.Jn 1985, it increased f ^ $1,617 miliionTof which $1,011 Tmilori'carre from 'reinvested r eamings. TheTemainder of the 1985 incireasewasacapital con- .0% tfain'offsetting loss of .volume related to the salesof our' agricul-- !f? .1.987, incofhe y\ras_8.6 percerit of shareholder's equity, jural chemicals and vinyl chloride monomer businesses. This "compared withj52 percentjn^1986'and 132 percent in`1985. Capital Expenditures ^ Capital spending for Chemical Prod-; :-J expenditures, which amounted toj$2,220 million in 1987, $2,343 : -y' Jj&lwas $163 million in 1987, compared with $95 million in' millionjn.1986'and$3,779million'in' 1985.The`slight decrease f -j .986'and $195.million in~1985.^Capital programs in 1987 cqr^rV;;jin.i987f.^p^J^i^'Sfewr propertya^adbnqpfrtu-'vivH j^Tto'focus on'ddmestic'pfod'Jctiof1 efficiency projects and an r^'nities m^'eq^K^^'giaTei^liwiej'drilling'costs. *i': '; :1 lS^reionarbui^Geisma"r4 Louisiana plant for detergent prod-li'S^^ShellOirscapital sending progrannTcbhtinues to emphasize ; 4 imc In 1 QRCI ink'll irloH m rtlowo fnr r\i ir Dni i"rt\/ irH/oet.. - - thn OYnlnratinn fnr -2an/4 tho'^anni iloltlnn onH rlanlnnnuint nf ' Non-Allocated Corporate Costs - .with 75 percent in 1986 arid 74 percent in 1985. These outlays Corporate costs not allocated to the segments reduced eam- were primarily in the United States. Oil and Chemical Products f$148 million in 1987, compared with $194 million in 1986 accounted for 23 percent of total spending in 1987, compared and$134 million in 1985. Costs were lower in 1987, mainly with 19 percent in 1986 and .18 percent in 1985. ' because the prior year was impaired by $70 million, reflecting a Capital expenditures of $2.8 billion are projected for 1988, settlement with the Department of Energy. In addition, interest with $1.9 billion,' or about 70 percent of the total, designated for arise in 1987 was lower due to a reduction in the average :. exploration, acquisition and development of energy resources, . J of debt and lower interest rates, which more than offset principally domestic oil and natural gas. Capital expenditures of ; ^associated with the redemption of certain debentures. The impairment from 1985 to 1986 was primarily the result of '^Department of Energy settlement, and interest expense also roeased in 1986 due to a higher average level of debt during that^year. Capital Resources and Liquidity Oil's balance sheet strengthened in 1987 as assets and Shareholder's equity increased and debt declined. ynds Proved fr0m Operations -- In 1987, funds provided [.operations continued to be the primary source of funding Shell Oil's capital investment program, dividends, debt reduc- Consolidated Funds Provided from Operations {Millions of dollars)________ i iii 3000 Consolidated Capital and Exploratory Expenditures {Millions of dollars) other needs. In 1987, such funds amounted to $3,407 ... compared with $3,531 million in 1986 and $3,927 million 985.1'- - -.:-- ^Obligations -- In 1987, Shell Oil reduced its total debt obli- 2000 INI 1000 _j,by $293 million, compared with a decrease of $298 mil- 1^986 and an increase of $765 million in 1985. The 1987 ' ^consisted of $113 million of long-term obligations, and ; .It*?3 . tign .in_short-term obligations. ^ vK^O '84 85 86 87 88* \- `Projected r - *. . ---.if.;. *. > - LAM 022371 abs- 059g8 25 ^t';-..;^;^ j^i^-ifo-g-iy?^ !<"t?\\ i1 v-V---- ..:-. ' - -1 * v -1 >^>'-s-HS'v.'as st y about $400 million are planned for Oil Products and $250 V ' yfy Working capital amounted to $529 million at the end of ./million for Chemical Products'. It is anticipated that such expendi- / compared with $598 million at the end ofJ986, and $1o6, tures will continue to be funded predominantly with internally gen- ' million in 1985. Shell Oil's liquidity'position is'considerably erated funds. .. -.y /''.. ;..V V,-. stronger than indicated by these! working' capital levels hica of relatively low historical costs assigned to inventories unde? Dividends -- Dividends in both 1987 and 1986 were $700 mil UFO accounting procedures. The year-end inventoryvaiues lion and $639 million in 1985. ' y' included in working capital were below their current costs'Bj? $911 million in 1987, $857 million in 1986, and $1,398 million Liquidity -- Cash and short-term securities amounted to $535 1985. - -- "' million at year-end 1987, a decrease of $453 million from 1986 and an increase of $51 million over 1985. A portion of the Other Matters -. r:/W- increase in 1986 represented the proceeds from the sale of During the fourth quarter of 1987, the Financial Accounting Shell Oil's agricultural chemical business. Some of those pro Standards Board (FASB) issued three new Statements ofF? ceeds were used in February 1987 to redeem all outstanding cial Accounting Standards (SFAS), which will affect the Cot? 1AV* percent debentures due in 2011. pan/s financial statements upon their planned adoption inT Internally generated funds, access to outside financing based SFAS No. 94 requires the'consolidation of all majority ovf on strong credit ratings, and prudent management of minimum subsidiaries except in circumstances where a question' de working capital are the essential components of Shell Oil's liquid-. control exists. Although Shell Oil's consolidated net income y. rty position/-' .". -.Vy':?/'/;. .{ ' : ' shareholder's equity will not change as a'result of adopting - Shell Oil's strategy continues to rely mainly on internally gener standard, various asset and liability categories will be resist, ated funds to finance routine operating requirements and capital 'as further described in Note 4 of the Notes to Consolidated spending! Short-term borrowings will generally be used to fund " Rnandal St^ements.-yji^ interim working capital needs and unusual requirements. Shell . In addition, SFAS No. 95 requires that a statement of cash Oil and its finance subsidiary, Shell Credit, Inc.; had a total of. . flows replace the existing Statement ofChanges jn financST $2,020 million of unused back-up credit facilities available for V' : Position. This new standard redefines cash flow' activities into general corporate purposes, including support of commercial. ; investing, financing, or operating categories. The Company- paper, as of December 31,1987. Under certain conditions, the y . intends to present earlier years on a basis consistent with the Company would consider utilizing its existing shelf registration to!/ new standard. This statement will not affecUhe consolidated issue up to $500 million'of debt securities. arice sheet or income'statement -The FASB also issued SFASiNov96jwhjch. requires that the /liability method be used forjacqMinfirig'fcyjncoiro faces/Sf(E. "Oil plan's tb'adopt the standardprior Net Income" as a ,, / Percent of S/y Shareholder's Equity (Percent)* ' 'Vr ; Long-Term yyjiy - c; / Obligations as a yy _ i Percent of > <;y \ ~ .' Capitalization ' --y ' , (Percent) ______________ -____ . - years. Jhe'cumulative effect of adopting SFAS No/96, pritf" resulting from the lower income tax rates provided in the Tax Reform Act of 1986, will be a reduction in defehed tax balances and a corresponding increase in net income currer : estimated to be approximately $975 million'. Under the new1 method of accounting for income faxes, future results will also be impacted by the effect of changes in income tax rates oh cumulative deferred tax balancea-y^/yyy 'myy/S^' ; In addition to the various economic conditions affecting I Oil, other matters which could affect its operations, earnings:? ' and financial condition are discussed in Note 15 of the Notes '83 '84 '85 '86 '87 ,'83 '84 '85 '86 '87 .- V. t-'v.-r.': V- -. V.'-' ^ v; . LAM 022372 ABS-005999 jgThe Company prepared, and ^responsible for, its consolidated financial statementsjarid the other information appearingVi this $SiS| annual report The Company believes that the consolidated financial statements fairly present its financiaipositiori in .caifofmity`^S:| |y&h generally accepted accounting principles. Inpreparing its consolidated financial statements, the Company^includes'amdunts Rifot -aro hacprl nn ewitimnfoc and ii iHnmpnt^ whirh thp Cnmnanu hplipv/pc; arp rpp^nnphlp I inHpr thp rirpi imctanpoc fjfet the Company meets its responsibilities in the preparation of its consolidated financial statements; and maintains reasonable^?? - Sp.! fpcountability for its assets.'Inqstabiishing and maintaining any system of internal accountingcontrol, estimatesand judgments,^ fpe^required to assess the relative costs and expected benefits. Also, the Company maintains an internal auditing program that assesses the effectiveness of the internal accounting control system and performs other internal audit functions. SfcThe independent accountants provide an objective, independent review of reported operating results and financial position. g|The Audit Committee of the Board of Directors, composed entirely of non-employee directors,"oversees the Company's financial ;; f ^porting process on behalf of the Board of Directors. Its functions include: reviewing and recommending to the Board the selection v \ Krf the independent accountants, and reviewing the scope and discharge of the responsibilities of management, internal auditing ;'?] ||nd the independent accountants during periodic meetings with representatives of these groups.; `r.'.'~. v 1. ; O n"'*be ha l-f-o-f-t-h-evC...o.mpany: . ,:; - V-'~ .x A ^ - -..... --a uary'9,1988 A1 ` ' /T,-.' - -- "S v.'sf, ____ _ J.C. Jacobsen c ` -*: '- Vice President Finance and . v - . ; Chief Financial Officer": : *' ; r'-ifU''Vs.1'OV'^*V*- ^ v* + V. r-v >,-L; * ,J yFteport of Independent Accountants ; ; ffothe Board of Directors and Shareholder of Shell Oil Company: J|ln our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income and |eamings reinvested and of changes in financial position present fairly the financial position of Shell Oil Company and its ^subsidiaries at December 31,1987 and 1986, and the results of their operations and the changes in their financial position for |each of the three years in the period ended December 31,1987, in conformity with generally accepted accounting principles Consistently applied. Our examinations of these statements were made in accordance with generally accepted auditing ^standards and accordingly included such tests of the accounting records and such other auditing procedures as we ^considered necessary in the circumstances. ^Houston, Texas ' iry 9,1988 .tL AjUJ^ LAM 022373 ABS-006000 04 27 ; : ' ''v;:; ' v'\' -V^-.v.- Consolidated Statement of Income ^and Earnings Reinvested a _ -> ' " "" -'' V'' r-. '" -iv" A''. -: >;;. ... - i. ;'. --,r4- ;V-.-?^;' Years ended December 31 Sales and other operating revenue .' ' Less: Consumer excise and sales taxes Equity earnings, interest and other income Total Costs and Expenses -I -.'V' =V;'-. Purchases and operating expenses Selling, general and administrative expenses Exploration, including exploratory dry holes Research expenses Depreciation, depletion, amortization and retirements Interest and discount amortization Income and operating taxes Operating taxes - Federal and other income taxes v ' Total v Net Income : Net income ; v:.: y ,*- - - ,-i ' -. 591 551 19,992 .16,470 .1 $ 1,230 ~ v $ 883 i: . $;V . . r?&z ;7. . - - :r ,. , - `.iT. . ' .' - . ' ' - r.- ', ., , ................ .. ........................... . . . ............. , ... . v - - . ' '-V-- r *: v'.'. .?*-r.": -. : L.A_M__0_2_2_3-74. ' 'r ^ ABS-006001 &&&7/ *:.7 ed Balance Sheet exceptper share amounts ,;-Receivables and prepayments, less allowance for7:77 '"i^^^^^i^-vdoubtful accounts -- -7' .T:7i7v.7'7.- ''7' "368^^&839 IP 2.3887^iv^.913.^J Inventories of oils and chemicals ; _' - ^Current /Assets - . . 77 , v ;. ;i:! -:Investments, Long-Term Receivables and ; Deferred Charges . :.- v -7 " . : *- Property, Plant and Equipment at cost, less v\ accumulated depreciation, depletion and amortization Total v* " ?: :;r/TV;-"!': .--696 . ^ 7777675 *"'v -.'7777v77279' 303 >4-022 7 v 4,081 77.7..-7 ,V -'r' 1,826 = - 1,613 21,089 20,520 ; Liabilities Accounts payable--trade ^Commercial notes 77:777.., Other payables and accruals' V - 'i' ... 7777-. Income, operating and consumer taxes 777 ,v.-r : Kf?r-- %................... ............................ - Owing to related parties Long-term obligations due within one year ,609 7#7$ ,1,272 '622 :7.-* .77; 674. 7777- 516 77-- : . 582 7^7^;!%7ir7319 169 v v .. 1 : , ' 258 ' 386 Total Current Liabilities Long-Term Obligations Long-term debt Owing to related parties Other long-term obligations ' ; ^ - - . 3,493 . 7/ . v 3,305 77.: 22 - 203 7 3,483 . 3,355 . . 46 "242 * ' > v Total Long-Term Obligations Deferred Credits--Income Taxes Shareholder's Equity Common stock -- 1,000 shares of $10 per share par value authorized and outstanding Capital in excess of par value Earnings reinvested 3,530 5,072 -- 2,045 12,797 3,643 : 4,776 ' -- 2,045 12,267 Total Shareholder's Equity 14,842 .14,312 Total $26,937 The accompanying Notes to Consolidated Financial Statements are an integral part of these - . ';77 $26,214 '7s*- . ; i- .v - ; > . . > . jV''./.A-'-' J. *-- .-,...-7 7:..-\ * .nAvvV-.'Jr-.:. k.v-= r , A>'.;'y * - -vs-7^''?v^rv;n': 7k....._ Consolidated Statement of Changes in Financial Position Masons of :; . .yy _. ^'.: -: '=' c)St* Years ended December 31 -'" * 1986 ^19851 ; Funds Provided ; " ' Net income . : ' . ' v-r.V , -r' $1,230 $883:-; $1.6^ . from Operations y./.y--' Depreciation, depletion, amortization and retirements ..; ' 1/2,002 lyy; ; 2,096 "... . 1.7J7g * ` - * ` ' ` -' Deferred credits--income taxes '. 4/-- ^ .: 296 > 494 ' *; : :rr. v. T' */' *' - . Dividends in excess of (less than) equity income .x "(121)1" ;-Vv 58vf ; Vx'^Sy :JCw.\ . - Other Sources (Uses) of Funds ; Funds provided from operations Property sales and salvage Other non-current items Current receivables and prepayments ' 3,407 - 3,531 ; 203 . . 288 : ' 3,92j . xyi>Jg 24^ (646) :: : 94 " .. (397), 546 yfgj Inventories '3 79 (m Current payables and accruals 190 ' (693) . (130]! Other sources (uses) of funds ; ' :(647) . , . 314 ; , . (25^ Funds Provided by Increase in long-term debt . (Used for) Financing 7 Decrease in long-term debt - Transactions Decrease in production payment >, . ^ 252 ; ' 1,020 1,378| (302) ,(1,375) , * .'(8g| . - ` (203fl - / Increase in other long-term obligations Y'y/vy.yy -60;' , - -158| >':' \ / y- . :.y ; Decrease in other long-term obligations : - -I Increase (decrease) in short-term obligations ' (63) , ^ (180) ; . (77) ' , - ^ '(29fi 74 i ' 3511 : . /' : .' . - . Funds provided by (used for) financing transactions ,:\v (293) . /.ir-:; (298) :.. , 765| ' Funds Used for Capital : Expenditures . Capital expenditures .-y ,. / ? 2,220 y' 2343 - 3,77|| Funds Used for Dividends ;\ Increase (Decrease) in ' Cash and Short-Term Securities Dividends . / -. ./ . - ' . . -* - ;-y .y, 700. ty":;,yy..7do ;;yy ;.y : 63^ . . :: v ' . - ; ; .:;.':-yyry;y'r %'Y- .- --iyl'S y Cash and short-term securities $(453) X? $ 504 ` $ 20| The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. LAM 022376 - ' IS - v." '4>- -/. - l -SV& * VV*''4S#1 -* - ' -v * ^ >.Vi.y."` ~ > - o,,. ABS- 006003 ......... . ... p^ccountirig'Pol|cies'3S^H^::^-7:-:Zr^y27si1: gfShellOil Company"(the Oompany) is whoiiy owned by Shell Depreciation, Depletion and Amortization'^Depredatiorv* ^Petrbie'umjnc. ;a Delaware corporation,whose shares are .;W^itdepletiorland amortization.ofthecapitaBzedccetot producing Retiredly orjndirectly owned 60% by Royal Dutch Petroleum C-i ^properties, both tangible and intangible^are provided for bn a ^Compariyt-]^ Nethertands. arid 40% ly srsheii' Tronerwrt onH Trorftrvi rV\mnarn; Dt iKIl/'* I imfteirl bf productibn.basis^Deyeloped reseryeYare used in com-3 'm rflnn Imft ratoo fnr HrilUnn onrJ rfax/olrtnmont ^^v`*4 4/V^t [pany, _ _ _ ?Thisjummary of thei major accbunting policies of.Shell Oil j^mpanyand its consolidated subsidiaries'(Shell Oil) is pre- .' lease costs from 'date of acquisition is'based primarily upon_^l| I'sented tovassistThe'reader in evaluating Shell Oil'sfinahcial - experience'in establishing rates to fully amortize over the boldine BoVr.tomonto and nthor Ha?a>nintain^ in thic'ronnrt Sr'Si - 7 period those leases that may be unproductive; Estimated dis- v \ '.*"mantlemenVrestoration'and abandonment costs and estimated Principles of Consolidation'--'Jhe financial statementsresidua) salvage valuesare taken into account in determining ^ Include the'accounts of Shell Oil Company and its majority- " V amortization and depreciation provisions, owned subsidiaries, except for a finance subsidiary, an insur- 'pother plant and equiprnent are depreciated on a straight-line''' ance subsidiary, and a foreign operating oil and gas subsidiary ' basis over their estimated useful lives. On a cycle basis, asset vt j-which are carried on an equity basis. Investments in companies - - lives are reviewed for propriety of estimated useful life. Changes !!twhich Shell Oil has a voting stock interest of 20%, but not ' j in depreciation rates, if any.'are applied prospectively rare than 50%, are carried at equity in uridertying net assets ' Investments in less than 20% owned companies are carried at ^ ^.Deferred Income Taxes -^.Transactions' which affect book Ifwith dividends recorded injneomeasreceived. ^if^income and taxable income in different periods are adjusted by*| <>7 inter-period tax allocation to eliminate the effect of such timing ;f ^Inventories ^Inventories of oils and chemicals are valued at -i :v:. differences. Tax allocation for differences pertaining to capital- ' fcost predominantly on a last-in, first-out (LIFO) basis which is ' flower than market Materials and supplies are earned at average ized costs and assodated write-offs, including intangible drilling and other costs associated with the exploration for and develop icostorless. . ; - ' . . -. ment of oil and gas reserves, is reflected in Deferred Credits -- Income Taxes in the Consolidated Balance Sheet For other dif ^Exploration and Development -- Exploration and develop ferences, the net cumulative effect is reflected in Receivables ment expenditures are accounted for according to the "suc- and prepayments or Other payables and accruals in the Consol gcessful efforts" method of accounting. idated Balance Sheet $5 Property Acquisition Costs -- Direct costs of acquiring de veloped or undeveloped leasehold acreage including lease . I bonus, brokerage and other fees are capitalized. The cost of Investment Tax Credit -- Investment tax credits are applied to reduce federal income taxes in the year realized. ^undeveloped properties which become productive is transferred i to a producing property account. Capitalization of Interest -- The capitalization of interest is Exploratory Costs -- Exploratory expenses, including geo^jogical and geophysical expenses and annual delay rentals on limited to projects where construction or development of the asset takes considerable time, entails substantial expenditures >.vOil and gas leases, are charged to income as incurred. Explora and involves a significant amount of interest cost tory drilling costs are initially capitalized, but should the efforts be ^'.determined to be unsuccessful, they are then charged to ^Income. V Development Costs -- Costs incurred to drill and equip de velopment wells, including dry holes, platform costs, well equipj-^Ynent costs, and attendant production facilities costs are '^.capitalized. -. .. LAM 022377 UiVir>vS'.j-t'-f. .. { ABS-006004 31 2. Transactions with Related Parties 4' Shell Oil had transactions, including the purchase, sale and transportation of crude oil, petroleum and chemical products in the ordinary course of business with related parties, including 4 K5 companies affiliated with the Royal Dutch Petroleum Company ; and The "Shell" Transport and Trading Company, Public Limited Company. Such transactions were as follows: ',' / ;: Millions of dollars ......... Sales and other operating revenue Purchases and transportation 1987 $ 521 1,223 1986 $359. 733 1985 $243 464 Transactions with related companies also include certain for eign venture arrangements with respect to the exploration foK and development and production of crude oil and natural gas,, and arrangements whereby the Company and a company ' affiliated with the Royal Dutch/Shell Group' of companies each perform for, and exchange with the other, research services related to petroleum technology, chemicals and other fields. The revenues and costs related to these transactions are com mingled with other revenues and costs and the amount of profit 4 thereon is not accurately determinable without effort and ex pense disproportionate to the relative importance of such amount In addition, a Canadian subsidiary was sold in 1986 for $80 mil lion, with a gain of $62 million, to Shell Canada Limited. 3. Inventories of Oils and Chemicals T Inventories are carried predominantly on a LIFOvbasis which was lower than current cost by $911 million at December 31, 1987, $857 million at December 31,1986 and $1,398 million at December 31,1985. Partial liquidation of inventories valued on LIFO basis was minimal in 1987 and 1986 and increased net income by $67 million in 1985. . LAM 022378 4. Investments , ; j. 44:-4- Investments in unconsolidated subsidiaries accounted for by the equity method include PICO Limited, a wholiy owned Bermuda'^ 4 V: insurance subsidiary; Shell Credit Inc., a wholly owned domestic finance subsidiary and Pecten Cameroon Company, a majority 44 owned foreign operating oil and gas subsidiary. . ... . .. . ... . -4-:::< .44 44'i 7 . In 1987, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 94 V which requires that the accounts of these insurance and finance subsidiaries be consolidated in the Company's 1988 financial ` statements. The effect of applying the provisions of that standard on the December 31,1987 Consolidated Balance Sheet will be to; . 4 increase the reported balances of total assets by $647 million, current liabilities by $287 million, and long-term obligations by $99 4 V million. There will be no effect on net income or shareholder's equity and the impact on debt ratios,will not'be' material.' ,'5i; -r 5^ Investments in companies in which Shell Oil has a voting stock interest of 20 percent but not more than 50 percent are'also S4 '4 accounted for on an equity basis. These include Saudi Petrochemical Company, a petrochemical company in Saudi ArabiaTand;*, 14' investments in several pipeline companies: Shell Oil previously accounted for its investment in A T. Massey Coal Co., Ina on an 4 equity basis, but following a division of partnership "properties in July 1987, the companies received were fully consolidated. 4:'4.:'.,The equity investment in these companies amounted to $857 million, $1,149 million and $1,296 million at December 31,1987, v ; 1986 and 1985, respectively. Summarized financial information of the companies and Shell Oil's equity share thereof is as follows: 4 , Unconsolidated Subsidiaries Twenty to Fifty f - j. ; ; Percent Owned ; Companies -: . . V .' '' Millions of dollars Current assets . Noncurrent assets .- - Current liabilities - Noncurrent liabilities* . Deferred credits - ; Revenues . . Net income Current assets ' 7 -v ; . Noncurrent assets ; Current liabilities ... . Noncurrent liabilities ' Deferred credits Revenues Net income (Loss) \\ 1987 Total Equity Share $ 685 794 537 234 318 ... 281 101 $ 655 722 504 216 318 235 97 1986 4985 Total Equity Share Total Equity Share $ 821 $ 776 -. $ 604 787 694 ' 860 ' ' 589 . 545 - 623 : 432 " , 405 ' : . 329 ' 247' 247 4:159 251 ' :T-; 214 . 450 88 86 ' 95 ' 539' 737' .572, ' 272 .' 159 . 374 : 82,- ' $ 372 2,810 189 2,028 54 1,459 186 $ 174 1,316 . 81 957 15 642 78 - $ 491 ' $ 233 ; -;:: $ 614 ':': $ 290' ' / 4,426 . '. 2,127 ; :. 4,616 ;. f 2,222 . : 297 . ' 134 V' 404 ... ' 189 2.971 54 1,425 .. : ,. 2.892 1,382r 16 48 13 1,841 ; 854 634 252 69 .14 . (56) : (37) ; . `Includes a $45 million long-term note payable by Shell Credit, Inc. to the Company at the end of each of the three years. ABS~0060o5 5. Lang-Term Debt.-., v- ;/*.:; ''Long-term debt due after one year from December 31 consisted of the following: v- "Millions of dollars Shell Oil Company ^* 4V4% Notes Due 1990 . V . > 5% Debentures Due 1991 , 5.3% Debentures Due 1992 ...... .*: 8V4% Debentures Due 2000 J'/4% Debentures Due 2002 . , . ( v8VS% Debentures Due 2005 & *8% Debentures Due 2007 ./' 7'A% Notes Due 1991 .; Vv- -' V'.,..' 97%% Notes Due 1993 ' i'- ' /. j8%% Notes Due 1996 -.: i .9'A% Notes Due 1990 1 _ " * ; - .., oj 354% Notes Due 1991 v. : ' ;>' E1514% Notes Due 1988 ' ` ' ;'':73%to 8.7% Notes Due 1989-1996 T " r Commercial paper and bank loans '6.3% to 12% Pollution control obligations ^Other obligations at various interest rates Consolidated subsidiaries "Industrial Development Revenue Bonds . Tlotes and Debentures Due through 1999 y;y.. - . ;;. Cess unamortized discount long-term debt, less unamortized discount 1987 1986 ( 55 .10 8 / 35 . .. 35 ' 122 58 l 250 250 250 250 . 200 188 1,270 116 26 ; 60 15 . - .8 36 44 . 134 78 250 ' 250 . 250 250 200 50 250 1,300 116 21 148 37 3,308 .'3 $3,305 46 3,358 3 $3,355 Commercial paper, bank loans and certain Industrial Development Revenue Bonds'of $1,400 million, with interest averaging 7.3% as of December 31,1987, are reported as long term since Shell Oil intends to finance that amount on a long?rm basis by either rolling over the short-term obligations as they become due or by replacing them with long-term obligafons. Shell Oil has available commitments for long-term financing consisting of $2,000 million under variable rate re iving credit agreements as further described in Note 6. *ln previous years, the Company purchased U.S. government securities and deposited them in irrevocable trusts to be used to fund the scheduled principal and interest payments on cer tain portions of the Company's long-term debt. These govern ment securities and long-term debt issues were removed from toe balance sheet, and at December 31,1987, $389 million of mch debt remained outstanding. jj^The amounts of long-term debt and capitalized lease obliga tions maturing during the next five years are $258 million in 988, $76 million in 1989, $324 million in 1990, $566 million in 1991 and $10 million in 1992. The commercial paper and cer tain other short-term obligations reported as long-term debt 've been excluded from the above amounts because the n^ure and timing of future extinguishments and refinancings Wnnot be reasonably determined. 6. Lines of Credit ' "1 Shell Oil had $2,020 million of unused back-up credit facilities available for general porporate purposes, including support of ..-'i commercial paper, as of December 31,1987. These facilities included long-term variable rate revolving credit agreements totaling $2,000 million available to the Company, of which $1,050 million was also available to a financing subsidiary. The remain ing facilities consisted of $20 million of unused short-term confirmed lines available to a pipeline subsidiary. Customary commitment fees were paid for $1,650 million of these facilities with the remainder supported by compensating bank balances resulting from operating funds flowing through banks. None of these balances are restricted as to withdrawal nor are they material in relation to Shell Oil's liquidity position. 7. Receivables and Prepayments Receivables, prepayments, and allowance for doubtful accounts as of December 31,1987 and 1986, and the provisions for those years consist of the following: Millions of dollars Trade receivables Other receivables Prepayments Less Allowance for Doubtful Accounts Balance beginning of year Provision Net write-offs Balance end of year Total 1987 $1,674 556 184 2,414 1986 $1,234 406 297 1,937 24 26 (24) 26 $2,388 25 28 (29) 24 $1913 8. Capital in Excess of Par Value Changes in capital in excess of par value were as follows: Millions of dollars Balance at beginning of year Transfer from Common Stock of par value in connection with acquisition of all shares by Shell Petroleum Inc. (formerly SPNV Holdings, Inc.) Transfer from Treasury Stock of carrying value of treasury shares cancelled in connection with such acquisition Capital contribution from Shell Petroleum Inc.* Excess over par value for shares issued Balance at end of year 1987 $2,045 -- -- $2,045 1986 $2,045 -- $2,045 1985 $1,143 309 (14) 606 1 $2,045 `In 1985, Shell Oil Company received as a capital contribution, 100% of the capital stock of Scallop Holding Incorporated, Scallop Coal Corporation and Scallop Development Inc. LAM 022379 4BS- 600f 33 9. Pension Plans and Provident Fund Accounting for pension plans is in accordance with SFAS No. 87, Employers' Accounting for Pensions, which sets forth specific rules for determining expense, irrespective of amounts funded. The Shell Pension Plan covers employees of the Company and certain subsidiaries. Benefits are based on years of service and the employee's average final compensation. Contributions to the Shell Pension Trust of $78 million for 1987 were based on utilization of the prq'ected unit credit actuarial method, on rates determined by an independent actuary to be reasonable, and a methodology that meets the requirements of the Employee Retirement Income Security Act The plan's funded status at December 31 was as follows: Millions of dollars Actuarial present value: Accumulated benefit obligation including vested benefits of $1,978 and $1,883 for 1987 and 1986, respectively Projected benefit obligation Plan assets at fair value, primarily common stocks and fixed income investments Plan assets m excess of projected benefit obligation Remaining unrecognized net asset existing at date of initial application of SFAS No. 87 Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions Prior service cost not yet recognized in net periodic pension cost Net prepaid pension expense 1987 1986 $2,195 $2,534 $2,111 $2,471 2,888 354 2,853 382 (138) (150) (61) (120) 47 $ 202 23 $ 135 Shell Oil also has a Benefit Restoration Plan and a Senior Staff Plan. The Benefit Restoration Plan generally provides for payments of amounts in excess of limits imposed by federal tax law on benefit payments under the Shell Pension Plan. The Senior Staff Plan provides for defined monthly supplemental pension payments to members of the senior staff (consisting of certain officers and other high ranking employees). Both of these plans are unfunded. The accumulated benefit obligation for these plans totaled $86 million and $40 million at Decem ber 31.1987 and 1986, respectively. The projected benefit obligation for these plans totaled $104 million and $63 million at December 31,1987 and 1986, respectively. Of the 1987 projected benefit obligation amount, $65 million will be expensed in the future and $39 million of unfunded accrued pension cost is included in Other long-term obligations on the Consolidated Balance Sheet The components of net pension expense for the Shell Pension! Plan, Benefit Restoration Plan and Senior Staff Plan were: Millions of dollars - . ' 1987 198^ Service cost--benefits earned during the period Interest cost on projected benefit obligation: Actual return on plan assets* Net amortization and deferral* Net pension expense $ 70 214 (136) (124) $ 24 $ 69 W 204J3 <371)1 136jg $ 38j| *An estimated long-term rate of return on plan assets of 10% was used in 1987 and 1986 in determining pension expense for the period. The difference between actual return and estimated return is included in Net amortiza? lion and deferral. Current year pension expense isTiased on measurements of the projected benefit obligation and the market-related valued of plan assets as of the end of the previous year. The pro- jected benefit obligation as of December 31,1987 and 1986 was based on discount rates of 9% and 8%%, respectively, and an average Iqng-term rate of compensation growth of 5% ' for both years. ' The Shell Provident Fund covers employees of the Com- j pany and certain subsidiaries after stated periods of service, and provides for contributions into the Fund by the employing'^ company of a stated percentage of the employees' salaries and wages. Employees may contribute amounts up to the stated percentage. Total cost of these plans was as follows: Millions of dollars Pension Plans Provident Fund Total 1987 $ 24 90 $114 1986 $ 38 88 $126 1985 j $ 24j 87 1 $111 i In addition, several subsidiary companies have separate pension plans using actuarial rates and assumptions deter- : mined to be appropriate to these companies. These plans are relatively small and have not been included above. 10. Postretirement Benefits The Company and certain of its subsidiaries currently pro vide certain medical care benefits for retired employees. These benefits are arranged through insurance companies and the premiums are generally based on benefits paid during the year. < Shell Oil recognizes the cost of these benefits by expensing its portion of the insurance premiums, which was $17 million in 1987, $15 million in 1986 and $13 million in 1985. Shell Oil's life insurance plan includes postretirement bene fits; however, the cost of these benefits is funded by employees. lam 022380 ABS-006007 Property^ Plant and Equipment v: |^^J{ie'iniysinrier^jirr^opef1y.'|}lsint and equipment, including capitalized lease assets, were as follows: - :;x. .r>> y. ft...-; y .. : v . . ] : Investment :0 / ^Property, Plant -> Bg.and Equipment -T ' Hi _ >.''V '."2 'Vr`-f ft**,s* V-* Cif/ v?~<;sc2- December 31.1987 Millions of dollars ~ '" : Cost - Reserve* Net Cost Exploration and Production ..Oil arid gas ; $22,639 . $ 8.711 .. Other energy .. ' 1,373 V- '' V. 183 Oil and Chemical ' . "S', manufacturing facilities : - . 6,917 - 2,962 [Marketing facilities -7. -: . ' 1,672 488 Transportation facilities . ' y -860 : ' 493 Other T'y. : '> f-V-V-L wo .. 475 $13,928 1,190 $21825 .. 665 : 3,955 - 6,765 . 1,184 . r 1,559 367 857 465 ' 926 Total . . $34,401 $13,312 $21,089 $32,597 - <' x. December 31.1986 Reserve* Net .$ 7,819 147 . $14,006 . 518 2,755 461 .. 470 425 $12,077 4,010 -. .1,098 387 501 $20,520 mm Accumulated depreciation] depletion and amortization. . &12. Taxes Y.l&1\3?t? Operating arid income taxes incurred by Shell Oil were as l^oliows: /'. ' ^`Millions of dollars ^Operating Taxes Sfef Real.and personal property-2:-' ^SQil and gas production 2 rY ~ j^'^.windfall profit tax ;`K S&Sales arid use ' ' ? O'*- Payroll ' .,`Import and export duties Other .: ' ' '/ . : Total ^Federal and Other Income Taxes Egr;U.S. Federal i&fciz Current . Less investment tax credit *V fes'," Oeferred Iji. r* Foreign-current Ej: State and local Total 1987 1986 1985 y/ $175 ;J - ` ' 1. 116 ' 132 90 29 48 $188 $ 160 17 i 104 90 88 26 62 155 172 126 91 25 47 $591 $575 $ 776 $ 81 20 61 441 502 4 45 $551 $ 34 51 (17) 419 402 12 60 S474 $ 366 129 237 777 1,014 20 48 $1,082 gr^vThe tax effects of book/tax timing differences giving rise to i the above deferred income taxes were as follows: Minions of dollars Salterns associated with capitalized costs gif and write-offs K Operating taxes ^Department of Energy settlement sOther . . jjJSvv. Total 1987 1986 1985 $296 123 83 (61) $441 $494 -- (60) (15) $419 $ 547 165 -- 65 $ 777 pfe.:':: iVO.rA--.. . - - . . Total income tax expense for the years 1987,1986 and 1985 was equivalent to an effective tax rate of 30.9%, 34.9% and 39.6%, respectively, of earnings before income taxes. These rates are reconciled to the U.S. statutory rates as follows: U.S. statutory tax rate Investment tax credit Capital gains benefits Benefit of tax losses Other Total 1987 40.0% (1-1) (0.3) (4.5) (3.2) 30.9% 1986 46.0% (3.8) (6.1) _ (12) 34.9% 1985 46.0% (4.7) (0.7) -- (1.0) 39.6% In addition to the operating and income taxes above, Shell Oil is also responsible for collecting various excise taxes on the sale of products to its customers and for remitting these taxes to the various federal, state and local government agencies. A summary of these taxes, along with the operating and income taxes incurred by Shell Oil, is shown below: Millions of dollars Operating taxes Federal and other income taxes Consumer excise and sales taxes 1987 $ 591 551 1,521 1986 $ 575 474 1,389 1985 $ 776 1,082 1,251 In December 1987, the FASB issued SFAS No. 96 which requires that the liability method be used for accounting for income taxes. Shell Oil plans to adopt the standard in 1988 without restating prior years. The cumulative effect of adopting SFAS No. 96, primarily resulting from the lower income tax rates provided in the Tax Reform Act of 1986, will be a reduction in deferred tax balances and a corresponding increase in net income currently estimated to be approximately $975 million. Under the new method of accounting for income taxes, future results will also be impacted by the effect of changes in income tax rates on cumulative deferred tax balances. LAM 022381 uy-- ` %%:y :-,v` v ABS-006008 35 13. Interest Interest costs were as follows: excess of $700 million. Further, the Company has had liability }} Millions of dollars Interest expensed Interest capitated '. Total Interest Incurred - . 1987 : 1986 1985 $234 ,, $279 $198 75 112 172 . $309 $391 $370 insurance in force over the period of operations with a number ' of insurance companies. Since the Company and such insu rance companies have not been able to reach agreement with ^ respect to the coverage of the policies, the Company is seeking' a declaratory judgment that coverage exists for cleanup and contamination control expenses and damages to natural resources which may be imposed on the Company arising f 14. Foreign Currency Transactions The U.S. Dollar is the functional currency for each of Shell Oil's foreign operations. The net after-tax effect of foreign cur rency transactions was a loss of $1 million in 1987, a gain of $1 million in 1986 and a loss of $1 million in 1985. out of its operations at the Rocky Mountain Arsenal and a site } in Southern California. Trial in that action commenced on October 12,1987 and is proceeding. In addition, in the course of ordinary business and operations, f Shell Oil is subject to a number of other possible loss contingen cies including certain product liability actions concerning certain } agricultural and other chemicals, actions involving the calcula tion of gas royalties, and certain environmental and other issues' relating to possible obligations pertaining to the disposal or 15. Contingencies release of certain chemical and petroleum substances. Also, and Other Matters numerous federal, state and local income, property and excise Shell Oil and certain other petroleum companies have been tax returns of Shell Oil (including most significantly Windfall Profit ? named as defendants in certain civil antitrust actions brought Tax) are being examined by the respective taxing authorities, by state or local agencies which allege violations of federal and and certain interpretations by Shell Oil of the complex tax sta state monopoly and restraint of trade statutes. The relief sought tutes, regulations and practices are being challenged in adminis-} in such actions is trebled monetary damages. The trial judge trative proceedings and in federal and state actions. has granted the defendants' motion for summary judgment on While the ultimate effect of the foregoing contingencies can- the antitrust issues in the two most significant cases. Appeals not be ascertained at this time, based on developments to date, by the plaintiffs in those cases are pending. Final judicial management does not anticipate that any of the foregoing con determination of all of these actions is expected to take a tingencies will materially adversely affect Shell Oil's financial nurnber of years. : position. In December 1983, the United States filed a civil action The operations and earnings of Shell Oil continue to be against the Company alleging environmental damage and other affected by domestic and foreign political developments; legisla- ^ liabilities based primarily upon the Comprehensive Environmen tion and regulations and other actions taken by the United tal Response, Compensation and Liability Act (CERCLA) and States and foreign countries pertaining to energy production and} upon alleged breaches of lease obligations and other common use and related matters; natural gas regulation; tax changes; law claims resulting from the Company's operations at the U.S. and legislation, regulations and litigation concerning pollution Army's Rocky Mountain Arsenal near Denver, Colorado, which control, environmental conservation and hazardous substances. operations ceased in 1982. The State of Colorado has also filed Shell Oil may, from time to time, also be affected by, among an action under CERCLA against the United States, the U.S. Army other things, legislative actions pertaining to petroleum marketing} and the Company alleging in part that, under CERCLA, the practices; divestiture of certain segments of Shell Oil's opera- State is trustee of the natural resources in question. The law tions; incentives and deterrents to discovery or development of I suits seek expenditures and damages that greatly exceed new or additional sources of oil, gas and other raw materials, those the Army determined in a conceptual strategy dated including regulation of prices and changes in pipeline regulation; October 22,1984 to be necessary to ensure compliance with restrictions on production; governmental restrictions including - CERCLA and other environmental statutes. Further, the . eligibility to acquire realty and oil and gas or mineral leases, Company's position is that the Army, in view of its responsi based in some instances on the nationality of applicants or on bilities, including the construction and operation of the waste alien ownership; and changes in conditions under which crude . disposal system, should be required to bear a major share of all . : oil and petroleum products may be imported into the United . contamination control costs and expenditures and any realistic States. In addition, operations and earnings may be affected by assessment of natural resource damages. On February 1,1988, current and future developments in the law in the United States ; the United States and the Company filed a proposed consent and in foreign countries in which Shell Oil has business interests, > decree which, if approved by the court, would settle the action including legislation which could result in Shell Oil being subject filed by the United States. The proposed consent decree pro to litigation and claims which would not have been considered in} vides for the development of a remedial action plan; however, the past Shell Oil is unable to measure the overall effect on its the cost of implementing such plan cannot be determined at future operations and earnings of these matters, including exist this time. Under the proposed consent decree, the Company ing and future legislation and regulations which have been and .-. would pay 50% of any amount expended for remedial costs may be issued thereunder. . and natural resource damages up to $500 million. The Com- }' At December 31.1987, Shell Oil, as a direct or indirect / pany would also pay 35% for such expenditures between $500 guarantor, had contingent liabilities of $122 million for loan million and $700 million and 20% of any amount expended in iv guarantees of equity investees and others.. . . . _____ & 4BS- 006oog LAM 022382 ,.v.\^r*TuiKitilrUVv'.***' toai.V'f*.' *:i*y '& 16. Commitments ; V !w- ^y' ^'Y- (//v;;' v Shell Oil conducts a portion of its operations using leased \ :;-;\Jhe present (discounted) value' ofthese operating" leases in !-, facilities which include service stations, barges and tankers,/ .- ? the aggregate to the earliest cancellation date, induding penal- ; and other facilities. Future minimum payments under operating 1 ties and excluding executory costs,'approximated $569 million ji:'and capital leases with initial or remaining terms of one year or at December 31,1987. /; `r- <o;/.. f<. more consisted of the following at December 31,1987: / The composition of total rental expense for all operating ' Millions of dollars leases, except those with terms of a month or less that were Operating Capitalized 7 Leases - . Leases : hot renewed, was as follows: *" -i* ** *.' 1988 ,1989 . 1990 ' ' ' . 1991 : :'V 1992 . `'v'.: ' Thereafter .' Total minimum lease payments* . v- $ 202 , : . $ 14 Millions of dollars ./V-: 1987 : 176 i 171 : 13 .Minimumrentals v .13 ' /Contingent rentals "V-vL * $276 > : 143 12 r; (Based on sales volumes) - ' - - . ' 112 13 `Less sublease rentals -l-t-V .*, " '' (55) 797 : ' . 18 . .Total . - 7 $226 $1,601 83 .1986 v.1985 $283 - n $264 :.':'75 - . 6 (51) -- (42) $237 . $228 Estimated executory costs (such as taxes, maintenance, insurance, operating costs) . Net minimum lease payments Imputed interest Present value of net minimum lease payments'* . Under long-term agreements with an offshore port and cer ' (34) tain pipeline companies in which stock interests are held, Shell 49 Oil may be required to advance funds against future transpor (14) tation charges in the event such companies are unable to meet $ 35 their financial obligations. Under operating leases on four Minimum lease payments have not been reduced by minimum sublease ren . tankers, the Company is required to indemnify the equity owner tals of $205 and $15 million due in the future under noncancelable subleases in the event expected tax benefits are not realized. In addition, for operating and capitalized leases, respectively. There were no contingent rentals applicable to capital leases. ;.**Of the amount shown, the current portion of $4 million is reflected in Long- i `j term obligations due within one year and $31 million in Other long-term at December 31,1987, Shell Oil had substantial commitments including those related to agreements for the purchase of materials and services, and to the acquisition and building of obflgations on the Consolidated Balance Sheet facilities, all made in the normal course of business. LAM 022383 17. Operating Segments : Information Operating segments information for the years 1987,1986 and 1985 is presented below! Income taxes are allocated to segments 7 on the basis of contributions to taxable income reduced by investment tax credits based on qualified capital expenditures for each . segment. Shell Oil's activity outside the U.S. has not reached a level warranting separate geographical reporting. 1987 Summary Statement of Income 1987 Capital Expenditures Millions of dollars Sales and other operating revenue Other revenue Inter-segment transfers Total Revenue Costs and operating expenses Depreciation, amortization, etc. Operating Profit (Loss) Interest expense--capitalized leases Corporate expense--allocated Income tax expense--allocated Equity in net (income) loss of others Segment Net Incomeft Non-allocated costs Net Income Oil and Gas Production $ 1,467 79 3,301 4,847 2,257 1,491 1,099 3 62 363 (62) $ 733 $ 1,491 Products Oil Chemical $15,082 5 742 $ 3,578 42 80 15,829 15,247 264 3,700 2,910 190 318 -- 46 72 (24) 600 -- 23 210 (49) $ 224 $ 416 Other $ 711 12 -- 723 675 49 (1) -- 3 (10) 1 $5 $ 351 $ 163 . $ 132 Total $20,838 138 -- 20,976t 16,9661 1,994 2,016 3 134 635 (134) 1,378 148 $ 1,230 $ 2,220* Identifiable Assets Dec. 31,1987 $15,654 $ 5,236 $ 3,681 7 ; $1,464 $26,937*' See footnotes following the remainder of the segment report on next page. / ; .. i.v/1 ABS-006010 UPWl /.- 37 if. Operating Segments Information (continued) -/ 1986 Summary Statement of Income 1986 Capital Expenditures Identifiable Assets Dec. 31,1986 Millions of dollars Sales and other operating revenue Other revenue Inter-segmenl transfers Total Revenue Costs and operating expenses Depreciation, amortization, etc. Operating Profit (Loss) Interest expense--capitalized leases Corporate expense--allocated Income tax expense--allocated Equity in net (income) loss of others Segment Net Income (Loss) Non-allocated costs Net Income Oil and Gas Exploration and Production $ 1,573 113 2,868 4,554 2,335 1529 690 3 70 224 04) $ 427 $ 1,761 : 7;7>|| Products -Vi. Oil - Chemical 77 Other 7 $11,463 $3592 . ; $ 505 :; Total $i6533ti . 25 7 591 : 12,079 v 244 VI4: 7V 104 :7'- 3,640 - 7 ;. 7 512 7^1- 7 389` -ft .7 17522t| 11568 239 2,7217.; 271 526 ' .. 13587fa 51 2,090j 572 1 42 234 (24) 648 . 24 248 34 (65) , 7 1,845 M . 7 4^ .4 ' (40) (18) . 140 77l - 666 fi (42)| $ 319 $ 342ftf $ (11) 1,077 J 194 i) $ 883 3 $ 342 $ 95 $ 60 $ 5343*7 $15,433 $ 4,766 $3,447 $1520 $26514",; 1985 Summary Statement of Income 1985 Capital Expenditures Identifiable Assets Dec. 31,1985 Sales and other operating revenue Other revenue Inter-segment transfers Total Revenue Costs and operating expenses Depreciation, amortization, etc. Operating Profit (Loss) Interest expense--capitalized leases Corporate expense--allocated Income tax expense--allocated Equity in net (income) loss of others Segment Net Income (Loss) Non-allocated costs Net Income $ 1,825 9 4,792 6,626 2,825 1575 2,526 -- 63 1,078 (45) - $ 1,430 $ 2,815 - $14,870 4 1,034 $3518 2 124 $ 296 10 ' -' $20509 7 7 25,7 ___ XL 15,908 15,182 214 512 1 39 . 198 5 $ 269 3,444 - 306 - 20534fi 3,077 7 318 - 202 7 21 : . 15,452(1 1,712 5 . 165 (33) . 3,170 i 7-- .-- - 1 ;i 25 . . . > 57 36 .3 . 7 . 130 V (37) 7- 1575 7 77 8 12' 'V' (20) > _ , $96 7 , $ (11) 7;,7: 1.784 . - .* 7. / , 1 134 * - "' - -'.''-'V" . V; $ 1,6507 $ 496 ' 7 $ 195 $. 577 $ 3,779*.; $15,416 $ 5,049 $3,891 $ 663 $26,528" 7* fAfter elimination of inter-segment transfers of $4,123 million in 1987, $3,563 million in 1986 and $5,950 million in 1985, which are based on estimated market related values. fflndudes a tax benefit of $60 million for Oil and Gas Exploration and Production, and benefits of tax losses of $37 million for Oil Products and $43 million for Chemical Products, realized in fourth quarter of 1987. \. ' tttlndudes gain of approximately $120 million from the sale of the agricultural chemical business in fourth quarter of 1986. 'Includes non-segment capital expenditures of $83 million in 1987, $85 million in 1986 and $216 million in 1985. _- ' .. "Includes non-segment assets of $902 million in 1987, $1,348 million in 1986 and $1,509 million in 1985., - . . LAM 022384 7 Zy ` Supplementary Oil and Gas Information I;:'. ' v -v;' , ;.-'5l*jfcr^5r*v ' V i . 1 :fi 4 tv. Results of operations for oil and gas producing activities are shown below. These results exclude related activities, such as the i purchase and resale of natural gas, and revenues and expenses associated with certain non-hydrocarbon products, such as 4 ^sulfur and carbon dioxide, which are included in the Oil and Gas Exploration and Production segment data presented in Note 17 i `l-- Operating Segments Information. . ;. ' ' : . = ., -' -- \ ':r v. . . Results of Operations . . . i' (millions of dollars) Sales . Transfers f V'' * T" s/f Total Revenues Production costs Own consumed fuel Exploration expenses Depreciation, depletion. and amortization Income lax expense Results of Operations* Shell Oil's interest in results of operations of equity companies .1987 U.S. Foreign $1,161 2,883 4,044 1,396 (160) 337 $ 11 182 . 193 86 -- 64 1,440 379 $ 652 39 2 $2 -- $ 52 : > : Total $1,172 " 3,065 4.237 1,482 (160) 401 1,479 381 $ 654 $ 52 <1986 V. . u.s. - Foreign -Total CO $1260 . $1269 , 2,561 113 2,674 3,821 122 3,943 1,462 76 1538 (186) -- .(186) 406 87 493 1985 . us.; Foreign $1289 : $ 7 4514 123 5,803 1,870 (275) 558 130 68 -- 112 .* Tots $129? 4,637 5,933 1,938 (275 670 1.491 255 $ 393 26 1517 (31) 224 $(36) $ 357 1248 1,036 $1,366 21 (12) $(59) 1269 1,024 $1,307 -- $ 38 $ 38 -- $ 59 $ 59 `Excludes research, corporate overhead and interest costs. Capitalized costs related to oil and gas producing activities at year-end, and costs incurred in oil and gas property acquisition, .exploration and development activities for each year, were as follows: Capitalized Costs (millions of dollars) Costs Incurred in Property Acquisition, Exploration, and Development (millions of dollars) Proved properties Unproved properties Support equipment and facilities 1987 U.S. Foreign Total $19,732 1,613 $576 $20,308 32 1,645 671 15 686 Total Capitalized Costs Accumulated depreciation, depletion and amortization Net Capitalized Costs Shell Oil's interest in net capitalized costs of equity companies Acquisition of properties Proved Other Exploration costs Development costs 22,016 8,495 $13,521 _ $ 154 169 438 924 623 22,639 216 8,711 $407 $13,928 $154 $ 154 $4 4 73 78 $ 158 173 511 1,002 Shell Oil's share of costs incurred by equity companies -- $5 $ 5 1986 U.S. Foreign Total $18978 1,663 $458 $19,436 59 1,722 653 14 667 21294 531 21,825 7,641 178 7819 $13,653 $353 $14,006 $ - $182 $ 182 $ 353 143 458 1.060 $2 83 71 $ 355 143 541 1,131 - $ 6 $" 6 U.S. $18,037 1,720 1985 Foreign Total $384 $18,421 65 1,785 581 9 590 20,338 458 20,796 6,719 153 6,872 $13,619 $305 $13,924 _ $219 $ 219 $ 975 302 716 1213 $3 116 61 $ 975 305 832 1274 - $ 41 $ 41 'Costs have been categorized on the basis ofFinancial Accounting Standards Board definitions which include costs of oil Kf and gas producing activities whether capitalized or charged to expense as incurred. ,. '. r. * - *' *' ' LAM 022385 ABS-006012 39 "'-AS The weighted average price per unit of production of crude oil and condensate, natural gas liquids and natural gas available fofl market as well as selected expenses and results of operations for oil and gas producing activities on a per barrel of equivalent net? hydrocarbon production basis, for each of the past three years were as follows: ''V.;,. ; J .... Unit Statistics Weighted average price per barrel of net production Crude oil and . condensate Natural gas liquids Weighted average price per thousand cubic feet of net marketable natural gas produced Expenses (dollars per barrel of equivalent net hydrocarbon production) Production Exploration* Depreciation, deple tion and amortization Producing proper ties Non-producing leases Other Allocated income taxes Results of Operations (dollars per barrel of equivalent net hydro carbon production) 1987 US. Foreign Total - - 1986 .. v.,.r, U S. * Foreign Total . 1985 1 U.S. Foreign 7 -; ; .' Total^S $15.51 $18.14 11.24 20.33 $15.66 11.26 $1320 $15.11 $1328 - 10.82 . 11.75 10.82 $2455 16.83 $24.83 $2456^ 10.30 1682(1 1.85 I.93 4.35 1.05 7.38 5.46 3.71 .64 .14 1.18 3.13 .11 .07 .13 1.84 ' 2.17 91 2.15 4.46 1.21 3.69 .62 .14 1.15 4.50 8.30 4.60 125 9.48 1.47 - ~ 389 2.59 3.86 .69 .14 - ` .15 .68 .01 .78 (327) 67 . 2.74 .86 2.71J| : M- \ m 622 1.85 10.85 17.80 6.31 i 2.1 sj - 3.42 84 (.11) 3.44 2.66 .62 .07 (1.93) 3.41 p .83^ -`.fjXi 323 $ 2.03 $ .20 $ 1.97 $121 $(395) $1.07 $ 454 $(9.41) $ 426 S `Exploration expense typically precedes the discovery of hydrocarbons which will be produced in future periods. While current exploration expense is not directly related to current production, it does represent a charge against current period income. V. ~ '-I'!"- ' ' '* " ` Windfall Profit Tax on domestic crude oil and condensate averaged S OI per barrel in 1987, $.09 per barrel m 1986 and *-8 $.92 per barrel in 1985. " -. . V ,\ ' LAM 022386 Shell Oil's oil and gas exploration and development drilling, and the wells which were producing or capable of producing, were as follows: .. r-. " ' ........ Net Wells Drilled Oil and Gas Wells Producing or Capable of Producing Exploratory Oil and gas wells Dry holes Development Oil and gas wells Dry holes Gross Wells Oil . - ' Gas -7 . Net Wells Oil .. Gas Number of net oil and gas wells above completed in more than one producing - formation U.S. 18 54 1,179 15 29,853 .. 1,933 18,898 1,310 649 1987 Foreign Total 1986 U.S. Foreign Total 1985 U.S. Foreign V Total J - 9 27 , 29 1 .30 5 59 71 - 8 ' 79 21 3 82 9 24;. 9'i ""* \ 11 1,190 - ' 1,356 : 8 : 1264 - 821 .82 -- : ' 15 41 7, 41 . - 49 '. - 903 1 49 [ *.:'' ..jjVx rV'.> ' . ;. '. 354 . 30,207 V? 28,959''- T 315 ' 29274 V.-. ::' 31,847 . : 292 32,139 |sj 16 .. -`>.,'1,949 7;-' 2,123 'S 16" cf 2.139>: L 2,567 , 16 > 2.583 ?v' ^ V. : .' 171 19,069 18,196 156 >18,352 ,v ,17,500 139 . 17,639 2 1,312 ' 1259 . u ' 2 71.361 >.' 1,433 . v 1.7 1.434^ ..*3 43 692691 Y049 J-V 740 739 42 '. 781 i *"-T /_:* . VT-'.'T'; z.7-. i'- / * '* " " .^4 40 ABS-006013 ir deducting royalty and operating interests of others) ^ jp--: KNet Crude Oil and Condensate Produced : ^(thousands of barrels daily). ft.. - ; j' -VLv-VtfV* .-V-vt-rr '. V States Offshore Gult of Mexico' i T ` `California V-.-i; Louisiana ' .. .' ' Michigan : . .' .' -Texas '.-Other .. . : jf'Jnited States iU ' ,~0 '<- '1987 :-T.- ;-:1986 ir.iK5:7iSL1985 ^UjftKl984 ..vr- *l-Ti ' . .: 1983 `' . . .' 221 T 19 19 . ... : 67 45 : 121 : ' " 117 216 200 :: v ' 22 , 20 ' . 21 : 72 23 . ' 64 ' , 47 : ' ' 39 'is?:- 181 >": 19 : 26 - > : . 63 ' 45 ' ' ' tn- 171 16 31 63 46 . '.. ; 1^488 ,ii;V 499 ; ' - .v'V'i: 'i :28 j A,; .' 7.21 463 : 14 '7 464 12 453 15 ;!^&&Total Consolidated Companies : 516 .. T- .520 /: 477 . . 476 468 :. Shell Oil's interest in production of equity companies 26 30 ' . ' 25 21 15 Natural Gas Liquids . v rV.-O? -j'v>*'0 ;.* . r'.. ' Produced (thousands of barrels daily) '-V .jTi'jv Predominantly domestic - ' - " ' 70 .. 72 67 70 71 : ' ' ' . Total Liquids Produced 612 622 569 567 554 Net Natural Gas ' United States Produced* . ~. (millions of cubic feet daily) Offshore Gulf of Mexico ... ; Louisiana . 1,072 1,045 878 789 721 - 58 57 64 71 68 Michigan .132 . 140 150 159 152 .Oklahoma .. . . . - 30 36 .42 54 53 ... . - . Texas ; ' . .. '. ; . . : 315 307 320 332 282 ,r/'.. * ' .<' . Other , .':]: `190 ' 206 - 195 210 201 -> Foreign ; .. " -24 25 . . '19 15 12 ' ' Total Gas Produced 1,821 . 1,816 1,668 1,630 1,489 ; ' Net natural gas available for market excluding consumed in operations 1,553 .. 1347 1,424 1,305 1249 * Natural gas is reported on the basis of actual or calculated volumes which remain after removal of liquefiable hydrocarbons by lease or field separation facilities and of non-hydrocarbons where they occur in sufficient quantities to render the gas unmarketable. Reserve Estimates Oil and gas reserves cannot be measured exactly. Reserve estimates are based on many factors related to reservoir per-, formance which require evaluation by the engineers interpreting the available data, as well as price and other economic factors. The reliability of these estimates at any point in time depends on both the quality and quantity of the technical and economic data, the production performance of the reservoirs as well as extensive engineering judgment Consequently, reserve esti mates are subject to revision as additional data become avail able during the producing life of a reservoir. When a commer cial reservoir is discovered, proved reserves are initially determined based on limited data from the first well or wells. Later, further drilling may better define the extent of the reser voir and additional production performance, well tests and engineering studies will likely improve the reliability of the reserve estimate. The evolution of technology may also result in the application of improved recovery techniques such as supplemental or enhanced recovery projects, or both, which have the potential to increase reserves beyond those envi sioned during the early years of a reservoir's producing life. Shell Oil reports its reserve position annually. Revisions to reserves are based on engineering analyses of individual reser voirs at the field level. Prior to finalizing the annual reserve re port, a team of senior technical employees of Shell Oil reviews the reserve estimates, procedures and explanation of revisions for proven reservoirs. Proved reserves are those quantities which, upon analysis of geological and engineering data, appear with reasonable cer tainty to be recoverable in the future from known oil and gas reservoirs under economic and operating conditions existing as of the date the estimate is made. Proved developed reserves are those reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are those reserves which are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required. Net proved reserves represent the estimated volume after deducting from gross proved reserves the portion due land owners or others as royalty or operating interests. LAM 022387 ABS-006014 41 Estimated quantities of net proved oil, natural gas liquids and natural gas reserves and of changes in net quantities of proved developed and undeveloped reserves were as follows:. . ..m Oil Reserves (millions of barrels of crude oil and condensate) -y ; - . ' --- ` . 1987 . U.S. Foreign - Total Proved Developed and'' 'v'; y Undeveloped , Beginning of year ;.>>. . 2,347 Revisions of previous estimates 149 Improved recovery 51 Purchases of reserves* Extensions and discoveries Sales of reserves Production 106 36 (8) (178) End of year v- 2,503 130 2,477 (3) 146 -- . 51 -- . ; 106 15 -- (10) 132 51 (8) (188) 2,635 Net changes for year 156 2 158 1986 U.S. - Foreign - Total : - 1985 -------US. Foreign Total -ssl 2242 _ 84 180 . 43 (19) (183) 2,347 105 117 2,359 ' 2,042 11 4 88 -- 180 29 174 155 15 58 -- (19) (7) 090) 130 - 2.477 13 118 28 (17) (169) 2,242 200 115 2,157 |j| 7 -- -- _ -- (5) 117 2 36 .'vi 174 H 155 -H 28 M (17) 1 (174) 4 2,359 202 Shell Oil's interest in proved reserves of equity companies End of year Proved Developed Beginning of year End of year -- 1,401 1,517 46 46 65 1,466 65 1,582 - 1,363 1,401 55 55 51 1,414 65 1,466 - 1270 1263 55 55 36 1,306 'm 51 1,414 Natural Gas Liquids Reserves (millions of barrels) Gas Reserves (billions of cubic feet of natural gas)" Proved Developed and Undeveloped Beginning of year Revisions of previous estimates Purchases of reserves* Extensions and discoveries Sales of reserves Production 285 -- 285 (3) - --. ' -- -- (3) ~ 24 1 (1). ; -- (26) : -- - 25 (1) (26) 286 (6) 1 33 (3) (26) End of year 279 - 1 : 280 . 285 Net changes for year - . (6) 1 - (5) (D Proved Developed .. . Beginning of year yv End of year o - 223 : *: T- .: ! . 223 234 - 220 ' . 220 223 Proved Developed and Undeveloped Beginning of year Revisions of previous estimates Improved recovery Purchases of reserves* Extensions and discoveries Sales of reserves Production . 6,788 232 7,020 , 7,051 (68) 9 110 --- .-- --; (68) 9 110 - (250) ' 7 95 423 (65); (656) - 150 y. (9) 573 (65) (665) / 650 Y- (112) ` (653) End of year - y. - : y- , 6,541 : 373 ; : 6.914 . 6,788 -- -- -- -- -- -- - ,-- -- 241 -- -- -- -- (9) 232 286 (6) 1 33 (3) (26) 285 . (1) 279 (5) 3 34 (1) (24) 286 7 -- 279 -- (5) _3 _ 34 -- (1) - (24) -- 286 --7 234 , ' 234 223 : 234 / -- -- 234 234 7,292 7,455 ' 248 7,703 (250) 7 95 - (100) 25 112 -- (100) -- 25 -- 112 650 (112) (662) 324 (163) . (602) 7,020 : . 7,051 -- (7) 241 324 (163) (609) 7292 Net changes for year ' YV (247) > .141 :*'/ (106) (263) . (9) , (272) .: (404) ' (7) (411) Proved Developed . . : '' . '.jy_ Beginning of year `' ;/ 5,131 - 101 Y " 5,232 - ' .:.' 5,371 End of year ' 4,977 : .92 : 5,069 5,i3i 109 ' 5,480 : 5,439 101 5232 . 5,371 ' 116 . 5,555 109 ' 5,480 `Includes the net effect of exchanges of reserves with other companies. "Natural gas is reported on the basis of actual or calculated volumes which remain after removal of liquefiable hydrocarbons by lease or field separation facilities and of non-hydrocartons where they occur in sufficient quantities to render the gas unmarketable. Natural gas reserve volumes include liquefiable hydrocarbons approximating five percent of total gas reserves which are recoverable at natural gas processing plants downstream from the lease or field separation facilities. Such recoverable liquids also have been included in natural gas liquids reserve volumes. ' ^3. 42 LAM 022388 ABS-006015 Standardized Measure %.For this purpose, individual estimates of production quantities, :The following disclosures jcoticeming the standardized mea-.,,J. revenues and posts were developed for major fields and com Jsure of future cash flows from proved oil and gas reserves arej? bination of smaller, closely related fields. These fields con ^presented in'accordance with Statement of Financial Account- ^ tained approximately 80 percent of Shell Oil's total estimated ing Standards No. 69. As prescribed by this statement, the proved reserves. Estimates for the remaining fields were deve ^amounts shown are based on prices and costs at the end of ... loped in the aggregate by major geographic regions. Extensive Pleach period, currently enacted tax rates and a 10 percent ; judgments are involved in estimating the timing of production annual discount factor. Since prices and costs do not remain T and the costs that will be incurred throughout the remaining j; static, and no price or cost changes have been considered, the V; lives of these fields. Therefore, the results may not be com ^ results are not necessarily indicative of the fair market value of ?' parable to estimates submitted by other oil and gas producers. ^estimated proved reserves, but they do provide a common " iThe standardized measure of discounted future net cash . ^benchmark which may enhance the users' ability to project .flows related to proved oil and gas reserves at year-end was future cash flows. '."'" v - as foliows: / 7 ` Standardized Measure r of Discounted Future Net Cash Flows fr (millions ol dollars) fS-.-V- ; . ft*-;-. 1987 U.S. Foreign Future cash inflows* Future production and development costs' . Future income tax expenses* $49,244 $2,553 --j 26,666 ':C. 1.395 .. 6,259 622 Future net cash flows - - .. .- 16,319 V." 536 10% annual discount for estimated . > ' timing of cash flows ; 8,137 ' `380 Standardized measure of discounted . future net cash flows ' $ 8,182 . $ 156 Shell Oil's share of standardized measure of discounted future net cash flows of equity companies $ 156 Total $51,797 28,061 6,881 16.855 . 8,517 $ 8,338 $ 156 U.S. $44,023 1986 Foreign $ 1,895 Total $45,918 24,904 4,858 14,261 1,368 242 285 26,272 5,100 14,546 6,943 218 7,161 $ 7,318 $ 67 $ 7,385 _ $ 169 $ 169 'Future net cash flows were estimated using year-end prices and costs, and currently enacted tax rates. Shell Oil's domestic and foreign weighted average crude oil prices at year-end 1987 were $13.93 per barrel and $15.72 per barrel, compared to year-end 1986 prices of $12.69 and $12.77 per barrel, respectively. ay J > : ; The aggregate change in the standardized measure of discounted future net cash flows was an increase of $953 million in 1987, a decrease of $6,385 million in 1986, and an increase of $112 million in 1985. The principal sources of change were as follows: Changes in Standardized Measure of Discounted Future Net Cash Flows (millions of dollars) Sales and transfers of oil and gas produced, net of production costs Net changes in prices and costs Extensions, discoveries, additions, and improved recovery, less related costs Net purchases and sales of reserves Development costs incurred during the period Revisions of previous reserve estimates Accretion of discount Net change in income taxes 1987 1986 $(2,915) 1,548 $ (2,591) (10,800) 689 313 1,002 481 1,008 (917) 774 327 1,131 (156) 2,059 4,132 1985 $(4,270) (565) 1,340 684 1,274 66 2,074 258 if- > V-V is ml; *Jv-: LAM 022389 ABS-006016 43  Seismic activity for each of the past five years and acreage in which Shell Oil had an interest at the end of each of the periods indicated was as follows: -V '' 7?M Seismic Activity *_ Undeveloped Acreage (thousands of acres) Producing Oil and Gas Acreage (thousands of acres) . United States Offshore (boat months) ' United States Onshore (crew months) Foreign (crew months) Gross United States Onshore ,. Offshore Foreign Total Net United States Onshore Offshore Foreign Total Gross United Slates Foreign Total Net . United States Foreign Total 1987 24 . 129 36 . 1986 . 30 158 44 . .'-..1985 ' 1984 ... . ,if,45 - 36 .---.f:-. 154 .. 151 :. 38 .. 31 \ 1983 4 ,361 138 > 29 9,899 4,060 90,511 104,470 . 10,186 2,916 137,089 150,191 13290 . 3,174 . 173,801 190265 13,632 . 3^10 181,854 198,696 - 14,405 2,070 ' 104,591 r 121,066 8,146 3,371 52,767 64,284 1,569 34 1,603 1,180 6 1,186 8,197 2261 66,077 76,535 1,609 34 1,643 1,113 7 1.120 10,517 2,424 88206 101,147 10,597 2294 96,832 109,723 1,731 31 1,762 1265 30 1295 1,126 6- :-'.1,132 1,006 ' .5 1,011 11,029 1,583 67259 79,871 1,556 30 . 1,586 1,118 -. 5 1,123 ] c Information relating to other resources of the Exploration and Production business is summarized as follows: -. Coal (millions of short tons) .. Sulfur (thousands of long tons) Carbon Dioxide . .. (billions of cubic feet) - . -v- : . - -- Estimated proved reserves* ' Estimated probable reserves" ' ' v Shell Oil's interest in reserves . . of equity companies: Estimated proved reserves* Estimated probable reserves" Purchases Production (salable coal) Average sales price per ton Estimated proved reserves Production Recovered in refinery operations _ Average price per ton ; Estimated proved reserves Production 1987 1,548 692 1936 ' '1985 1984 ' 929 1 - . v933 v . -..-1,149 - . 967 . ; ;:/.974 ' : 1,537 ' ' -- 7-. *- >'' 1983 if ' 1,141 -S ' 1,580 ',1 ' `V --- . -- 2 15 $25.08 444 92 . 6 9 $ 22.55 460 . 95 6 /': 8 ' $ 24.71 -- V : 11 8 : $ 26.68 ---- 6 6 $ 3006 , 7,877 448 217 $93.41 8,293 - 9,144 . .' 9,527 10,982 447 424 :.. , 501 . 551 228 - 213 ...207 ' 205 . $109.08 $107.49 $ 91.42 . $ 91.31 6,563 v . 93 7253 ... .. .. 7,345 - - 6,913'.'-- 6,919 v . 92 ;;. : 60 V. . 20 . - 3; "Proved reserves are the estimated quantities of commercially recoverable reserves that, on the basis of geological, geophysical, and engineering data, can be demonstrated with a reasonably high degree of certainty to be recoverable in the future from known mineral deposits by either primary or improved recovery methods. Proved reserves are used for cost amortization purposes. :; ' "Probable reserves are the estimated quantities of commercially recoverable reserves that are less well defined than proved reserves and that may be estimated or indicated to exist on the basis of geological, geophysical, and - engineering data. . : y : -w j- LAM 022390 --Vi ABS-006017 A Supplementary Products Information ;t v fVs* Net Sources of Crude Oil (thousands of barrels daily) United Slates Foreign Total Oil Products Supply and Distribution (thousands of barrels daily) Supply . ... Net crude oil produced Natural gas liquids produced Crude oil purchased Crude oil sold Crude oil inventory change Oil products purchased - * - : Total Supply Distribution Refined products sold Used in chemical manufactures Product inventory change Own consumption, etc. Total Distribution Oil Products Inventories (millions of barrels at end of year) Crude oil Refined products Refinery Processing Intakes (thousands of barrels daily) . Anacortes, Washington Deer Park, Texas ' Martinez, California ' Norco, Louisiana Odessa, Texas Wilmington, California Wood River, Illinois Total Refined Product Manufacture (thousands of barrels daily) Automotive gasoline Jet fuel Kerosene, heating and diesel oils Heavy fuel oils Propane and other LPG Petrochemical feedstocks Asphalt Petroleum coke Lubricants, grease, process oils, and wax All other products Other Refinery Statistics Total Operable capacity of crude oil distillation units at end of year ' (thousands of barrels daily) Refinery intakes to crude oil distillation units (thousands of barrels daily) Refinery crude oil distillation unit intakes as a % of year-end operable capacity Own net produced crude and natural gas liquids as a % of intakes to crude oil distillation units 1987 726 279 1,005 516 70 1,001 (512) (4) 403 1,474 1,352 103 -- 19 1,474 20 39 83 202 129 210 27 116 252 1,019 523 141 58 117 21 80 35 32 13 47 1,067 1,066 969 90.9 60.5 1986 714 ' 258 1985 , - 698 166 972 864 - ' ' 520 .' . i 477 - 72 67 ' 822 - 697 . (370) V (310) ' (7) 10 271 144 1,308 1,085 1,173 100 5 30 1,308 18 38 74 203 . 131 194 25 115 233 975 511 130 59 107 19 62 32 33 12 44 1.009 953 93 (2) 41 1,085 16 36 65 : 198 - ' 97 180 28 111 211 890 427 127 59 91. 19 67 32 31 13 38 904 1984 680 173 853 476 70 757 (380) 8 114 1,045 903 103 (8) 47 1,045 20 37 68 204 108 207 23 97 190 897 437 129 42 108 12 80 26 30 17 33 914 1,046 1,021 1,005 925 853 838 88.4 83.5 83.4 64.0 63.8 65.2 1983 626 202 828 468 71 713 (353) 5 69 973 846 102 (12) 37 973 23 40 56 197 92 193 24 102 210 874 448 114 34 74 17 89 30 28 17 43 894 1,005 822 81 8 65.6 LAW 022391 Or*. p^BS-006018 k 45 9 - Bulk Distributing Plants Leased and Owned 1987 83 . 1986 83 1985 (84. - 1984 85 * 1983 87 Number of Service Stations Owned Leased . . . Jobber and other r,' ' t;" - i* ` 2,600 1,600 6.700 2,600 ' 1,700 : : 6,600 ' ' 2,700 . '1,800': .V: 6,700 , 2,400 . W' 6,800 ; 2,500 2,000 7.600 Refined Product Sales (thousands of barrels daily) V. Total . 'V . ; 10,900 :r- : 10,900 11^00 . : 11,000. 12,100 Automotive gasoline > 'i.'. ; - ?r:'-.' 693 Jet fuel ` 167 Kerosene, healing and diesel oils 95 Heavy fuel oils . 205 Propane and other LPG 79 Asphalt . 35 Lubricants, grease, process oils, and wax 17 Coke "v. . 14 All other products 47 620 135 . 73 174 . 77 32 17 16 29 ; ." 515 134 56 77 69 , 32 17 15 38 477. - . 465 130 116 50 41 91 . 69 70 67 29 30 18 17 13 12 25 29 Total 1,352 1,173 953 903 846 ~.4, 1 ;.fjr i y > Refined Product Sales (millions of dollars) - Automotive gasoline $ 6,665 $ 5,477 Jet fuel 1,371 1,060 Kerosene, heating and diesel oils 757 500 Heavy fuel oils 1,247 819 . Propane and other LPG 300 299 ' Asphalt -. ' . .. - 228 221 Lubricants, grease, process oils, and wax . > .,. . .497 507 Coke v- : .- .." 33 : .. 36 All other products . .' . : ' ' " ' 331 . - 190 $ 6,958 1,633 655 650 398 348 510 52 . 377 $ 6,457 1,654 597 884 444 306 559 36 " 245 , $ 6,565 1,541 505 630 459 290 528 . 34 283 4 i i 1 -? f -jf Total $11,429 $ 9,109 $11,581 $11,182 $10,835 Refined Product Sales (dollars per gallon) Automotive gasoline . ' -- $ .63 v:-;$ ".58 $ .88 ' $ 88 $ 22 Jet fuel . .54 'L'_' 51 ' .79 .83 .87 Kerosene, healing and diesel oils .- . * ; 52 .44 .76 . .78 .79 Heavy fuel oils .40 . .. .31 v/r- .55 .''' .63 . .60 Propane and other LPG = - 25 . 25 - .' 57 - , .41 .45 Asphalt \ ;. ;/ ' . .43 '' . ' .44 ' ;. .72 .70 .63 Lubricants, grease, process oils, and wax V- i.87 : . 1.95 1.99 " 1.98 1.99 Coke . ,v ' .15 ;r.:.vi- .15 ; : 23 . .18 . .19 ' All other products ' -S'-.' - .46 ; ' .43 . .65 .64 .65 f *' \ Chemical Sales (millions of dollars) . Average-Total Refined Products '/>.- % * $?';'25 T-.- $ 51 . $ .79 ' $ . .81 Olefins ' ` $ 598 $ 397 :; :. $ 588 $ 683 o r*- CM ' Aromatics ' " 447 ' : ' 234 : ' "-V.-' 235 . Chemical intermediates '' ' '' 380. 75. 320 ` /' '' 250 - '.' 231 Detergent and ethylene oxide products v: * : 512 ' ' '460 -. 455 . . ; 463 Solvents - 345 . - : .'. 383 ' 419 412 Plastics and elastomers ...v o .: 580 . 488' ' .. ' . 442 . 424 Resins ' 364 310 . 353 372 Agricultural chemicals* . -- 372 244 ' 294 Other 272 252 . 196 177 $ .84 $ .618 345 252 430 408 417 299 199 167 4 -ri Vi "r Total $ 3.498 - S 3,216 $ 3,217 $ 3,291 $ 3.135 Chemical Trends** Price index (1977 = 100) ' - Costs and expenses index (1977 = 100).' Sales volume index (1977 = 100) ' . ' Capacity utilization (percentage) ' : - - . . 135 130 ; 156 78 .130 132 . '144 73.. 149 158 129 69 , 158 165 125 73 158 169 119 66 'Business sold in October 1986. "Data is based on internally developed indices which we believe to be reasonably representative of directional trends. ,f LAM 022392 Other Financial Information gig| -vY'*'~Y ' 'r `i t*?-' T y ';-* i-l .`O'. ^ - V *,;*'Vv*; x. c.-A,: a M-`"-- V .'v- `v:'V ^-*v A l Y- * ... : v / - -. ; . Y Y Y;VV ' * 1987 .1986 1985 Statement ol Income Data (millions of dollars) Revenues . . \ . 1- Costs and expenses ; \. ;' - $21,222 19,992 $17,353 16,470 . $20,477 18,827 Net income ' ' . : $ 1,230 $ .883 $ 1,650 Balance Sheet Data (millions of dollars) . Changes In Financial Position Data (millions of dollars) ", . .Total assets - -- ;.. Gross investment* . , .- i Long-term obligations ' * - Deferred credits--income taxes - Shareholder's equity Capitalization** ' : v .. .v: $26,937 36,756 .'.3,530 ' 5,072 ' ; - 14,842 23,444 ; Funds provided from operations ` Capital expenditures . Cash dividends declared $ 3,407 2,220 . 700 $26,214 . . $26,528 34,808 . 33,260 . 3,643 . 4,015 4,776 4,282 .14,312 ; 14,129 22,731 22,426 $ 3,531 2,343 700 $ 3,927 3,779 639 Other Statistics ' / -- :-?* .V; '- ; * * '- W Personnel Count Net income as a % of shareholder's equity ' at the beginning of the year . 8.6 ` 6.2 Net income as a % of capitalization at the . beginning of the year*** ; .6.0 4.6 '. , Net income as a % of revenue : ; .-. i; ' 5.8 5.1 . - . . Cumulative depreciation, depletion and -Xvi'-." t: '-f. V' ' amortization as a % of gross property, . plant and equipment . . Long-term obligations as a % of capitalization . \ . ,: ; 38.7 .. 37.0 . *'*:'- 15.1 . 16.0 , ; . Funds provided from operations as a % of - : Y* ' Y - , > gross investment at beginning of year*** 10.2 11.1 _ Capital expenditures as a % of funds -i provided from operations 65.2 66.4 Number of employees at year-end 33,184 32,641 13.2 8.9 8.1 34.5 17.9 13.6 96.2 35,167 1984 $20,898 19,126 $ 1.772 $23,729 29,721 3,601 3,735 12,512 19,848 $ 3,978 3,365 618 15.6 9.8 8.5 34.3 18.1 14.6 84.6 34.699 1983 $19,883 18,250 $ 1,633 $22,169 27,872 4,442 3.173 11.359 18,974 $ 3,617 2,253 572 15.9 9.7 8.2 33.6 23.4 14.4 62.3 35,185 'Gross Investment consists of Gross Assets, less Current Liabilities. "Capitalization consists of Long-Term Obligations, Deferred Credits--Income Taxes, and Shareholder's Equity. "Interest expense, after related income taxes, has been added back to the numerator. i* LAM 022393 ABS-006020 47 VXM ,V ' ; ;' ' Capital Expenditures (millions of dollars) ' Exploratory Expenditures (millions of dollars) \ Research Expense* (millions of dollars) Quarterly Results of Operations (millions of dollars) p i:' -i: W f' " ' V . - - 'V:; r Exploration and Production . Oil and gas Other energy . Oil Products " Chemical Products Other : Total v -: v; - i `'v . ':V Vv-V1 : . ,* j . V 1987 $1,491 93 351 ,163 - 122 .1986 -v ; 1985 1984 ' ' $1,761 '. . 27 .. 342 p .'. -'-.V.*V3v:V,_' : _: $2,815 .-;V $2,649 V.^32 Z;:~' mp. ' 95 ' p 195 ; P; 118 - >' 241 127 1983 $1,621 19 282 . 230 101 2,220 2,343 -- 3,779 3,365 2253 Oil and gas ' Geological, geophysical and land expense Lease rentals Dry holes Other Total ; 253 16 132 3 404 275 18 . 200 . 6 499 336 :v _ 323 33 26 301 220 >4 5 674 574 335 22 227 13 597 Total Capital and Exploratory Expenditures $2,624 $2,842 $4,453 $3,939 $2,850 Exploration and Production Oil and gas Other Energy Oil Products Chemical Products Other Total $ 65 1 32 90 44 $ 232 $ 67 $ 74 11 27 26 109 97 42 =. . . 56 $ 246 ` $ 254 $ 78 1 26 90 22 $ 217 $ 74 1 23 80 25 $ 203 'Includes operating taxes and depreciation. - , : - - - ? ' :' v LJ' ' V Sales and other operating revenue Revenues, less purchases . and operating expenses Income before income taxes Net income .. - ;- 1987 v-v- 1986 First Second Third Fourth First Second Third Fourth $4,435 $5,109 $5,564 $5,744 $4,606 $4,092 $3,974 $4,160 ' -h ! '' 1,235 1.472 1,647 1,606 1,623 -- 1,449 . 1,289 1,463 . - 173 , 432 647- /' 530 457 . . 384 223 ' 292 v.. 108 -r- 266' YV 420 ip; 436 ';V L. 276 'S$ 219 ' 133 254 V.: . .. V ' `L',. *a -v' *. .-' . "V.-J - : -.-> ? ; V.".v . V/ r/;: ? 48 : V:* ` '" ; abS-006021 Directors and Management 5 Board of Directors L C. van Wachem Chairman President and a Managing Director, Royal Dutch Petroleum Company Robert E Allen President and Chief Operating Officer, American Telephone & Telegraph Co. Rand V. Araskog Chairman and Chief Executive Officer, ITT Corporation John F. Bookout President and Chief Executive Officer Robert F. Daniell Chairman and Chief Executive Officer, United Technologies Corporation Peter F. Holmes Chairman and a Managing Director, The "Shell" Transport and Trading Company, p.l.c. Lewis W. Lehr Retired Chairman and Chief Executive Officer, 3M Company Jack E Little Executive Vice President William A. Marquard Chairman of Executive Committee, American Standard Inc John H. Platts Retired Chairman and Chief Executive Officer, Whirlpool Corporation William B. Renner Retired Vice Chairman, Aluminum Company of America Frank H. Richardson Executive Vice President \ Committees of the Board The Audit Committee, composed entirely of nonempioyee directors, reviews and recommends selection of the independent account ants, reviews the scope and results of the independent accountants' audit and reviews the adequacy of the Company's internal account ing controls, internal audit pro gram and compliance with accounting and reporting standards having substantial authoritative support The Executive Committee, composed of three employee directors and one non-employee director, may exercise certain of the pow ers of the Board in the man agement of business and affairs of the Company. It meets only when the full Board is unavailable and immediate board action is required. The Executive Development and Compensation Committee, composed entirely of non employee directors, reviews management resources and development considers and recommends to the Board succession plans for senior management and reviews executive compensation plans, benefit programs and compensation of senior staff. The Nominating Committee, composed of two nonemployee directors and one employee director, conducts continuing studies of the size and composition of the Board of Directors, recom mends candidates for mem bership on the Board and reports to the Board any questions with respect to director quafifications. The Employees Benefits Committee, composed entirely of nonemployee directors, reviews and recommends appointment and removal of trustees or committee members of the var ious qualified employee pen sion, Provident Fund and stock ownership benefit plans. It mon itors the administrators' perfor mance and reports to the Board with respect to each of the plans. . : Officers John F. Bookout President and Chief Executive Officer Jack E Little Executive Vice President Frank H. Richardson Executive Vice President Philip J. Carroll Senior Vice President James R. Street President Shell Development Company, a division of Shell Oil Company Vice Presidents Exploration and Production Thomas F. Hart Senior Vice President Exploration L L Smith Production Products R. Lopez Manufacturing and Technical C. W. Wilson Refining and Marketing Davis B. Richardson Chemical Products Administration L. E Sloan Corporate Planning V. G. Whittington Employee Relations J. C. Jacobsen Finance M. K. Seggerman Government Relations Klaus L Mai Health, Safety and Environment L L Drury Information and Computer Services R. G. Dillard, Jr. Public Affairs James H. DeNike Purchasing and Administrative Services Steven C. Stryker General Tax Counsel Legal S. A. Lackey General Counsel Michael F. Sullivan Controller D. E. Cannon Treasurer Thomas E Baker Corporate Secretary LAM 022395 aBS_006022 41 `)I Shell Oil Company One Shell Plaza P.O. Box 2463 Houston, Texas 77252 LAM 022396 ABS-006023