<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[x] For the fiscal year ended December 31, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 0-9073
GULF CANADA RESOURCES LIMITED
(Exact name of Registrant as specified in its charter)
Canada 98-0086499
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ONE NORWEST CENTER, 1700 LINCOLN STREET, SUITE 5000, DENVER, COLORADO,
80203-4525
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 813-3800
Securities registered pursuant to section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class registered Name of each exchange on which registered
- ------------------------------ -----------------------------------------
<S> <C>
Ordinary Shares (No Par Value) New York Stock Exchange
Preference Shares Series 1 New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
As of March 2, 1998, the aggregate market value of the Registrant's
Ordinary Shares held by non-affiliates was approximately $2,118,893,461.
The number of shares outstanding of the Registrant's Ordinary Shares as
of March 2, 1998, was 348,795,944.
Documents Incorporated By Reference
Portions of the Registrant's annual proxy circular and statement for
1998 Annual and Special Meeting of Shareholders are incorporated by reference
into Part III.
<PAGE> 2
CURRENCY AND EXCHANGE RATES
Gulf Canada publishes its consolidated financial statements in Canadian
dollars. All dollar amounts set forth in this Annual Report are in Canadian
dollars, except where otherwise indicated. The following table sets forth for
the periods indicated certain exchange rates based on the noon buying rate in
the City of New York for cable transfers in Canadian dollars as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate"). Such rates are set forth as United States dollars per Cdn. $1.00 and are
the inverse of rates quoted by the Federal Reserve Bank of New York for Canadian
dollars per U.S. $1.00. On March 2, 1998, the Noon Buying Rate was Cdn. $1.00
equals U.S. $0.7018.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Noon Buying Rate at end of period.............. U.S.$0.6999 U.S.$0.7301 U.S.$0.7323 U.S.$0.7128 U.S.$0.7544
Average Noon Buying Rate during period.........
$0.7220 $0.7332 $0.7305 $0.7300 $0.7729
Highest Noon Buying Rate during period.........
$0.7487 $0.7513 $0.7527 $0.7632 $0.8046
</TABLE>
<PAGE> 3
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
UNLESS OTHERWISE STATED, ALL DOLLAR AMOUNTS HEREIN
ARE EXPRESSED IN CANADIAN CURRENCY
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Number
------
<S> <C> <C>
Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 11
Item 3. Legal Proceedings..................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders................................... 16
PART II
Item 5. Market for the Registrant's Ordinary Shares and Related
Stockholder Matters............................................................... 16
Item 6. Selected Financial Data............................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................... 18
Item 8. Financial Statements and Supplementary Data........................................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................................... 71
PART III
Item 10. Directors and Executive Officers of the Company....................................... 71
Item 11. Executive Compensation................................................................ 71
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................................................ 71
Item 13. Certain Relationships and Related Transactions........................................ 71
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K............................................................................... 71
Signatures............................................................................ 72
</TABLE>
<PAGE> 4
PART I
The statements contained in this Annual Report on Form 10-K ("Annual
Report") that are not historical facts, including, but not limited to,
statements found in Item 1. Business, Item 2. Properties, and Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, are forward-looking statements, as that term is defined in Section
21E of the Securities and Exchange Act of 1934, as amended, that involve a
number of risks and uncertainties. The actual results of the future events
described in such forward-looking statements in this Annual Report could differ
materially from those stated in such forward-looking statements. Among the
factors that could cause actual results to differ materially are: fluctuations
of the prices received or demand for the Company's oil and natural gas, the
uncertainty of drilling results and reserve estimates, operating hazards,
acquisition risks, requirements for capital, general economic conditions,
competition and government regulations, as well as the risks and uncertainties
discussed in this Annual Report, including, without limitation, the portions
referenced above, and the uncertainties set forth from time to time in the
Company's other public reports, filings and statements. Certain risk factors
which could affect the information set forth herein are described under the
caption "Risk Factors" in Item 1.
ITEM 1. BUSINESS
Gulf Canada Resources Limited ("Gulf Canada" or the "Company") is a
corporation organized under the Canada Business Corporations Act ("CBCA"). Gulf
Canada is one of Canada's largest independent producers of oil and natural gas,
with operations in Western Canada, where the Company has over 80 years of
experience in conventional oil and gas operations, and internationally with
operations in Indonesia, the North Sea and Australia. Gulf Canada's executive
offices are located at One Norwest Center, 1700 Lincoln Street, Suite 5000,
Denver, Colorado, 80203-4525, U.S.A. and its headquarters and registered office
is located at 401-9th Avenue S.W., Calgary, Alberta T2P 2H7.
In 1997, the Company completed the following significant transactions:
The Company completed its acquisition of Clyde Petroleum Plc
(Clyde) for $1,056 million. Clyde's material assets were located in the
North Sea, Indonesia and Australia. Clyde's assets had average daily
net sales of approximately 48 mboe during December 1997, and estimated
net proved reserves of 125 mmboe as of year-end 1997.
The Company sold $451 of Western Canadian assets during the
year including the Zama Virgo producing property located in northern
Alberta for $230 million cash plus the Coleville property adjacent to
Gulf's Coleville South heavy oil operations in Saskatchewan. Proceeds
were used primarily to repay indebtedness.
The Company consolidated its Indonesian assets into Gulf
Indonesia Resources Limited. In September 1997, Gulf Indonesia was
listed on the New York Stock Exchange under the symbol GRL, and an
initial public offering of approximately 28 per cent of the company's
shares was completed. Gulf received net proceeds of $602 million, which
was primarily used to repay indebtedness.
The Company acquired Stampeder Exploration Ltd. ("Stampeder")
in August 1997 for total consideration of $802 million, consisting of
$69 million cash and the remainder in Gulf stock. Stampeder's assets
were primarily heavy oil properties located in Western Canada.
Stampeder's assets had average daily net sales in December 1997 of
24,630 boe and estimated net proved reserves of 115 mmboe at December
31, 1997.
Following the acquisition of Stampeder, Gulf formed the Gulf
Heavy Oil division ("GHO") to consolidate the acquisition and operation
of its heavy oil assets.
As a consequence of its acquisition, exploration and development
activities, Gulf's estimated net proved oil and gas reserves increased 50 per
cent from 522 mmboe on December 31, 1996 to 783 mmboe on December 31, 1997, and
average daily net production increased 43 per cent from 107.0 mboe/d in 1996 to
153.3 mboe in 1997.
In early 1998, Gulf announced that it intended (i) to sell primarily
non-operated assets in the United Kingdom area of the North Sea and (ii) to form
an infrastructure trust to hold certain of its mid-stream assets in Canada and
sell interests in the trust in an initial public offering. Gulf also announced
an intent to sell certain non-core assets. Proceeds from these transactions will
be used primarily to repay indebtedness. On March 16, 1998, Gulf announced that
it had entered into a definitive agreement with Kerr-McGee Corporation to sell
the Company's assets in the U.K. North Sea for $590 million.
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<PAGE> 5
GENERAL.
Gulf was founded in 1906, and operated as a fully integrated oil
company until 1986 when the Company sold its refining and marketing assets. In
1988, the Company acquired Asamera, Inc., a predecessor to Gulf Indonesia
Resources Limited, which has operations in Indonesia. During 1997, the Company
further expanded its international operations primarily by acquiring Clyde
Petroleum Plc, which has operations in the North Sea, Indonesia and Australia.
Gulf is also a major producer of heavy oil and produces synthetic crude oil
through its interest in Syncrude.
The following table summarizes Gulf's net sales of production and
estimated net proved reserves as of and for the year ended December 31, 1997:
<TABLE>
<CAPTION>
AVERAGE DAILY ESTIMATED NET
NET SALES PROVED RESERVES
---------------------------------- ----------------------------------
LIQUIDS GAS LIQUIDS GAS
(MB) (MMCF) MBOE(4) (MMB) (BCF) MMBOE (4)
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
NORTH AMERICAN
CONVENTIONAL:
Light oil & natural gas ............ 48.4 351 83.5 157 1,107 268
Heavy Oil .......................... 4.7 -- 4.7 69 40 73
Other .............................. -- -- -- -- -- --
----- --- ----- --- ----- ---
Total North American
Conventional .................. 53.1 351 88.2 226 1,147 341
----- --- ----- --- ----- ---
INTERNATIONAL:
Indonesia (1) ...................... 16.6 -- 16.6 28 652 136
North Sea (2) ...................... 16.2 61 26.4 53 174 82
Australia .......................... 1.4 19 4.6 6 120 26
Other .............................. .3 2 .6 -- -- --
----- --- ----- --- ----- ---
Total International ................ 34.5 82 48.2 87 946 244
----- --- ----- --- ----- ---
SYNCRUDE (3) ............................ 16.9 -- 16.9 198 -- 198
----- --- ----- --- ----- ---
Total .............................. 104.5 433 153.3 511 2,093 783
===== === ===== === ===== ===
</TABLE>
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(1) The reserves attributable to Indonesia are owned by GRL, a 72 per cent
owned subsidiary of Gulf. The amount of reserves represent 100 per cent
of the estimated net proved reserves owned by GRL.
(2) Gulf has announced plans to sell certain of its North Sea assets
representing approximately 68 per cent of the total North Sea proved
reserves.
(3) Syncrude's estimated net proved reserves are equal to the lesser of (i)
the estimated reserves commercially recoverable from its leases
approved for mining by applicable regulatory authorities with high
geologic confidence based on core hole samples using current technology
and (ii) the production for the most recent year multiplied by the
number of years remaining on the Syncrude Project's license. The amount
of reserves recoverable from Syncrude's existing leases greatly exceeds
the amount of production during 1997 multiplied by the remaining term
of the facility license. The Syncrude proved reserves are therefore
equal to 1997 production multiplied by the remaining term on the
Syncrude license.
(4) In conformance with the Canadian norm, Gulf has historically reported
North American natural gas reserves converted to an oil equivalent at
10 mcf: 1 barrel.
NORTH AMERICA CONVENTIONAL PRODUCTION
Gulf's core areas in Western Canada are, and are expected to remain,
the Company's primary source of production through 2000. Gulf's conventional oil
production in Western Canada includes light and medium grades of oil (API
gravity of more than 30(Degree)) as well as heavy crude oil now managed by the
Gulf Heavy Oil division. The purchase price for heavy oil is generally less than
for light and medium grades of oil (reflecting higher transportation and
refining costs), reducing the profit margin and making heavy oil production more
sensitive to changes in oil prices.
Gulf is one of the most active drillers in Western Canada. In 1997,
Gulf drilled 542 net wells, 447 of which were successful, for a 82 per cent
success rate. These included 146 net exploration wells, 81 of which were
successful (55 per cent), and 396 development wells, 366 of which were
successful (92 per cent).
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<PAGE> 6
Of the total net wells drilled, Gulf operated 474 for an 83 per cent success
rate. Of the wells drilled in 1997, 277 net wells were natural gas reflecting
Gulf's objective to balance Canadian oil and gas production. Gulf's drilling
operations included 136 net wells drilled as part of its heavy oil operations,
88 per cent of which were successful. All of these wells were drilled in the
last four months of 1997 following Gulf's acquisition of Stampeder.
WESTERN CANADIAN LIGHT OIL AND NATURAL GAS OPERATIONS
Gulf Canada light oil and natural gas operations include interests in
over four million net acres of developed and undeveloped land in Western Canada.
As part of its business strategy, Gulf forms alliances with other Canadian
producers to explore and develop the undeveloped land holdings. During 1997,
Gulf formed alliances with Stellarton Energy Corporation and Sequoia Exploration
and Development to explore and develop non-core properties and with Northrock
Resources Ltd. (Northrock) to lead an exploration effort in an area of mutual
interest in west-central Alberta. In early 1998, Gulf announced an alliance with
Merit Energy Ltd. to explore and develop acreage near the Saskatchewan border in
southeast Alberta.
Gulf's Western Canadian light oil and natural gas operations produced
approximately 100,000 boe/d (before royalties) in 1997 from three main areas:
NORTHERN REGION. Gulf's Northern Region produced approximately 26,000
boe/d during 1997. Current production in the area is oil focused (83 per cent on
a boe basis), but a significant portion of current exploration and development
is for natural gas. The Northern Region includes properties in the Swan Hills
area that contain long-lived reserves and produce approximately 13,000 boe/d of
high-quality light oil. Production in the area has increased in the last several
years as a result of infill drilling and enhanced oil recovery operations. Light
conventional assets from the Stampeder acquisition expanded Gulf's growing
position in the Red Earth area. This area, which includes the Trout, Senex,
House Creek and Panny fields, produces approximately 8,500 boe/d and provides
Gulf with more than 700 sections of land to continue exploration and development
in the area.
WEST CENTRAL ALBERTA REGION. Gulf's west-central Alberta Region
produced approximately 18,000 boe/d in 1997. This has been a core oil and
natural gas producing area for Gulf for many years and includes such fields as
Caroline, Strachan, Brazeau, Nordegg and Pembina-Modeste. The Company has
expanded its land base in this area, due to the potential of the multi-zone
natural gas formations. During 1997, Gulf entered into a strategic alliance with
Northrock to explore and develop an area of mutual interest representing
approximately 60 per cent of Gulf's gross land holdings in this region. During
1998, Gulf expects to participate in 150 wells in this area.
Gulf also operates sizable mid-stream natural gas gathering and
processing facilities in this Region. These include major gas plants at Rimbey,
Gilby, Strachan, Nordegg and Brazeau, with total sour gas processing capacity of
approximately 1 bcf/d. This dominant position presents opportunities to maximize
value through increased capacity utilization and third-party processing
revenues.
PLAINS REGION. In the Plains Region, located in southeastern Alberta,
Gulf produced approximately 35,000 boe/d of light oil and natural gas during
1997, primarily from the Westerose, Gilby, Fenn, Ghost Pine and Richdale fields.
The Company has been actively pursuing natural gas opportunities in this area
with several multi-well, shallow, natural gas exploitation drilling programs.
Gulf controls production and processing facilities in the area and has numerous
opportunities to increase both oil and natural gas production, including infill
locations, enhanced recovery oil development and shallow gas development. The
alliance with Merit Energy Ltd. entered into in early 1998 extends Gulf's reach
to the Saskatchewan border and is intended to accelerate exploration with a
partner that has established exploration and development facilities and has a
proven track record in the area. The budget plans for 1998 include drilling more
than 50 wells in the area, 10 to 20 of which will be on Gulf land.
EXPLORATION
In addition to its established core areas, Gulf is actively exploring
new areas in northern Alberta and British Columbia. Key prospects in this area
include Steen, Sikanni, South Haro and Musreau Lake. The Company also explores
two areas totaling 150,000 net acres in the United States. In 1998, Gulf will
drill two wells in Fort Peck, Montana and conduct a 3D seismic program on its
Cotton Valley prospects in East Texas.
The Company is negotiating to commence work on the 4.5 million acres on
which it holds exploration permits in the Saint Pierre and Miquelon area. Gulf
has identified prospects from existing
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<PAGE> 7
seismic data and may participate in a 5,000-kilometer seismic data acquisition
program planned for summer 1998.
HEAVY OIL OPERATIONS
Subsequent to the acquisition of Stampeder in September, Gulf created
the Gulf Heavy Oil (GHO) division to consolidate and focus the Company's heavy
oil activities. This division has an industry-leading technical team dedicated
to optimizing production from a large and concentrated, high-quality, heavy oil
resource base. GHO also operates the Surmont steam-enhanced recovery pilot
project in Alberta.
GHO began 1998 producing approximately 20,000 b/d of heavy oil. The
operations are concentrated in two regions: the Central Plains Region located
near Coleville in west-central Saskatchewan and the Northern Plains Region
located near Lloydminster on the Alberta-Saskatchewan border.
The Central Plains Region contributed approximately 13,500 b/d of heavy
oil including production from the main fields of Coleville, Coleville South and
Kerrobert. The Coleville-Kerrobert area currently produces from a combination of
primary and secondary waterflood production. GHO commenced operation of a
steam-enhanced oil recovery project in the Kerrobert field in late 1997. The
Cental Plains Region also includes a joint venture where Gulf and a partner
lease 500,000 gross acres. At the beginning of the year, the joint venture
contributed 2,800 b/d (net) of heavy oil production.
The Northern Plains Region was producing approximately 6,500 b/d of
heavy oil at the beginning of 1998. The main fields -Senlac, Long Lake and
Rutland -- collectively produce 4,800 gross b/d.
In August, Gulf commenced operation of a steam-enhanced oil recovery
pilot project at its Surmont leases, in the Athabasca Tar Sands near Fort
McMurray, Alberta. The pilot will be used to test and prove methods of
recovering bitumen using steam injection. Gulf's Surmont leases contain more
than 10 billion barrels of bitumen, and the Company estimates that more than two
billion barrels can potentially be recovered with steam-injection methods. If
Surmont performs as expected, first production from a 20,000 b/d commercial
project could commence before the end of the year 2001.
SYNCRUDE
Gulf holds a 9.03 per cent interest in Syncrude. Syncrude, with
facilities near Fort McMurray, Alberta, is the world's largest producer of
synthetic crude oil from oil sands. Bitumen is mined, extracted and upgraded
into a high quality, low-sulphur, light crude oil known as Syncrude Sweet Blend
("SSB"), which receives a premium price relative to conventional light oil.
Gulf's share of SSB production continued its steady growth, increasing from
18,200 b/d in 1996 to 18,600 b/d in 1997. SSB production is expected to increase
to approximately 20,000 b/d in 1998, benefiting from completion of a coker
debottleneck in April 1997 and the opening of a new mine train (the mining and
processing equipment required to recover, prepare and transport ore for
extraction) at the North Mine in September 1997.
Syncrude's net operating income increased 35 per cent from 1996, the
fourth consecutive year of earnings growth. Crown royalties paid in connection
with Syncrude were significantly lower in 1997, as a result of a 68 per cent
increase in capital expenditures and a new oil sands royalty regime introduced
at the beginning of the year. The new royalty regime provides a direct incentive
for increased capital investment in oil sands projects.
In November, Syncrude released its 1997 business plan. With
approximately 7.4 billion barrels of bitumen under lease and recoverable with
current technology plus incentives provided by the new royalty regime, the plan
proposes to double Syncrude production over the next ten years. The plan, which
will require capital expenditures of approximately $6 billion dollars ($540
million net to Gulf) over the next 10 years, provides for a four-stage expansion
to increase production capacity from 76 million barrels per year in 1997 to 154
million barrels per year (or 38,000 b/d net to Gulf) by 2007. Three new mining
trains and associated extraction facilities will be opened on further the Aurora
North leases, 35 kilometers north of the existing mine and plant site. The plan
also calls for further debottlenecking of the existing upgrading facilities and
the installation of a third coker.
In 1995, Gulf formed the Athabasca Oil Sands Trust, and consummated an
initial public offering of units of beneficial interest in the trust. The Trust
acquired an 11.74 per cent interest in Syncrude from the Alberta government.
Gulf continues to provide administrative services to the Athabasca Oil Sands
Trust and markets the Trust's share of Syncrude production.
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<PAGE> 8
INDONESIA
In October 1997, Gulf completed a successful public offering of nearly
28 per cent of Gulf Indonesia Resources Limited ("GRL"), formerly a wholly owned
subsidiary of Gulf. GRL's ordinary shares are traded on the New York Stock
Exchange under the symbol "GRL".
During 1997, GRL significantly increased the size of its Indonesia land
base, adding almost 12 million gross offshore acres and establishing two new
core areas. Early in 1997, GRL acquired Clyde Petroleum's interest in the Kakap
PSC, located offshore Sumatra in the West Natuna Sea, and the Halmahera PSC,
located offshore from Halmahera Island in eastern Indonesia. Subsequently, GRL
acquired two new blocks in the West Natuna Sea to complement Kakap as well as
interests in three exploration blocks offshore from Java.
Gulf Indonesia's production averaged 22,500 b/d in 1997 from fields
located in on-shore Sumatra and in the West Natuna sea offshore Sumatra. GRL's
operations are conducted through contractual arrangements with Pertamina in the
form of 13 production sharing contracts ("PSC"), one technical assistance
contract and one enhanced oil recovery contract. Under these arrangements, GRL
and its partners provide financing and technical expertise to conduct
exploration, development and production operations in a specified geologic area
(each a "contract area"). Five contract areas currently produce oil, four of
which are located on-shore Sumatra, and one of which is located in the West
Natuna Sea.
GRL's on-shore oil properties produced 14,000 b/d in December 1997.
On-shore production is transported by pipeline to a refinery. The pipeline and
refinery are owned by the Indonesian state oil company, and all of the Company's
oil production is sold to the state oil company for prices based on various
postings in the area. GRL's off-shore production is from 40 wells in eight
fields and produced 9,200 b/d in December 1997. GRL operates four production
platforms in the area with initial processing facilities that are linked by
pipelines to a floating production, storage and off-loading vessel with a
650,000 barrel capacity. Offshore production is sold in the spot market.
GRL continues to develop the Corridor Block Gas Project. This project
contemplates the development of GRL's natural gas reserves in central Sumatra,
transportation of the gas through the trans-central Sumatra pipeline to the Duri
Steamflood oil fields in northern Sumatra. Corridor Project natural gas
production will be used to power the steamflood equipment operating at the Duri
Steamflood to recover oil. The Company will exchange its natural gas production
for oil produced from the Duri Steamflood on a energy equivalent basis. GRL has
entered into contracts to transport and sell the oil it receives in exchange for
its gas production.
The Corridor Block Gas Project is currently in the construction phase
and is expected to be completed in the fourth quarter of 1998. GRL is developing
the Corridor Block fields, including drilling development and exploration wells,
constructing a gas processing plant and related gas gathering and de-watering
facilities. The trans-central Sumatra pipeline is owned and construction is
managed by PGN, the Indonesian state pipeline agency.
EXPLORATION
GRL had a number of exploration successes in late 1996, during 1997 and
in early 1998. In late 1996, GRL drilled a gas exploration well in the South
Jambi `B' PSC, located north of the Corridor Block area. This well was a
discovery, penetrating almost 100 meters (325 feet) of net pay and flowing at a
cumulative rate of 36.5 mmcf/d with a 60 per cent CO2 content. Subsequently,
during 1997 GRL focused on discovering sufficient reserves required to develop a
commercial project. Efforts proved successful with significant discoveries at
Rayun and Bungin. Preliminary estimates of potential gross recoverable sales gas
reserves fall within a range that would support a 200-300 mmcf/d natural gas
project.
GRL drilled an exploration well in the Tungkal PSC in the Corridor
Block area which tested 1.3 mb/d of oil and 3 mmcf/d of natural gas from two
zones. Based upon these results and a 3D seismic program completed in the fourth
quarter, GRL intends to drill two more delineation wells in mid-1998. GRL also
plans to drill another oil prospect ten kilometers south of Mengeopeh.
On the Kakap PSC located offshore in the West Natuna Sea, the Company
drilled a successful exploration well in the Nelayan field, and has begun a six
well exploration drilling program underway to test oil and natural gas prospects
on the block.
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<PAGE> 9
SERVICES AGREEMENTS.
In connection with the initial public offering of GRL, the Company and
GRL entered into a number of agreements under which the material provisions are
described below. Each of these agreements has been filed as an exhibit to the
Company's Form 10-K and the following discussion is qualified in its entirety by
reference to such agreements.
Gulf has historically provided services to GRL and, in connection with
the initial public offering of GRL stock, entered into agreements providing for
the following services, each of which is to be provided at Gulf's actual direct
and indirect costs, provided that total payments for services may not exceed 2
per cent of GRL's total operating and capital expenditures for a year.
TECHNICAL SERVICES. Technical services are defined to include
engineering, supervisory and related services, field services, geological,
geophysical and related services, legal, financial and other services related to
project financing and other commercial agreements.
ADMINISTRATIVE SERVICES. Administrative services include financial, and
treasury services, certain human resources services, assistance with public
relations and regulatory and public company compliance matters.
INFORMATION SERVICES. Information services is defined to include data
processing and similar services.
Each of the services agreements has an initial term of 10 years, and
may be canceled by either party prior to the end of such term with 12 months
prior notice. The agreements also contain other provisions regarding their
termination.
During 1997, total payments under these agreements to Gulf Canada were
approximately US$825,000.
CORPORATE OPPORTUNITY AGREEMENT. GRL has advised Gulf Canada that it
does not currently intend to engage in the oil and gas exploration business
outside Indonesia, and Gulf Canada has advised GRL that it does not currently
intend to engage in the oil and gas exploration business in Indonesia except
through its ownership of Common Shares of GRL.
Gulf Canada has further advised GRL that if it acquires Indonesian oil
and gas assets in connection with an acquisition of non-Indonesian oil and gas
assets or otherwise, it currently intends to offer the Indonesian assets to GRL
for that portion of Gulf Canada's purchase price fairly allocable to the
Indonesian assets plus the amount of any costs, including taxes, that would be
incurred by Gulf Canada in connection with such sale to GRL. There could be
factors, however, including its obligations to third parties, that would cause
Gulf Canada not to offer such assets to GRL.
In this connection, Gulf Canada and GRL have entered into a Corporate
Opportunity Agreement, which provides that if Gulf Canada acquires or makes an
investment in an enterprise or assets which include Indonesian oil and gas
assets (the "Indonesian Assets") with a fair market value in excess of US$100
million, Gulf Canada will within one year either offer to GRL the right to
purchase the Indonesian Assets at Gulf Canada's purchase price plus the amount
of any costs, including taxes, that would be incurred by Gulf Canada in
connection with such sale to GRL or cause some or all of its representatives to
resign from GRL's board of directors so that a majority of GRL's directors will
have no affiliation with Gulf Canada. In addition, if Gulf Canada elects to
relinquish control, GRL will have the right to terminate the Corporate
Opportunity Agreement and the Service Agreements. Decisions by GRL with respect
to the acquisition of Indonesian Assets from Gulf Canada are to be made by a
committee of GRL's non-management directors who are also not affiliated with
Gulf Canada. If GRL declines to acquire Indonesian Assets on any such occasion,
GRL will not be entitled as a matter of right to acquire, invest in, or
participate in additional investments with respect to such Indonesian Assets.
GRL has agreed that it will not, without Gulf Canada's consent, directly acquire
non-Indonesian oil and gas assets or acquire a majority equity or voting
interest in an entity with non-Indonesian oil and gas assets unless a majority
of the fair market value of such assets are located in Indonesia.
The Corporate Opportunity Agreement will terminate in the event that
Gulf Canada holds less than a majority of the Common Shares or ceases to hold
shares entitled to cast a majority of the votes entitled to vote for the
election of directors. In the event that disagreements arise under the
agreement, GRL and Gulf Canada have agreed that they will submit the matter to
arbitration.
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<PAGE> 10
TRADE-MARK SUBLICENSE AND NAME USE AGREEMENT. GRL has entered into a
Trade-Mark Sublicense and Name Use Agreement with Gulf Canada, giving GRL the
right to use the word "Gulf" in its name, and to use the "Gulf" logo, for a fee
of US$67,000 per year. The Trade-Mark Sublicense and Name Use Agreement will
terminate if Gulf Canada holds less than a majority of the Common Shares. In
that event, GRL will have up to eighteen months to cease use of the name "Gulf"
and to cease using Gulf trademarks. Gulf Canada licenses the trademark in
Indonesia from Gulf International Lubricants Ltd.
CROSS-INDEMNIFICATION AGREEMENT. In anticipation of the initial public
offering of GRL, Gulf Canada transferred to GRL all of its Indonesian assets not
already owned by GRL, including Indonesia assets acquired in the Clyde
acquisition (the "Transferred Indonesian Assets"), and GRL transferred to Gulf
Canada all of the shares of certain subsidiaries of GRL not carrying on business
in Indonesia (the "Transferred Non-Indonesian Assets"). In connection with such
transfers, GRL and Gulf Canada have entered into a Cross-Indemnification
Agreement. In the Cross-Indemnification Agreement, Gulf Canada has agreed to
indemnify GRL against any and all liabilities that are associated with the
ownership or operation of the Transferred Non-Indonesian Assets and any taxes
incurred by GRL in connection with the transfer of the Transferred
Non-Indonesian Assets. GRL has agreed to indemnify Gulf Canada against any and
all liabilities that are associated with the ownership or operation of the
Transferred Indonesian Assets or with respect to obligations assumed by Gulf
Canada with respect to the Corridor Block Gas Project.
GRISSIK OPTION AGREEMENT. GRL has granted Gulf Canada an option to
acquire all of the outstanding shares of Grissik Gas Company Ltd. ("Grissik"),
one of GRL's subsidiaries. This option is exercisable at Gulf Canada's election
on prior written notice, subject to certain conditions, for a price equal to
fair market value of the Grissik shares. The option agreement contemplates that
the sale of the Grissik shares will be accomplished as part of a reorganization
whereby all of the assets and liabilities of Grissik, other than certain
Canadian tax losses that are not otherwise usable by GRL, are transferred to a
new subsidiary of GRL. Upon exercise of the option, Gulf Canada is obligated to
hold GRL harmless from any taxes, expenses or other costs or liabilities
incurred by GRL that it would not have incurred absent the exercise of the
option.
REGISTRATION RIGHTS AGREEMENT. Pursuant to the terms of a Registration
Rights Agreement with Gulf Canada, GRL has agreed that, subject to certain
restrictions, upon the request of Gulf Canada (or certain assignees), GRL will
register under the Securities Act, applicable state securities laws and laws of
certain other jurisdictions the sale of the Common Shares owned by Gulf Canada
which Gulf Canada requests to be registered. After the third anniversary of the
closing of the Offerings, Gulf Canada may request such registration to be on a
"shelf" registration statement. In addition, in the event that GRL proposes to
sell Common Shares, Gulf Canada has a right to sell Common Shares in the same
offering subject to certain restrictions. In addition, GRL has agreed, subject
to certain conditions, to assist Gulf Canada in its efforts to sell Common
Shares held by Gulf Canada in transactions exempt from the registration
requirements of the Securities Act.
GRL has agreed to pay all expenses incurred with the registration and
sale of Common Shares by Gulf Canada, other than underwriting fees and discounts
and applicable filing fees, except that Gulf Canada has agreed to reimburse GRL
for its out of pocket costs incurred with respect to requested registrations
after Gulf Canada's third requested registration.
NORTH SEA
The Company completed the acquisition of Clyde Petroleum Plc in the
first quarter of 1997. Clyde's Petroleum's North Sea operations were producing
approximately 70 per cent of its sales volumes when it was acquired by Gulf. The
acquisition gave Gulf a new operating area in the North Sea.
UNITED KINGDOM
As announced in February 1998 and in March 1998, Gulf intends to divest
its U.K. assets, including interests in four producing oil fields, two projects
currently under development and offshore/onshore exploration licenses for $590
million. U.K. oil production, mainly from non-operated interests in the Wytch
Farm, Gryphon and Andrew fields, averaged 17,000 b/d in 1997, accounting for
approximately nine per cent of Gulf's total production. The two development
projects are the non-operated Ross field (in which Gulf has a 14.5 per cent
working interest) and the Leadon project (in which Gulf has a 100 per cent
working interest).
-7-
<PAGE> 11
THE NETHERLANDS
The Netherlands North Sea operations are focused on three core
operating areas comprising about 2.5 million gross acres. Gulf operates 15
shallow water offshore licenses and three onshore licenses that contributed
approximately 62 mmcf/d of production net to Gulf in 1997. Production from the
K5E field (in which Gulf owns a 4.4 per cent working interest) began in November
1997, which offset production declines in existing fields.
Gulf's assets in the region are the result of a consolidation of three
companies with ten years experience in the area. The Netherlands staff
successfully acquired acreage in early North Sea licensing rounds (which are
generally more favorable than more recent licenses) and has significant control
of infrastructure that together form a solid platform for satellite
developments. Capital expenditures during the year were focused primarily on
development of the "P" quadrant area to evaluate commerciality of the reservoir
(in which Gulf owns a 22.2 per cent working interest). A horizontal well was
spudded in December in this area and is currently testing in the P2a-SE field.
Following evaluation of the well, another horizontal well may be drilled in the
second quarter of 1998.
Gulf acquired the G17cd exploration license (in which Gulf has a 100
per cent working interest). This license is located offshore some 160 kilometers
north of Amsterdam and contains a substantial Triassic prospect. Gulf has
acquired a 135 square kilometer 3D seismic survey early in 1998 to identify 1999
drilling targets. The Company also acquired an interest in the gas rights in the
K18/L16 blocks (an average 34 per cent working interest) and plans to drill a
horizontal well in 1999 to evaluate commerciality of the reservoir. Gulf and its
predecessors have a 69 per cent exploration success rate over the past ten years
and has developed a five year exploration inventory of 45 operated and 24
non-operated prospects.
AUSTRALIA
Gulf's principal assets in Australia consist of two core areas;
production of 5,700 boe/d from the Cooper Basin Unit Area (in which Gulf owns a
4.75% working interest) in central Australia and exploration in the Bonaparte
basin (North West Shelf region) where Gulf has acquired a contiguous land
position. In addition to these core areas, Gulf has a land position in the
Carnarvon, Otway and Gippsland basins, offshore Australia. The Company expects
to spend one-third of its 1998 Australia capital budget on exploration and
development in the Cooper Basin, one-third on non-Cooper Basin exploration, and
the balance on seismic and appraisal drilling. Gulf currently holds 20
exploration permits in Australia covering 30 million gross, or 2 million net
acres.
ONSHORE. The Cooper Basin in central Australia comprises approximately
20 million acres of which Gulf has a 4.75% working interest. The land straddles
the border between the states of South Australia and South West Queensland. In
addition to production of gas, ethane, condensate and LPG, the joint venture has
undertaken a significant exploration initiative throughout 1997. In 1997, Gulf
participated in a total of 64 exploration wells in the Cooper Basin with a
success ratio of 68%. The reserves addition from this activity added
approximately 2 million barrels of oil equivalent of proven and probable
reserves. This level of activity is expected to continue throughout 1998.
OFFSHORE. Gulf has focussed its exploration activities towards the
highly prolific Bonaparte Basin (offshore northwest Australia) where it has an
interest in almost two million gross acres (565,000 net acres). In 1997, Gulf's
first discovery was made in the region with the drilling of Tenacious - 1 on the
AC/P17 permit (operated by Cultus Petroleum, Gulf 25% working interest) Work is
progressing on appraisal and development plans for this discovery. Tenacious -1
was a significant discovery for the region as it proved up a new horizon known
as the Tithonian and flowed 7,667 b/d, which was a record for the region. The
adjacent permit operator plans to drill the first delineation well on the
Tenacious structure during second quarter 1998. If this well is successful, a
second appraisal well could be drilled on AC/P 17 ( in which the Company has a
25% working interest) pending rig availability. The AC/P 17 joint venture has
begun discussions with the operator of the nearby FPSO with regard to the
technical and commercial aspects of producing and selling Tenacious oil via that
facility, which is only 13 kilometers away. Initial Tenacious production is
targeted for mid-1999.
The Company is participating in a multi-client 1,625 square kilometer
3D survey on permits AC/P 17,20 & 21 in the Bonaparte Basin and a 3,550
kilometer 2D program in AC/P 18,20 and 21. Data from these programs will form a
key component of exploration in this core area. Gulf expects the
partner-operated Brontosaurus-1 (40% working interest) on AC/P 20 to spud in
late 1998 or early 1999. The well is located 25 kilometers west of the Jabiru
oil field and related infrastructure.
-8-
<PAGE> 12
RISK FACTORS
VOLATILITY OF OIL AND NATURAL GAS PRICES
Gulf Canada's results of operations and financial condition are
dependent on the prices received for its oil and natural gas production. The
Company's ability to arrange financing and acquire the capital necessary to
explore and develop its properties is also dependent on the price of oil and
natural gas. Oil and natural gas prices have fluctuated widely during recent
years and are determined by supply and demand factors, including weather and
general economic conditions, as well as conditions in other oil producing
regions, which are beyond the control of Gulf Canada. Any decline in oil or
natural gas prices could have a material adverse effect on Gulf Canada's
operations, financial condition, proved reserves and the level of expenditures
for the development of its oil and natural gas reserves. No assurance can be
given that oil and natural gas prices will be at levels which will generate
profits for Gulf Canada.
In addition, Gulf Canada regularly assesses the carrying value of its
assets in accordance with Canadian GAAP and U.S. GAAP under the successful
efforts method. See the Consolidated Financial Statements included herein. If
oil and natural gas prices become depressed or decline, the carrying value of
Gulf Canada's assets could be subject to downward revision.
During the first quarter of 1998, oil prices have been low compared to
prices received in the last five years. Continued low oil prices could have a
material adverse affect on Gulf.
NEED TO REPLACE RESERVES
Gulf Canada's future oil and natural gas reserves and production, and
therefore its cash flows, are highly dependent upon Gulf Canada's success in
exploiting its current reserve base and acquiring or discovering additional
reserves. Without reserve additions through exploration, acquisition or
development activities, Gulf Canada's reserves and production will decline over
time as reserves are produced. The business of exploring for, developing or
acquiring reserves is capital intensive. To the extent cash flows from
operations are insufficient and external sources of capital become limited or
unavailable, the Company's ability to make the necessary capital investments to
maintain and expand its oil and natural gas reserves will be impaired. In
addition, there can be no assurance that Gulf Canada will be able to find and
develop or acquire additional reserves to replace production at acceptable
costs.
LEVERAGE
Gulf Canada's debt instruments impose restrictions on the operations
and activities of Gulf Canada. Generally, the most significant restrictions
relate to debt incurrence, investments, capital expenditures, sales of assets
and the use of proceeds therefrom and cash distributions by Gulf Canada and
require Gulf Canada to comply with certain financial covenants, including the
maintenance of a debt to total capitalization ratio. The ability of Gulf Canada
to comply with the foregoing restrictions and covenants will be dependent upon
its future performance and various other factors, including factors beyond Gulf
Canada's control. A failure to comply with these restrictions or covenants could
result in an event of default under the applicable instrument, which could cause
acceleration of the debt under such instrument and other instruments that
contain cross-default provisions.
OPERATING HAZARDS AND OTHER UNCERTAINTIES
Acquiring, developing and exploring for oil and natural gas involves
many risks. These risks include encountering unexpected formations or pressures,
premature declines of reservoirs, blow-outs, equipment failures and other
accidents, craterings, sour gas releases, uncontrollable flows of oil, natural
gas or well fluids, adverse weather conditions, pollution, other environmental
risks, fires and spills. Although Gulf Canada maintains insurance in accordance
with customary industry practice, Gulf Canada is not fully insured against all
of these risks. Losses resulting from the occurrence of these risks could have a
material adverse impact on Gulf Canada. Gulf Canada, like other international
oil companies, attempts to conduct its business and financial affairs so as to
protect against political and economic risks applicable to operations in the
various countries where it operates, but there can be no assurance that Gulf
Canada will be successful in so protecting itself.
Gulf Canada is also subject to deliverability uncertainties related to
the proximity of its reserves to pipeline and processing facilities and the
inability to secure space on pipelines which deliver oil and natural gas to
commercial markets.
-9-
<PAGE> 13
UNCERTAINTY OF RESERVE ESTIMATES
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of Gulf Canada. The
reserve data set forth herein represent estimates only. In general, estimates of
economically recoverable oil and natural gas reserves and the future net cash
flows therefrom are based upon a number of variable factors and assumptions,
such as historical production from the properties, the assumed effects of
regulation by governmental agencies and future operating costs, all of which may
vary considerably from actual results. All such estimates are to some degree
speculative, and classifications of reserves are only attempts to define the
degree of speculation involved. For those reasons, estimates of the economically
recoverable oil and natural gas reserves attributable to any particular group of
properties, classification of such reserves based on risk of recovery and
estimates of future net revenues expected therefrom, prepared by different
engineers or by the same engineers at different times, may vary substantially.
Gulf Canada's actual production, revenues, taxes and development and operating
expenditures with respect to its reserves will vary from such estimates, and
such variances could be material.
Estimates with respect to proved reserves that may be developed and
produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than actual production history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves.
In accordance with applicable requirements of the U.S. Securities and
Exchange Commission ("SEC"), the estimated discounted future net cash flows from
estimated proved reserves are based on prices and costs as of the date of the
estimate unless such prices or costs are contractually determined at such date.
Actual future prices and costs may be materially higher or lower. Actual future
net cash flows also will be affected by factors such as actual production,
supply and demand for oil and natural gas, curtailments or increases in
consumption by natural gas purchasers, changes in governmental regulation or
taxation and the impact of inflation on costs.
The securities disclosure legislation and policies of Canada, as
interpreted by the securities commissions in Canada, permit the use of escalated
prices and costs in calculating reserve quantities, which is not permitted for
disclosure of reserve quantities in financial statements filed with the SEC.
Reserves set forth in financial statements filed with the SEC must be based on
period end prices and costs, without escalation, except where required by
contract. Additionally, Canadian legislation and policies permit the disclosure
of "probable" reserves which may not be disclosed in financial statements filed
with the SEC. Probable reserves are generally believed to be less likely to be
recovered than proved reserves.
The reserve estimates included herein could be materially different
from the quantities and values ultimately realized.
ENVIRONMENTAL RISKS
All phases of the oil and natural gas business present environmental
risks and hazards and are subject to environmental regulation pursuant to a
variety of international conventions and Canadian and U.S. federal, provincial,
state and municipal laws and regulations. Environmental legislation provides
for, among other things, restrictions and prohibitions on spills, releases or
emissions of various substances produced in association with Gulf Canada's past
and current operations. The legislation also requires that refineries, service
stations, wells and facility sites be operated, maintained, abandoned and
reclaimed to the satisfaction of applicable regulatory authorities. Compliance
with such legislation can require significant expenditures and a breach may
result in the imposition of fines and penalties, some of which may be material.
In addition, certain types of operations require the submission and approval of
environmental impact assessments. Environmental legislation is evolving in a
manner expected to result in stricter standards and enforcement, larger fines
and liability and potentially increased capital expenditures and operating
costs. Gulf Canada, either directly or through subsidiaries, owned numerous
refineries, service stations and related operations in Canada and the United
States prior to 1985, and continues to hold former sites, which have given rise
to some claims and could give rise to additional claims in the future under laws
that provide that responsible parties can include present and prior owners,
operators and others, including claims for investigation, clean-up and
restoration costs and damages for personal injury. Although Gulf Canada believes
that it is currently in substantial compliance with all existing material
environmental regulations, there can be no assurance that future environmental
costs will not have a material adverse effect on Gulf Canada's financial
condition or result of operations.
-10-
<PAGE> 14
COMPETITION
There is strong competition relating to all aspects of the oil and gas
industry, in particular the exploration for and development of new oil and
natural gas reserves. Gulf Canada actively competes for reserve acquisitions,
exploration leases, licenses and concessions and skilled industry personnel with
a substantial number of other oil and gas companies, many of which have
significantly greater financial resources than Gulf Canada. Gulf Canada's
competitors include major integrated oil and gas companies and numerous other
independent oil and gas companies and individual producers and operators.
GOVERNMENTAL REGULATION
The petroleum industry is particularly subject to regulation and
intervention by governments in such matters as the awarding of exploration and
production interests, the imposition of specific drilling obligations,
environmental protection controls, control over the development and abandonment
of fields (including restrictions on production) and possibly expropriation or
cancellation of contract rights, as well as with respect to prices, taxes,
royalties and the exportation of oil and natural gas. Such regulation may be
changed from time to time in response to economic or political conditions. The
implementation of new regulations or the modification of existing regulations
affecting the oil and gas industry could reduce demand for natural gas and crude
oil, increase Gulf Canada's costs and have a material adverse impact on Gulf
Canada.
EXCHANGE RATE FLUCTUATIONS
Gulf Canada is exposed to foreign exchange risks since the majority of
its revenue is received in or by reference to U.S. dollar denominated prices
while the majority of its expenditures are in Canadian dollars. The exchange
rate between Canadian dollars and U.S. dollars has varied substantially in the
last five years. See "Currency and Exchange Rates."
ITEM 2. PROPERTIES
RESERVES
The following table describes the Company's estimated net proved
reserves as of the end of each of the last three years:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------- ------------------
<S> <C> <C> <C>
ESTIMATED NET PROVED RESERVES:
Oil and natural gas liquids (mmb).............. 511 326 321
Natural gas (bcf).............................. 2,093 1,674 1,204
Mmboe.......................................... 783 522 441
Present value of future net cash flows
discounted at 10% (millions of dollars)... 2,415 2,633 1,471
</TABLE>
The Company's internal staff of reserve engineers prepared the
estimates of proven reserves of the Company. Reserves were estimated using oil
and gas prices and production and development costs in effect on December 31 of
each year, without escalation, and were otherwise prepared in accordance with
the Commission regulations regarding disclosure of oil and gas reserve
information.
There are numerous uncertainties inherent in estimating quantities of
proved reserves, including many factors beyond the control of the Company and
the Reserve Engineers. The reserve data set forth in this document represent
only estimates. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
manner and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment. As
a result, estimates by different engineers often vary, sometimes significantly.
In addition, physical factors, such as the results of drilling, testing and
production subsequent to the date of an estimate, as well as economic factors,
such as an increase or decrease in
-11-
<PAGE> 15
product prices that renders production of such reserves more or less economic,
may justify revision of such estimates. Accordingly, reserve estimates are
different from the quantities of oil and gas that are ultimately recovered. See
"Risk Factors -- Uncertainty of Reserve Estimates."
OIL AND GAS DRILLING ACTIVITIES
During the five years ended December 31, 1997, approximately 93 per
cent of the Company's net wells drilled were in western Canada. As a result of
Gulf Canada's increased capital expenditures during 1995 through 1997, drilling
activity increased from previous years. In 1997, Gulf Canada had drilling
success rates of 54 per cent for gross (53 per cent net) exploration wells and
91 per cent for gross (93 per cent net) development wells.
The following table sets forth the gross and net number of productive
and dry exploratory and development oil and natural gas wells drilled from 1995
through 1997 for the Company as a whole. "Gross" means all wells in which Gulf
Canada has an interest and "net" means gross wells after deducting interests of
others.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
DEVELOPMENT
WELLS:
Productive:
Oil ............... 209 147 103 67 89 58
Gas ............... 284 236 146 76 104 69
Dry .................. 51 30 57 40 48 33
EXPLORATION
WELLS:
Productive:
Oil ............... 57 44 49 44 38 30
Gas ............... 93 45 46 36 75 47
Dry .................. 126 79 70 52 61 35
--- --- --- --- --- ---
Total Wells ............. 820 581 471 315 415 272
=== === === === === ===
</TABLE>
PRODUCTIVE WELLS
The following table summarizes Gulf Canada's oil and natural gas wells
that are capable of production as at December 31, 1997. "Gross" means all wells
in which Gulf Canada has a working interest and "net" means gross wells after
deducting working interests of others.
<TABLE>
<CAPTION>
OIL NATURAL GAS TOTAL
------------- --------------- ---------------
GROSS NET GROSS NET GROSS NET
----- ---- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
NORTH AMERICA
Alberta ............... 4,835 3,411 3,026 1,850 7,861 5,261
Other Western Canada .. 98 56 145 65 243 121
United States ......... 6 3 -- -- 6 3
INTERNATIONAL
Indonesia ............. 436 247 -- -- 436 247
Other ................. 293 106 651 36 944 142
TOTAL WELLS ................ 5,668 3,823 3,822 1,951 9,490 5,774
- ----------------
</TABLE>
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<PAGE> 16
ACREAGE
The following table summarizes Gulf Canada's conventional oil and
natural gas land holdings as at December 31, 1997.
<TABLE>
<CAPTION>
DEVELOPED ACREAGE(1) UNDEVELOPED ACREAGE(1)
-------------------------------------- --------------------------------------
GROSS NET GROSS NET
----- --- ----- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
NORTH AMERICA
Alberta............... 1,671 1,040 2,988 2,353
Other Western
Canada............ 466 169 1,567 1,105
Frontier.............. - - 6,504 5,058
Other................. - - 1,489 858
INTERNATIONAL
Indonesia............. 346 186 16,059 8,544
United Kingdom........ 67 8 1,040 499
Australia............. 991 42 29,567 2,029
Netherlands........... 1,587 208 719 237
Other................. 12 3 5,931 1,799
------- -------- -------- -------
TOTAL 5,140 1,656 65,864 22,482
======= ======== ======== ========
</TABLE>
- ------------
(1) "Gross acres" means all acreage in which Gulf Canada has an interest
and "net acres" means gross acres after deducting interests of others.
"Developed acreage" refers to the acreage to which the Company has
assigned proved reserves. "Undeveloped acreage" refers to the acreage
to which the Company has not assigned any proved reserves. The table
does not include approximately 325,000 gross acres in which royalty
interests are held.
TITLE TO PROPERTIES
Oil and gas rights in western Canada are held primarily by the
provinces but may also be privately owned. On provincially owned lands, the two
main types of rights agreements are licenses and leases. Licenses define the
boundaries of an exploration area and the work required to maintain good
standing. Satisfying the license requirements entitles the holder to convert all
or a portion of the license rights to lease form. Leases accommodate
exploration, development and production activities. The lessee of a lease is
generally responsible for paying all development and operating costs and is
entitled to the production subject to a rental and royalty payable to the
lessor. Leases are also granted by private owners of mineral rights for varying
terms. Both provincial and private leases are generally maintained by production
or productive capability.
Most of Gulf Canada's interests in frontier lands are held under
significant discovery licenses pursuant to the Canada Petroleum Resources Act
(Canada) ("CPRA"). In the Amauligak area of the Beaufort Sea, Gulf Canada's
interest is held under a production license, subject to the CPRA.
Interests issued in the east coast offshore are adjacent to the
Province of Newfoundland and are subject to the Canada-Newfoundland Atlantic
Accord Implementation Act. The east coast offshore interests include 4.6 million
gross and 4.6 million net acres in the St. Pierre Bank and Banquereau areas that
are presently under development moratorium. There is continuing negotiation over
provincial jurisdiction between Newfoundland and Nova Scotia and the lands will
remain in moratorium until this matter is settled.
The Company's land interests in Indonesia are owned by GRL. These
interests are held subject to production sharing contracts, a technical
assistance contract and an enhanced oil recovery contract, under which the GRL
and the other contracting companies are eligible to recover their capital and
operated costs from production if a commercial discovery is made. Any balance of
production is divided in varying shares between the government of the producing
country, or its state-owned oil corporation, and the contracting companies.
-13-
<PAGE> 17
Interests in the U.K. North Sea are held under licenses issued by the
United Kingdom Department of Trade and Industry. The Netherlands North Sea
licenses are issued by the Netherlands government.
In Australia, the Company's land interests (both onshore and offshore)
consist of interests in production licenses, exploration permits and retention
leases issued under the Petroleum Submerged Lands Act (Commonwealth or State, as
appropriate). Interests held in the Zone of Cooperation which is administered by
the Joint Authority established by the Australian and Indonesian governments
consist of production sharing contracts approved by the Joint Authority. The
relationships amongst the parties are governed through joint venture operating
agreements, which are permit specific. Gulf holds its interest in land through
either a trust relationship with the Operator or by being a registered title
holder on the relevant permit.
GAS PLANTS AND PIPELINES
Gulf Canada's business includes the acquisition, ownership and
operation of assets which generate cash flow and that are non-depleting, such as
gas processing plants, pipelines and gathering systems. As at December 31, 1997,
Gulf Canada operated six major natural gas plants with total gross processing
capacity of approximately 1,075 mmcf/d and operates another ten plants and has
interests in numerous other non-operating gas plants. Gulf Canada markets unused
plant capacity to third parties, and attempts to acquire natural gas properties
and exploit existing natural gas properties adjacent to these plants.
Gulf Canada has interests in two pipeline systems - the Rimbey
Pipeline, in which it has a 40.6 per cent interest, and the Wabasca River
Pipeline, in which it has a 28.5 per cent interest. The Rimbey Pipeline carries
propane, butane and condensate to Edmonton for subsequent redistribution at a
rate of 40 mbbls/d. The Wabasca River Pipeline carries 15 to 20 mbbls/d of crude
oil from the Senex, Trout Mountain, Kidney and Panny fields in Alberta to the
Rainbow Pipeline. Gulf Canada operates both pipeline systems from its control
center in Edmonton, Alberta. The Corporation is also the operator of three
natural gas liquids product pipelines operating between the Fort Saskatchewan,
Alberta liquids fractionation and storage plant and Edmonton. Gulf Canada has a
31 per cent interest in the Fort Saskatchewan facilities.
Gulf Canada is considering an infrastructure trust arrangement and is
currently reviewing these assets for that purpose.
OTHER FACILITIES AND OPERATIONS
COAL. Although Gulf Canada is not currently engaged in commercial
production of coal, it continues to hold some coal properties. The Corporation's
most significant coal property is Mount Klappan in British Columbia where
drilling has confirmed a substantial anthracite deposit. Gulf Canada has
announced that it plans to divest of the Mount Klappan coal property.
MARKETING
The marketing of crude oil, natural gas liquids and natural gas is an
integral part of Gulf Canada's business. Gulf Canada continues to grow marketing
capabilities and third party volumes as a way to provide flexibility and lower
cost services for Gulf Canada's increasing liquids and gas volumes. During 1997,
Petro-Canada and Shell Canada Limited accounted for 14.4 per cent and 10.2 per
cent respectively, of oil and gas revenues of the Company. The Company had no
other purchasers that accounted for greater than 10 per cent of its oil and gas
revenues. The Company believes that the loss of any single customer would not
have a material adverse effect on the results of operations of the Company.
Crude Oil. In 1996, Gulf Canada was selected as one of three companies
to market the Province of Alberta's Crown royalty crude oil volumes. The
Province's 78,000 b/d of light sweet crude, combined with other third party and
Gulf Canada's own volumes, brought total volumes marketed by Gulf Canada,
including a portion of SSB from the Syncrude facility, to over 250,000 bbls/d.
As a result of Gulf Canada's marketing arrangement with Athabasca, Gulf Canada
has agreed to market the synthetic crude oil production attributable to the
11.74 per cent interest in Syncrude recently acquired by Athabasca, representing
approximately 24 mbbls/d. During 1997, 50 per cent and 50 per cent of Gulf
Canada's crude oil production from western Canada (including synthetic crude
oil) was marketed directly to refiners in Canada and the United States,
respectively, on terms negotiated with each buyer.
Gulf is a 50% shareholder in a new corporation, Tidal Energy Marketing
Inc., formed to carry on crude oil marketing business. Tidal is marketing Gulf's
crude oil pursuant to an arrangement effective January 1, 1998.
-14-
<PAGE> 18
In Indonesia, the Corporation's crude oil production, which averaged
22,500 mbbls/d in 1997 and represented approximately 15 per cent of the
Corporation's consolidated gross revenues, is sold to Pertamina, the Indonesian
state owned oil company as well as directly to offshore markets. The price
received for the crude oil is determined monthly by the Indonesian government
based on a weighted average of benchmark world crude oil prices.
NATURAL GAS LIQUIDS. Gulf Canada is a major marketer of natural gas
liquids, consisting of ethane, propane and butane. These natural gas liquids are
extracted from natural gas processed at various field plants. The Corporation
also fractionates, stores and sells natural gas liquids at an underground
storage facility at Fort Saskatchewan, Alberta, in which Gulf Canada holds a 31
per cent interest. The natural gas liquid products are delivered to market
through various pipelines, storage and loading facilities, tank trucks and a
leased, Gulf Canada operated, rail tank car fleet. In 1997, Gulf Canada marketed
approximately 15 mb/d of natural gas liquids, approximately 40 per cent of which
represents third party volumes.
NATURAL GAS. Sales of natural gas averaged 497 mmcf/d in 1997 compared
to 441 mmcf/d for 1996. Approximately 35 per cent of Gulf Canada's natural gas
sales in 1997 were pursuant to long-term contracts with Alberta gas purchasers
(known as "aggregators") who resell the gas in both domestic and export markets.
The remaining natural gas sales were direct sales to local distribution
companies, industrial customers and marketing companies.
SEGMENT INFORMATION. Reference is made to Note 19 entitled "Segment
information" under the heading "Notes to Consolidated Financial Statements" of
the Consolidated Financial Statements of the Company for the year ended December
31, 1997.
BUSINESS ENVIRONMENT
COMPETITIVE AND INDUSTRY CONDITIONS. There is strong competition
relating to all aspects of the oil and gas industry, and in particular in the
exploration and development of new oil and natural gas reserves.
The oil and natural gas business is subject to extensive government
regulation relating to prices, taxes, royalties, land tenure, allowable
production, the export of oil and natural gas and many other aspects. Gulf
Canada's production is subject to deliverability uncertainties related to the
proximity of its reserves to pipeline and processing facilities, and shipping
restrictions on pipelines that deliver oil and natural gas to commercial
markets. Future production from frontier lands will depend upon, among other
factors, satisfactory fiscal and regulatory terms, oil prices, the establishment
of sufficient reserves to justify the substantial capital costs of production
facilities and the development of transportation systems to bring such reserves
to market.
The business environment also exposes Gulf Canada to a number of risks,
including those associated with fluctuations in oil prices and exchange rates,
uncertainties in estimates of reserves, risks arising from active oil and gas
exploration and development activities, and the potential for environmental
clean-up obligations and liabilities arising from its current or past
operations. The Corporation endeavors to carry on its business in such a manner
as to minimize such risks.
ENVIRONMENTAL PROTECTION. The operations of Gulf Canada are, and will
continue to be, affected in varying degrees by laws and regulations regarding
the protection of the environment. It is impossible to predict the full impact
of these laws and regulations on Gulf Canada's operations. However, it is not
anticipated that Gulf Canada's competitive position will be adversely affected
by current or future environmental laws and regulations governing its current
oil and gas operations. Since 1990, Gulf Canada has implemented a program of
regular environmental audits to review operating practices and procedures at
major plants and facilities in western Canada and to provide for compliance with
regulatory requirements. In addition, acquisitions and divestitures are subject
to environmental audits. Gulf Canada's accounting policy is to provide for
future site restoration costs, including dismantling plants and abandoning
properties, using the unit of production method or, where appropriate, the
estimated remaining useful lives of the related assets. Gulf Canada has accrued
$119 million for such future costs at December 31, 1997. Total anticipated
future costs, given Gulf Canada's current inventory of wells and facilities,
including those relating to Syncrude, is estimated to be approximately $470
million over the next 20 years. Gulf Canada also has environmental obligations
related to certain mineral operations for which it has recorded a provision. In
addition to its environmental responsibility for current operations, Gulf Canada
is or may be responsible for future environmental costs related to certain past
operations, mainly downstream in nature.
FOREIGN OPERATIONS. Some of Gulf Canada's reserves and operations
outside Canada and those acquired in 1997 through the acquisition of control of
Clyde are located in regions that may be considered politically and economically
unstable. These reserves and the related operations are subject to certain
-15-
<PAGE> 19
risks, including increases in taxes and royalties, the establishment of
production limits, export restrictions, the involuntary renegotiation of
contracts, the nationalization of assets, other risks relating to changes in
local government regimes and policies and resulting changes in business customs
and practices, payment delays, currency exchange restrictions and losses and
impairment of operations by actions of insurgent groups. Gulf Canada, like other
international oil companies, attempts to conduct its business and financial
affairs in such a manner as to protect against such political and economic
risks. Gulf Canada reduces risk associated with foreign projects through
farmouts, phased development programs and project financing. There can be no
assurance, however, that Gulf Canada will be successful in protecting itself
from the risks presented by foreign operations.
GENERAL
EMPLOYEES. As of December 31, 1997, Gulf Canada employed 1,129 regular
employees.
ITEM 3. LEGAL PROCEEDINGS
Gulf is involved in various litigation, regulatory and other
environmental matters in the ordinary course of business. In management's
opinion, an adverse resolution of these matters would not have a material impact
on operations or financial position. However, no such matter can be predicted
with certainty.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S ORDINARY SHARES AND RELATED STOCKHOLDER
MATTERS
The Ordinary Shares are traded on the New York Stock Exchange ("NYSE"),
the Toronto Stock Exchange ("TSE") and the Montreal Exchange under the symbol
GOU. There were approximately 10,690 shareholders of record of the Ordinary
Shares as of March 2, 1998. The Company has not paid dividends on its Ordinary
Shares, and does not contemplate the payment of such dividends in the
foreseeable future. In addition, restrictions in indentures relating to the
Company's outstanding senior subordinated debentures and its credit facilities
with commercial lenders restrict the payment of dividends. The high and low
prices of the Ordinary Shares during 1996 and 1997 are set forth below:
<TABLE>
<CAPTION>
QUARTER ENDED: NYSE (U.S.$) TSE (CDN$)
-------------------------------- --------------------------------
HIGH LOW HIGH LOW
---- --- ---- ----
<S> <C> <C> <C> <C>
March 31, 1996................. 4.875 4.000 6.75 5.50
June 30, 1996.................. 5.500 4.750 7.40 6.25
September 30, 1996............. 6.625 5.000 8.95 6.85
December 31, 1996.............. 7.750 6.125 10.35 8.40
March 31, 1997................. 9.000 6.875 11.90 9.50
June 30, 1997.................. 9.125 6.625 13.05 9.40
September 30, 1997............. 9.563 7.125 13.25 9.95
December 31, 1997.............. 9.375 6.250 12.90 9.25
</TABLE>
-16-
<PAGE> 20
Item 6. Selected Financial Data
FIVE - YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(millions of dollars, except per 1997 1996 1995 1994 1993
share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS (LOSS)
Revenues
Net oil and gas $ 1,254 $ 856 $ 661 $ 654 $ 702
Gain on sale of shares
by subsidiary 417 0 0 0 0
Net gain on asset disposals
and provision for future (75) 5 6 17 61
losses
Other 81 48 51 48 59
------------ ----------- --------- ---------- ----------
$ 1,677 $ 909 $ 718 $ 719 $ 822
============ =========== ========== ========== ==========
Earnings (loss):
from continuing operations $ 204 $ 39 $ (28) $ (191) $ (31)
total $ 204 $ 37 $ (28) $ (197) $ (32)
Earnings (loss) per ordinary share:
from continuing operations $ 0.62 $ 0.04 $ (0.32) $ (1.36) $ (0.37)
total $ 0.62 $ 0.03 $ (0.32) $ (1.39) $ (0.37)
Dividends declared:
per ordinary share $ NIL $ NIL $ NIL $ NIL $ NIL
per Series 1 preference share (1) $ 0.58 $ 0.36 $ 0.32 $ NIL $ 0.05
STATEMENTS OF CASH FLOWS
Operating activities
Cash generated from
continuing operations $ 592 $ 440 $ 292 232 $ 272
Other operating activities, net 29 (68) (17) (47) (3)
------------ ----------- ---------- ---------- ----------
621 372 275 279 269
Investing activities (1,936) (743) (635) (164) 180
Dividends (1) (69) (42) (35) 0 (13)
Financing activities 1,691 229 (87) (304) (147)
------------ ----------- ---------- ---------- ----------
Increase (decrease) in cash $ 307 $ (184) $ (482) $ (189) $ 289
============ =========== ========== ========== ==========
December 31
1997 1996 1995 1994 1993
STATEMENTS OF FINANCIAL
POSITION
Total assets $ 6,629 $ 3,476 $ 2,877 $ 2,876 $ 3,245
Current Liabilities (666) (620) (306) (314) (274)
--------------- ------------- ------------ ------------ ------------
Capital employed 5,963 2,856 2,571 2,562 2,971
Long-term debt 2,785 1,198 1,104 1,372 1,577
Other long-term liabilities 201 140 153 116 112
Deferred income taxes 307 148 91 73 105
Minority interest 220 0 0 0 0
--------------- ------------- ------------ ------------ ------------
Shareholders' equity (2) $ 2,450 $ 1,370 $ 1,223 $ 1,001 $ 1,177
=============== ============= ============ ============ ============
</TABLE>
(1) 1997 includes payment of regular and special dividends on preference
shares.
(2) Includes Series 1 preference shares of $428 million and Series 2
Preference shares of $149 million in each of 1993 through 1997.
(3) Certain of the financial data for years prior to 1997 have been
reclassified to conform with the presentation adopted for 1997.
-17-
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL REVIEW
Gulf Canada Resources Limited generated record cash from continuing
operations of $592 million in 1997, up dramatically From $440 million in 1996
and $292 million in 1995. The Company realized earnings of $204 million in 1997
versus $37 million in 1996. The significant growth in 1997 earnings is mainly
attributable to the gain on the sale of shares in Gulf's Indonesian subsidiary
and reflects the value Gulf has added to the properties over the years. 1996
earnings of $37 million contrast with a 1995 loss of $28 million, which is
mainly attributable to volume growth and improved commodity prices in 1996 over
1995.
During 1997, Gulf spent $1.9 billion acquiring Clyde Petroleum plc and
Stampeder Exploration Ltd. With the acquisition of Clyde, Gulf emerged as a
truly international Company, complementing existing operations in Indonesia and
expanding into the United Kingdom, the Netherlands and Australia. The
acquisition of Clyde also added considerable international exploration
opportunities. The purchase of Stampeder augmented Gulf's historically strong
position in heavy oil. These transactions added significant production
capability, reflected in the substantial increase in Gulf's sales volumes
totaling 180,200 boe/d in 1997, up 37 per cent from 131,300 boe/d in 1996. 1996
volumes increased 18 per cent from 1995 levels of 110,100 boe/d, reflecting the
effect of the Pennzoil Canada Inc. and Mannville Oil and Gas Ltd. acquisitions
and increased capital expenditures.
In addition to funding acquisitions, cash generated from operations was
used to fund capital and exploration activity of $1.1 billion in 1997, up 76 per
cent over 1996 spending. North American conventional oil and gas operations
accounted for $499 million of the spending. In addition, Gulf spent $32 million
on Syncrude, $48 million on thermal projects, $23 million on infrastructure
assets, $366 million in Indonesia, $122 million on other international projects
and $25 million on marketing and other corporate expenditures. 1996 spending of
$644 million represented a $142 million increase over 1995 capital and
exploration activity of $502 million, mainly due to a higher level of drilling
activity and spending on the Corridor Block Gas Project.
During 1997, Gulf made substantial progress in refinancing the debt
incurred through the acquisition of Clyde and Stampeder. A successful offering
of 23 million shares resulted in net proceeds of $232 million, and an offering
of 20 year term senior notes yielded net proceeds of $304 million. In addition,
approximately $700 million of new equity was issued to purchase Stampeder. The
on-going divestment of non-core Western Canada oil and gas assets yielded
proceeds of $451 million in 1997. In addition, a major event occurred in October
when net proceeds of US$439 million were received from the public offering of 28
percent of the shares of Gulf Indonesia Resources Limited. Gulf Indonesia is
listed on the New York Stock Exchange. During 1996, Gulf received proceeds of
$130 million through a public issue of Gulf common stock, acquired most of
Pennzoil Canada Inc.'s Western Canada assets for net cash consideration of $273
million, and issued US$250 million of senior notes due in 2006.
RESULTS FROM OPERATIONS
Traditionally, Gulf has reported its year-to-year operations in three
business segments: Western Canada conventional, Oil Sands and International. In
this report, an additional segment has been added to present Gulf Indonesia
separately. In addition, the Western Canada operations have been restated to
reflect North American performance with the exception of the Syncrude operations
which are presented separately due to the unique nature of their operations.
-18-
<PAGE> 22
NORTH AMERICA - OIL & GAS
Cash generated by North American production was $506 million in 1997,
virtually unchanged from 1996. A $45 million increase attributable to the
acquisition of Stampeder in August 1997 was offset by a decline in revenue as a
result of asset divestitures. 1996 cash generated from operations of $504
million increased $200 million from 1995 levels mainly due to higher sales
volumes and commodity prices in 1996. Net operating income declined to $113
million in 1997 from $208 million in 1996, primarily as a result of asset
divestitures, lower crude oil prices, increased exploration activity, and a
higher depreciation, depletion and amortization charge. 1996 net operating
income almost doubled to $208 million from $107 million in 1995 for the reasons
stated above.
Net oil and gas revenues, excluding the effect of hedging, increased by
$24 million to $693 million. The acquisition of Stampeder contributed $72
million and an $0.11 per mcf increase in average natural gas prices contributed
$16 million. These increases were primarily offset by a 51 mmcf/d decrease in
average year-over-year gas volumes due to asset sales (resulting in a $34
million decrease) and a $1.79 per barrel decline in the average realized price
of crude oil in 1997 (accounting for a $27 million decrease). 1996 net oil and
gas revenues of $669 million increased $248 million from $421 million in 1995.
Higher commodity prices, with a $5.18 per barrel increase in the average
realized liquids price and $0.45 per mcf increase in the average natural gas
price, accounted for the majority of the increase, with the balance largely due
to increased volumes.
Production costs increased $24 million to $211 million in 1997, mainly
attributable to Stampeder operations. Costs per unit of production increased by
$0.31 per boe, which largely reflects the acquisitions. A significant proportion
of high cost properties were sold near the end of 1997. 1996 production costs of
$187 million increased over 1995 costs of $134 million as a result of an unusual
amount of one time costs relating to production enhancements and as a result of
the growth of production due to acquisitions and other capital spending.
Acquisitions and the write-down of certain unproductive properties
caused depreciation, depletion and amortization expense to increase to $295
million in 1997 compared with $235 million in 1996 and $145 million in 1995.
Exploration expenses increased to $98 million in 1997 from $61 million
in 1996, attributable on an approximately equal basis to dryhole and seismic
costs. 1996 exploration expenses increased $9 million over 1995 costs of $52
million. Total capital and exploration expenditures for North America
conventional oil and gas operations were $499 million in 1997, $502 million in
1996 and $427 million in 1995.
Expenditures on thermal projects, comprising Gulf's activities in the
development of steam-assisted oil recovery operations in the Surmont and
Kerrobert areas, increased to $48 million in 1997 from $7 million in 1996.
Spending of $31 million on the Surmont project included drilling four horizontal
wells, installing new surface facilities and delineation drilling for commercial
development. Expenditures of $17 million on the Kerrobert project in the four
months after the acquisition of Stampeder resulted in the completion of the main
steam facilities.
Expenditures on infrastructure assets of $23 million in 1997 were
investments in gas transmission and processing facilities aimed at generating
revenues by providing capacity to other companies.
-19-
<PAGE> 23
NORTH AMERICA - OIL & GAS
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Volumes sold (gross)
Liquids (thousands of barrels per day)
Conventional light crude oil 43.0 39.0 34.3
Conventional heavy crude oil 5.4 0 0
Natural gas liquids 16.4 16.1 12.4
Natural gas (millions of cubic feet per day) 413.0 441 315
Price
Liquids (dollars per barrel)
Conventional light crude oil 26.13 27.92 22.66
Conventional heavy crude oil 13.71 0 0
Natural gas liquids 21.43 21.35 15.74
Natural gas (unhedged)(dollars per thousand cubic feet) 1.84 1.73 1.28
</TABLE>
-20-
<PAGE> 24
NORTH AMERICA - OIL & GAS*
<TABLE>
<CAPTION>
1997 1996 1995
$ millions $/boe** $ millions $/boe** $ millions $/boe**
<S> <C> <C> <C> <C> <C> <C>
Gross oil and gas revenues 842 21.77 809 22.27 503 17.65
Royalties (149) (3.84) (140) (3.86) (82) (2.87)
----- --------- --------- --------- ---------- --------
Net oil and gas revenues 693 17.93 669 18.41 421 14.78
Other revenue 29 0.75 28 0.78 23 0.82
Operating expenses
- Production (211) (5.45) (187) (5.14) (134) (4.71)
- Other expenses (5) (0.15) (6) (0.17) (6) (0.21)
Exploration expenses (98) (2.53) (61) (1.68) (52) (1.81)
Depreciation, depletion
& amortization expense (295) (7.63) (235) (6.46) (145) (5.09)
--------- --------- --------- --------- ---------- --------
Net operating income 113 2.92 208 5.74 107 3.78
Non-cash items 393 10.15 296 8.14 197 6.90
--------- --------- --------- --------- ---------- -------
Cash generated 506 13.07 504 13.88 304 10.68
========= ========= ========= ========= ========== =======
Capital and exploration
expenditures
- conventional oil and gas*** 499 502 427
- thermal projects 48 7 0
- infrastructure assets 23 5 1
Gross proved reserve additions 84.0 68.8 69.8
(millions of boes)
</TABLE>
* excludes hedging
** based on barrels of oil equivalents sold
*** excludes cost of injectants
SYNCRUDE
Gulf owns a 9.03 per cent interest in the Syncrude Project. Net
operating income from Syncrude increased to $62 million in 1997 from $46 million
in 1996 and $32 million in 1995, the fourth consecutive year of earnings growth.
Cash generated from operations has followed a similar trend, increasing to $78
million in 1997 from $65 million in 1996 and $46 million in 1995.
Net revenues from Syncrude were $171 million in 1997 compared to $157
million in 1996, a nine per cent improvement. Crown royalties were significantly
lower than the previous year as a result of the effect of a 68 per cent increase
in capital expenditures and a new oil sands royalty regime, implemented on
January 1, 1997. 1996 net revenues of $157 million increased $20 million over
1995 net revenues of $137 million largely attributable to a $5.37 per barrel
price improvement. Syncrude experienced another record production year, with
Gulf's share of sales volumes increasing to 18,600 b/d in 1997 from 18,200 b/d
in 1996 as a result of the opening of a new mining train in the North Mine and a
higher bitumen conversion yield. Partially offsetting this increase in net
revenues was a $1.38 per barrel decline in prices in 1997. 1996 volumes remained
virtually unchanged at 18,200 b/d from 1995 levels of 18,100 b/d.
Gulf's share of capital expenditures in Syncrude increased to $32
million in 1997 from $19 million in 1996, attributable to the new North Mine
train, debottlenecking extraction and upgrading facilities and
-21-
<PAGE> 25
development work on the Aurora Mine. Capital expenditures in 1996 of $19
million remained unchanged from 1995.
SYNCRUDE
<TABLE>
<CAPTION>
1997 1996 1995
$ millions $/bbl $ millions $/bbl $ millions $/bbl
<S> <C> <C> <C> <C> <C> <C>
Gross oil revenues 189 27.84 194 29.22 158 23.85
Royalties (18) (2.64) (37) (5.56) (21) (3.13)
------ ------- ---- ------- --- -------
Net oil revenues 171 25.20 157 23.66 137 20.72
Other revenue 1 0.07 1 0.11 0 0
Operating expenses (94) (13.84) (93) (13.95) (91) (13.83)
Depreciation, depletion &
amortization expense (16) (2.33) (19) (2.84) (14) (2.09)
------ ------- ---- ------- --- -------
Net operating income 62 9.10 46 6.98 32 4.80
Non-cash items 16 2.33 19 2.86 14 2.12
------ ------- ---- ------- --- -------
Cash generated 78 11.43 65 9.84 46 6.92
====== ======= ==== ======= === =======
Capital and exploration
expenditures 32 19 19
Gross proved reserve additions 39.1 0 4.9
(millions of barrels)
Gross barrels sold 18.6 18.2 18.1
(thousands of barrels per day)
</TABLE>
INDONESIA
Gulf owns 72 per cent of Gulf Indonesia Resources Limited and
consolidates 100 per cent of their results. The Indonesian segment consists of
onshore operations, which are mainly focused on the island of Sumatra, and
offshore operations located in the West Natuna Sea.
Cash generated from operations of $115 million increased $45 million
from 1996, reflecting in large part the impact of the Company's February 1997
acquisition of Clyde Petroleum plc's Indonesian asset, the Kakap production
sharing contract (PSC) in the West Natuna Sea. 1996 cash generated from
operations of $70 million increased $11 million from $59 million in 1995 due to
higher revenues resulting from improved crude prices in 1996.
1997 net operating income of $34 million was unchanged from the prior
year. The Kakap PSC acquisition contributed $19 million in earnings in 1997,
which was offset by higher dry hole write-offs associated with Indonesia's
increased exploration program. 1996 net operating income of $34 million
increased $16 million from 1995 due mainly to higher net revenues.
Net oil revenue for 1997 was $160 million compared to $99 million for
the same period last year, a $61 million increase. The Kakap PSC accounted for
the majority of the increase. Net revenue from onshore operations remained
relatively flat year-over-year as reduced government take was offset by a $1.26
per barrel decline in the 1997 average realized crude oil price. 1996 net oil
revenues increased $13 million compared to 1995 net oil revenues of $86 million,
due to an improvement in the 1996 average sales price per barrel.
-22-
<PAGE> 26
Operating expenses for 1997 fell to $5.43 per barrel ($45 million) from
$5.65 per barrel ($29 million) in 1996, largely as a result of the addition of
lower-cost production from the Kakap PSC. As well, 1997 operating expenses for
onshore operations reflect the impact of additional workover activity to
maintain production levels. Operating expenses remained consistent between 1996
and 1995 at $29 million.
Exploration expenses increased $19 million to $26 million for 1997 due
to the increased level of activity in 1997. The Company drilled 12 exploration
wells in 1997 compared with five wells in 1996. Of the total exploration wells
drilled, five exploratory wells were dry in 1997 and two were dry in 1996. 1996
exploration expenses decreased by $3 million from $10 million in 1995.
Capital expenditures and exploration expenses significantly increased
from $78 million in 1996 to $366 million in 1997. During 1997, Gulf incurred
approximately $246 million associated with the construction of the Corridor
Block Gas Project, compared to approximately $37 million in 1996. As well, 1997
included $28 million of capital expenditures and exploration expenses related to
the Kakap PSC. 1996 expenditures of $78 million increased from $31 million in
1995 mainly due to the Corridor Block Gas Project.
During the latter part of 1997 and into 1998, Indonesia's economy
suffered severe setbacks. One of the factors that precipitated this situation
was a decline in value of the Indonesian rupiah against the U.S. dollar. These
currency fluctuations are not expected to have a material long-term impact on
Gulf's financial position as all current revenues are U.S. dollar-denominated,
all major contracts entered into are in U.S. dollars and rupiah-denominated
expenses are limited to approximately 10-15 per cent of the Company's overall
expenditure profile. In addition, upon start-up of the Corridor Block Gas
Project in late 1998, natural gas will be exchanged for exportable Duri crude
oil pursuant to a long-term 15-year contract.
INDONESIA
<TABLE>
<CAPTION>
1997 1996 1995
$ millions $/bbl $ millions $/bbl $ millions $/bbl
<S> <C> <C> <C> <C> <C> <C>
Gross oil revenues 218 26.55 139 27.34 119 23.60
Royalties (58) (7.11) (40) (7.81) (33) (6.55)
--------- --------- --------- --------- --------- ---------
Net oil revenues 160 19.44 99 19.53 86 17.05
Other revenue 0 0 0 0 2 0.33
Operating expenses (45) (5.43) (29) (5.65) (29) (5.63)
Exploration expenses (26) (3.12) (7) (1.44) (10) (2.06)
Depreciation, depletion &
amortization expense (55) (6.67) (29) (5.71) (31) (6.06)
--------- --------- --------- --------- --------- ---------
Net operating income 34 4.22 34 6.73 18 3.63
Non-cash items 81 9.79 36 7.15 41 8.12
--------- --------- --------- --------- --------- --------
Cash generated 115 14.01 70 13.88 59 11.75
========= ========= ========= ========= ========= ========
Capital and exploration expenditures 366 78 31
Gross proved reserve additions 46.9 95.1 3.2
(millions of boes)
Gross barrels sold 22.5 13.9 13.8
(thousands of barrels per day)
</TABLE>
-23-
<PAGE> 27
OTHER INTERNATIONAL
The other international segment was expanded in 1997 with the
acquisition of Clyde Petroleum plc. This segment's operations now include the
North Sea in the United Kingdom, the Netherlands, and Australia. International
exploration prospects include Algeria, Yemen, the Ivory Coast, the Falklands and
various offshore areas surrounding Australia. In early 1998, Gulf announced that
it had acquired significant assets in Mongolia with existing infrastructure and
exploration potential.
UNITED KINGDOM
United Kingdom North Sea crude oil sales averaged 17,000 b/d. Cash
generated from operations was $118 million and net operating income was $39
million. The major fields contributing to cash generation include Wytch Farm,
Andrew and Gryphon. Capital and exploration spending of $46 million was focused
on the producing assets and the partner-operated Ross field, where production is
expected to begin by the fourth quarter of 1998. Exploration writeoffs and
depreciation expense were $11 million and $69 million respectively.
NETHERLANDS
Netherlands North Sea gas sales of 62 mmcf/d generated cash of $65
million and net operating income of $12 million. Total capital and exploration
expenditures were $31 million. The majority of the capital expenditures were in
the "P" quadrant area. Exploration write-offs and depreciation expense were $4
million and $49 million respectively.
OTHER INTERNATIONAL
Gulf's other international holdings reported liquid sales of 1,750 b/d
and natural gas sales of 22 mmcf/d, resulting in cash generation of $28 million
and net operating income of $1 million. Capital and exploration expenditures in
Australia, Algeria, Yemen, Argentina and the Ivory Coast amounted to $45
million. Exploration expense was $11 million, relating primarily to activity in
Yemen and Australia and depreciation expense was $15 million.
-24-
<PAGE> 28
OTHER INTERNATIONAL*
<TABLE>
<CAPTION>
1997
$ millions $/boe
<S> <C> <C>
Gross oil and gas revenues 264 21.84
Royalties (12) (1.00)
---------- ----------
Net oil and gas revenues 252 20.84
Other revenue 8 0.65
Operating expenses (49) (4.07)
Exploration expenses (26) (2.17)
Depreciation, depletion & amortization expense (133) (11.04)
---------- ----------
Net operating income 52 4.21
Non-cash items 159 13.20
---------- ---------
Cash generated 211 17.41
========== =========
Capital and exploration expenditures 122
Gross proved reserve additions (millions of boe's) 26.5
VOLUMES SOLD (GROSS)
Liquids (thousands of barrels per day) 19
Natural gas (millions of cubic feet per day) 84
PRICE
Liquids (unhedged, dollars per barrel) 23.96
Natural gas (dollars per thousand cubic feet) 3.16
* excludes hedging
</TABLE>
CORPORATE
Gulf's consolidated net earnings were $204 million, up from $37 million
in 1996 and a $28 million loss in 1995. Total cash generated from operations
also increased substantially to $592 million in 1997 from $440 million in 1996
and $292 million in 1995. In addition to the preceding operating segment
results, corporate financial performance was influenced by the following
factors:
Gulf's commodity hedging activity reduced pre-tax earnings and cash
generation by $22 million in 1997, compared with a net loss of $69 million in
1996 and a $17 million hedging gain in 1995. The Company's hedging program is
designed to mitigate downside risk while providing Gulf with a reliable level of
cash flow upon which to base capital expenditure.
Finance charges for 1997 were $222 million, up $143 million from 1996.
The change is primarily related to an increase of $79 million in interest
expense on long-term debt and an increase in net short-term interest expense of
$72 million. The increase in net short-term interest expense is primarily
related to the acquisition of Clyde and is compared with $54 million in net
interest earned during the same period last year, mainly related to an income
tax refund. 1996 finance charges of $79 million had decreased from $135 million
in 1995, primarily as a result of the interest income on the 1996 income tax
refund.
On a unit-of-production basis, general and administrative costs were
$0.98 per boe compared with $1.02 for 1996. General and administrative expenses
for 1997 increased $15 million to $64 million due primarily to the addition of
the Clyde and Stampeder operations. 1996 general and administrative costs of $49
million had declined slightly over 1995 levels of $53 million.
-25-
<PAGE> 29
The Indonesian IPO resulted in a pre-tax gain of $417 million. This
gain was partially offset by $117 million of write-offs and one-time items to
reduce the carrying value of properties to their estimated realizable values in
anticipation of future disposal. Included in the write-offs were a $67 million
charge associated with the planned divestment of Gulf's Mount Klappan coal
property and a $47 million write-down of North American oil and gas assets.
These writedowns were mitigated by a $42 million net gain on Western Canada
asset disposals.
Gulf's plan to annuitize its defined benefit pension plan resulted in a
1997 charge of $53 million relating to deferred pension expenses. 1997 earnings
were also impacted by $14 million of restructuring charges relating to
organizational changes. In 1995 a $24 million charge was recorded relating to
future lease costs on office space no longer required.
CORPORATE AND OTHER
<TABLE>
<CAPTION>
(millions of dollars) 1997 1996 1995
<S> <C> <C> <C>
Hedging gains (losses), net (22) (69) 17
Net gain on asset disposals and provision for future losses 342 5 6
Other revenue 43 19 26
Operating expenses - other (7) (5) (4)
Exploration expenses 0 (2) (5)
Depreciation, depletion &amortization expense (5) (6) (3)
Pension settlement and restructuring charges (67) (4) (24)
General and administrative expenses (64) (49) (53)
Finance charges, net (222) (79) (135)
Income tax expense (59) (59) (10)
Minority shareholders' interest 4 0 0
--------- --------- --------
Net loss (57) (249) (185)
Non-cash items (261) 50 68
--------- --------- --------
Cash required (318) (199) (117)
========= ========= =========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Gulf's 1997 capital and investing requirements were funded by record
cash generated from continuing operations of $592 million and proceeds from
equity and debt offerings. In October, Gulf completed the sale of 24,150,000
shares representing 28 per cent of the shares of Gulf Indonesia Resources
Limited for net proceeds of US$439 million. These proceeds plus almost $500
million of proceeds from the sale of non-core assets were applied to reduce debt
associated with acquisitions.
Gulf's acquisitions of Clyde and Stampeder, for a total of $1.9 billion
were the most important investing activities in 1997. The Clyde acquisition was
financed through a public offering of 23 million Gulf ordinary shares for net
cash proceeds of $232 million, the issuance of US$225 million senior notes due
2017 for net proceeds of $304 million, and through the assumption of
approximately $800 million of other long-term debt. Gulf syndicated its debt
maturities associated with the operations and acquisition of Clyde into a US$700
million bank facility that was reduced to a US$500 million facility by year end.
The Company issued approximately $700 million of equity to acquire Stampeder in
August 1997.
Proceeds from the issue of long-term debt were $1.6 billion versus $500
million in 1996, and 1997 debt repayments totaled $897 million versus $421
million in 1996. Short-term debt was reduced to $51 million at December 31,
1997, down $172 million from $223 million at year end 1996. As of December 31,
1997, Gulf had $1.3 billion available under committed credit facilities, of
which $1 billion had been drawn. It also had available uncommitted operating
bank lines totaling approximately $470 million, of
-26-
<PAGE> 30
which $51 million had been drawn, and $188 million of cash, a portion of which
is earmarked for 1998 capital spending in Indonesia. The Company, along with
its partners, has a limited recourse credit facility for US$450 million (US$270
million net to Gulf) in connection with the Corridor Block Gas Project. At
December 31, 1997, US$150 million (Gulf's share) of the facility had been
drawn.
In the fourth quarter, Gulf paid all preferred share dividends in
arrears, repaying the December 31, 1996 outstanding balance of $45 million.
Gulf's 1998 capital budget is currently $1.1 billion. Major budgeted
1998 capital expenditures include approximately 52 per cent for North American
exploratory drilling and facilities, plus heavy oil and oil sands development;
33 per cent for the Corridor Block and other gas projects in Indonesia; and 15
per cent for other international activities. Gulf currently expects to finance
this budget with internally generated cash flows, the proceeds from
non-strategic asset sales, and non-recourse Corridor Project borrowing.
CAPITAL EXPENDITURES AND EXPLORATION EXPENSES
<TABLE>
<CAPTION>
(millions of dollars) 1997 1996 1995
<S> <C> <C> <C>
Canada
- Conventional oil and gas* 540 469 427
- Syncrude 32 19 19
United States 48 55 12
Indonesia 366 78 31
Other international 122 3 1
Corporate and other 25 20 12
--------- --------- ---------
1,133 644 502
========= ========= =========
*Includes cost of injectants 18 10 11
</TABLE>
RISK MANAGEMENT
FOREIGN EXCHANGE
Gulf's results from operations are affected by the Canadian/U.S. dollar
exchange rate. Prices for substantially all of Gulf's Western Canada oil
production and approximately 35 per cent of its natural gas production are U.S.
dollar denominated, while most of its expenses (with the exception of
international operations and interest costs on U.S. dollar-denominated debt),
are denominated in Canadian dollars. Accordingly, a decline in the value of the
Canadian dollar relative to the U.S. dollar has the effect of increasing
revenues relative to expenses, although such a reduction in the relative value
of the Canadian dollar results in unrealized foreign exchange losses on Gulf's
U.S. dollar-denominated debt.
To mitigate the impact of exchange rate fluctuations on revenues, Gulf
attempts to hedge its U.S. dollar exposure in two ways. First, it seeks to incur
its debt in U.S. dollars. Second, it undertakes forward sales of U.S. dollars
into Canadian dollars. As of February 28, 1998, Gulf had entered into forward
contracts to exchange US $465 million in 1998, US $175 million in 1999, US $180
million in 2000 and US $210 million in 2001 for Canadian dollars at exchange
rates between US $0.68 and US $0.78, with an average rate of approximately
US $0.74. Both of these strategies offer benefits to the Company in the event of
a decline in the U.S. dollar relative to the Canadian dollar by decreasing its
Canadian dollar equivalent cost of debt service obligations and by creating a
gain on the forward sales of U.S. dollars. These benefits
-27-
<PAGE> 31
partially offset any decline in revenues resulting from such devaluation of the
U.S. dollar. Conversely, these strategies will partially offset any increase in
revenues that the Company would derive from a stronger U.S. dollar. Because the
U.S. dollar has strengthened relative to the Canadian dollar since much of the
Company's debt was incurred, Gulf has experienced unrealized foreign exchange
losses that have partially offset the beneficial impact of the U.S. dollar's
appreciation on its revenues. As at December 31, 1997, the Canadian dollar
equivalent of Gulf's U.S. dollar-denominated debt had increased by $254 million
since the debt was incurred. Under Canadian GAAP, $115 million ($85 million
after tax) of this increase had been amortized against earnings as of December
31, 1997, leaving a $139 million balance ($103 million after tax) which will be
amortized over the remaining term of the debt. Under U.S. GAAP the full amount
would have been charged to earnings.
COMMODITY PRICE
Gulf's results of operations are dependent upon the difference between
prices received for its oil and natural gas production and the costs to find and
produce such oil and natural gas. The prices received for a substantial portion
of the Company's oil and natural gas liquids are related to the spot price of
WTI crude oil. Oil and natural gas prices have been and, in the future, are
expected to remain volatile and subject to fluctuations based on a number of
economic factors. During 1997, prices for natural gas production in Canada and
the United States were higher than those prevailing during 1996. However, prices
for Western Canada natural gas production were low during 1997 relative to
prices for natural gas in certain U.S. markets due to export pipeline
constraints and related over-supply in Western Canada.
Gulf maintains active risk management programs to mitigate the
financial impacts of fluctuating commodity prices, providing protection against
falling commodity prices while retaining some upside potential. As of December
31, 1997, the Company had sold forward 10,833 b/d of liquids production in 1998
at an average minimum price of US$19.46 and a maximum price of US$22.98 and
approximately 95 mmcf/d of 1998 gas production at an average plant gate price of
approximately C$1.80 per mcf (assuming a U.S/Canadian dollar exchange rate of
US$0.72). These prices were achieved using a combination of physical sales and
financial forward sales and options. In addition, Gulf has fixed the basis
differential through gas aggregator sales, direct physical sales and the use of
financial transactions between Henry Hub, Louisiana (the pricing location used
by the New York Mercantile Exchange) and Alberta (Nova Inventory Transfer) on
approximately 115 mmcf/d at an average level of approximately US$0.80 discount
per million British Thermal Units (BTU). In February 1998, Gulf entered into a
swap transaction to fix the price on 28,000 b/d of oil production at US$ 19.73
during the last six months of 1998.
Gulf's Board of Directors has authorized commodity trading activities,
provided that the Company's total risk of loss shall not exceed $5 million at
any time. The authorities include limits on both the number of uncovered
cumulative positions and maximum dollar loss amounts. Control is maintained
through the separation of trading and accounting functions as well as through
daily mark-to-market reporting. Gulf has not engaged in any significant
speculative foreign exchange or commodity price transactions.
YEAR 2000
On January 1, 2000 many of the world's date sensitive computer systems
could begin to fail due to programming that may lead them to read "00" as 1900.
This issue, commonly referred to as "Year 2000" or "Y2K" is gaining prominence
as the new millennium approaches. Gulf believes its greatest vulnerability lies
in its operating and control systems throughout its worldwide operations and
with certain external service providers. In addition, Gulf believes that the
Year 2000 is a global issue that requires a cross-industry focus.
-28-
<PAGE> 32
During 1997, Gulf established a task force to assess and implement
required changes. The task force developed a plan that will be implemented in
quarterly phases throughout 1998 to ensure that all Gulf companies will continue
to operate into and beyond 2000. Gulf expects that it will determine the timing,
costs and resources required by the end of the second quarter. Gulf believes
there is sufficient preparedness planning under way to ensure that the Year 2000
will not impact Gulf's business materially.
SENSITIVITIES
Based on current production, price estimates and current hedge
positions, the estimated effect on the Company's financial results for 1998 of a
change in the following factors is set out below:
<TABLE>
<CAPTION>
CASH GENERATED FROM
CONTINUING OPERATIONS
---------------------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Production volumes Oil and liquids - 1,000 b/d 4
Natural gas - 10 mmcf/d 3
Prices(1) WTI oil - US$1.00 per bbl 50
Natural gas (Canada) - C$0.10 per mcf 12
Exchange rate(1) US$/C$ - One cent 4
Interest rate(1) (2) 1 per cent 5
</TABLE>
(1) The impact of hedging contracts in place at February 28, 1998 has been
included.
(2) The effect on cash flow is mitigated by capitalization of interest
associated with the Corridor Block Gas Project.
-29-
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S RESPONSIBILITY
FOR FINANCIAL STATEMENTS
The management of Gulf Canada Resources Limited (Gulf) is responsible
for preparing the accompanying consolidated financial statements. The
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in Canada and are necessarily based in part on
management's best estimates and judgments. When alternative accounting methods
exist, management has chosen those it deems most appropriate in the
circumstances. The financial information included elsewhere in the Annual Report
is consistent with that contained in the consolidated financial statements.
Gulf maintains a system of internal control including an internal audit
function. Management believes that this system of internal control provides
reasonable assurance that financial records are reliable and form a proper basis
for preparation of financial statements. The internal control process includes
communication to employees of Gulf's standards for ethical business conduct.
The Board of Directors is responsible for ensuring that management
fulfills its responsibilities for financial reporting and internal controls. The
Board exercises this responsibility through its Audit Committee, none of whom
are officers or employees of Gulf. The Committee meets with management, its
internal auditors and the independent auditors to satisfy itself that each group
is properly discharging its responsibilities and to review the consolidated
financial statements and the independent auditors' report. The Audit Committee
reports its findings to the Board of Directors for consideration in approving
the consolidated financial statements for issuance to the shareholders. The
Committee also considers, for review by the Board and approval by the
shareholders, the engagement or re-appointment of the external auditors.
The consolidated financial statements have been examined by the
independent auditors, Ernst & Young, and their report follows. The independent
auditors have full and free access to the Audit Committee.
<TABLE>
<S> <C>
/s/ R. H. Auchinleck /s/ C. S. Glick
R.H. Auchinleck C.S. Glick
PRESIDENT AND CHIEF EXECUTIVE OFFICER SENIOR VlCE-PRESIDENT, CORPORATE AND
CHIEF FINANCIAL OFFICER
</TABLE>
CALGARY, CANADA
FEBRUARY 19, 1998
-30-
<PAGE> 34
AUDITOR'S REPORT
TO THE SHAREHOLDERS OF GULF CANADA RESOURCES LIMITED:
We have audited the consolidated statements of financial position of
Gulf Canada Resources Limited as at December 31, 1997 and 1996 and the
consolidated statements of earnings (loss) and retained earnings (deficit) and
cash flows for each of the years in the three year period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 1997 and 1996 and the results of its operations and the changes in its
financial position for each of the years in the three year period ended December
31, 1997 in accordance with accounting principles generally accepted in Canada.
Ernst & Young
Chartered Accountants
Calgary, Canada
February 18, 1998
-31-
<PAGE> 35
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
Year ended December 31
(millions of dollars - except per share amounts) 1997 1996 1995
<S> <C> <C> <C>
EARNINGS (LOSS)
REVENUES
Net oil and gas $ 1,254 $ 856 $ 661
Gain on sale of shares by subsidiary (Note 1).... 417 0 0
Net gain on asset disposals and provision
for future losses (Note 2) (75) 5 6
Other 81 48 51
---------------- ---------------- ---------------
1,677 909 718
---------------- ---------------- ---------------
EXPENSES
Operating - production 399 309 254
- other 12 11 10
Exploration 150 70 67
General and administrative 64 49 53
Depreciation, depletion and amortization 504 289 193
Pension settlement and restructuring charges
(Note 2) 67 4 24
Finance charges, net (Note 3) 222 79 135
Income tax expense (Note 4) 59 59 10
Minority shareholders' interest (4) 0 0
---------------- ---------------- ---------------
1,473 870 746
---------------- ---------------- ---------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS 204 39 (28)
Discontinued operations 0 (2) 0
---------------- ---------------- ---------------
EARNINGS (LOSS) FOR THE YEAR $ 204 $ 37 $ (28)
================ ================ ===============
PER ORDINARY SHARE (Note 5)
Earnings (loss) from continuing operations $ 0.62 $ 0.04 $ (0.32)
Earnings (loss) $ 0.62 $ 0.03 $ (0.32)
RETAINED EARNINGS (DEFICIT)
BALANCE, BEGINNING OF YEAR $ 0 $ (8) $ (1,129)
Earnings (loss) for the year 204 37 (28)
Dividends declared on preference shares
(Note 14) (23) (29) (37)
Deficit elimination (Note 14) 0 0 1,186
---------------- ---------------- ---------------
BALANCE, END OF YEAR $ 181 $ 0 $ (8)
================ ================ ===============
</TABLE>
(See summary of significant accounting policies and notes to consolidated
financial statements.)
-32-
<PAGE> 36
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(millions of dollars) 1997 1996 1995
<S> <C> <C> <C>
OPERATING ACTIVITIES
EARNINGS (LOSS) FROM CONTINUING OPERATIONS $ 204 $ 39 $ (28)
NON-CASH ITEMS INCLUDED IN EARNINGS (LOSS)
Depreciation, depletion and amortization 504 289 193
Net gain on asset disposals and provision
for future losses (342) (5) (6)
Amortization of deferred foreign
exchange losses (Note 3) 17 15 52
Pension settlement and restructuring
charges (Note 2) 53 0 25
Exploration expense 150 70 67
Deferred incomes taxes (Note 4) 17 41 (3)
Other (11) (9) (8)
------- ------- -------
CASH GENERATED FROM CONTINUING OPERATIONS 592 440 292
Other long-term liabilities (10) (15) 20
Changes in non-cash working capital (Note 6) 43 (44) (21)
Other, net (4) (9) (16)
------- ------- -------
621 372 275
------- ------- -------
INVESTING ACTIVITIES
Proceeds on asset disposals 1,099 278 51
Acquisitions (Note 7) (1,944) (284) (216)
Capital expenditures and exploration expenses (1,133) (644) (502)
Changes in non-cash working capital (Note 6) 3 (21) 62
Other, net 39 (72) (30)
------- ------- -------
(1,936) (743) (635)
------- ------- -------
DIVIDENDS
Regular dividends declared on
preference shares (23) (29) (37)
Special dividends declared on preference
shares (Note 14) (45) (13) 0
Changes in non-cash working capital (Note 6) (1) (0) 2
------- ------- -------
(69) (42) (35)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from issue of long-term debt 1,628 500 281
Long-term debt repayments (897) (421) (663)
Issue of equity 964 150 295
Other (4) 0 0
------- ------- -------
1,691 229 (87)
------- ------- -------
Increase (decrease) in cash 307 (184) (482)
Cash at beginning of year (170) 14 496
------- ------- -------
Cash at end of year (1) $ 137 $ (170) $ 14
------- ------- -------
</TABLE>
(1) Comprises cash and short-term investments, net of short-term loans.
(See summary of significant accounting policies and notes to consolidated
financial statements.)
-33-
<PAGE> 37
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31
(millions of dollars) 1997 1996
<S> <C> <C>
ASSETS
CURRENT
Cash and short-term investments $ 188 $ 53
Accounts receivable (Note 15b) 346 295
Other (Note 8) 121 83
------- -------
655 431
INVESTMENTS, DEFERRED CHARGES AND OTHER ASSETS (Note 9) 238 236
PROPERTY, PLANT AND EQUIPMENT (Note 10) 5,736 2,809
------- -------
$ 6,629 $ 3,476
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Short-term loans (Note 12) $ 51 $ 223
Accounts payable 420 277
Current portion of long-term debt (Note 12) 29 0
Current portion of other long-term liabilities (Note 13) 37 34
Other (Note 11) 129 86
------- -------
666 620
LONG-TERM DEBT (Note 12) 2,785 1,198
OTHER LONG-TERM LIABILITIES (Note 13) 201 140
DEFERRED INCOME TAXES 307 148
MINORITY INTEREST 220 0
------- -------
4,179 2,106
------- -------
Commitments and contingent liabilities (Note 16)
SHAREHOLDERS' EQUITY
Share capital (Note 14)
Senior preference shares 577 577
Ordinary shares 1,660 687
Contributed surplus 35 80
Retained earnings 181 0
Foreign currency translation adjustment (3) 26
------- -------
2,450 1,370
------- -------
$ 6,629 $ 3,476
======= =======
</TABLE>
(See summary of significant accounting policies and notes to consolidated
financial statements
APPROVED BY THE BOARD
<TABLE>
<S> <C>
/s/ Robert H. Allen /s/ Walter B. O'Donoghue
Robert H. Allen Walter B. O'Donoghue
DIRECTOR DIRECTOR
</TABLE>
-34-
<PAGE> 38
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Gulf Canada Resources Limited
(Gulf) include the accounts of all subsidiary companies, with the exception of
Asamera Minerals Inc. which is accounted for as a discontinued operation.
Substantially all of the activities of Gulf are conducted jointly with others
and these financial statements reflect the proportionate interest in such
activities. Investments in companies in which Gulf exercises significant
influence are accounted for on the equity basis.
PROPERTY, PLANT AND EQUIPMENT
The successful efforts method of accounting is followed for oil and gas
exploration and development costs. The initial acquisition costs of oil and gas
properties and the costs of drilling and equipping successful exploratory wells
are capitalized. The costs of unsuccessful exploration wells are charged to
earnings. All other exploration costs are charged to earnings as incurred. All
development costs, including the cost of liquid injectants used in enhanced oil
recovery projects, are capitalized. Maintenance and repairs are charged to
earnings; renewals and betterments, which extend the economic life of the
assets, are capitalized.
Capitalized costs of proved oil and gas properties are amortized using
the unit-of-production method based on estimated proved oil and gas reserves.
Depreciation of plant and equipment is based on estimated remaining useful lives
of the assets using either the straight-line method or the unit-of-production
method. Individually insignificant unproved properties are amortized on a group
basis at rates determined after considering past experience and lease terms.
Certain costs relating to significant acquisitions and major projects remain
undepreciated pending evaluation or completion of development.
As changes in circumstances warrant, the net carrying values of proved
properties, plant and equipment are assessed to ensure that they do not exceed
future cash flows from use. Capitalized costs of significant unproved properties
are also assessed regularly to determine whether an impairment in value has
occurred.
ENVIRONMENTAL AND SITE RESTORATION LIABILITIES
Future obligations for site restoration costs, including dismantling
plants and abandoning properties, are provided for using the unit-of-production
method or, where appropriate, the estimated remaining useful lives of the
related assets. Accruals for other potential environmental remediation
obligations, such as those related to discontinued downstream operations, are
made when management believes that Gulf has an obligation for remediation and
the anticipated costs can be estimated within a reasonable range.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of self-sustaining foreign subsidiaries are
translated into Canadian dollars at year-end exchange rates. The resulting
unrealized exchange gains or losses are reflected in shareholders' equity.
Revenues and expenses are translated using the average rates of exchange during
the year.
Assets and liabilities of all other foreign subsidiaries and all other
transactions in foreign currencies are translated into Canadian dollars at the
exchange rates prevailing at the transaction dates. Monetary assets and
liabilities denominated in foreign currencies are translated into Canadian
dollars at year-end exchange rates. Exchange gains or losses are included in
earnings with the exception of the unrealized gains or losses on translation of
long-term monetary liabilities, which are deferred and amortized over the
remaining terms of such liabilities on a straight-line basis.
PENSIONS AND OTHER POST-RETIREMENT BENEFITS
The pension plans, which cover North American employees, have both
defined benefit and defined contribution options, which are company funded. The
cost of the defined benefit option reflects management's best estimates of the
pension plan's expected investment yields, salary escalation, mortality
-35-
<PAGE> 39
of members, terminations and the ages at which members will retire. Defined
benefit pension plan assets are reported at market values. Adjustments arising
from plan amendments, transitional surplus, experience gains and losses and
changes in assumptions are amortized on a straight-line basis over the estimated
average remaining service lives of the employees. The cost of the defined
contribution option reflects specific amounts contributed on behalf of
participating employees during the year.
The costs of post-retirement benefits other than pensions, including
dental, medical and life insurance, are accounted for on a cash basis
DERIVATIVE INSTRUMENTS
The Company enters into various contracts -- physical and financial
forward sales contracts and options -- to manage its exposure to changes in
commodity prices and exchange rates (Note 15). Gains and losses on the contracts
that are used to hedge such exposures on future transactions are recognized in
the financial statements when the related transactions occur, and are included
in the measurement of such transactions. Changes in the market values of
derivatives that are not hedges, or that arise subsequent to when they cease to
be effective hedges, are recognized as gains and losses in the earnings of each
period. Such gains or losses, which have not been significant, are recorded in
other revenues.
A derivative is treated as a hedge when all of the following criteria are met:
- The Company has an identified risk exposure to commodity
prices, exchange rates, interest rates or some other risk
factor related to an asset or a liability, a contractual
commitment or a reasonably certain future transaction.
- The derivative is reasonably assured to be effective in
reducing this risk. Reasonable assurance of effectiveness is
considered to be at least an 80% negative correlation between
the cash flows of the derivative and those of the position to
be hedged, in relation to the identified risk.
- Management intends to use the derivative to hedge the
exposure. The derivative is therefore designated a hedge at
its inception. The designation of a derivative as a hedge is
never made nor reversed retroactively
If a hedge is terminated early, or if the designation of a derivative
as a hedge is discontinued, any accumulated gain or loss up to that time
continues to be deferred until the hedged transaction occurs. If the term of a
derivative used as a hedge extends beyond the date of the hedged transaction,
any deferred gain or loss at that date is included in the measurement of the
hedged transaction; gains and losses thereafter are recognized in earnings on an
accrual basis. If a hedged transaction ceases to be reasonably certain of
occurrence, any deferred gain or loss on the hedge is recognized in income
immediately
The Company also enters into interest rate swap agreements to manage
interest rate risk. The initial cost of the contract is amortized over its life,
while changes in market value are recognized on an accrual basis as part of net
finance charges.
INCOME TAXES
The Company follows the tax allocation method of accounting for income
taxes. Under this method, deferred income taxes are recorded to the extent that
income taxes otherwise payable are reduced by capital cost allowances and
exploration and development costs in excess of the depletion and depreciation
provisions recorded in the accounts.
MEASUREMENT UNCERTAINTY
Certain items recognized in the financial statements are subject to
measurement uncertainty. The recognized amounts of such items are based on the
Company's best information and judgment. Such amounts are not expected to change
materially in the near term. These include:
- The amounts recorded for depletion, depreciation, amortization
and impairment of property, plant and equipment and for future
site restoration costs depend on estimates of
-36-
<PAGE> 40
oil and gas reserves or the economic lives and future cash
flows from related assets. The provision for future site
restoration costs also depends on estimates of such costs.
- The recognized amounts of other potential environmental claims
and liabilities depend on estimates of the magnitude and
probability of future costs.
- The values of pension obligations and assets and the amount of
pension costs charged to earnings depend on certain actuarial
and economic assumptions.
- The amounts recorded for assets and liabilities of acquired
companies depend on estimates of their fair values on the
acquisition date and are subject to subsequent adjustment over
a one year period.
-37-
<PAGE> 41
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(tabular amounts expressed in millions of dollars except where otherwise noted)
1. GAIN ON SALE OF SHARES BY SUBSIDIARY
On September 29, 1997, Gulf completed a public offering of 28 percent
of the shares of Gulf Indonesia Resources Limited (Gulf Indonesia), the
Indonesian arm of its oil and gas exploration and development activities. The
Company sold 24,150,000 shares of Gulf Indonesia at US$19.50 per share for cash
proceeds of $602 million, net of $44 million of costs. A gain of $417 million
($384 million after tax) associated with this transaction was recognized during
the third quarter of 1997. Prior to the public offering, Gulf Indonesia was a
wholly-owned subsidiary of the Company.
2. UNUSUAL ITEMS
NET GAIN ON ASSET DISPOSALS AND PROVISION FOR FUTURE LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
Net gain on asset disposals (a) $ 42 $ 5 $ 6
Provision for expected losses on future asset
disposals (b) (117) 0 0
-------------- --------------- --------------
$ (75) $ 5 $ 6
============== =============== ==============
</TABLE>
(a) In 1997, the net gain on asset disposals consisted of a $27 million
gain on the sale of the remaining unit of Gulf's northern drilling
system and a $15 million net gain on the sale of Western Canada oil and
gas assets.
(b) The provision for expected losses on future asset disposals is the
reduction to estimated realizable values in the carrying amounts of
assets which the Company expects to divest. It consists of write-downs
of an undeveloped coal property of $67 million, North American oil and
gas assets of $47 million and other assets of $3 million.
PENSION SETTLEMENT AND RESTRUCTURING CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
Pension settlement (a) $ 53 $ 0 $ 0
Restructuring charges (b) 14 4 24
-------------- --------------- --------------
$ 67 $ 4 $ 24
============== =============== ==============
</TABLE>
(a) PENSION SETTLEMENT
Deferred pension costs were written off to reflect the Company's
decision to commence a program to annuitize the obligations of the
defined benefit pension plan (see Note 17).
(b) RESTRUCTURING CHARGES
The charge recorded in 1997 consists of $7 million of costs related to
the relocation of the Company's executive office to Denver and $7
million of severance and other costs related to organizational changes.
The charge recorded in 1996 consists mainly of severance and
outplacement costs resulting from organizational changes. The charge
recorded in 1995 relates primarily to future lease costs of office
space no longer required as a result of significant staff reductions.
The total after-tax impact of the above adjustments was $46 million in 1997, $2
million in 1996 and $18 million in 1995.
-38-
<PAGE> 42
3. FINANCE CHARGES, NET
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
CASH EXPENSES
<S> <C> <C> <C>
Interest - long-term debt $ 182 $ 103 $ 101
short-term loans 29 7 0
Interest income on short-term investments (11) (3) (22)
---------------- ---------------- ---------------
Interest on net debt position (a) 200 107 79
Interest on income tax funds 0 (58) (12)
Other cash charges 9 20 22
---------------- ---------------- ---------------
209 69 89
NON-CASH EXPENSES
Amortization of deferred foreign exchange
losses 17 15 52
Other non-cash credits, net (4) (5) (6)
---------------- ---------------- ---------------
$ 222 $ 79 $ 135
================ ================ ===============
</TABLE>
(a) Net debt includes long-term debt and short-term loans less cash and
short-term investments.
4. INCOME TAX EXPENSE
The income tax expense reflects an effective tax rate which differs from the
Canadian statutory rate of 44 per cent. This difference is mainly the result of
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
Earnings (loss) from continuing operations
before income taxes
Canadian $ 225 $ 72 $ (38)
Foreign 38 26 20
---------------- ---------------- ---------------
263 98 (18)
---------------- ---------------- ---------------
Computed income tax expense (recovery) at
the statutory rate $ 114 $ 43 $ (8)
Non-deductible and non-taxable amounts
related to
Net Capital Gains (148) (7) (1)
Amortization of assets with no tax
basis 47 12 13
Sales of assets with no tax basis 21 9 0
Crown royalties and other payments
to governments 58 64 39
Resource allowance (46) (52) (33)
Large corporations tax 7 5 4
Other 6 (15) (4)
---------------- ---------------- ---------------
Income tax expense $ 59 $ 59 $ 10
================ ================ ===============
Current $ 42 $ 18 $ 13
Deferred (recovery) 17 41 (3)
---------------- ---------------- ---------------
Income tax expense $ 59 $ 59 $ 10
================ ================ ===============
</TABLE>
Foreign taxes account for $34 million, $13 million and $12 million of the
current taxes and $18 million, $9 million and $3 million of the deferred taxes
in 1997, 1996 and 1995, respectively.
5. EARNINGS (LOSS) PER ORDINARY SHARE
Earnings (loss) per ordinary share were calculated after deduction of cumulative
preference share dividend requirements (including those in arrears in 1995) of
$23 million, $29 million and $41 million for 1997,
-39-
<PAGE> 43
1996, and 1995, respectively. The weighted average number of ordinary shares
outstanding was 290,873,726 for 1997, 238,156,206 for 1996, and 215,241,006 for
1995. Earnings per share on a fully diluted basis were $0.58, assuming all
outstanding warrants and stock options at December 31, 1997 had been exercised
in 1997.
6. CHANGES IN NON-CASH WORKING CAPITAL
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
(Increase) decrease in non-cash working
capital
Accounts receivable (Note 15(b)) $ (51) $ (138) $ 5
Other current assets (38) (28) (6)
Accounts payable 143 72 61
Other current liabilities 43 13 (16)
---------------- ---------------- ---------------
97 (81) 44
Items not having a cash effect (52) 16 (1)
---------------- ---------------- ---------------
$ 45 $ (65) $ 43
================ ================ ===============
The change relates to the following activities:
Operating $ 43 $ (44) $ (21)
Investing 3 (21) 62
Dividends (1) 0 2
---------------- ---------------- ---------------
$ 45 $ (65) $ 43
================ ================ ===============
</TABLE>
7. ACQUISITIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
Clyde Petroleum plc (a) $ 1,056 $ 0 $ 0
Stampeder Exploration Ltd. (b) 802 0 0
Pennzoil Canada Inc. (c) 0 273 0
Mannville Oil & Gas Ltd. (d) 0 0 143
Other oil and gas assets 86 11 73
---------------- ---------------- ---------------
$ 1,944 $ 284 $ 216
================ ================ ===============
</TABLE>
(a) ACQUISITION OF CLYDE PETROLEUM PLC
Effective February 18, 1997, Gulf purchased all of the issued and
outstanding common shares of Clyde Petroleum plc for 120 UK pence per
share. The acquisition has been accounted for using the purchase
method. Gulf's consolidated financial statements include the operating
results of the acquired business from February 18,1997. The purchase
price has been allocated as follows:
<TABLE>
<S> <C>
Property, plant and equipment $ 1,628
Investments and other assets 33
Working capital 124
Deferred income taxes (100)
Long-term debt (including current portion) (449)
Other long-term liabilities (38)
---------------
1,198
Less: cash and short-term investments acquired (142)
---------------
$ 1,056
===============
</TABLE>
(b) ACQUISITION OF STAMPEDER EXPLORATION LTD.
Effective August 28, 1997, Gulf acquired all of the issued and
outstanding common shares of Stampeder Exploration Ltd. for total
consideration of $802 million (including $31 million of acquisition
costs) with consideration consisting of 0.69124 of a Gulf ordinary
share for each Stampeder common share (Note 14) and $69 million in cash
on exercise of Stampeder's option to acquire a major heavy oil
property. This acquisition has been accounted for using the purchase
-40-
<PAGE> 44
method. Gulf's consolidated financial statements include the operating
results of the acquired business from August 28,1997. The purchase
price has been allocated as follows:
<TABLE>
<S> <C>
Property, plant and equipment $ 1,249
Working capital (23)
Deferred income taxes (47)
Long-term debt (including current portion) (343)
Other long-term liabilities (23)
---------------
813
Less: cash and short-term investments acquired (11)
---------------
$ 802
===============
</TABLE>
(C) ACQUISITION OF PENNZOIL CANADA INC.
Effective July 1, 1996, Gulf purchased all of the issued and
outstanding common shares of Pennzoil Canada Inc. for net cash
consideration of $273 million. The acquisition has been accounted for
using the purchase method. Gulf's consolidated financial statements
include the operating results of the acquired business from July 1,
1996 and, in addition, would not be significantly different if included
from January 1, 1996. The purchase price has been allocated as follows:
<TABLE>
<S> <C>
Property, plans end equipment $ 286
Working capital 15
Deferred income taxes (22)
Other long-term liabilities (6)
-----
$ 273
=====
</TABLE>
(d) ACQUISITION OF MANNVILLE OIL & GAS LTD.
Effective June 22, 1995, Gulf purchased all of the issued and
outstanding common shares of Mannville Oil and Gas Ltd. for $4.50 cash
per share. The acquisition has been accounted for using the purchase
method. Gulf's consolidated financial statements include the operating
results of the acquired business from June 22, 1995 and, in addition,
would not be significantly different if included from January 1, 1995.
The purchase price has been allocated as follows:
<TABLE>
<S> <C>
Property, plant and equipment $ 231
Working capital 1
Deferred income taxes (2)
Long-term debt (including current portion) (78)
Other long-term liabilities (5)
-----
147
Less: cash and short-term investments acquired (4)
-----
$ 143
=====
</TABLE>
The following discloses the pro forma operating results for December 31,1997 and
1996 as though Clyde Petroleum plc and Stampeder Exploration Ltd. had been
acquired at the beginning of the period:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
<S> <C> <C>
Revenue $ 1,883 $ 1,484
Net income 186 36
Earnings per share (dollars) 0.49 0.02
</TABLE>
-41-
<PAGE> 45
8. OTHER CURRENT ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
<S> <C> <C>
Product inventories $ 20 $ 20
Materials and supplies 86 50
Prepaid expenses 12 13
Other 3 0
--------- ---------
$ 121 $ 83
========= =========
</TABLE>
9. INVESTMENTS, DEFERRED CHARGES AND OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
<S> <C> <C>
Deferred foreign exchange loss on long-term debt $ 139 $ 72
Investment in equity securities 49 27
Deferred long-term debt placement costs 40 26
Deferred costs related to Clyde acquisition 0 49
Deferred pension costs (Note 17) 0 54
Other 10 8
--------- -------
$ 238 $ 236
========= =======
</TABLE>
10. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
ACCUMULATED
GROSS INVESTMENT DEPRECIATION,
AT COST DEPLETION AND NET
AMORTIZATION INVESTMENT
<S> <C> <C> <C>
DECEMBER 31, 1997
Exploration and production
- North America $ 4,192 $ 1,087 $ 3,105
- International 2,680 464 2,216
Syncrude 432 143 289
Oil sands and coal 182 115 67
Other 91 32 59
-------- --------- -------
$ 7,577 $ 1,841 $ 5,736
======== ========= =======
Net carrying value of property,
plant and equipment not being
amortized $ 1,975
=======
DECEMBER 31, 1996
Exploration and production
- North America $ 3,063 $ 1,012 $ 2,051
- International 607 269 338
Syncrude 428 156 272
Oil sands and coal 152 48 104
Drilling system 20 12 8
Other 64 28 36
-------- --------- -------
$ 4,334 $ 1,525 $ 2,809
======== ========= =======
Net carrying value of property,
plant and equipment not being
amortized $ 736
=======
</TABLE>
-42-
<PAGE> 46
11. OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
<S> <C> <C>
Interest payable on long-term debt $ 62 $ 48
Accrued payroll, bonuses and other employee costs 12 12
Income and other taxes payable 20 7
Accrued acquisition costs 16 5
Other 19 14
--------- ---------
$ 129 $ 86
========= =========
</TABLE>
12. SHORT-TERM AND LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
<S> <C> <C>
SHORT-TERM DEBT, UNSECURED
Bankers acceptances (1997 - 4.15%; 1996 - 5.1%)(1) $ 51 $ 223
========= =========
LONG-TERM DEBT
Bank credit facilities (1997 - 5.80%)(1) $ 1,000 $ 0
8.25% notes payable 2017 (US$225 million) 321 0
8.35% notes payable 2006 (US$250 million) 357 342
9% debentures payable 1999 (US$125 million) 179 172
9.25% debentures payable 2004 (US$300 million) 428 409
9.625% debentures payable 2005 (US$200 million) 286 274
Long term secured loan (1997 - 7.96%) 215 0
Other secured loan 28 0
Other 0 1
--------- ---------
2,814 1,198
Less current portion (29) 0
--------- ---------
$ 2,785 $ 1,198
========= =========
</TABLE>
(1) Rates reflect the weighted average rate on instruments outstanding at
December 31. Rates are floating rate-based and vary with changes in
short term interest rates.
BANK CREDIT FACILITIES
As of December 31, 1997, the Company had available $1.3 billion under committed
credit facilities, of which $1 billion had been drawn. Gulf also had available
uncommitted operating bank lines totaling approximately $470 million, of which
$51 million had been drawn. Interest rates on the committed and uncommitted
facilities are based on the bankers acceptance rate plus between 0.5 and 1
percent. The average effective rate on the balances outstanding during 1997 was
approximately 6.1 per cent.
DEBENTURES AND NOTES
US dollar debentures and notes are unsecured with interest paid semi-annually.
LONG TERM SECURED LOAN
In February 1997, the Company, along with its partner in the Corridor Block Gas
Project (the Project) entered into a Credit Agreement (Corridor Loan) with
various lending institutions to provide up to US$450 million of financing to
fund the development of the Project of which Gulf's share is US$270 million. The
borrowings are London Interbank Offered Rate based. Interest and commitment fees
related to the Corridor Loan will be capitalized until the overall completion of
the project (Project Completion Date) (1997--$7.4 million). Subsequent to
completion of the project, the lenders recourse under the Corridor Loan is
limited to the Corridor production sharing contract asset which has been pledged
as collateral.
The expected minimum repayments on the Corridor loan are equal semi-annual
installments beginning the earlier of (i) six months after the Project
Completion Date or (ii) August, 1999 and ending the earlier of (i) eight years
after the Project Completion Date or (ii) February, 2007. Mandatory and optional
prepayments may also occur, depending on the cash flow generated by the Project.
The Project Completion Date is expected to occur during the fourth quarter of
1998.
-43-
<PAGE> 47
OTHER SECURED LOAN
The other secured loan represents senior notes issued by a wholly owned
subsidiary which are exchangeable, at the option of the holder into shares of
Triton Energy Limited (currently held by the subsidiary) at a conversion price
of US$36.75. The notes have a fixed rate of interest of 6% and are due for
repayment on February 14, 2004.
INTEREST RATE SWAPS
In November 1997, Gulf entered into a transaction to lock in an underlying
Treasury bond price in connection with a planned issuance of debt securities
under a Shelf Registration Statement filed by the Company. At year end, Gulf had
locked in at a 6.57% rate on US$250 million thirty year bonds. Gulf expects to
complete this US$250 million financing during 1998.
With the acquisition of Clyde, the Company has also taken over a series of
interest rate swaps with an average notional principal amount of US$20 million
to fix a portion of their outstanding debt at rates approximating 8% for terms
through September 1999.
DEBT REPAYMENTS
With the exception of the Corridor Loan repayments which cannot be determined at
this time, the Company's contractual minimum repayment requirements in respect
of long-term debt for the five years following December 31,1997, are 1998 - $29
million, 1999 - $ 429 million, 2000 - $250 million, 2001 - $250 million and 2002
- - $222 million.
13. OTHER LONG - TERM LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
<S> <C> <C>
Provision for losses under swap arrangements (Note 15(c))
$ 33 $ 42
Provision for environmental and site restoration
costs (a) 119 58
Provision for future lease costs (Note 2) 25 30
Other 61 44
--------- ---------
238 174
Less current portion 37 34
--------- ---------
$ 201 $ 140
========= =========
</TABLE>
(a) $28 million of site restoration costs were charged to income in 1997
(1996 - 13 million).
14. SHARE CAPITAL
AUTHORIZED:
Senior preference shares - unlimited number. These preference shares rank in
priority to the ordinary shares and may be issued from time to time in series
with the consideration per share, designation, attributes, including any
preemptive, redemption or conversion rights, and the number of each series to be
fixed by the directors prior to its issue.
Junior preference shares - unlimited number. The attributes associated with
these shares are substantially the same as the senior preference shares except
that they rank junior to the senior preference shares.
Ordinary shares - voting, unlimited number without nominal or par value.
-44-
<PAGE> 48
<TABLE>
<CAPTION>
ISSUED AND OUTSTANDING: Number Amount
<S> <C> <C>
SENIOR PREFERENCE SHARES:
(As at December 31, 1994, 1995, 1996 and 1997)
Series 1 (a) 85,504,557 $ 428
============
Series 2 (b) 300 149
============ ---------
$ 577
=========
ORDINARY SHARES:
At December 31, 1994 163,768,452 $ 1,520
Issued pursuant to employee stock savings plan (c) 346,291 2
Issued pursuant to exercise of stock options (d) 253,825 1
Issued for cash (e) 55,000,000 187
Deficit elimination (f) 0 (1,181)
Cancellation of common shares (171,933) 0
------------ ---------
At December 31, 1995 219,196,635 529
Issued pursuant to exercise of stock options (d) 2,628,537 13
Issued for cash (g) 22,059,302 129
Issued for pension plan funding 628,402 5
Issued for acquisition 400,000 3
------------ ---------
At December 31, 1996 244,912,876 679
Issued pursuant to exercise of stock options (d) 3,716,481 18
Issued for cash (h) 23,000,000 241
Issued for acquisition of Stampeder (i) 65,030,084 702
Issued pursuant to ordinary share warrants (e) 1,877,567 12
Issued for pension plan funding 116,353 1
------------ ---------
At December 31, 1997 338,653,361 1,653
============
ORDINARY SHARE WARRANTS (c) 11,872,433 7
============ ---------
$ 1,660
=========
</TABLE>
(a) SERIES 1
Cumulative dividends accumulate monthly at a floating rate based on the
average prime rate of interest charged by specified Canadian banks,
adjusted for a factor based on the market price of the Series 1 shares.
These shares are non-voting and are redeemable in whole or in part at
the option of Gulf at a price of $5.00 per share.
On March 17, 1993, payment of dividends on the Series 1 shares was
suspended. Payment of dividends was reinstated on February 9,1995. At
December 31, 1997, Gulf had no dividends in arrears (1996 -- $33
million or $0.39 per share). Dividends paid in arrears were charged to
contributed surplus.
(b) SERIES 2
Cumulative dividends are payable at rates determined by Gulf based on
negotiations with holders of the shares, or by a dealer bid or by
auction procedures. The shares are non-voting and are redeemable in
whole or in part at the option of Gulf at the end of any dividend
period upon written notice at an amount equal to $0.5 million per
share.
On March 17, 1993, payment of dividends on the Series 2 shares was
suspended. Payment of dividends was reinstated on February 9, 1995. At
December 31, 1997, Gulf had no dividends in arrears (1996 -- $12
million or $40,000 per share). Dividends paid in arrears were charged
to contributed surplus.
(c) Prior to December 1, 1995, the Company provided employees with a
savings plan to which the employee could contribute up to six per cent
of annual salary. The Company provided a matching contribution of 75
percent in the form of Gulf ordinary shares issued monthly from
treasury stock. The Company's portion vested with each member annually.
Effective December 1, 1995, this savings plan was wound up.
-45-
<PAGE> 49
(d) At December 31, 1997, pursuant to the terms of Gulf's Incentive Stock
Option Plan (1994), options are outstanding to all employees to
purchase an aggregate 17,336,170 ordinary shares. During 1997, the
number of options granted was 6,989,698 (1996 -- 3,739,273), while
944,457 had expired (1996 -- 603,545). Under the plan, 4,741,281 shares
are reserved but unallocated (1996 -- 4,786,522).
A summary of the status of the Company's stock options as of December 31, 1997
and 1996 and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996
SHARES WEIGHTED-AVG. SHARES WEIGHTED-AVG.
(000) EXERCISE PRICE (000) EXERCISE PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning of
year 15,008 $ 5.84 14,501 $ 5.22
Granted 6,989 11.03 3,739 7.61
Exercised (3,717) (4.76) (2,629) (4.81)
Forfeited (944) (9.32) (603) (6.36)
---------- ----------
Outstanding at end of year 17,336 7.98 15,008 5.84
========== ==========
Options exercisable at end of year
6,559 6,846
Weighted average fair value of
options granted during the
year $ 4.65 $ 3.21
</TABLE>
The following table summarizes information about stock options outstanding at
December 31,1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- --------------------------------------
NUMBER WEIGHTED-AVG. NUMBER
OUTSTANDING AT REMAINING EXERCISABLE AT
RANGE OF 12/31/97 CONTRACTUAL LIFE WEIGHTED-AVG. 12/31/97 WEIGHTED-AVG.
EXERCISE PRICES (000) EXERCISE PRICE (000) EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$3.70 - 6.13 7,352 3.8 years $ 5.25 5,389 $ 5.12
$6.25 - 9.30 3,207 8.3 7.70 3 6.25
$9.95 - 13.10 6,777 9.1 11.06 1,167 11.25
---------- --------
17,336 6.7 7.97 6,559 6.21
========== ========
</TABLE>
(e) On January 25, 1995, the Company issued 55 million units for gross
proceeds of $295 million to a group of investors led by Torch Energy
Advisors Inc. Each unit consisted of one ordinary share plus one
quarter warrant to purchase one ordinary share for $5.75 per share. The
warrants were to expire on January 25, 1998. Net proceeds of $293
million were allocated as follows: $187 million to ordinary shares, $8
million to ordinary share warrants and $98 million to contributed
surplus. Through a resolution passed in a meeting of the Board on
January 15, 1998, the Corporation provided each Warrant Holder with the
option to amend the terms of the warrant indenture to extend the time
for the exercise of the Warrants to December 15, 1998 in consideration
for a strike price of $6.50 and subject to a hold period ending July
27, 1998. At December 31, 1997 there were 11.9 million ordinary share
warrants outstanding with a book value of $7 million.
(f) At the May 3, 1995 annual meeting, shareholders approved a resolution
to eliminate the $1,186 million deficit accumulated to the end of the
first quarter by applying it to the Company's share capital and
contributed surplus.
(g) On March 7, 1996, pursuant to a public share offering, Gulf issued
approximately 22 million ordinary shares for net proceeds of $129
million.
(h) On January 15, 1997, pursuant to a public share offering, Gulf issued
23 million ordinary shares for net proceeds of $241 million including
tax recovery of $8.6 million on issue costs.
-46-
<PAGE> 50
(i) On August 28, 1997, Gulf issued approximately 64 million ordinary
shares to the shareholders of Stampeder Exploration Company Ltd. to
acquire a 100% equity interest in that company. On September 9,1997,
approximately one million additional shares were issued to complete the
acquisition. Total value of shares assigned for this acquisition was
$702 million.
The aggregate stated capital at December 31, 1997, for purposes of the Canada
Business Corporations Act, of the senior preference shares and ordinary shares
is $184 million and $1,671 million, respectively.
15. FINANCIAL INSTRUMENTS
(a) RISK MANAGEMENT
The Company is exposed to fluctuations in oil and gas prices, exchange
rates and interest rates and has entered into contracts to hedge or
manage its exposure. Maximum exposure to credit losses on these
instruments approximates their fair value as disclosed below. The
Company is also exposed to credit risk on the oil and gas price and
exchange rate instruments to the extent of non-performance by
counterparties. For the oil and gas price instruments, credit risk is
controlled through credit controls, limits and monitoring procedures.
Gulf provides margin deposits as collateral for some of the
transactions. The Company deals with multiple brokers and never has a
material deposit with one broker. All exchange rate contracts are with
major financial institutions and non-performance is not expected.
i) OIL AND GAS PRICES
The Company is exposed to price risks on future oil and gas
production. To reduce this risk, at December 31, 1997, the
Company sold, on a forward basis, approximately 10,833 barrels
per day of 1998 liquids production at an average minimum floor
price of approximately US$19.46 per barrel and an average
maximum ceiling price of US$22.98.
The Company also forward sold approximately 95 million cubic
feet per day of 1998 gas production at an average plant gate
price of approximately Cdn$1.80 per thousand cubic feet
(assuming a foreign exchange rate of US$0.72 to Cdn$1.00).
This price was achieved through the use of a combination of
physical sales and financial forward sales and options. In
addition, Gulf has fixed the basis differential through gas
aggregator sales, direct physical sales and the use of
financial transactions between Henry Hub, Louisiana (the
pricing location used by the New York Mercantile Exchange) and
Alberta on approximately 115 million cubic feet per day at an
average level of approximately US$0.80 discount per million
British Thermal Units.
ii) EXCHANGE RATES
As a large portion of Gulf's sales are based on U.S. dollar
pricing, the Company sells U.S. dollars forward to reduce its
foreign exchange risk. At December 31,1997, the Company had
entered into the following U.S. dollar forward sale contracts
and options:
<TABLE>
<CAPTION>
SETTLEMENT YEAR TOTAL CONTRACT AMOUNTS CONTRACT RATE RANGE AVERAGE RATE
<S> <C> <C> <C>
1998 US$ 165 0.702-0.778 0.727
1999 175 0.762-0.780 0.768
2000 180 0.763-0.780 0.768
2001 210 0.758-0.782 0.753
</TABLE>
iii) INTEREST RATES -- REFER TO NOTE 12.
(b) SALE OF ACCOUNTS RECEIVABLE
In November 1994, Gulf entered into an agreement which was amended in
March 1997, giving it the right, on a continuing basis, to sell certain
accounts receivable to a third party to a maximum amount of $125
million. The amount sold at December 31,1997 was $91 million (1996 --
$68 million). The agreement calls for purchase discounts, based on
Canadian Bankers Acceptance rates, to be paid on an ongoing basis. The
average effective rate for 1997 was approximately 4.03 per cent (1996
-- 5.3 per cent). The Company has potential exposure to an immaterial
amount of credit loss.
-47-
<PAGE> 51
(c) OIL INDEXED FINANCIAL INSTRUMENT
A special purpose entity has $200 million 11 per cent public debentures
issued and outstanding which mature on October 31, 2000, and assets
consisting of a $200 million 5 per cent fixed plus variable rate oil
indexed debenture maturing on October 31, 2000 and an interest rate
swap agreement for the same amount and term of the debentures which
converts the variable rate on the debenture into a 6 per cent fixed
rate. These are not included in Gulf's statement of financial position
because Gulf does not have the right and ability to obtain future
economic benefits from the resources of the entity and is not exposed
to the related risks, nor does Gulf have the continuing power to
determine the strategic operating, investing, and financing policies of
the entity without the cooperation of others.
Gulf has an interest rate conversion agreement whereby Gulf pays to the
special purpose entity the fixed rate of 6 per cent and is eligible to
receive a variable rate ranging from nil to 16.8 per cent, depending on
the average quarterly West Texas Intermediate oil price. The Company's
exposure to loss is 6 per cent of $200 million ($12 million) per year
until October 31, 2000. In 1993 and 1992, the Company recorded
provisions totaling $67 million to recognize the present value of the
Company's exposure. The unamortized balance of the provision at
December 31, 1997 is $33 million (1996 -- $42 million).
CARRYING AMOUNTS AND ESTIMATED FAIR VALUES OF GULF'S FINANCIAL INSTRUMENTS ARE:
<TABLE>
<CAPTION>
ASSET (LIABILITY)
DECEMBER 31, 1997 DECEMBER 31, 1996
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Equity investments $ 49 $ 53 $ 27 $ 34
Long-term debt (Note 12)
8.25% notes (321) (346) 0 0
8.35% notes (357) (387) (342) (356)
9% debentures (179) (186) (172) (180)
9.25% debentures (428) (450) (409) (433)
9.625% debentures (286) (310) (274) (296)
Oil indexed rate conversion agreement (33) (31) (42) (41)
Other long-term obligation (28) (35) (29) (37)
Foreign exchange contracts 0 (56) 25 32
Commodity price contracts 0 14 0 (15)
Interest rate swap contracts 0 (30) 0 0
</TABLE>
The following methods and assumptions were used in estimating the fair values of
financial instruments:
Cash and short-term investments, accounts receivable, bank credit facilities,
accounts payable, and long-term secured loan: Terms are such that their carrying
amounts approximate fair values.
Equity investments: Fair value of market traded securities is based on quoted
market prices. Other investments are relatively insignificant and their carrying
amounts are assumed to approximate fair values.
Oil indexed rate conversion agreement: Fair value is estimated using discounted
cash flow analysis based on the applicable current incremental borrowing rate.
Income on the variable rate portion of interest is estimated based on a forecast
of the average quarterly price of West Texas Intermediate crude oil.
Committed bank facilities and other long-term obligation: Fair values are
estimated using discounted cash flow analysis based on current incremental
borrowing rates for similar borrowing arrangements.
Notes and debentures: Fair values are based on the quoted market price.
Commodity price and foreign exchange contracts: Fair values are estimated based
on quoted market prices of comparable contracts. The differences between the
fair values and carrying amounts are equal to the cumulative unrecognized gains
or losses on these contracts. Commodity price contracts include those that may
be settled by the delivery of product.
-48-
<PAGE> 52
16. COMMITMENTS AND CONTINGENT LIABILITIES
Gulf has lease commitments relating to office buildings. The estimated annual
minimum operating lease rental payments for the buildings, before deducting
sublease income, will be US$15 million in 1998, US$17 million in 1999-2002, and
US$1 million in 2003-2007, the remaining term of the leases.
As part of Gulf's upstream operations and as a result of certain discontinued
downstream operations, Gulf has ongoing site restoration and remediation
responsibilities. Site restoration costs within upstream operations involve the
surface clean-up and reclamation of wellsites and field production facilities to
ensure that they can be safely returned to appropriate alternative land uses. In
addition, over the long term, certain plant facilities will require
decommissioning which will involve dismantling of facilities as well as the
decontamination and reclamation of these lands. Total anticipated future costs
(including plugging and abandoning of wells), given Gulf's current inventory of
wells and facilities including Syncrude, is in the order of $470 million over
the next twenty years. Gulf has accrued $108 million ($11 million as current)
for future upstream site restoration costs and continues to accrue these costs
on the basis described in the summary of significant accounting policies.
Environmental liabilities relating to discontinued downstream operations
generally involve the decontamination and/or remediation of formerly owned
service stations, bulk fuel facilities and refinery sites. These future
obligations are difficult to estimate as the number of sites that will need
reclaiming, their degree of contamination, the cleanup standards, future
regulatory requirements and other potentially responsible parties are all
unknown. Gulf has accrued approximately $11 million ($4 million as current) for
future downstream remediation costs. Based on current information it is not
possible to reasonably estimate Gulf's total potential future liability for
discontinued downstream operations.
Gulf is involved in various litigation, regulatory and other environmental
matters in the ordinary course of business. In management's opinion, an adverse
resolution of these matters would not have a material impact on operations or
financial position.
In connection with the Corridor Block Gas Project, the Company has committed to
the construction of a natural gas processing plant, surface facilities and
related wells and gathering lines in the Corridor Block PSC area. The Company's
total investment in the project will be approximately US$374 million including
US$24 million of capitalized interest. The US$374 million will be funded with
US$104 million of equity and US$270 million of debt. At December 31, 1997, the
Company had fully funded its equity commitment and US$150 million of the loan
had been drawn (Note 12).
17. PENSION PLANS
Defined benefit pensions at retirement are related to years of service and
remuneration during the last years of employment. Funds are deposited with a
trustee over periods permitted by regulatory authorities. These funds are
invested primarily in publicly traded fixed income and equity securities.
Actuarial reports are prepared annually by independent actuaries for accounting
and funding purposes. For the years 1995 to 1997, assumed future rates of return
on assets (net of administrative expenses), discount rates used to estimate
projected benefit obligations of the plan and long-term average salary and wage
escalation rates were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Assumed discount rate on liabilities and rate of
return on assets 7.75% 8.25% 9.50%
Estimated wage & salary escalation rate (average) 3.75% 4.50% 5.50%
Estimated remaining service life (years) 13 13 13
</TABLE>
At December 31, 1997, the assumed future rate of return on assets of the plan,
net of administration expenses, was reduced to 6.25 per cent. Estimated
projected benefit obligations of the plans were determined using a discount rate
of 6.25 per cent and a long-term salary and wage escalation rate averaging 3 per
cent.
-49-
<PAGE> 53
The actuarial fair values of pension assets and benefit obligations are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
<S> <C> <C>
Market value of assets (a)(b) $ 369 $ 440
Projected benefit obligations 388 437
--------- ---------
Surplus (deficiency) of market value of assets over
projected benefit obligations (a) $ (19) $ 3
========= =========
</TABLE>
(a) Gulf uses the market value method of asset valuation, rather than the
smoothed method of adjusting asset values to market over a period of
five years.
(b) At December 31, 1997, the plan held 744,755 ordinary shares of Gulf
valued at $7 million plus 2,000,000 Gulf ordinary stock warrants valued
at $9 million.
In February 1997, the Company concluded an agreement to transfer to another
company the pension obligations of a portion of the plan's members along with an
equivalent amount of plan assets. This settlement resulted in a reduction in
both the market value of assets and projected benefit obligations by
approximately $30 million.
In December 1997, the Company started a program of annuitizing the plan's
pension obligations with major life insurance companies. The program will be
implemented on a phased basis and is anticipated to be completed over the next
two years. The first phase implemented involved annuity purchases settling
pension obligations of $48 million. The amounts and timing of phases are at the
Company's discretion and will depend on market conditions.
Both the rate of return on a portion of plan assets and the discount rate for
plan obligations are related to market interest rates and therefore both the
value of assets and benefit obligations are affected by changes in such rates.
At December 31, 1997, approximately 71 percent of the plan's assets consisted of
fixed income securities with an average maturity of about 12 years, which
approximates the term and interest rate exposure of the obligations.
In 1993, the Company's pension plan was amended to give Gulf's active Canadian
employees the option to accrue future benefits under a defined contribution
alternative. All new employees accrue future benefits on a defined contribution
basis. At December 31, 1997, 92 percent of employees were members within the
defined contribution option.
The Company's pension expense for both the defined benefit and the defined
contribution components of the plan was $6 million, $8 million and $6 million
for the years ended December 31, 1997, 1996, and 1995, respectively. In
addition, a one-time write off of deferred pension costs of $53 million was
recognized in 1997 relating to the Company's decision to annuitize the plan's
pension obligations.
The Company also administers a defined benefit pension plan for employees of
Clyde Petroleum plc. The market value of assets and projected benefit
obligations of that plan were (pound)15 million and (pound)10 million,
respectivELy, at December 31,1997. Estimated projected benefit obligations of
the plans were determined using a discount rate of 7 percent and a long-term
salary and wage escalation rate of 4 percent.
Additionally, the Company has an interest in the defined benefit pension plan of
the Syncrude joint venture. Gulf's proportionate share of the market value of
assets and projected benefit obligations of that plan were $53 million and $48
million, respectively, at December 31, 1997 ($46 million and $47 million,
respectively, at December 31, 1996).
18. RELATED PARTY TRANSACTIONS
On November 30, 1995, for $2.4 million, Gulf acquired all of the Preferred
Shares of Athabasca Oil Sands Investments Inc. ("Athabasca"), entitling Gulf to
elect two of the directors of Athabasca. Gulf also acquired 1,760,000 Units of
the Athabasca Oil Sands Trust (the "Trust") for $17.6 million, which it sold in
June 1996. Athabasca is the manager and a wholly owned subsidiary of the Trust.
Gulf also has
-50-
<PAGE> 54
agreements with Athabasca for the provision of administrative and marketing
services. Revenue from such services was $2.7 million in 1997, $2.5 million in
1996 and was immaterial in 1995.
In connection with the formation of the Trust in 1995, Gulf received a
structuring fee of $7.7 million. It then paid $2.4 million of this fee to Torch
Energy Advisors Inc., the lead member of an investor group that held a
significant proportion of Gulf ordinary shares, for negotiating the purchase of
the assets of the Trust.
-51-
<PAGE> 55
19. SEGMENT INFORMATION
<TABLE>
<CAPTION>
NORTH AMERICA
------------------------------------------------------------------------------------------------
OIL AND GAS (a) SYNCRUDE OTHER (b)
----------------------------- ----------------------------- ------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE (c)
GROSS OIL AND GAS
REVENUES
Crude oil - unhedged $ 437 $ 399 $ 283 $ 189 $ 194 $ 158 $ 0 $ 0 $ 0
- hedging (19) (56) (12) 0 0 0 0 0 0
Natural gas liquids 128 125 71 0 0 0 0 0 0
Natural gas - unhedged 277 280 147 0 0 0 0 0 0
- hedging (4) (13) 29 0 0 0 0 0 0
Sulphur 0 5 2 0 0 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------
819 740 520 189 194 158 0 0 0
Less: Royalties (149) (140) (82) (18) (37) (21) 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------
Net oil and gas 670 600 438 171 157 137 0 0 0
revenues
Other revenue 29 28 23 1 1 0 43 19 22
- ----------------------------------------------------------------------------------------------------------------------------
699 628 461 172 158 137 43 19 22
- ----------------------------------------------------------------------------------------------------------------------------
EXPENSES
Operating - production (211) (187) (134) (94) (93) (91) 0 0 0
- other (5) (6) (6) 0 0 0 (7) (5) (4)
Exploration (98) (61) (52) 0 0 0 0 0 (1)
Depreciation, depletion &
amortization (295) (235) (145) (16) (19) (14) (5) (6) (3)
- ----------------------------------------------------------------------------------------------------------------------------
(609) (489) (337) (110) (112) (105) (12) (11) (8)
- ----------------------------------------------------------------------------------------------------------------------------
$ 90 $ 139 $ 124 $ 62 $ 46 $ 32 $ 31 $ 8 $ 14
============================================================================================================================
<CAPTION>
INTERNATIONAL
---------------------------------------------------------------
INDONESIA OTHER
----------------------------- -----------------------------
1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
REVENUE (c)
GROSS OIL AND GAS
REVENUES
Crude oil - unhedged $ 218 $ 139 $ 119 $ 148 $ 0 $ 0
- hedging 0 0 0 1 0 0
Natural gas liquids 0 0 0 18 0 0
Natural gas - unhedged 0 0 0 98 0 0
- hedging 0 0 0 0 0 0
Sulphur 0 0 0 0 0 0
- -------------------------------------------------------------------------------------------
218 139 119 265 0 0
Less: Royalties (58) (40) (33) (12) 0 0
- -------------------------------------------------------------------------------------------
Net oil and gas 160 99 86 253 0 0
revenues
Other revenue 0 0 2 8 0 4
- -------------------------------------------------------------------------------------------
160 99 88 261 0 4
- -------------------------------------------------------------------------------------------
EXPENSES
Operating - production (45) (29) (29) (49) 0 0
- other 0 0 0 0 0 0
Exploration (26) (7) (10) (26) (2) (4)
Depreciation, depletion &
amortization (55) (29) (31) (133) 0 0
- -------------------------------------------------------------------------------------------
(126) (65) (70) (208) (2) (4)
- -------------------------------------------------------------------------------------------
$ 34 $ 34 $ 18 $ 53 $ (2) $ 0
===========================================================================================
<CAPTION>
TOTAL
-----------------------------
1997 1996 1995
<S> <C> <C> <C>
REVENUE (c)
GROSS OIL AND GAS
REVENUES
Crude oil - unhedged $ 992 $ 732 $ 560
- hedging (18) (56) (12)
Natural gas liquids 146 125 71
Natural gas - unhedged 375 280 147
- hedging (4) (13) 29
Sulphur 0 5 2
- ----------------------------------------------------------------------------------------------
1,491 1,073 797
Less: Royalties (237) (217) (136)
- ----------------------------------------------------------------------------------------------
Net oil and gas 1,254 856 661
revenues
Other revenue 81 48 51
- ----------------------------------------------------------------------------------------------
1,335 904 712
- ----------------------------------------------------------------------------------------------
EXPENSES
Operating - production (399) (309) (254)
- other (12) (11) (10)
Exploration (150) (70) (67)
Depreciation, depletion &
amortization (504) (289) (193)
- ----------------------------------------------------------------------------------------------
(1,065) (679) (524)
- ----------------------------------------------------------------------------------------------
270 225 188
Net gain on asset disposals and provision for future losses 342 5 6
Pension settlement and restructuring charges (67) (4) (24)
General and administrative expenses (64) (49) (53)
Finance charges, net (222) (79) (135)
Income tax expense (59) (59) (10)
Minority shareholders' interest 4 0 0
------------------------------------------------------------ ------ ------- -------
Earnings (loss) from continuing operations 204 39 (28)
Discontinued operations 0 (2) (0)
------------------------------------------------------------ ------ ------- -------
Earnings (loss) for the year $ 204 $ 37 $ (28)
============================================================ ====== ======= =======
Identifiable assets Canada - oil and gas $3,906 $ 2,741 $ 2,256
- Syncrude 300 281 280
United States 59 57 9
Indonesia 936 393 330
Other international 1,428 4 2
------------------------------------------------------------ ------ ------- -------
$6,629 $ 3,476 $ 2,877
============================================================ ====== ======= =======
Capital and Canada - oil and gas $ 540 $ 469 $ 427
Exploration expenditures - Syncrude 32 19 19
United States 48 55 12
Indonesia 366 78 31
Other international 122 3 1
Corporate & other 25 20 12
------------------------------------------------------------ ------ ------- -------
$1,133 $ 644 $ 502
============================================================ ====== ======= =======
</TABLE>
(a) Included in the North American oil and gas segment is the following
information pertaining to the United States:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net oil and gas revenues $ 2 $ 0 $ 0
Depreciation, depletion
& amortization expense (9) (2) 0
Net operating loss (30) (10) 0
</TABLE>
(b) Other North America includes frontiers, pipelines, contract drilling and
other.
(c) Approximately $309 million of revenues was derived from sales to two
customers in the year ended December 31, 1997 (1996 - $237 million, 1995 -
$254 million).
There were no inter-segment transfers of product.
Included in earnings (loss) from continuing operations are export sales of
$213 million, $315 million and $260 million in 1997, 1996 and 1995,
respectively.
-52-
<PAGE> 56
20. UNITED STATES ACCOUNTING PRINCIPLES AND U.S. DOLLAR SUMMARY
INFORMATION
If United States generally accepted accounting principles (U.S. GAAP) had been
followed, the earnings (loss) and earnings (loss) per ordinary share would have
been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
EARNINGS (LOSS) FROM CONTINUING OPERATIONS, as reported $ 204 $ 39 $ (28)
Adjustments:
Interest rate swap (b) (9) (8) (8)
New asset values (a)(i) (92) (58) (16)
Foreign exchange (c) (67) 10 82
Restructuring charges (e) 7 0 (53)
Post-retirement benefits (f) 1 1 8
Income tax recovery 55 13 26
--------- ---------- ---------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS, as adjusted 99 (3) 11
Discounted operations 0 (2) 0
Cumulative effect of accounting change (f) 0 0 (30)
--------- ---------- ----------
EARNINGS (LOSS), as adjusted 99 (5) (19)
Cumulative dividends on senior preference shares (23) (29) (41)
--------- ---------- ----------
EARNINGS (LOSS) AVAILABLE TO ORDINARY SHAREHOLDERS $ 76 $ (34) $ (60)
========= =========== ==========
BASIC EARNINGS PER ORDINARY SHARE, as adjusted (dollars)
Earnings (loss) from continuing operations before cumulative
effect of accounting change $ 0.26 $ (0.14) $ (0.14)
Cumulative effect of accounting change $ 0.00 $ 0.00 $ (0.14)
Earnings (loss) $ 0.26 $ (0.14) $ (0.28)
</TABLE>
If U.S. GAAP had been followed, cash generated from continuing operations would
have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
CASH GENERATED FROM CONTINUING OPERATIONS, as reported $ 592 $ 440 $ 292
Adjustments: Restructuring charges (e) 7 0 (29)
--------- ---------- ----------
CASH GENERATED FROM CONTINUING OPERATIONS, as adjusted $ 599 $ 440 $ 263
========= ========== =========
</TABLE>
The Consolidated Statements of Cash Flows presented under Canadian GAAP comply
with International Accounting Standard 7, except as noted in (d) below and that
the $702 million of equity issued in connection with the acquisition of
Stampeder would not have been reflected.
-53-
<PAGE> 57
If U.S. GAAP were followed, amounts on the Consolidated Statements of Financial
Position would be adjusted as follows:
<TABLE>
<CAPTION>
DECEMBER 31 December 31
1997 1996
<S> <C> <C>
ASSETS
Accounts receivable (b) $ 2 $ 4
Current deferred income taxes (a)(ii) 6 (1)
Investments, deferred charges and other assets (b)(c) 61 128
Deferred income taxes (a) (ii) 0 11
Property, plant and equipment (a)(i) 1,313 604
------------- -------------
$1,382 $ 746
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of other long-term liabilities (b) $ (12) $ (12)
Other current liabilities (a)(ii)(b) (1) 4
Long-term debt (b) 200 200
Other long-term liabilities (a)(i)(b)(e)(f)(g) 39 47
Deferred income taxes (a)(i)(ii)(b)(c)(g) 1,374 615
Share capital, ordinary shares (a) (i) (89) (88)
Deficit (129) (20)
------------- -------------
$1,382 $746
============= =============
</TABLE>
The financial statements have been prepared in accordance with accounting
principles generally accepted in Canada which, in the case of Gulf, conform in
all material respects with those in the United States except that:
(a) The financial statements would reflect the following effects of adopting
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS 109).
(i) SFAS 109 requires a restatement, to pre-tax amounts, of the
new asset values reflected in the accounts in connection with the
change of control in 1986 of Gulf Canada Limited and the
acquisition of new subsidiaries. This restatement, along with
differences between the tax bases and recorded amounts of other
asset transfers, would result in property, plant and equipment
(PP&E) and deferred income taxes both being $1,313 million higher
than under Canadian generally accepted accounting principles
("Canadian GAAP") at December 31, 1997 (1996 -- $604 million).
These differences are amortized to earnings over the lives of the
related assets. The application of previous accounting standards
at the time of the change in control results in ordinary share
capital being lower by $89 million (1996 --$88 million).
(ii) Measurement and presentation of deferred income taxes
according to SFAS 109 would result in recording current and
non-current deferred tax assets and liabilities, for a net
increase in the deferred tax liability of $94 million at December
31,1997 (1996 -- a net increase of $35 million).
(b) A special purpose entity has $200 million 11 per cent public debentures
issued and outstanding which mature on October 31, 2000, and assets
consisting of a $200 million oil indexed debenture maturing on October 31,
2000 and an interest rate swap. These are not included in Gulf's statement
of financial position, but under U.S. GAAP would have been included in
long term debt and investments and other assets, respectively.
Amortization of a provision for losses on a related swap agreement of $9
million ($5 million after tax) in 1997, $8 million ($5 million after tax)
in 1996 and $8 million ($4 million after tax) in 1995 would not have been
recorded under U.S. GAAP.
(c) Unrealized gains or losses arising on translation of long-term liabilities
repayable in foreign funds would be included in earnings in the period in
which they arise under U.S. GAAP. The balances of such deferred losses
were $139 million at December 31,1997, $72 million at December 31,1996 and
$82 million at December 31,1995.
-54-
<PAGE> 58
(d) In the Consolidated Statement of Cash Flows, borrowings under short term
loans ($51 million for the year ended December 31,1997) would be presented
as a financing activity rather than as a reduction of cash and cash
equivalents.
(e) Under U.S. GAAP a liability for non-contractual involuntary employee
termination benefits is not incurred until the terms of the termination
are communicated to the affected individual employees. Under Canadian
GAAP, the liability was recorded when the Company made the termination
decision. As such, under U.S. GAAP, the liability recorded prior to
employees being notified is reversed and recognized in the year of
notification.
(f) Under U.S. GAAP, the costs of providing all forms of post-retirement
benefits to employees should be recognized during the active service life
of the employees rather than expensing the costs as they occur. The
accumulated post-retirement benefit obligation at December 31, 1997 is
estimated to be $44 million ($26 million after tax) using a discount rate
of 6.4 per cent. The difference between the net period service cost under
U.S. GAAP and the pay-as-you-go amount under Canadian GAAP is $1 million
for the year ended December 31, 1997 and $1 million for the year ended
December 31, 1996.
(g) Under U.S. GAAP, as at December 31, 1997, an additional minimum pension
liability of $8 million ($4 million after tax) must be accrued for the
deficit between the market value of the Company's pension plan assets and
its accumulated benefit obligations.
SUMMARY FINANCIAL INFORMATION IN U.S. DOLLARS
The following information is based on U.S. GAAP and translated to Canadian into
U.S. dollars at the average exchange rates for each of the years presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
Net revenue from continuing operations US$ 1,211 US$ 664 US$ 524
Cash generated from continuing operations 433 321 192
Earnings (loss) from continuing operations before
cumulative effect of accounting change 72 (2) 8
Earnings (loss) 72 (4) (14)
Per ordinary share: (dollars)
Earnings (loss) from continuing operations before
cumulative effect of accounting change US$ 0.19 US$ (0.09) US$ (0.10)
Earnings (loss) 0.19 (0.10) (0.20)
Average exchange rate (Cdn$1) 0.72 0.73 0.73
</TABLE>
INTEREST AND INCOME TAXES PAID
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
Cash interest expense paid (net of amounts capitalized) $ 225 $ 133 $ 123
Cash income taxes paid (net of tax refunds received) 11 39 1
</TABLE>
-55-
<PAGE> 59
INCOME TAXES
Components of deferred income taxes: The net deferred tax liability (current and
noncurrent) comprises:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
<S> <C> <C>
DEFERRED TAX LIABILITIES
Additional values assigned to assets in connection with prior changes of control $ (1,414) $ (593)
Other differences between tax bases and reported amounts of depreciable assets (400) (326)
Differences between tax bases and reported amounts of financial instruments (17) (18)
Other taxable temporary differences (26) (35)
-------- --------
(1,857) (972)
-------- --------
DEFERRED TAX ASSETS
Tax credit carry forwards(a) 39 53
Capital loss carried forward 0 48
Foreign currency translation losses tax deductible upon realization 60 31
Provisions for site restoration and environmental costs 27 18
Provincial royalty rebates 51 43
Post-retirement benefits liability 20 20
Other deductible temporary differences 32 36
---------- ---------
229 249
---------- ---------
Valuation allowance (41) (35)
---------- ---------
Net deferred tax liability $ (1,669) $ (758)
========== =========
</TABLE>
(a) The expiration dates of tax credit carry forwards as at December
31, 1997 are:
<TABLE>
<CAPTION>
EXPIRATION DATES 1998 1999 2002 2003 2004 2005 2006
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts (millions of dollars) 13 9 1 1 1 1 1
</TABLE>
The Company will utilize $12 million of tax credit carry forwards in the 1997
tax return.
COMPONENTS OF INCOME TAX EXPENSE (RECOVERY): Income tax expense (recovery)
attributable to continuing operations is comprised of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
Current tax expense $ 42 $ 18 $ 13
Deferred tax expense (recovery) (38) 28 (29)
--------- ---------- ----------
Income tax expense (recovery) attributable to continuing operations $ 4 $ 46 $ (16)
========= ========== ==========
</TABLE>
For the year ended December 31,1997 a tax expense of $1 million (1996 -- tax
expense of $1 million; 1995 -- benefit of $6 million) was credited directly to
the foreign currency translation adjustment component of shareholders' equity.
STOCK-BASED COMPENSATION PLANS
Pro forma disclosures of earnings and earnings per share are presented below as
if the Company had adopted the cost recognition requirements under FASB
Statement No. 123. The compensation cost for the stock-based compensation was
$11 million for 1997 (1996 -- $8 million; 1995 -- $11 million). Pro forma
disclosures are not likely to be representative of the effects on reported
earnings for future years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
Earnings (loss) - As reported $ 99 $ (5) $ (19)
- Pro forma 88 (13) (30)
(dollars)
Earnings (loss) per share - As reported $ 0.26 $ (0.14) $ (0.28)
- Pro forma 0.22 (0.16) (0.31)
</TABLE>
-56-
<PAGE> 60
Fixed stock option plan: The Company has a fixed stock option plan. Pursuant to
the terms of the Incentive Stock Option Plan (1994), the Company may grant
options to its employees for up to 21 million shares of common stock. Options
outstanding are granted at prices which equate the market value of the stock on
the date of grant and an option's maximum term is 10 years. Options are granted
during the year and they vest from one to three years after issue.
The fair value of each option granted during 1997,1996 and 1995 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: expected volatility of 30 per cent; risk-free interest
rate of 5.4 per cent; no payment of common share dividends; and expected life of
6 years.
PENSION PLANS
Pension expense:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
Current service cost $ 3 $ 3 $ 3
Interest costs on projected benefit obligations 32 36 39
Estimated return on assets (a) (32) (35) (39)
Other, net 56 4 1
--------- --------- ----------
Pension expense $ 59 $ 8 $ 4
========= ========= ==========
</TABLE>
Deferred pension cost:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
<S> <C> <C>
Accumulated benefit obligations(b) $ 376 $ 435
Effect of future salary and wage increases 7 10
--------- ----------
Projected benefit obligations 383 445
Market-related value of assets 369 440
--------- ----------
Deficiency of pension plan assets over projected
benefit obligations (14) (5)
Unrecognized net losses 0 54
Unrecognized past service cost 0 6
Unrecognized transition surplus: 0 (1)
--------- ----------
Deferred pension cost $ (14) $ 54
========= ==========
</TABLE>
(a) Actual returns on assets were $37 million, $53 million, and
$76 million for the years ended December 31,1997,1996, and
1995, respectively.
(b) Includes vested benefit obligations of $376 million and $428
million at December 31, 1997 and December 31, 1996,
respectively. The prescribed year-end settlement rate for
discounting purposes was 6.4 per cent (1996 -- 7.5 per cent).
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company is obligated to provide post retirement benefits other than pensions
to all regular employees who have retired on or before April 1,1996. The cost of
this plan is funded annually out of general revenues and includes such benefits
as life insurance, dental coverage, supplementary health benefits and the
subsidy of certain provincial health care premiums. The amount of net post
retirement benefit cost for the year ended December 31, 1997 and the effect of a
1% increase in the assumed health care cost trend rate of each future year is
immaterial. The medical/dental cost trend is estimated to decrease from 9.5% in
1997 to 6.5% for the years 2002 and thereafter.
-57-
<PAGE> 61
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Canadian GAAP financial statements do not include the assets and liabilities
of a special purpose entity. The carrying amount and fair value of these
financial instruments are as follows:
<TABLE>
<CAPTION>
ASSET (LIABILITY)
DECEMBER 31, 1997 DECEMBER 31, 1996
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Oil indexed debenture and related swaps $ 200 $198 $200 $195
11% debentures (200) (229) (200) (237)
</TABLE>
The following methods and assumptions were used in estimating the fair values of
these financial instruments:
Oil indexed debenture: Fair values are estimated using discounted cash flow
analysis based on the applicable current incremental borrowing rate. Income on
the variable rate portion of interest is estimated based on a forecast of the
average quarterly price of West Texas Intermediate crude oil.
11% debentures: Fair values are estimated using discounted cash flow analysis
based on current incremental borrowing rates for similar borrowing arrangements.
Interest rate swaps: Fair values are estimated based on quoted market prices of
comparable contracts.
FOREIGN CURRENCY TRANSACTIONS
The aggregate foreign currency transaction loss included in net income for the
year ended December 31, 1997 is $75 million (1996 -- loss of $5 million).
NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board released Statement No.
130 (SFAS 130), "Reporting Comprehensive Income" and Statement No. 131 (SFAS
131), "Disclosure about Segments of an Enterprise and Related Information". Both
statements become effective for fiscal years beginning after December 15, 1997
with early adoption permitted. SFAS 130 established standards for reporting and
display of certain components of changes in equity that arise from non-owner
sources. SFAS 131 establishes standards for reporting information about
operating segments and related disclosures. Neither section addresses issues of
recognition or measurement in the financial statements, and their adoption is
not expected to have any effect on the results of operations or financial
position of the Company. These standards will be applied in 1998.
21. RECLASSIFICATIONS
Certain amounts for 1996 and 1995 have been reclassified to conform with the
presentation adopted for 1997.
22. SUBSEQUENT EVENTS
On February 19, 1998 Gulf announced its intention to sell significant North
American and International producing and non-producing assets, including its
interest in the United Kingdom North Sea and its Mount Klappan coal deposit. The
Company also intends to create an infrastructure trust to sell an interest in a
portion of its gas transmission and processing facilities in west-central
Alberta. Expected proceeds of approximately $850 million will be used to reduce
the Company's debt.
-58-
<PAGE> 62
SUPPLEMENTAL INFORMATION
FIVE-YEAR OPERATING SUMMARY
<TABLE>
<CAPTION>
VOLUMES SOLD (1) (2) 1997 1996 1995 1994 1993
CRUDE OIL AND NATURAL GAS LIQUIDS GROSS/NET gross/net gross/net gross/net gross/net
(thousands of barrels per day)
North America
<S> <C> <C> <C> <C> <C>
Conventional light crude oil 43.0/ 35.3 39.0/ 31.4 34.3/ 28.4 36.3/ 30.1 42.0/35.0
Conventional heavy crude oil 5.4/ 4.7 -/- -/- -/- -/-
Synthetic crude oil 18.6/ 16.9 18.2/ 15.0 18.1/ 16.4 17.3/ 16.4 16.6/15.6
Condensate 5.7/ 4.0 5.6/ 4.6 4.1/ 3.6 3.2/ 2.6 4.5/ 3.9
Other natural gas liquids 10.7/ 9.1 10.5/ 8.6 8.3/ 7.0 8.9/ 7.5 9.0/ 7.7
------------ ----------- ------------ ----------- -----------
83.4/ 70.0 73.3/ 59.6 64.8/ 55.4 65.7/ 56.6 72.1/ 62.2
------------ ----------- ------------ ----------- -----------
International
Indonesia 22.5/ 16.6 13.9/ 10.3 13.8/ 10.3 14.4/ 10.8 14.5/10.6
North Sea 17.0/ 16.2 -/ - -/ - -/ - -/ -
Other 2.0/ 1.7 -/ - -/ - -/ - -/ -
------------ ----------- ------------ ------------ -----------
41.5/ 34.5 13.9/ 10.3 13.8/ 10.3 14.4/ 10.8 14.5/10.6
------------ ----------- ------------ ----------- ----------
124.9/ 104.5 87.2/ 69.9 78.6/ 65.7 80.1/ 67.4 86.6/72.8
============ =========== ============ =========== ==========
NATURAL GAS (MILLIONS OF CUBIC FEET PER DAY)
North America 413/ 351 441/ 371 315/ 271 265/ 212 270/ 224
North Sea 62/ 61 -/ - -/ - -/ - -/ -
Other International 22/ 21 -/ - -/ - -/ - -/ -
------------ ----------- ----------- ----------- -----------
497/ 433 441/ 371 315/ 271 265/ 212 270/ 224
============ =========== =========== =========== ===========
Total barrels of oil equivalent
per day (3) 180.2/ 153.3 131.3/107.0 110.1/ 92.8 106.6/ 88.6 113.6/95.2
============ =========== ============ =========== ==========
GROSS AVERAGE PRICES
CRUDE OIL AND NATURAL GAS LIQUIDS (DOLLARS PER BARREL)
North America
Conventional light crude oil 26.13 27.92 22.66 20.45 20.39
Conventional heavy crude oil 13.71 - - - -
Synthetic crude oil 27.84 29.22 23.85 21.80 21.13
Condensate 28.65 27.58 20.46 18.33 19.76
Other natural gas liquids 17.56 18.01 13.39 13.28 14.91
International
Indonesia 26.55 27.34 23.60 21.62 22.30
North Sea 23.59 - - - -
Other international 27.16 - - - -
Average unhedged 24.98 26.88 22.01 20.06 20.26
hedged 24.58 25.13 21.58 20.05 20.73
NATURAL GAS (DOLLARS PER THOUSAND CUBIC FEET)
North America
unhedged 1.84 1.73 1.28 2.00 1.68
hedged 1.82 1.65 1.53 2.08 1.68
International 3.16
Average unhedged 2.06 1.73 1.28 2.00 1.68
hedged 2.04 1.65 1.53 2.08 1.68
AVERAGE EXCHANGE RATES (Cdn$1) US$ 0.72 US$ 0.73 US$ 0.73 US$ 0.73 US$ 0.78
(1) "Gross" sales include royalties; "net" sales are after royalties.
Volumes are adjusted for:
NGL and gas re-injection requirements
(mboe/d) 4.2 4.2 5.6 7.3 6.7
inventory drawdown/(buildup) (mboe/d) - (0.4) 0.2 0.7 0.3
(2) In 1995, Gulf sold its interest in a Russian joint stock company which
had been accounted for under the equity method in 1994.
For comparability, volumes from 1993 have been excluded.
(3) North American gas converted @ 10:1, North Sea and other international @
6:1.
</TABLE>
-59-
<PAGE> 63
SUPPLEMENTAL INFORMATION
QUARTERLY SUMMARIES
<TABLE>
<CAPTION>
(UNAUDITED) 1997
---------------------------------------------------------------------------
1 2 3 4
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL (millions of dollars)
Net revenue from continuing operations 289 342 626 420
Earnings (loss) from continuing operations 12 (10) 202 0
Per ordinary share (dollars) 0.02 (0.06) 0.67 (0.01)
Earnings (loss) 12 (10) 202 0
Per ordinary share (dollars) 0.02 (0.06) 0.67 (0.01)
Cash generated from operations 140 106 155 191
Per ordinary share (dollars) 0.51 0.38 0.51 0.56
MARKET VALUE PER SHARE
Toronto Stock Exchange
Ordinary
high 11.90 13.05 13.25 12.90
low 9.50 9.40 9.95 9.25
close 10.25 11.30 12.55 10.00
Preference (Series 1)
high 4.46 4.30 4.29 4.76
low 4.16 3.99 4.20 4.05
close 4.19 4.30 4.29 4.19
New York Stock Exchange (U.S.$)
Ordinary
high 9.000 9.125 9.563 9.375
low 6.875 6.625 7.125 6.250
close 7.375 8.312 9.125 7.000
Preference (Series 1)
high 3.250 3.125 3.125 3.500
low 2.875 2.750 3.000 2.688
close 3.000 3.000 3.063 2.875
DIVIDENDS (1)
Dividends declared (millions of dollars)(2)
Ordinary 0 0 0 0
Preference (Series 1) 4 4 4 5
Preference (Series 2) 2 1 1 2
Special dividends 3 4 3 35
Dividends declared per share (dollars) (2)
Ordinary 0 0 0 0
Preference (Series 1) 0.05 0.05 0.05 0.05
Special dividends (Series 1) 0.03 0.03 0.03 0.29
</TABLE>
(1) Ordinary share dividends were discontinued in 1992. Preference share
dividends, suspended in 1993, were reinstated in February 1995. In November
1997, all dividends in arrears were paid.
(2) Dividends paid on shares owned by non-residents of Canada are generally
subject to 25 per cent withholding tax. However, for recipients to whom the
existing tax treaty between the United States and Canada is applicable, the
rate is 15 per cent.
-60-
<PAGE> 64
SUPPLEMENTAL INFORMATION
QUARTERLY SUMMARIES
<TABLE>
<CAPTION>
(UNAUDITED) 1996
---------------------------------------------------------------------------
1 2 3 4
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL (millions of dollars)
Net revenue from continuing operations 205 217 243 244
Earnings (loss) from continuing operations 19 6 7 7
Per ordinary share (dollars) 0.04 (0.01) 0.00 0.01
Earnings (loss) 19 6 7 5
Per ordinary share (dollars) 0.04 (0.01) 0.00 0.00
Cash generated from operations 129 87 101 123
Per ordinary share (dollars) 0.54 0.33 0.38 0.47
MARKET VALUE PER SHARE
Toronto Stock Exchange
Ordinary
high 6.75 7.40 8.95 10.35
low 5.50 6.25 6.85 8.40
close 6.50 6.90 8.50 10.00
Preference (Series 1)
high 4.60 4.50 4.50 4.50
low 3.90 4.18 4.25 4.38
close 4.45 4.25 4.45 4.45
New York Stock Exchange (U.S.$)
Ordinary
high 4.875 5.500 6.625 7.750
low 4.000 4.750 5.000 6.125
close 4.750 5.125 6.375 7.375
Preference (Series 1)
high 3.375 3.375 3.250 3.375
low 2.875 3.000 3.000 3.000
close 3.375 3.000 3.125 3.125
DIVIDENDS (1)
Dividends declared (millions of dollars)(2)
Ordinary
Preference (Series 1) 6 5 6 4
Preference (Series 2) 3 2 2 1
Special dividends 2 3 4 4
Dividends declared per share (dollars) (2)
Ordinary 0 0 0 0
Preference (Series 1) 0.07 0.06 0.07 0.05
Special dividends (Series 1) 0.02 0.03 0.03 0.03
</TABLE>
(1) Ordinary share dividends were discontinued in 1992. Preference share
dividends, suspended in 1993, were reinstated in February 1995.
(2) Dividends paid on shares owned by non-residents of Canada are generally
subject to 25 per cent withholding tax. However, for recipients to whom the
existing tax treaty between the United States and Canada is applicable, the
rate is 15 per cent.
-61-
<PAGE> 65
SUPPLEMENTAL INFORMATION
LAND INVENTORY
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
PETROLEUM AND NATURAL GAS GROSS/NET gross/net gross/net gross/net gross/net
(millions of acres)
<S> <C> <C> <C> <C> <C>
Western Canada
Alberta 4.6/ 3.3 5.0/ 3.5 3.7/ 2.6 2.1/ 1.5 2.1/ 1.5
British Columbia 0.3/ 0.1 0.5/ 0.3 0.4/ 0.2 0.2/ 0.2 0.4/ 0.2
Saskatchewan 1.7/ 1.2 -/ - -/ - -/ - -/ -
Manitoba 0.1/ 0.0 -/ - -/ - -/ - -/ -
------------ ----------- ------------ ----------- -----------
Total Western Canada 6.7/ 4.7 5.5/ 3.8 4.1/ 2.8 2.3/ 1.7 2.5/ 1.7
------------ ----------- ------------ ----------- -----------
Frontiers
Beaufort Sea 0.5/ 0.1 0.5/ 0.1 0.5/ 0.1 0.5/ 0.1 0.6/ 0.1
Yukon and N.W.T. -/ - 0.5/ 0.3 0.5/ 0.3 0.5/ 0.3 0.5/ 0.3
Mackenzie Delta 0.6/ 0.2 0.1/ 0.1 0.1/ 0.1 0.1/ 0.1 0.1/ 0.1
Arctic Islands 0.4/ 0.1 0.4/ 0.1 0.4/ 0.1 0.4/ 0.1 0.4/ 0.1
------------ ----------- ------------ ----------- -----------
Total Northern Canada 1.5/ 0.4 1.5/ 0.6 1.5/ 0.6 1.5/ 0.6 1.6/ 0.6
------------ ----------- ------------ ----------- -----------
East Coast 5.0/ 4.6 4.9/ 4.6 4.9/ 4.6 5.0/ 4.6 5.0/ 4.6
------------ ----------- ------------ ----------- -----------
Total Eastern Canada 5.0/ 4.6 4.9/ 4.6 4.9/ 4.6 5.0/ 4.6 5.0/ 4.6
------------ ----------- ------------ ----------- -----------
International
United States 1.5/ 0.9 0.6/ 0.4 0.4/ 0.2 -/ - -/ -
Netherlands 2.3/ 0.4 -/ - -/ - -/ - -/ -
Indonesia 16.4/ 8.7 4.7/ 2.6 5.0/ 3.2 5.4/ 3.6 5.8/ 3.9
Australia 30.6/ 2.0 0.3/ 0.1 1.3/ 0.3 1.3/ 0.3 1.3/ 0.3
United Kingdom 1.1/ 0.5 0.3/ 0.3 -/ - -/ - -/ -
Other 5.9/ 1.8 0.7/ 0.1 0.6/ 0.1 1.2/ 0.2 1.2/ 0.2
------------ ----------- ------------ ----------- -----------
Total International 57.8/ 14.3 6.6/ 3.5 7.3/ 3.8 7.9/ 4.1 8.3/ 4.4
------------ ----------- ------------ ----------- -----------
OIL SANDS - Alberta 0.4/ 0.2 0.4/ 0.2 0.5/ 0.2 0.6/ 0.2 0.5/ 0.2
------------ ----------- ------------ ----------- -----------
TOTAL LAND INVENTORY 71.4/ 24.2 18.9/ 12.7 18.3/ 12.0 17.3/ 11.2 17.9/ 11.5
============ =========== ============ =========== ===========
</TABLE>
"Gross" refers to land or wells in which Gulf owns an interest; "net" is the sum
of the fractional interests owned by Gulf in gross land or wells.
-62-
<PAGE> 66
SUPPLEMENTAL INFORMATION
WELLS DRILLED
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
GROSS/NET gross/net gross/net gross/net gross/net
<S> <C> <C> <C> <C> <C> <C>
Western Canada
Exploratory wells: Oil 45/ 39 44/ 40 37/ 29 28/ 21 16/ 11
Gas 55/ 42 44/ 35 75/ 47 35/ 18 24/ 16
Dry 77/ 65 52/ 42 59/ 34 33/ 14 20/ 6
-------- --------- --------- -------- --------
177/ 146 140/ 117 171/ 110 96/ 53 60/ 33
-------- --------- --------- -------- --------
Development wells: Oil 166/ 133 91/ 61 80/ 54 47/ 22 83/ 38
Gas 247/ 233 146/ 76 104/ 69 52/ 24 40/ 23
Dry 50/ 30 55/ 39 47/ 32 28/ 13 23/ 14
-------- --------- --------- -------- --------
463/ 396 292/ 176 231/ 155 127/ 59 146/ 75
-------- --------- --------- -------- --------
United States
Exploratory wells: Oil 2/ 1 4/ 3 1/ 1 -/ - -/ -
Gas -/ - -/ - -/ - -/ - -/ -
Dry 11/ 8 16/ 9 -/ - -/ - -/ -
-------- --------- --------- -------- --------
13/ 9 20/ 12 1/ 1 -/ - -/ -
-------- --------- --------- -------- --------
Indonesia:
Exploratory wells Oil 4/ 3 1/ 1 -/ - -/ - 3/ 2
Gas 3/ 1 2/ 1 -/ - 6/ 3 3/ 1
Dry 5/ 4 2/ 1 2/ 1 3/ 2 2/ 1
-------- --------- --------- -------- --------
12/ 8 5/ 3 2/ 1 9/ 5 8/ 4
-------- --------- --------- -------- --------
Development wells: Oil 28/ 13 12/ 6 9/ 4 6/ 2 10/ 6
Gas 2/ 1 -/ - -/ - -/ - -/ -
Dry 1/ - 2/ 1 1/ 1 1/ 1 1/ -
-------- --------- --------- -------- --------
31/ 14 14/ 7 10/ 5 7/ 3 11/ 6
-------- --------- --------- -------- --------
North Sea
Exploratory wells: Oil 2/ 1 -/ - -/ - -/ - -/ -
Gas 2/ - -/ - -/ - -/ - -/ -
Dry 4/ 1 -/ - -/ - -/ - -/ -
-------- --------- --------- -------- --------
8/ 2 -/ - -/ - -/ - -/ -
-------- --------- --------- -------- --------
Development wells: Oil 12/ 1 -/ - -/ - -/ - -/ -
Gas 7/ 1 -/ - -/ - -/ - -/ -
Dry -/ - -/ - -/ - -/ - -/ -
-------- --------- --------- -------- --------
19/ 2 -/ - -/ - -/ - -/ -
-------- --------- --------- -------- --------
Other International
Exploratory wells: Oil 4/ - -/ - -/ - -/ - -/ -
Gas 33/ 2 -/ - -/ - -/ - -/ -
Dry 29/ 1 -/ - -/ - 2/ 1 3/ 1
-------- --------- --------- -------- --------
66/ 3 -/ - -/ - 2/ 1 3/ 1
-------- --------- --------- -------- --------
Development wells: Oil 3/ - -/ - -/ - 3/ 3 6/ 2
Gas 28/ 1 -/ - -/ - -/ - -/ -
Dry -/ - -/ - -/ - -/ - -/ -
-------- --------- --------- -------- --------
31/ 1 -/ - -/ - 3/ 3 6/ 2
-------- --------- --------- -------- --------
TOTAL WELLS DRILLED 820/ 581 471/ 315 415/ 272 244/ 124 234/ 121
======== ========= ========= ======== ========
</TABLE>
"Gross" refers to land or wells in which Gulf owns an interest; "net" is the sum
of the fractional interests owned by Gulf in gross land or wells.
-63-
<PAGE> 67
SUPPLEMENTAL INFORMATION
RESULTS OF OIL & GAS OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
NORTH AMERICA INTERNATIONAL TOTAL
CANADA(1) US INDONESIA OTHER
<S> <C> <C> <C> <C> <C>
Net revenue derived from proved oil and gas
reserves during the year $ 668 $ 2 $ 160 $ 253 $ 1,083
Less: Production costs 209 1 45 49 304
Exploration expenses 70 22 26 26 144
Depreciation, depletion & amortization 286 9 55 133 483
Income tax expense (recovery) 53 0 26 31 110
-------- ------- --------- -------- ---------
Results of operations from producing activities $ 50 $ (30) $ 8 $ 14 $ 42
======== ======= ========= ======== =========
</TABLE>
(1) Does not include reduction in carrying value of assets
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
NORTH AMERICA INTERNATIONAL TOTAL
CANADA(1) US INDONESIA OTHER
<S> <C> <C> <C> <C> <C>
Net revenue derived from proved oil and gas
reserves during the year $ 600 0 $ 99 0 $ 699
Less: Production costs 187 0 29 0 216
Exploration expenses 53 8 7 2 70
Depreciation, depletion & amortization 233 2 29 0 264
Income tax expense (recovery) 65 0 22 (1) 86
-------- ------ --------- ------- ---------
Results of operations from producing activities $ 62 $ (10) $ 12 $ (1) $ 63
======== ====== ========= ======= =========
</TABLE>
(1) Does not include reduction in carrying value of assets
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
NORTH AMERICA INTERNATIONAL TOTAL
CANADA(1) US INDONESIA OTHER
<S> <C> <C> <C> <C> <C>
Net revenue derived from proved oil and gas
reserves during the year $ 438 0 $ 88 0 $ 526
Less: Production costs 134 0 29 0 163
Exploration expenses 52 3 10 1 66
Depreciation, depletion & amortization 145 0 31 0 176
Income tax expense (recovery) 53 0 15 0 68
-------- ------ --------- ------- ---------
Results of operations from producing activities $ 54 $ (3) $ 3 $ (1) $ 53
======== ====== ========= ======= =========
</TABLE>
(1) Does not include reduction in carrying value of assets
-64-
<PAGE> 68
SUPPLEMENTAL INFORMATION
COSTS INCURRED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
NORTH AMERICA INTERNATIONAL TOTAL
CANADA US INDONESIA OTHER
<S> <C> <C> <C> <C> <C>
Costs incurred (capitalized & expensed during the year) for:
Property acquisitions: Proved $ 1,281 $ 0 $ 77 $ 1,243 $ 2,601
Unproved 64 26 107 195 392
Exploration 146 21 82 47 296
Development(1) 337 1 282 83 703
$1,828 $ 48 $ 548 $ 1,568 $ 3,992
</TABLE>
(1) Includes amounts for capitalized injection of $18 million, $10 million and
$11 million for 1997, 1996 and 1995 respectively
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
NORTH AMERICA INTERNATIONAL TOTAL
CANADA US INDONESIA OTHER
<S> <C> <C> <C> <C> <C>
Costs incurred (capitalized & expensed during the year) for:
Property acquisitions: Proved $ 247 $ 0 $ 0 $ 0 $ 247
Unproved 76 32 1 4 113
Exploration 172 23 28 2 225
Development(1) 261 0 49 0 310
-------- ------- --------- -------- ---------
$ 756 $ 55 $ 78 $ 6 $ 895
======== ======= ========= ======== =========
</TABLE>
(1) Includes amounts for capitalized injection of $18 million, $10 million and
$11 million for 1997, 1996 and 1995 respectively
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
NORTH AMERICA INTERNATIONAL TOTAL
CANADA US INDONESIA OTHER
<S> <C> <C> <C> <C> <C>
Costs incurred (capitalized & expensed during the year) for:
Property acquisitions: Proved $ 256 $ 0 $ 0 $ 0 $ 256
Unproved 90 9 0 0 99
Exploration 154 4 11 0 169
Development(1) 228 0 20 0 248
-------- ------- --------- -------- ---------
$ 728 $ 13 $ 31 $ 0 $ 772
======== ======= ========= ======== =========
</TABLE>
(1) Includes amounts for capitalized injection of $18 million, $10 million and
$11 million for 1997, 1996 and 1995 respectively
-65-
<PAGE> 69
SUPPLEMENTAL INFORMATION
CAPITALIZED COSTS
<TABLE>
<CAPTION>
AS AT DECEMBER 31, 1997
NORTH AMERICA INTERNATIONAL TOTAL
CANADA(1) US INDONESIA OTHER
<S> <C> <C> <C> <C> <C>
Proved properties $ 3,549 $ 7 $ 948 $ 1,193 $ 5,697
Unproved properties 509 67 183 189 948
Support facilities 25 1 0 109 135
Incomplete wells and facilities 25 9 36 22 92
-------- ------- --------- -------- ---------
4,108 84 1,167 1,513 6,872
Less related accumulated depreciation, depletion &
amortization 1,061 26 338 126 1,551
-------- ------- --------- -------- ---------
Net capitalized costs $ 3,047 $ 58 $ 829 $ 1,387 $ 5,321
======== ======= ========= ======== =========
</TABLE>
(1) Unproved properties includes $329 million for frontier areas
<TABLE>
<CAPTION>
AS AT DECEMBER 31, 1996
NORTH AMERICA INTERNATIONAL TOTAL
CANADA(1) US INDONESIA OTHER
<S> <C> <C> <C> <C> <C>
Proved properties $ 2,425 $ 4 $ 516 $ 0 $ 2,945
Unproved properties 509 41 67 4 621
Support facilities 25 0 0 0 25
Incomplete wells and facilities 46 13 20 0 79
-------- ------- --------- -------- ---------
3,005 58 603 4 3,670
Less related accumulated depreciation, depletion &
amortization 1,010 2 269 0 1,281
-------- ------- --------- -------- ---------
Net capitalized costs $ 1,995 $ 56 $ 334 $ 4 $ 2,389
======== ======= ========= ======== =========
</TABLE>
(1) Unproved properties includes $329 million for frontier areas
<TABLE>
<CAPTION>
AS AT DECEMBER 31, 1995
NORTH AMERICA INTERNATIONAL TOTAL
CANADA(1) US INDONESIA OTHER
<S> <C> <C> <C> <C> <C>
Proved properties $ 2,092 $ 0 $ 370 $ 0 $ 2,462
Unproved properties 499 9 116 0 624
Support facilities 21 0 0 0 21
Incomplete wells and facilities 41 1 44 0 86
-------- ------- --------- -------- ---------
2,653 10 530 0 3,193
Less related accumulated depreciation, depletion &
amortization 902 0 239 0 1,141
-------- ------- --------- -------- ---------
Net capitalized costs $ 1,751 $ 10 $ 291 $ 0 $ 2,052
======== ======= ========= ======== =========
</TABLE>
(1) Unproved properties includes $329 million for frontier areas
-66-
<PAGE> 70
SUPPLEMENTAL INFORMATION
STANDARDIZED MEASURE
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
RESERVES. The standardized measure for calculating the present value of future
net cash flows from proved oil and gas reserves is based on current costs and
prices and a 10 per cent discount factor as prescribed by the FASB.
Accordingly, the estimated future net cash inflows were computed by applying
selling prices prevailing at December 31 for crude oil and during the month of
December for other products to the estimated future production of proved
reserves. Estimated future expenditures to be incurred in developing and
producing proved reserves are based upon average costs incurred in each year
presented and assume the continuation of economic conditions existing at the end
of each year presented.
Although these calculations have been prepared according to the standards
described above, it should be emphasized that, due to the number of assumptions
and estimates required in the calculations, the amounts are not indicative of
the amount of net revenue that the Company expects to receive in future years.
They are also not indicative of the current value or future earnings that may be
realized from the production of proved reserves nor should it be assumed that
they represent the fair market value of the reserves or of the oil and gas
properties.
Although the calculations are based on existing economic conditions at each year
end, such economic conditions have changed, and may continue to change
significantly due to events such as the continuing changes in international
crude oil availability and prices, and changes in government policies and
regulations. While the calculations are based on the Company's understanding of
the established FASB guidelines, there are numerous other equally valid
assumptions under which these estimates could be made which would produce
significantly different results.
STANDARDIZED MEASURE
<TABLE>
<CAPTION>
AS AT DECEMBER 31, 1997
OTHER
CANADA (1) INDONESIA NORTH SEA INTERNATIONAL TOTAL
<S> <C> <C> <C> <C> <C>
Future cash inflows $ 5,769 $ 2,569 $ 1,277 $ 535 $ 10,150
Future development costs (626) (425) (185) (16) (1,252)
Future production costs (2,104) (738) (454) (161) (3,457)
Future wellhead taxes (36) (19) (88) (31) (174)
Future income taxes (781) (439) (130) (92) (1,442)
-------- -------- --------- --------- --------
Future net cash flows 2,222 948 420 235 3,825
10% annual discount for estimated of cash flows (820) (409) (88) (93) (1,410)
-------- -------- --------- --------- --------
Standardized measure of discounted future net
cash flows $ 1,402 $ 539 $ 332 $ 142 $ 2,415
======== ======== ========= ========= ========
Minority interest's share of standardized measure
of discounted net cash flows relating to proved
reserves $ 17 $ 149 $ 0 $ 0 $ 166
======== ======== ========= ========= ========
</TABLE>
-67-
<PAGE> 71
STANDARDIZED MEASURE
<TABLE>
<CAPTION>
AS AT DECEMBER 31, 1996
OTHER
CANADA (1) INDONESIA INTERNATIONAL TOTAL
<S> <C> <C> <C> <C>
Future cash inflows $ 6,763 $ 2,644 $ 11 $ 9,418
Future development costs (157) (459) 0 (616)
Future production costs (1,389) (853) (4) (2,246)
Future wellhead taxes (49) (35) 0 (84)
Future income taxes (1,564) (561) (3) (2,128)
-------- ---------- ------------- -----------
Future net cash flows 3,604 736 4 4,344
10% annual discount for estimated of cash flows (1,318) (391) (2) (1,711)
-------- ---------- ------------- -----------
Standardized measure of discounted future net
cash flows $ 2,286 $ 345 $ 2 $ 2,633
======== ========== ============= ===========
</TABLE>
STANDARDIZED MEASURE
<TABLE>
<CAPTION>
AS AT DECEMBER 31, 1995
CANADA (1) INDONESIA TOTAL
<S> <C> <C> <C>
Future cash inflows $ 4,156 $ 434 $ 4,590
Future development costs (100) (11) (111)
Future production costs (1,476) (150) (1,626)
Future wellhead taxes (26) (27) (53)
Future income taxes (460) (98) (558)
---------- ----------- ---------
Future net cash flows 2,094 148 2,242
10% annual discount for estimated of cash flows (726) (45) (771)
---------- ----------- ---------
Standardized measure of discounted future net
cash flows $ 1,368 $ 103 $ 1,471
========== =========== =========
</TABLE>
CHANGES IN THE STANDARDIZED MEASURE DURING THE YEAR
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
Sales of oil and gas produced net of production costs $ (612) $ (554) $ (347)
Development costs incurred during the year 613 310 248
Sales of reserves in place (683) (231) (28)
Purchases of reserves in place 1,429 390 164
Extensions, discoveries and improved recovery, less related
costs 267 1,000 109
Additions due to "Other" (1) 37 61 140
Revisions of previous quantity and timing estimates (346) (55) (125)
Price and cost changes
Selling prices (1,630) 1,120 (91)
Producing costs (49) (1) 91
Development costs (91) (92) 9
Accretion of discount 389 177 144
Other (131) (94) 21
Change in income taxes 589 (869) 61
---------- ---------- ----------
Net Change (218) 1,162 396
Balance at beginning of year 2,633 1,471 1,075
---------- ---------- ----------
Balance at end of year $ 2,415 $ 2,633 $ 1,471
========== ========== ==========
</TABLE>
(1) Under SFAS 69, additions due to "Other" would be considered part of
revisions of previous quantity and timing estimates.
-68-
<PAGE> 72
SUPPLEMENTAL INFORMATION
RESERVES
<TABLE>
<CAPTION>
CRUDE OIL AND 1997 1996 1995 1994 1993
NATURAL GAS LIQUIDS gross/net gross/net gross/net gross/net gross/net
(millions of barrels)
<S> <C> <C> <C> <C> <C>
PROVED (1)
North America
Conventional 192/ 157 162/ 131 150/ 125 128/ 106 136/ 113
Heavy oil 78/ 69 -/ - -/ - -/ - -/ -
Syncrude 226/ 198 194/ 174 200/ 180 196/ 177 161/ 145
------------- ------------- -------------- ------------ -------------
Subtotal N. America 496/ 424 356/ 305 350/ 305 324/ 283 297/ 258
------------- ------------- -------------- ------------ -------------
Indonesia 42/ 28 36/ 21 27/ 16 31/ 19 35/ 22
North Sea 54/ 53 -/ - -/ - -/ - -/ -
Australia 7/ 6 -/ - -/ - -/ - -/ -
------------- ------------- -------------- ------------ --------------
Subtotal International 103/ 87 36/ 21 27/ 16 31/ 19 35/ 22
------------- ------------- -------------- ------------ -------------
TOTAL PROVED LIQUIDS 599/ 511 392/ 326 377/ 321 355/ 302 332/ 280
============= ============= ============== ============ =============
PROVED & PROBABLE (2)
North America
Conventional 247/ 202 215/ 174 205/ 172 183/ 151 191/ 159
Heavy Oil 110/ 97 -/ - -/ - -/ - -/ -
Syncrude 526/ 460 208/ 188 215/ 194 222/ 200 221/ 199
Other/Frontier 270/ 229 270/ 229 270/ 229 270/ 229 306/ 259
------------- ------------- -------------- ------------ -------------
Subtotal N. America 1,153/ 988 693/ 591 690/ 595 675/ 580 718/ 617
------------- ------------- -------------- ------------ -------------
Indonesia 70/ 46 59/ 33 45/ 27 56/ 34 64/ 40
North Sea 79/ 76 -/ - -/ - -/ - -/ -
Australia 8/ 7 -/ - -/ - -/ - -/ -
------------- ------------- -------------- ------------ --------------
Subtotal International 157/ 129 59/ 33 45/ 27 56/ 34 64/ 40
------------- ------------- -------------- ------------ -------------
TOTAL PROVED & PROBABLE
LIQUIDS 1,310/ 1,117 752/ 624 735/ 622 731/ 614 782/ 657
============= ============= ============== ============ =============
NATURAL GAS
(billions of cubic feet)
PROVED (1)
North America 1,347/ 1,147 1,482/ 1,248 1,396/1,204 931/ 758 923/ 762
Indonesia 758/ 652 504/ 426 -/ - -/ - 55/ 47
North Sea 177/ 174 -/ - -/ - -/ - -/ -
Australia 138/ 120 -/ - -/ - -/ - -/ -
------------- ------------- ------------- ------------ -------------
TOTAL PROVED NATURAL GAS 2,420/ 2,093 1,986/ 1,674 1,396/ 1,204 931/ 758 978/ 809
============= ============= ============== ============ =============
PROVED & PROBABLE (2)
North America
Conventional 1,815/ 1,546 1,948/ 1,640 1,937/ 1,670 1,359/ 1,106 1,310/ 1,081
Frontier 2,590/ 2,279 2,590/2,279 2,590/ 2,279 2,590/ 2,279 2,604/ 2,291
Indonesia 1,447/ 1,227 1,311/1,048 877/ 738 787/ 645 825/ 646
North Sea 285/ 281 -/ - -/ - -/ - -/ -
Australia 159/ 138 -/ - -/ - -/ - -/ -
------------- ------------- ------------- ------------- -------------
TOTAL PROVED & PROBABLE
NATURAL GAS 6,296/ 5,471 5,849/ 4,967 5,404/ 4,687 4,736/ 4,030 4,739/ 4,018
============= ============= ============== ============ ============
TOTAL BARRELS OF OIL
EQUIVALENT (3) (MILLIONS)
PROVED 912/ 783 624/ 522 517/ 441 448/ 378 433/ 364
============= ============= ============== ============ =============
PROVED & PROBABLE EXCL.
FRONTIER 1,536/ 1,316 895/ 734 805/ 683 728/ 603 745/ 614
============= ============= ============== ============ =============
TOTAL PROVED & PROBABLE 2,065/ 1,773 1,424/ 1,191 1,334/ 1,140 1,257/ 1,060 1,311/ 1,102
============= ============= ============== ============ ============
</TABLE>
(1) "Gross" reserves are before deduction of royalties. "Net" reserves are
after deduction of royalties which vary depending on prices, production
rates and legislation changes. "Proved" reserves are those which appear
with reasonable certainty to be recoverable under existing economic and
operating conditions.
(2) "Proved plus probable" reserves are those which appear with reasonable
certainty to be recoverable under existing and anticipated economic
conditions plus that judgment portion of contiguous reserves that are
interpreted to exist, from geological, engineering or similar information,
with reasonable certainty.
(3) Canadian natural gas reserves are converted to an oil equivalent at 10mcf:
1 barrel; International at 6mcf: 1 barrel
-69-
<PAGE> 73
PROVED RESERVES
<TABLE>
<CAPTION>
NORTH AMERICA (3) INDONESIA
------------------------------------- ----------------------------------
LIQUIDS GAS LIQUIDS GAS
(mmbbls)(2) (Bcf) (mmbbls) (Bcf)
---------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
PROVED DEVELOPED AND UNDEVELOPED
At December 31, 1994 128 106 931 758 31 19 -- --
Additions from discoveries & extensions 18 15 314 271 1 -- -- --
Additions from improved recovery -- -- -- -- 1 1 -- --
Additions from development (1) 14 11 70 60 1 1 -- --
Purchases of reserves in place 11 9 239 206 -- -- -- --
Revisions of previous estimates -- 1 (36) 14 (2) (1) -- --
Sales of reserves in place (4) (3) (7) (6) -- -- -- --
Production (17) (14) (115) (99) (5) (4) -- --
---------------- ---------------- ------------- --------------
At December 31, 1995 150 125 1,396 1,204 27 16 -- --
Additions from discoveries & extensions 16 13 270 227 2 1 -- --
Additions from improved recovery 7 5 4 4 2 1 -- --
Additions from development (1) 11 9 78 65 7 4 504 426
Purchases of reserves in place 14 11 279 235 2 2 -- --
Revisions of previous estimates -- (3) 76 36 1 1 -- --
Sales of reserves in place (16) (13) (459) (387) -- -- -- --
Production (20) (16) (162) (136) (5) (4) -- --
---------------- ---------------- ------------- --------------
At December 31, 1996 162 131 1,482 1,248 36 21 504 426
Additions from discoveries & extensions 19 16 196 167 1 -- 144 124
Additions from improved recovery 32 28 13 11 -- -- -- --
Additions from development (1) 9 7 29 25 4 3 110 96
Purchases of reserves in place 101 86 255 219 13 8 -- --
Sales of reserves in place (29) (24) (499) (424) -- -- -- --
Revisions of previous estimates 10 10 22 30 (3) 3 -- 6
Production (23) (20) (151) (128) (9) (7) -- --
---------------- ---------------- ------------- --------------
At December 31, 1997 281 234 1,347 1,148 42 28 758 652
---------------- ---------------- ------------- -------------
PROVED DEVELOPED
At December 31, 1995 133 111 927 799 23 13 -- --
At December 31, 1996 142 115 1,043 879 25 14 -- --
At December 31, 1997 196 164 986 839 32 21 -- --
</TABLE>
<TABLE>
<CAPTION>
OTHER INTERNATIONAL TOTAL
----------------------------------- ------------------------------------
LIQUIDS GAS LIQUIDS GAS
(mmbbls) (Bcf) (mmbbls) (Bcf)
------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
PROVED DEVELOPED AND UNDEVELOPED
At December 31, 1994 -- -- -- -- 159 125 931 758
Additions from discoveries & extensions -- -- -- -- 19 15 314 271
Additions from improved recovery -- -- -- -- 1 1 -- --
Additions from development (1) -- -- -- -- 15 12 70 60
Purchases of reserves in place -- -- -- -- 11 9 239 206
Revisions of previous estimates -- -- -- -- (2) -- (36) 14
Sales of reserves in place -- -- -- -- (4) (3) (7) (6)
Production -- -- -- -- (22) (18) (115) (99)
------------- ------------- -------------- ---------------
At December 31, 1995 -- -- -- -- 177 141 1,396 1,204
Additions from discoveries & extensions -- -- -- -- 18 14 270 227
Additions from improved recovery -- -- -- -- 9 6 4 4
Additions from development (1) -- -- -- -- 18 13 582 491
Purchases of reserves in place -- -- -- -- 16 13 279 235
Revisions of previous estimates -- -- -- -- 1 (2) 76 36
Sales of reserves in place -- -- -- -- (16) (13) (459) (387)
Production -- -- -- -- (25) (20) (162) (136)
------------- ------------- -------------- ---------------
At December 31, 1996 -- -- -- -- 198 152 1,986 1,674
Additions from discoveries & extensions 21 21 9 8 41 37 349 299
Additions from improved recovery -- -- -- -- 33 28 13 11
Additions from development (1) 3 3 2 2 16 13 141 123
Purchases of reserves in place 42 39 295 275 156 133 550 494
Sales of reserves in place -- -- -- -- (29) (24) (499) (424)
Revisions of previous estimates 1 2 41 39 7 15 63 75
Production (6) (6) (32) (30) (38) (33) (183) (158)
------------- ------------- -------------- ---------------
At December 31, 1997 61 59 315 294 384 321 2,420 2,094
------------- ------------- -------------- ---------------
PROVED DEVELOPED
At December 31, 1995 -- -- -- -- 156 124 927 799
At December 31, 1996 -- -- -- -- 167 129 1,043 879
At December 31, 1997 25 24 228 214 253 209 1,214 1,053
</TABLE>
(1) Under Statement of Financial Accounting Standards No. 69 (SFAS 69),
these additions are considered part of revisions of previous estimates.
(2) Excludes synthetic crude oil from oil sands.
(3) The above estimated reserve quantities are based upon year-end economic
conditions as required under SFAS 69. Using management's estimate of costs
and prices net proved reserves as at December 31, 1997 for oil and natural
gas liquids would be 226 millions of barrels and for natural gas would be
1,147 billions of cubic feet.
-70-
<PAGE> 74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information required by this item will be included in the Company's
proxy statement for its 1998 Annual and Special Meeting, and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be included in the Company's
proxy statement for its 1998 Annual and Special Meeting, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item will be included in the Company's
proxy statement for its 1998 Annual and Special Meeting, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this item will be included in the Company's
proxy statement for its 1998 Annual and Special Meeting, and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Exhibits
--------
<S> <C>
3.1 Articles of Incorporation of Gulf Canada Resources
Limited (incorporated by reference to Exhibit 3.1 of the
Company's 10-Q filed for quarter ended June 30, 1997,
filed August 14, 1997)
3.2 Bylaws of Gulf Canada Resources Limited (incorporated by
reference to Exhibit 3.2 of the Company's 10-Q for quarter
ended June 30, 1997, filed August 14, 1997)
4.1 Indenture dated July 1, 1989 between the Company and
Chase Manhattan Bank pertaining to the Company's 9%
debentures due 1999 (incorporated by reference to the
Company's Registration Statement on Form F-10,
Registration No. 33-30138)
4.2 Indenture dated January 27, 1994 between the Company and
The Bank of New York pertaining to the Company's 9.25%
Senior Subordinated Debentures due 2004 (incorporated by
reference to the Company's Registration Statement on Form
F-10, Registration No. 33-73252)
4.3 Indenture dated July 5, 1995 between the Company and The
Bank of New York pertaining to the Company's 9.625% Senior
Subordinated Debentures due 2005 (incorporated by
reference to Exhibit 7.1 to the Company's Registration
Statement on form F-10, Registration No. 33-93452)
4.4 Indenture dated August 7, 1997 between the Company and
The Bank of New York pertaining to the company's 8.35%
Senior Notes payable 2006 (incorporated by reference to
Exhibit 7.1 to the Company's Registration Statement on
Form F-10, Registration No. 333-5332)
4.5 Indenture dated March 21, 1997 between the Company and
The Bank of New York pertaining to the Company's 8.25%
Senior Notes payable 2017 (incorporated by reference to
Exhibit 7.1 to the Company's Registration Statement on
form F-10, Registration No. 333-6608)
4.6 Incentive Stock Plan 1994 (incorporated by reference to
Exhibit 10.3 to the Company's Form 10-Q for the quarter
ended June 30, 1997, filed August 14, 1997)
10.1 Loan Agreement dated July 18, 1997 with a syndicate of
banks (incorporated by reference to Exhibit 10.2 to the
Company's report on Form 10-Q for the quarter ended June
30, 1997, filed August 14, 1997)
10.2 Employment Agreement, dated February 1996 with Mr.
Auchinleck
10.3 Employment Agreement, dated January 1995 with Mr. Glick
10.4 Employment Agreement, dated February 1996 with Mr. Feuchuk
10.5 Employment Agreement, dated January 1995 with Mr. Herbst
23.2 Consent of Ernst & Young
27 Financial Data Schedule
</TABLE>
-71-
<PAGE> 75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GULF CANADA RESOURCES LIMITED
By: /s/ RICHARD H. AUCHINLECK
---------------------------------------
Name: Richard H. Auchinleck
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
/s/ RICHARD H. AUCHINLECK Chief Executive Officer; Director March 25, 1998
- ----------------------------- (principal executive officer)
Richard H. Auchinleck
/s/ CRAIG S. GLICK Chief Financial Officer (principal March 25, 1998
- ----------------------------- financial officer)
Craig S. Glick
/s/ DENNIS G. FEUCHUK Vice President and Controller March 25, 1998
- ----------------------------- (principal accounting officer)
Dennis G. Feuchuk
/s/ ROBERT H. ALLEN Director March 25, 1998
- -----------------------------
Robert H. Allen
/s/ STANLEY H. HARTT Director March 25, 1998
- -----------------------------
Stanley H. Hartt
/s/ RAYMOND H. HEFNER, JR. Director March 25, 1998
- -----------------------------
Raymond H. Hefner, Jr.
/s/ H. EARL JOUDRIE Director March 25, 1998
- -----------------------------
H. Earl Joudrie
/s/ T. MICHAEL LONG Director March 25, 1998
- -----------------------------
T. Michael Long
/s/ DONALD F. MAZANKOWSKI Director March 25, 1998
- -----------------------------
The Right Honourable
Donald F. Mazankowski
/s/ ALAN H. MICHELL Director March 25, 1998
- -----------------------------
Alan H. Michell
/s/ HELMUT M. NELDER Director March 25, 1998
- -----------------------------
Helmut M. Nelder
/s/ RONALD N. ROBERTSON, Q.C. Director March 25, 1998
- -----------------------------
Ronald N. Robertson, Q.C.
</TABLE>
-72-
<PAGE> 76
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Articles of Incorporation of Gulf Canada Resources
Limited (incorporated by reference to Exhibit 3.1 of the
Company's 10-Q filed for quarter ended June 30, 1997,
filed August 14, 1997)
3.2 Bylaws of Gulf Canada Resources Limited (incorporated by
reference to Exhibit 3.2 of the Company's 10-Q for quarter
ended June 30, 1997, filed August 14, 1997)
4.1 Indenture dated July 1, 1989 between the Company and
Chase Manhattan Bank pertaining to the Company's 9%
debentures due 1999 (incorporated by reference to the
Company's Registration Statement on Form F-10,
Registration No. 33-30138)
4.2 Indenture dated January 27, 1994 between the Company and
The Bank of New York pertaining to the Company's 9.25%
Senior Subordinated Debentures due 2004 (incorporated by
reference to the Company's Registration Statement on Form
F-10, Registration No. 33-73252)
4.3 Indenture dated July 5, 1995 between the Company and The
Bank of New York pertaining to the Company's 9.625% Senior
Subordinated Debentures due 2005 (incorporated by
reference to Exhibit 7.1 to the Company's Registration
Statement on form F-10, Registration No. 33-93452)
4.4 Indenture dated August 7, 1997 between the Company and
The Bank of New York pertaining to the company's 8.35%
Senior Notes payable 2006 (incorporated by reference to
Exhibit 7.1 to the Company's Registration Statement on
Form F-10, Registration No. 333-5332)
4.5 Indenture dated March 21, 1997 between the Company and
The Bank of New York pertaining to the Company's 8.25%
Senior Notes payable 2017 (incorporated by reference to
Exhibit 7.1 to the Company's Registration Statement on
form F-10, Registration No. 333-6608)
4.6 Incentive Stock Plan 1994 (incorporated by reference to
Exhibit 10.3 to the Company's Form 10-Q for the quarter
ended June 30, 1997, filed August 14, 1997)
10.1 Loan Agreement dated July 18, 1997 with a syndicate of
banks (incorporated by reference to Exhibit 10.2 to the
Company's report on Form 10-Q for the quarter ended June
30, 1997, filed August 14, 1997)
10.2 Employment Agreement, dated February 1996 with Mr.
Auchinleck
10.3 Employment Agreement, dated January 1995 with Mr. Glick
10.4 Employment Agreement, dated February 1996 with Mr. Feuchuk
10.5 Employment Agreement, dated January 1995 with Mr. Herbst
23.2 Consent of Ernst & Young
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.2
EXECUTIVE EMPLOYMENT CONTRACT
THIS AGREEMENT is dated as of February 7, 1996.
BETWEEN:
GULF CANADA RESOURCES LIMITED
(hereinafter called the "Corporation")
OF THE FIRST PART
- and -
RICHARD H. AUCHINLECK
(hereinafter called the "Executive")
OF THE SECOND PART
WHEREAS
(a) The Executive is an officer of the Corporation and is
considered by the Board of Directors of the Corporation to be
a valued employee of the Corporation and has acquired
outstanding and special skills and abilities and an extensive
background in and knowledge of the Corporation's business and
the industry in which it is engaged;
(b) The Board of Directors recognizes that it is essential, in the
best interests of the Corporation, that the Corporation retain
the continuing dedication of the Executive to his office and
employment and that the past service of the Executive to the
Corporation requires that the Executive receive fair
treatment, particularly in the event of an actual or
constructive termination of his employment with the
Corporation;
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the
mutual covenants herein contained and in consideration of the Executive
remaining in office and in the employment of the Corporation at the present
time and throughout the period of material change of ownership or organization
of the Corporation, it is hereby agreed as follows:
<PAGE> 2
-2-
1. DEFINITIONS
In this Agreement:
(a) "affiliate" means:
(i) one body corporate is an affiliate of another body
corporate if one of them is the subsidiary of the
other or both are subsidiaries of the same body
corporate or each of them is under the control of the
same person; and
(ii) two bodies corporate that are an affiliate of the
same body corporate at the same time are affiliates
of each other.
(b) "associate" has the meaning ascribed to that term in the
Canada Business Corporations Act.
(c) "change of control" means or shall be deemed to have occurred
if and when:
(i) the acquisition, by whatever means (including without
limitation, amalgamation, consolidation, liquidation,
arrangement or merger), by a person (or two or more
persons who in such acquisition have acted jointly or
in concert or intend to exercise jointly or in
concert any voting rights attaching to the securities
acquired), directly or indirectly, of the beneficial
ownership of such number of voting securities or
rights to voting securities of the Corporation, which
together with such person's then owned voting
securities and rights to voting securities, if any,
represent (assuming the full exercise of such rights
to voting securities) more than 20% of the combined
voting power of the Corporation's then outstanding
voting securities, together with the voting
securities acquired and such person's previously
owned rights to voting securities; or
(ii) individuals who were members of the Board of
Directors of the Corporation immediately prior to a
meeting of the shareholders of the Corporation
involving a contest for or on an item of business
relating to the election of directors shall not
constitute a majority of the Board of Directors
following such election.
(d) "Compensation Committee" means the Committee of the Board of
Directors of the Corporation from time to time appointed to
fix the
<PAGE> 3
- 3 -
remuneration of executives of the Corporation or, if such
Committee has not been appointed, means the Board of Directors
of the Corporation.
(e) "constructive dismissal" means, unless consented to by the
Executive in writing, any action by the Corporation which
constitutes constructive dismissal of the Executive,
including, without limiting the generality of the foregoing:
(i) any material reduction in the Executive's office,
titles, positions, duties, responsibilities, powers
or reporting relationships;
(ii) any reduction in the annual salary of the Executive;
(iii) a requirement to relocate to another province, state
or country; and
(iv) any reduction in the value of the Executive's
employee benefits plans and programmes, including,
without limiting the generality of the foregoing,
bonus arrangements.
(f) "confidential information" means information, processes,
know-how, data, trade secrets, techniques, knowledge and other
confidential information not generally known to the public
relating to or connected with the business or corporate
affairs and operations of the Corporation and its affiliates.
(g) "control" has the meaning ascribed to that term in the Canada
Business Corporations Act.
(h) "executive superannuation undertakings" refers, for purposes
of section 2.6(c) of this Agreement, to a commitment given by
the Corporation in recognition of the fact that the retirement
benefits under the registered pension plans of the Corporation
and its affiliates are subject to a maximum pension limitation
as fixed from time to time under the Income Tax Act (Canada)
and the rules and regulations promulgated by Revenue Canada,
Taxation, from time to time thereunder. To the extent that
this limitation applies with respect to the registered pension
plans of the Corporation or its affiliates for service prior
to January 1, 1996, the Corporation has undertaken to pay a
supplemental retirement allowance sufficient to provide the
Executive with an annual pension equal to the annual pension
to which the Executive would be entitled under the registered
pension plans of the Corporation and its affiliates if such
limitation did not apply to such plans. For service from
January 1, 1996 onwards, once the Revenue Canada contribution
limit has been reached,
<PAGE> 4
- 4 -
contributions of the same amount as required under the pension
plan will be paid to the Executive semi-monthly.
(i) "person" has the meaning ascribed to that term in the Canada
Business Corporations Act.
(j) "subsidiary" of a corporation means, at any time, a
corporation of which the corporation has control at that time,
whether directly or indirectly through one or more
subsidiaries.
2. EMPLOYMENT
2.1 Position, Duties and Responsibilities of Executive
The Executive shall have such responsibilities and powers as the Board
of Directors or the by-laws of the Corporation or the Executive's superiors may
from time to time prescribe. The Executive shall devote the whole of his time
to the Executive's duties hereunder and shall use his best efforts to promote
the interests of the Corporation. The executive shall, during the term of this
agreement:
(a) perform such managerial duties and responsibilities for the
Corporation as may be assigned to him by the Chief Executive
Officer and by the Board of Directors of the Corporation, and
at no additional remuneration, shall serve in such other
comparable positions with affiliates and associates of the
Corporation as the Board of Directors of the Corporation may
from time to time determine; and
(b) accept such office or offices to which he may be elected or
appointed by the Chief Executive Officer or by the Board of
Directors of the Corporation in addition to those of Senior
Vice-President, Exploration and International, provided that
the performance of the duties of such offices shall be
consistent with the scope of the duties assigned in accordance
with or as provided for in section 2.1(a) above.
2.2 Term of Agreement
The term of this Agreement shall commence on the date hereof, and
shall continue in effect to and including the earlier of:
(a) the date of voluntary retirement of the Executive in
accordance with the retirement policies established for senior
employees of the Corporation; or
<PAGE> 5
- 5 -
(b) the voluntary resignation of the Executive other than a
voluntary resignation pursuant to either section 2.6(b)(ii)
or section 2.6(b)(iii) hereof.
2.3 Termination of Agreement upon Disability of Executive
If at the end of any month the Executive is and has been for a period
of more than twelve (12) consecutive months unable to perform the duties
specified pursuant to this Agreement in the normal and regular manner due to
mental or physical disability, this Agreement may be terminated by the
Corporation on 30 days' notice. Notwithstanding anything contained in this
Section 2.3, the Executive shall be entitled to all benefits provided under the
disability and pension plans of the Corporation or its affiliates applicable to
the Executive at the date of this Agreement.
2.4 Termination of Agreement upon Death of Executive
If the Executive dies, this Agreement shall be terminated immediately
on the date of the Executive's death. Provided that the Executive is insurable
at reasonable premium rates, the Corporation shall cause to be obtained and
maintained during the term of this Agreement a life insurance policy naming
beneficiaries specified by the Executive, which life insurance policy shall
provide a lump sum payment of not less than two times the Executive's salary to
such beneficiaries in the event that the Executive dies during the term of this
Agreement. This insurance policy shall be in addition to and not in
substitution for any insurance policies provided to the Executive under the
Corporation's benefit plans and programmes.
2.5 Termination of Agreement by the Corporation for Cause
The Corporation may terminate this Agreement at any time without
notice in the event the Executive shall be convicted of a criminal act of
dishonesty resulting or intended to result directly or indirectly in gain or
personal enrichment of the Executive at the expense of the Corporation, or for
other sufficient cause pursuant to written notice setting forth particulars of
such cause.
<PAGE> 6
- 6 -
2.6 Severance Entitlement Upon Termination of Employment of the Executive
(a) The provisions of sub-section 2.6(c) shall not apply to, and
the Executive shall not be entitled to receive any severance
payments or other benefits as provided for in this Agreement
as a result of any circumstance where the termination of the
Executive's employment arises from the occurrence of any event
described in any of sections 2.2, 2.3, 2.4 or 2.5 hereof.
(b) The provisions of sub-section 2.6(c) shall, except as
specifically provided in sub-section 2.6(a) hereof, apply in
all circumstances where the Executive's employment with the
Corporation terminates, including, without limiting the
generality of the foregoing, any of the following
circumstances:
(i) where the Corporation terminates the employment of
the Executive for any reason other than for cause;
or,
(ii) where the Executive, by notice in writing to the
Corporation, terminates his employment with the
Corporation within ninety (90) days following
constructive dismissal of the Executive;
(iii) where the Executive, by notice in writing to the
Corporation, terminates his employment with the
Corporation within ninety (90) days following a
change of control of the Corporation as described in
section 1(c)(i).
(c) In the event of the termination of the Executive's employment
as provided in sub-section 2.6(b) hereof, the following
provisions shall apply:
(i) the Executive shall be entitled to receive and the
Corporation shall forthwith pay to the Executive, a
retiring allowance (hereinafter called the "Retiring
Allowance") in an undiscounted cash amount equal to
one (1) month's base salary multiplied by the number
of years of service of the Executive with the
Corporation subject to a minimum entitlement and
payment equal to twenty-four (24) months' base salary
and a maximum entitlement and payment equal to thirty
(30) months' base salary;
(ii) in addition, the Executive shall be entitled to
receive and the Corporation shall forthwith pay to
the Executive an undiscounted cash amount equal to
the value to the Executive of all those benefits
plans and programmes provided by the Corporation and
listed in Schedule "A" attached hereto for a period
of time equal to one (1)
<PAGE> 7
- 7 -
month for every year of service of the Executive with
the Corporation with a minimum entitlement and
payment equal to twenty-four (24) months of benefits
value and a maximum entitlement and payment equal to
thirty (30) months of benefits value. All amounts
payable under this sub-section 2(c)(ii) shall be
determined by a Fellow of the Canadian Institute of
Actuaries acceptable to the Corporation and the
Executive;
(iii) in addition, the Executive shall be entitled to
receive and the Corporation shall forthwith pay to
the Executive an undiscounted amount equal to the
product obtained by multiplying by two (2) the
Executive's target bonus under the Corporation's
Total Compensation Plan or such other similar plan
that may have replaced the Total Compensation Plan
for the year in which his employment is terminated;
(iv) the Executive shall also be entitled to receive on
termination the normal and any supplementary pension
benefits in effect on the date of this Agreement
according to the terms of the Corporation's
registered pension plans and executive superannuation
undertakings, or according to similar provisions of
any successor plan, of which the Executive is a
member at the date of termination of the Executive's
employment (collectively hereinafter called the
"Plans"). The Executive's total pension entitlement
shall be determined on the basis that the Executive
had two (2) additional years of credited service and
age under the Plans in which he is participating at
his date of termination of employment over and above
his actual age or years of credited service. In
addition, such additional years of credited service
shall be included for the purpose of determining
final or best average earnings assuming that the
Executive's monthly base salary at the date of
termination of employment would have continued
unchanged during the period of additional credited
service. Any portion of the total pension entitlement
of the Executive not eligible to be paid under the
provisions of the registered pension plans of the
Corporation shall be payable as supplementary
payments in accordance with the
<PAGE> 8
- 8 -
executive superannuation undertakings. If the
Executive has not vested in any or all of the Plans
on the date of termination of his employment, he
shall be or shall be deemed to be vested in any of
the Plans in which he is not vested on the date of
termination of his employment;
(v) all options for the purchase of shares of the
Corporation which have been granted by the
Corporation to the Executive prior to January 31,
1995 under the Executive Stock Option Plan (1990) or
(1994) but not yet vested shall immediately vest on
the date of termination of the Executive and the
Executive shall be entitled to exercise all such
options for the purchase of shares of the Corporation
for a period of five (5) years from the date of
termination of the Executive whether the options
vested on or before the date of termination of the
Executive;
(vi) all options for the purchase of shares of the
Corporation granted by the Corporation to the
Executive since January 1, 1995 under the Incentive
Stock Option Plan (1994) or otherwise (including,
without limitation, those options granted to the
Executive on January 31, 1995) to the date of
termination of the Executive but not yet vested shall
immediately vest on the date of termination of the
Executive and the Executive shall be entitled to
exercise any or all such options for the purchase of
shares of the Corporation for a period of one (1)
year from the date of termination of the Executive
whether such options vested on or before the date of
termination of the Executive;
(vii) the Corporation and the Executive agree that the
provisions of section 2.6(c) are fair and reasonable
and that the amounts payable by the Corporation to
the Executive pursuant to section 2.6(c) are
reasonable estimates of the damages which will be
suffered by the Executive in the event of the
termination of his employment with the Corporation in
any and all of the circumstances set out in section
2.6(b) and shall not be construed as a penalty; and,
(viii) all amounts paid by the Corporation to the Executive
pursuant to section 2.6(c) shall satisfy and forever
discharge all liabilities, claims
<PAGE> 9
- 9 -
or actions that the Executive may or shall have
against the Corporation arising from the termination
of employment of the Executive whether at common law
or under statute or otherwise and such payment shall
be made against delivery by the Executive to the
Corporation of a release in form and terms reasonably
satisfactory to the Corporation and the Executive.
2.7 Executive Superannuation Funding
The Corporation shall maintain in place and continue to fund the
obligations of the Corporation to the Executive under the executive
superannuation undertakings for service prior to January 1, 1996 referred to in
section 2.6(c)(iv) substantially in accordance with the terms of the Retirement
Compensation Arrangement Trust Agreement made as of January 25, 1995 between
the Corporation and The Canada Trust Company.
2.8 Directors' and Officers' Liability Insurance
Unless otherwise agreed between the parties hereto, Gulf shall
purchase and maintain, or cause to be purchased and maintained, while the
Executive remains an officer of Gulf and for a period of 10 years thereafter,
directors' and officers' errors and omissions insurance for the benefit of the
Executive on terms no less favourable in terms of coverage, and amounts, to the
extent available on reasonable commercial terms, than such insurance maintained
in effect by the Corporation on the date hereof.
3. INTEGRATION
Except for the Executive's rights to continued participation in the
Corporation's employee benefit plans, including, without limitation, the
Corporation's or its affiliates' stock option plans and savings plans and
conditions of employment generally available to other Executives of the
Corporation or its affiliates, this Agreement contains the entire agreement
between the parties and supersedes all prior oral and written agreements,
understandings, commitments and practices between the parties, including all
prior employment agreements, whether or not fully performed by the Executive
before the date of this Agreement. No amendments to this Agreement may be made
except in writing signed by both parties.
<PAGE> 10
- 10 -
4. CONFIDENTIAL INFORMATION
In the event of termination of employment of the Executive, the
Executive agrees to keep confidential all information of a confidential or
proprietary nature concerning the Corporation, its subsidiaries and affiliates
and their respective operations, assets, finances, business and affairs and
further agrees not to use such information for personal advantage or the
advantage of an employer, provided that nothing herein shall prevent disclosure
of information which is publicly available or which is required to be disclosed
under appropriate statues, rules of law or legal process.
5. SEVERABILITY
The invalidity and unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provisions of this
Agreement, which shall remain in full force and effect.
6. BENEFIT OF AGREEMENT
This Agreement shall enure to and be binding upon the Corporation and
its successors and the Executive and his legal representatives but otherwise it
is not assignable. It shall be a condition of any transfer by the Corporation
of the Executive to any affiliate or associate of the Corporation that, on
request of the Executive, such affiliate or associate agree to observe all the
covenants of and be bound by all obligations imposed on the Corporation under
this Agreement. The failure to do so shall be deemed to constitute a
constructive dismissal of the Executive for the purposes of section 2.6.
<PAGE> 11
- 11 -
7. CHOICE OF LAW
This Agreement shall be governed and interpreted in accordance with
the laws of the Province of Alberta, which Province shall be the sole and
proper forum with respect to any suit brought with respect to this Agreement.
8. COPY OF AGREEMENT
The Executive hereby acknowledges having received a copy of this
Agreement duly signed by the Corporation.
IN WITNESS WHEREOF the parties hereto have duly executed and delivered
this Agreement.
GULF CANADA RESOURCES LIMITED
/s/ Craig Glick
/s/ Andrew Wiswell
/s/ Lynne Walker /s/ Richard Auchinleck
- ------------------------------ RICHARD H. AUCHINLECK
Witness
<PAGE> 1
EXHIBIT 10.3
EXECUTIVE EMPLOYMENT CONTRACT
THIS AGREEMENT is dated as of February 7, 1996.
BETWEEN:
GULF CANADA RESOURCES LIMITED
(hereinafter called the "Corporation")
OF THE FIRST PART
- and -
CRAIG S. GLICK
(hereinafter called the "Executive")
OF THE SECOND PART
WHEREAS
(a) The Executive is an officer of the Corporation and is
considered by the Board of Directors of the Corporation to be
a valued employee of the Corporation and has acquired
outstanding and special skills and abilities and an extensive
background in and knowledge of the Corporation's business and
the industry in which it is engaged;
(b) The Board of Directors recognizes that it is essential, in the
best interests of the Corporation, that the Corporation retain
the continuing dedication of the Executive to his office and
employment and that the past service of the Executive to the
Corporation requires that the Executive receive fair
treatment, particularly in the event of an actual or
constructive termination of his employment with the
Corporation;
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the
mutual covenants herein contained and in consideration of the Executive
remaining in office and in the employment of the Corporation at the present
time and throughout the period of material change of ownership or organization
of the Corporation, it is hereby agreed as follows:
<PAGE> 2
-2-
1. DEFINITIONS
In this Agreement:
(a) "affiliate" means:
(i) one body corporate is an affiliate of another body
corporate if one of them is the subsidiary of the
other or both are subsidiaries of the same body
corporate or each of them is under the control of the
same person; and
(ii) two bodies corporate that are an affiliate of the
same body corporate at the same time are affiliates
of each other.
(b) "associate" has the meaning ascribed to that term in the
Canada Business Corporations Act.
(c) "change of control" means or shall be deemed to have occurred
if and when:
(i) the acquisition, by whatever means (including without
limitation, amalgamation, consolidation, liquidation,
arrangement or merger), by a person (or two or more
persons who in such acquisition have acted jointly or
in concert or intend to exercise jointly or in
concert any voting rights attaching to the securities
acquired), directly or indirectly, of the beneficial
ownership of such number of voting securities or
rights to voting securities of the Corporation, which
together with such person's then owned voting
securities and rights to voting securities, if any,
represent (assuming the full exercise of such rights
to voting securities) more than 20% of the combined
voting power of the Corporation's then outstanding
voting securities, together with the voting
securities acquired and such person's previously
owned rights to voting securities; or
(ii) individuals who were members of the Board of
Directors of the Corporation immediately prior to a
meeting of the shareholders of the Corporation
involving a contest for or on an item of business
relating to the election of directors shall not
constitute a majority of the Board of Directors
following such election.
(d) "Compensation Committee" means the Committee of the Board of
Directors of the Corporation from time to time appointed to
fix
<PAGE> 3
-3-
the remuneration of executives of the Corporation or, if
such Committee has not been appointed, means the Board of
Directors of the Corporation.
(e) "constructive dismissal" means, unless consented to by the
Executive in writing, any action by the Corporation which
constitutes constructive dismissal of the Executive,
including, without limiting the generality of the foregoing:
(i) any material reduction in the Executive's office,
titles, positions, duties, responsibilities, powers
or reporting relationships;
(ii) any reduction in the annual salary of the Executive;
(iii) a requirement to relocate to another province, state
or country; and
(iv) any reduction in the value of the Executive's
employee benefits plans and programmes, including,
without limiting the generality of the foregoing,
bonus arrangements.
(f) "confidential information" means information, processes,
know-how, data, trade secrets, techniques, knowledge and other
confidential information not generally known to the public
relating to or connected with the business or corporate
affairs and operations of the Corporation and its affiliates.
(g) "control" has the meaning ascribed to that term in the Canada
Business Corporations Act.
(h) "executive superannuation undertakings" refers, for purposes
of section 2.6(c) of this Agreement, to a commitment given by
the Corporation in recognition of the fact that the retirement
benefits under the registered pension plans of the Corporation
and its affiliates are subject to a maximum pension limitation
as fixed from time to time under the Income Tax Act (Canada)
and the rules and regulations promulgated by Revenue Canada,
Taxation, from time to time thereunder. To the extent that
this limitation applies with respect to the registered pension
plans of the Corporation or its affiliates for service prior
to January 1, 1996, the Corporation has undertaken to pay a
supplemental retirement allowance sufficient to provide the
Executive with an annual pension equal to the annual pension
to which the Executive would be entitled under the registered
pension plans of the Corporation and its affiliates if such
limitation did not apply to such plans. For service from
January 1, 1996 onwards, once the Revenue Canada contribution
limit has been reached,
<PAGE> 4
- 4 -
contributions of the same amount as required under the pension
plan will be paid to the Executive semi-monthly.
(i) "person" has the meaning ascribed to that term in the Canada
Business Corporations Act.
(j) "subsidiary" of a corporation means, at any time, a
corporation of which the corporation has control at that time,
whether directly or indirectly through one or more
subisdiaries.
2. EMPLOYMENT
2.1 Position, Duties and Responsibilities of Executive
The Executive shall have such responsibilities and powers as the Board
of Directors or the by-laws of the Corporation or the Executive's superiors may
from time to time prescribe. The Executive shall devote the whole of his time
to the Executive's duties hereunder and shall use his best efforts to promote
the interests of the Corporation. The executive shall, during the term of this
agreement:
(a) perform such managerial duties and responsibilities for the
Corporation as may be assigned to him by the Chief Executive
Officer and by the Board of Directors of the Corporation, and
at no additional remuneration, shall serve in such other
comparable positions with affiliates and associates of the
Corporation as the Board of Directors of the Corporation may
from time to time determine; and
(b) accept such office or offices to which he may be elected or
appointed by the Chief Executive Officer or by the Board of
Directors of the Corporation in addition to those of Senior
Vice-President, Law and Corporate Services, provided that the
performance of the duties of such offices shall be consistent
with the scope of the duties assigned in accordance with or as
provided for in section 2.1(a) above.
2.2 Term of Agreement
The term of this Agreement shall commence on the date hereof, and
shall continue in effect to and including the earlier of:
(a) the date of voluntary retirement of the Executive in
accordance with the retirement policies established for senior
employees of the Corporation; or
<PAGE> 5
- 5 -
(b) the voluntary resignation of the Executive other than a
voluntary resignation pursuant to either section 2.6(b)(ii)
or section 2.6(b)(iii) hereof.
2.3 Termination of Agreement upon Disability of Executive
If at the end of any month the Executive is and has been for a period
of more than twelve (12) consecutive months unable to perform the duties
specified pursuant to this Agreement in the normal and regular manner due to
mental or physical disability, this Agreement may be terminated by the
Corporation on 30 days' notice. Notwithstanding anything contained in this
Section 2.3, the Executive shall be entitled to all benefits provided under the
disability and pension plans of the Corporation or its affiliates applicable to
the Executive at the date of this Agreement.
2.4 Termination of Agreement upon Death of Executive
If the Executive dies, this Agreement shall be terminated immediately
on the date of the Executive's death. Provided that the Executive is insurable
at reasonable premium rates, the Corporation shall cause to be obtained and
maintained during the term of this Agreement a life insurance policy naming
beneficiaries specified by the Executive, which life insurance policy shall
provide a lump sum payment of not less than two times the Executive's salary to
such beneficiaries in the event that the Executive dies during the term of this
Agreement. This insurance policy shall be in addition to and not in
substitution for any insurance policies provided to the Executive under the
Corporation's benefit plans and programmes.
2.5 Termination of Agreement by the Corporation for Cause
The Corporation may terminate this Agreement at any time without
notice in the event the Executive shall be convicted of a criminal act of
dishonesty resulting or intended to result directly or indirectly in gain or
personal enrichment of the Executive at the expense of the Corporation, or for
other sufficient cause pursuant to written notice setting forth particulars of
such cause.
<PAGE> 6
- 6 -
2.6 Severance Entitlement Upon Termination of Employment of the Executive
(a) The provisions of sub-section 2.6(c) shall not apply to, and
the Executive shall not be entitled to receive any severance
payments or other benefits as provided for in this Agreement
as a result of any circumstance where the termination of the
Executive's employment arises from the occurrence of any event
described in any of sections 2.2, 2.3, 2.4 or 2.5 hereof.
(b) The provisions of sub-section 2.6(c) shall, except as
specifically provided in sub-section 2.6(a) hereof, apply in
all circumstances where the Executive's employment with the
Corporation terminates, including, without limiting the
generality of the foregoing, any of the following
circumstances:
(i) where the Corporation terminates the employment of
the Executive for any reason other than for cause;
or,
(ii) where the Executive, by notice in writing to the
Corporation, terminates his employment with the
Corporation within ninety (90) days following
constructive dismissal of the Executive;
(iii) where the Executive, by notice in writing to the
Corporation, terminates his employment with the
Corporation within ninety (90) days following a
change of control of the Corporation as described in
section 1(c)(i).
(c) In the event of the termination of the Executive's employment
as provided in sub-section 2.6(b) hereof, the following
provisions shall apply:
(i) the Executive shall be entitled to receive and the
Corporation shall forthwith pay to the Executive, a
retiring allowance (hereinafter called the "Retiring
Allowance") in an undiscounted cash amount equal to
one (1) month's base salary multiplied by the number
of years of service of the Executive with the
Corporation subject to a minimum entitlement and
payment equal to twenty-four (24) months' base salary
and a maximum entitlement and payment equal to thirty
(30) months' base salary;
(ii) in addition, the Executive shall be entitled to
receive and the Corporation shall forthwith pay to
the Executive an undiscounted cash amount equal to
the value to the Executive of all those benefits
plans and programmes provided by the Corporation and
listed in Schedule "A" attached hereto for a period
of time equal to one (1)
<PAGE> 7
- 7 -
month for every year of service of the Executive with
the Corporation with a minimum entitlement and
payment equal to twenty-four (24) months of benefits
value and a maximum entitlement and payment equal to
thirty (30) months of benefits value. All amounts
payable under this sub-section 2(c)(ii) shall be
determined by a Fellow of the Canadian Institute of
Actuaries acceptable to the Corporation and the
Executive;
(iii) in addition, the Executive shall be entitled to
receive and the Corporation shall forthwith pay to
the Executive an undiscounted amount equal to the
product obtained by multiplying by two (2) the
Executive's target bonus under the Corporation's
Total Compensation Plan or such other similar plan
that may have replaced the Total Compensation Plan
for the year in which his employment is terminated;
(iv) the Executive shall also be entitled to receive on
termination the normal and any supplementary pension
benefits in effect on the date of this Agreement
according to the terms of the Corporation's
registered pension plans and executive superannuation
undertakings, or according to similar provisions of
any successor plan, of which the Executive is a
member at the date of termination of the Executive's
employment (collectively hereinafter called the
"Plans"). The Executive's total pension entitlement
shall be determined on the basis that the Executive
had two (2) additional years of credited service and
age under the Plans in which he is participating at
his date of termination of employment over and above
his actual age or years of credited service. In
addition, such additional years of credited service
shall be included for the purpose of determining
final or best average earnings assuming that the
Executive's monthly base salary at the date of
termination of employment would have continued
unchanged during the period of additional credited
service. Any portion of the total pension entitlement
of the Executive not eligible to be paid under the
provisions of the registered pension plans of the
Corporation shall be payable as supplementary
payments in accordance with
<PAGE> 8
- 8 -
the executive superannuation undertakings. If the
Executive has not vested in any or all of the Plans
on the date of termination of his employment, he
shall be or shall be deemed to be vested in any of
the Plans in which he is not vested on the date of
termination of his employment;
(v) all options for the purchase of shares of the
Corporation which have been granted by the
Corporation to the Executive prior to January 31,
1995 under the Executive Stock Option Plan (1990) or
(1994) but not yet vested shall immediately vest on
the date of termination of the Executive and the
Executive shall be entitled to exercise all such
options for the purchase of shares of the Corporation
for a period of five (5) years from the date of
termination of the Executive whether the options
vested on or before the date of termination of the
Executive;
(vi) all options for the purchase of shares of the
Corporation granted by the Corporation to the
Executive since January 1, 1995 under the Incentive
Stock Option Plan (1994) or otherwise (including,
without limitation, those options granted to the
Executive on January 31, 1995) to the date of
termination of the Executive but not yet vested shall
immediately vest on the date of termination of the
Executive and the Executive shall be entitled to
exercise any or all such options for the purchase of
shares of the Corporation for a period of one (1)
year from the date of termination of the Executive
whether such options vested on or before the date of
termination of the Executive;
(vii) the Corporation and the Executive agree that the
provisions of section 2.6(c) are fair and reasonable
and that the amounts payable by the Corporation to
the Executive pursuant to section 2.6(c) are
reasonable estimates of the damages which will be
suffered by the Executive in the event of the
termination of his employment with the Corporation in
any and all of the circumstances set out in section
2.6(b) and shall not be construed as a penalty; and,
(viii) all amounts paid by the Corporation to the Executive
pursuant to section 2.6(c) shall satisfy and forever
discharge all liabilities, claims
<PAGE> 9
- 9 -
or actions that the Executive may or shall have
against the Corporation arising from the termination
of employment of the Executive whether at common law
or under statute or otherwise and such payment shall
be made against delivery by the Executive to the
Corporation of a release in form and terms reasonably
satisfactory to the Corporation and the Executive.
2.7 Executive Superannuation Funding
The Corporation shall maintain in place and continue to fund the
obligations of the Corporation to the Executive under the executive
superannuation undertakings for service prior to January 1, 1996 referred to in
section 2.6(c)(iv) substantially in accordance with the terms of the Retirement
Compensation Arrangement Trust Agreement made as of January 25, 1995 between
the Corporation and The Canada Trust Company.
2.8 Directors' and Officers' Liability Insurance
Unless otherwise agreed between the parties hereto, Gulf shall
purchase and maintain, or cause to be purchased and maintained, while the
Executive remains an officer of Gulf and for a period of 10 years thereafter,
directors' and officers' errors and omissions insurance for the benefit of the
Executive on terms no less favourable in terms of coverage, and amounts, to the
extent available on reasonable commercial terms, than such insurance maintained
in effect by the Corporation on the date hereof.
3. INTEGRATION
Except for the Executive's rights to continued participation in the
Corporation's employee benefit plans, including, without limitation, the
Corporation's or its affiliates' stock option plans and savings plans and
conditions of employment generally available to other Executives of the
Corporation or its affiliates, this Agreement contains the entire agreement
between the parties and supersedes all prior oral and written agreements,
understandings, commitments and practices between the parties, including all
prior employment agreements, whether or not fully performed by the Executive
before the date of this Agreement. No amendments to this Agreement may be made
except in writing signed by both parties.
<PAGE> 10
- 10 -
4. CONFIDENTIAL INFORMATION
In the event of termination of employment of the Executive, the
Executive agrees to keep confidential all information of a confidential or
proprietary nature concerning the Corporation, its subsidiaries and affiliates
and their respective operations, assets, finances, business and affairs and
further agrees not to use such information for personal advantage or the
advantage of an employer, provided that nothing herein shall prevent disclosure
of information which is publicly available or which is required to be disclosed
under appropriate statues, rules of law or legal process.
5. SEVERABILITY
The invalidity and unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provisions of this
Agreement, which shall remain in full force and effect.
6. BENEFIT OF AGREEMENT
This Agreement shall enure to and be binding upon the Corporation and
its successors and the Executive and his legal representatives but otherwise it
is not assignable. It shall be a condition of any transfer by the Corporation
of the Executive to any affiliate or associate of the Corporation that, on
request of the Executive, such affiliate or associate agree to observe all the
covenants of and be bound by all obligations imposed on the Corporation under
this Agreement. The failure to do so shall be deemed to constitute a
constructive dismissal of the Executive for the purposes of section 2.6.
<PAGE> 11
- 11 -
7. CHOICE OF LAW
This Agreement shall be governed and interpreted in accordance with
the laws of the Province of Alberta, which Province shall be the sole and
proper forum with respect to any suit brought with respect to this Agreement.
8. COPY OF AGREEMENT
The Executive hereby acknowledges having received a copy of this
Agreement duly signed by the Corporation.
IN WITNESS WHEREOF the parties hereto have duly executed and delivered
this Agreement.
GULF CANADA RESOURCES LIMITED
/s/ Andrew Wiswell
/s/ Richard Auchinleck
/s/ Lynne Walker /s/ Craig Glick
- ------------------------------ CRAIG S. GLICK
Witness
<PAGE> 1
EXHIBIT 10.4
EXECUTIVE EMPLOYMENT CONTRACT
THIS AGREEMENT is dated as of February 7, 1996.
BETWEEN:
GULF CANADA RESOURCES LIMITED
(hereinafter called the "Corporation")
OF THE FIRST PART
- and -
DENNIS G. FEUCHUK
(hereinafter called the "Executive")
OF THE SECOND PART
WHEREAS
(a) The Executive is an officer of the Corporation and is
considered by the Board of Directors of the Corporation to be
a valued employee of the Corporation and has acquired
outstanding and special skills and abilities and an extensive
background in and knowledge of the Corporation's business and
the industry in which it is engaged;
(b) The Board of Directors recognizes that it is essential, in the
best interests of the Corporation, that the Corporation retain
the continuing dedication of the Executive to his office and
employment and that the past service of the Executive to the
Corporation requires that the Executive receive fair
treatment, particularly in the event of an actual or
constructive termination of his employment with the
Corporation;
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the
mutual covenants herein contained and in consideration of the Executive
remaining in office and in the employment of the Corporation at the present
time and throughout the period of material change of ownership or organization
of the Corporation, it is hereby agreed as follows:
<PAGE> 2
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1. DEFINITIONS
In this Agreement:
(a) "affiliate" means:
(i) one body corporate is an affiliate of another body
corporate if one of them is the subsidiary of the
other or both are subsidiaries of the same body
corporate or each of them is under the control of the
same person; and
(ii) two bodies corporate that are an affiliate of the
same body corporate at the same time are affiliates
of each other.
(b) "associate" has the meaning ascribed to that term in the
Canada Business Corporations Act.
(c) "change of control" means or shall be deemed to have occurred
if and when:
(i) the acquisition, by whatever means (including without
limitation, amalgamation, consolidation, liquidation,
arrangement or merger), by a person (or two or more
persons who in such acquisition have acted jointly or
in concert or intend to exercise jointly or in
concert any voting rights attaching to the securities
acquired), directly or indirectly, of the beneficial
ownership of such number of voting securities or
rights to voting securities of the Corporation, which
together with such person's then owned voting
securities and rights to voting securities, if any,
represent (assuming the full exercise of such rights
to voting securities) more than 20% of the combined
voting power of the Corporation's then outstanding
voting securities, together with the voting
securities acquired and such person's previously
owned rights to voting securities; or
(ii) individuals who were members of the Board of
Directors of the Corporation immediately prior to a
meeting of the shareholders of the Corporation
involving a contest for or on an item of business
relating to the election of directors shall not
constitute a majority of the Board of Directors
following such election.
(d) "Compensation Committee" means the Committee of the Board of
Directors of the Corporation from time to time appointed to
fix the
<PAGE> 3
- 3 -
remuneration of executives of the Corporation or, if such
Committee has not been appointed, means the Board of Directors
of the Corporation.
(e) "constructive dismissal" means, unless consented to by the
Executive in writing, any action by the Corporation which
constitutes constructive dismissal of the Executive,
including, without limiting the generality of the foregoing:
(i) any material reduction in the Executive's office,
titles, positions, duties, responsibilities, powers
or reporting relationships;
(ii) any reduction in the annual salary of the Executive;
(iii) a requirement to relocate to another province, state
or country; and
(iv) any reduction in the value of the Executive's
employee benefits plans and programmes, including,
without limiting the generality of the foregoing,
bonus arrangements.
(f) "confidential information" means information, processes,
know-how, data, trade secrets, techniques, knowledge and other
confidential information not generally known to the public
relating to or connected with the business or corporate
affairs and operations of the Corporation and its affiliates.
(g) "control" has the meaning ascribed to that term in the Canada
Business Corporations Act.
(h) "executive superannuation undertakings" refers, for purposes
of section 2.6(c) of this Agreement, to a commitment given by
the Corporation in recognition of the fact that the retirement
benefits under the registered pension plans of the Corporation
and its affiliates are subject to a maximum pension limitation
as fixed from time to time under the Income Tax Act (Canada)
and the rules and regulations promulgated by Revenue Canada,
Taxation, from time to time thereunder. To the extent that
this limitation applies with respect to the registered pension
plans of the Corporation or its affiliates for service prior
to January 1, 1996, the Corporation has undertaken to pay a
supplemental retirement allowance sufficient to provide the
Executive with an annual pension equal to the annual pension
to which the Executive would be entitled under the registered
pension plans of the Corporation and its affiliates if such
limitation did not apply to such plans. For service from
January 1, 1996 onwards, once the Revenue Canada contribution
limit has been reached,
<PAGE> 4
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contributions of the same amount as required under the pension
plan will be paid to the Executive semi-monthly.
(i) "person" has the meaning ascribed to that term in the Canada
Business Corporations Act.
(j) "subsidiary" of a corporation means, at any time, a
corporation of which the corporation has control at that time,
whether directly or indirectly through one or more
subisdiaries.
2. EMPLOYMENT
2.1 Position, Duties and Responsibilities of Executive
The Executive shall have such responsibilities and powers as the Board
of Directors or the by-laws of the Corporation or the Executive's superiors may
from time to time prescribe. The Executive shall devote the whole of his time
to the Executive's duties hereunder and shall use his best efforts to promote
the interests of the Corporation. The executive shall, during the term of this
agreement:
(a) perform such managerial duties and responsibilities for the
Corporation as may be assigned to him by the Chief Executive
Officer and by the Board of Directors of the Corporation, and
at no additional remuneration, shall serve in such other
comparable positions with affiliates and associates of the
Corporation as the Board of Directors of the Corporation may
from time to time determine; and
(b) accept such office or offices to which he may be elected or
appointed by the Chief Executive Officer or by the Board of
Directors of the Corporation in addition to those of
Vice-President and Controller, provided that the performance
of the duties of such offices shall be consistent with the
scope of the duties assigned in accordance with or as provided
for in section 2.1(a) above.
2.2 Term of Agreement
The term of this Agreement shall commence on the date hereof, and
shall continue in effect to and including the earlier of:
(a) the date of voluntary retirement of the Executive in
accordance with the retirement policies established for senior
employees of the Corporation; or
<PAGE> 5
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(b) the voluntary resignation of the Executive other than a
voluntary resignation pursuant to either section 2.6(b)(ii)
or section 2.6(b)(iii) hereof.
2.3 Termination of Agreement upon Disability of Executive
If at the end of any month the Executive is and has been for a period
of more than twelve (12) consecutive months unable to perform the duties
specified pursuant to this Agreement in the normal and regular manner due to
mental or physical disability, this Agreement may be terminated by the
Corporation on 30 days' notice. Notwithstanding anything contained in this
Section 2.3, the Executive shall be entitled to all benefits provided under the
disability and pension plans of the Corporation or its affiliates applicable to
the Executive at the date of this Agreement.
2.4 Termination of Agreement upon Death of Executive
If the Executive dies, this Agreement shall be terminated immediately
on the date of the Executive's death. Provided that the Executive is insurable
at reasonable premium rates, the Corporation shall cause to be obtained and
maintained during the term of this Agreement a life insurance policy naming
beneficiaries specified by the Executive, which life insurance policy shall
provide a lump sum payment of not less than two times the Executive's salary to
such beneficiaries in the event that the Executive dies during the term of this
Agreement. This insurance policy shall be in addition to and not in
substitution for any insurance policies provided to the Executive under the
Corporation's benefit plans and programmes.
2.5 Termination of Agreement by the Corporation for Cause
The Corporation may terminate this Agreement at any time without
notice in the event the Executive shall be convicted of a criminal act of
dishonesty resulting or intended to result directly or indirectly in gain or
personal enrichment of the Executive at the expense of the Corporation, or for
other sufficient cause pursuant to written notice setting forth particulars of
such cause.
<PAGE> 6
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2.6 Severance Entitlement Upon Termination of Employment of the Executive
(a) The provisions of sub-section 2.6(c) shall not apply to, and
the Executive shall not be entitled to receive any severance
payments or other benefits as provided for in this Agreement
as a result of any circumstance where the termination of the
Executive's employment arises from the occurrence of any event
described in any of sections 2.2, 2.3, 2.4 or 2.5 hereof.
(b) The provisions of sub-section 2.6(c) shall, except as
specifically provided in sub-section 2.6(a) hereof, apply in
all circumstances where the Executive's employment with the
Corporation terminates, including, without limiting the
generality of the foregoing, any of the following
circumstances:
(i) where the Corporation terminates the employment of
the Executive for any reason other than for cause;
or,
(ii) where the Executive, by notice in writing to the
Corporation, terminates his employment with the
Corporation within ninety (90) days following
constructive dismissal of the Executive;
(iii) where the Executive, by notice in writing to the
Corporation, terminates his employment with the
Corporation within ninety (90) days following a
change of control of the Corporation as described in
section 1(c)(i).
(c) In the event of the termination of the Executive's employment
as provided in sub-section 2.6(b) hereof, the following
provisions shall apply:
(i) the Executive shall be entitled to receive and the
Corporation shall forthwith pay to the Executive, a
retiring allowance (hereinafter called the "Retiring
Allowance") in an undiscounted cash amount equal to
one (1) month's base salary multiplied by the number
of years of service of the Executive with the
Corporation subject to a minimum entitlement and
payment equal to twenty-four (24) months' base salary
and a maximum entitlement and payment equal to thirty
(30) months' base salary;
(ii) in addition, the Executive shall be entitled to
receive and the Corporation shall forthwith pay to
the Executive an undiscounted cash amount equal to
the value to the Executive of all those benefits
plans and programmes provided by the Corporation and
listed in Schedule "A" attached hereto for a period
of time equal to one (1)
<PAGE> 7
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month for every year of service of the Executive with
the Corporation with a minimum entitlement and
payment equal to twenty-four (24) months of benefits
value and a maximum entitlement and payment equal to
thirty (30) months of benefits value. All amounts
payable under this sub-section 2(c)(ii) shall be
determined by a Fellow of the Canadian Institute of
Actuaries acceptable to the Corporation and the
Executive;
(iii) in addition, the Executive shall be entitled to
receive and the Corporation shall forthwith pay to
the Executive an undiscounted amount equal to the
product obtained by multiplying by two (2) the
Executive's target bonus under the Corporation's
Total Compensation Plan or such other similar plan
that may have replaced the Total Compensation Plan
for the year in which his employment is terminated;
(iv) the Executive shall also be entitled to receive on
termination the normal and any supplementary pension
benefits in effect on the date of this Agreement
according to the terms of the Corporation's
registered pension plans and executive superannuation
undertakings, or according to similar provisions of
any successor plan, of which the Executive is a
member at the date of termination of the Executive's
employment (collectively hereinafter called the
"Plans"). The Executive's total pension entitlement
shall be determined on the basis that the Executive
had two (2) additional years of credited service and
age under the Plans in which he is participating at
his date of termination of employment over and above
his actual age or years of credited service. In
addition, such additional years of credited service
shall be included for the purpose of determining
final or best average earnings assuming that the
Executive's monthly base salary at the date of
termination of employment would have continued
unchanged during the period of additional credited
service. Any portion of the total pension entitlement
of the Executive not eligible to be paid under the
provisions of the registered pension plans of the
Corporation shall be payable as supplementary
payments in accordance with the
<PAGE> 8
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executive superannuation undertakings. If the
Executive has not vested in any or all of the Plans
on the date of termination of his employment, he
shall be or shall be deemed to be vested in any of
the Plans in which he is not vested on the date of
termination of his employment;
(v) all options for the purchase of shares of the
Corporation which have been granted by the
Corporation to the Executive prior to January 31,
1995 under the Executive Stock Option Plan (1990) or
(1994) but not yet vested shall immediately vest on
the date of termination of the Executive and the
Executive shall be entitled to exercise all such
options for the purchase of shares of the Corporation
for a period of five (5) years from the date of
termination of the Executive whether the options
vested on or before the date of termination of the
Executive;
(vi) all options for the purchase of shares of the
Corporation granted by the Corporation to the
Executive since January 1, 1995 under the Incentive
Stock Option Plan (1994) or otherwise (including,
without limitation, those options granted to the
Executive on January 31, 1995) to the date of
termination of the Executive but not yet vested shall
immediately vest on the date of termination of the
Executive and the Executive shall be entitled to
exercise any or all such options for the purchase of
shares of the Corporation for a period of one (1)
year from the date of termination of the Executive
whether such options vested on or before the date of
termination of the Executive;
(vii) the Corporation and the Executive agree that the
provisions of section 2.6(c) are fair and reasonable
and that the amounts payable by the Corporation to
the Executive pursuant to section 2.6(c) are
reasonable estimates of the damages which will be
suffered by the Executive in the event of the
termination of his employment with the Corporation in
any and all of the circumstances set out in section
2.6(b) and shall not be construed as a penalty; and,
(viii) all amounts paid by the Corporation to the Executive
pursuant to section 2.6(c) shall satisfy and forever
discharge all liabilities, claims
<PAGE> 9
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or actions that the Executive may or shall have
against the Corporation arising from the termination
of employment of the Executive whether at common law
or under statute or otherwise and such payment shall
be made against delivery by the Executive to the
Corporation of a release in form and terms reasonably
satisfactory to the Corporation and the Executive.
2.7 Executive Superannuation Funding
The Corporation shall maintain in place and continue to fund the
obligations of the Corporation to the Executive under the executive
superannuation undertakings for service prior to January 1, 1996 referred to in
section 2.6(c)(iv) substantially in accordance with the terms of the Retirement
Compensation Arrangement Trust Agreement made as of January 25, 1995 between
the Corporation and The Canada Trust Company.
2.8 Directors' and Officers' Liability Insurance
Unless otherwise agreed between the parties hereto, Gulf shall
purchase and maintain, or cause to be purchased and maintained, while the
Executive remains an officer of Gulf and for a period of 10 years thereafter,
directors' and officers' errors and omissions insurance for the benefit of the
Executive on terms no less favourable in terms of coverage, and amounts, to the
extent available on reasonable commercial terms, than such insurance maintained
in effect by the Corporation on the date hereof.
3. INTEGRATION
Except for the Executive's rights to continued participation in the
Corporation's employee benefit plans, including, without limitation, the
Corporation's or its affiliates' stock option plans and savings plans and
conditions of employment generally available to other Executives of the
Corporation or its affiliates, this Agreement contains the entire agreement
between the parties and supersedes all prior oral and written agreements,
understandings, commitments and practices between the parties, including all
prior employment agreements, whether or not fully performed by the Executive
before the date of this Agreement. No amendments to this Agreement may be made
except in writing signed by both parties.
<PAGE> 10
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4. CONFIDENTIAL INFORMATION
In the event of termination of employment of the Executive, the
Executive agrees to keep confidential all information of a confidential or
proprietary nature concerning the Corporation, its subsidiaries and affiliates
and their respective operations, assets, finances, business and affairs and
further agrees not to use such information for personal advantage or the
advantage of an employer, provided that nothing herein shall prevent disclosure
of information which is publicly available or which is required to be disclosed
under appropriate statues, rules of law or legal process.
5. SEVERABILITY
The invalidity and unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provisions of this
Agreement, which shall remain in full force and effect.
6. BENEFIT OF AGREEMENT
This Agreement shall enure to and be binding upon the Corporation and
its successors and the Executive and his legal representatives but otherwise it
is not assignable. It shall be a condition of any transfer by the Corporation
of the Executive to any affiliate or associate of the Corporation that, on
request of the Executive, such affiliate or associate agree to observe all the
covenants of and be bound by all obligations imposed on the Corporation under
this Agreement. The failure to do so shall be deemed to constitute a
constructive dismissal of the Executive for the purposes of section 2.6.
<PAGE> 11
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7. CHOICE OF LAW
This Agreement shall be governed and interpreted in accordance with
the laws of the Province of Alberta, which Province shall be the sole and
proper forum with respect to any suit brought with respect to this Agreement.
8. COPY OF AGREEMENT
The Executive hereby acknowledges having received a copy of this
Agreement duly signed by the Corporation.
IN WITNESS WHEREOF the parties hereto have duly executed and delivered
this Agreement.
GULF CANADA RESOURCES LIMITED
/s/ Craig Glick
/s/ Richard Auchinleck
/s/ Lynne Walker /s/ Dennis Feuchuk
- ------------------------------ DENNIS G. FEUCHUK
Witness
<PAGE> 1
EXHIBIT 10.5
EXECUTIVE EMPLOYMENT CONTRACT
THIS AGREEMENT is dated as of February 7, 1996.
BETWEEN:
GULF CANADA RESOURCES LIMITED
(hereinafter called the "Corporation")
OF THE FIRST PART
- and -
HARRY R. HERBST
(hereinafter called the "Executive")
OF THE SECOND PART
WHEREAS
(a) The Executive is an officer of the Corporation and is
considered by the Board of Directors of the Corporation to be
a valued employee of the Corporation and has acquired
outstanding and special skills and abilities and an extensive
background in and knowledge of the Corporation's business and
the industry in which it is engaged;
(b) The Board of Directors recognizes that it is essential, in the
best interests of the Corporation, that the Corporation retain
the continuing dedication of the Executive to his office and
employment and that the past service of the Executive to the
Corporation requires that the Executive receive fair
treatment, particularly in the event of an actual or
constructive termination of his employment with the
Corporation;
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the
mutual covenants herein contained and in consideration of the Executive
remaining in office and in the employment of the Corporation at the present
time and throughout the period of material change of ownership or organization
of the Corporation, it is hereby agreed as follows:
<PAGE> 2
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1. DEFINITIONS
In this Agreement:
(a) "affiliate" means:
(i) one body corporate is an affiliate of another body
corporate if one of them is the subsidiary of the
other or both are subsidiaries of the same body
corporate or each of them is under the control of the
same person; and
(ii) two bodies corporate that are an affiliate of the
same body corporate at the same time are affiliates
of each other.
(b) "associate" has the meaning ascribed to that term in the
Canada Business Corporations Act.
(c) "change of control" means or shall be deemed to have occurred
if and when:
(i) the acquisition, by whatever means (including without
limitation, amalgamation, consolidation, liquidation,
arrangement or merger), by a person (or two or more
persons who in such acquisition have acted jointly or
in concert or intend to exercise jointly or in
concert any voting rights attaching to the securities
acquired), directly or indirectly, of the beneficial
ownership of such number of voting securities or
rights to voting securities of the Corporation, which
together with such person's then owned voting
securities and rights to voting securities, if any,
represent (assuming the full exercise of such rights
to voting securities) more than 20% of the combined
voting power of the Corporation's then outstanding
voting securities, together with the voting
securities acquired and such person's previously
owned rights to voting securities; or
(ii) individuals who were members of the Board of
Directors of the Corporation immediately prior to a
meeting of the shareholders of the Corporation
involving a contest for or on an item of business
relating to the election of directors shall not
constitute a majority of the Board of Directors
following such election.
(d) "Compensation Committee" means the Committee of the Board of
Directors of the Corporation from time to time appointed to
fix the
<PAGE> 3
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remuneration of executives of the Corporation or, if such
Committee has not been appointed, means the Board of Directors
of the Corporation.
(e) "constructive dismissal" means, unless consented to by the
Executive in writing, any action by the Corporation which
constitutes constructive dismissal of the Executive,
including, without limiting the generality of the foregoing:
(i) any material reduction in the Executive's office,
titles, positions, duties, responsibilities, powers
or reporting relationships;
(ii) any reduction in the annual salary of the Executive;
(iii) a requirement to relocate to another province, state
or country; and
(iv) any reduction in the value of the Executive's
employee benefits plans and programmes, including,
without limiting the generality of the foregoing,
bonus arrangements.
(f) "confidential information" means information, processes,
know-how, data, trade secrets, techniques, knowledge and other
confidential information not generally known to the public
relating to or connected with the business or corporate
affairs and operations of the Corporation and its affiliates.
(g) "control" has the meaning ascribed to that term in the Canada
Business Corporations Act.
(h) "executive superannuation undertakings" refers, for purposes
of section 2.6(c) of this Agreement, to a commitment given by
the Corporation in recognition of the fact that the retirement
benefits under the registered pension plans of the Corporation
and its affiliates are subject to a maximum pension limitation
as fixed from time to time under the Income Tax Act (Canada)
and the rules and regulations promulgated by Revenue Canada,
Taxation, from time to time thereunder. To the extent that
this limitation applies with respect to the registered pension
plans of the Corporation or its affiliates for service prior
to January 1, 1996, the Corporation has undertaken to pay a
supplemental retirement allowance sufficient to provide the
Executive with an annual pension equal to the annual pension
to which the Executive would be entitled under the registered
pension plans of the Corporation and its affiliates if such
limitation did not apply to such plans. For service from
January 1, 1996 onwards, once the Revenue Canada contribution
limit has been reached,
<PAGE> 4
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contributions of the same amount as required under the pension
plan will be paid to the Executive semi-monthly.
(i) "person" has the meaning ascribed to that term in the Canada
Business Corporations Act.
(j) "subsidiary" of a corporation means, at any time, a
corporation of which the corporation has control at that time,
whether directly or indirectly through one or more
subisdiaries.
2. EMPLOYMENT
2.1 Position, Duties and Responsibilities of Executive
The Executive shall have such responsibilities and powers as the Board
of Directors or the by-laws of the Corporation or the Executive's superiors may
from time to time prescribe. The Executive shall devote the whole of his time
to the Executive's duties hereunder and shall use his best efforts to promote
the interests of the Corporation. The executive shall, during the term of this
agreement:
(a) perform such managerial duties and responsibilities for the
Corporation as may be assigned to him by the Chief Executive
Officer and by the Board of Directors of the Corporation, and
at no additional remuneration, shall serve in such other
comparable positions with affiliates and associates of the
Corporation as the Board of Directors of the Corporation may
from time to time determine; and
(b) accept such office or offices to which he may be elected or
appointed by the Chief Executive Officer or by the Board of
Directors of the Corporation in addition to those of
Vice-President, Finance and Strategic Planning, provided that
the performance of the duties of such offices shall be
consistent with the scope of the duties assigned in accordance
with or as provided for in section 2.1(a) above.
2.2 Term of Agreement
The term of this Agreement shall commence on the date hereof, and
shall continue in effect to and including the earlier of:
(a) the date of voluntary retirement of the Executive in
accordance with the retirement policies established for senior
employees of the Corporation; or
<PAGE> 5
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(b) the voluntary resignation of the Executive other than a
voluntary resignation pursuant to either section 2.6(b)(ii)
or section 2.6(b)(iii) hereof.
2.3 Termination of Agreement upon Disability of Executive
If at the end of any month the Executive is and has been for a period
of more than twelve (12) consecutive months unable to perform the duties
specified pursuant to this Agreement in the normal and regular manner due to
mental or physical disability, this Agreement may be terminated by the
Corporation on 30 days' notice. Notwithstanding anything contained in this
Section 2.3, the Executive shall be entitled to all benefits provided under the
disability and pension plans of the Corporation or its affiliates applicable to
the Executive at the date of this Agreement.
2.4 Termination of Agreement upon Death of Executive
If the Executive dies, this Agreement shall be terminated immediately
on the date of the Executive's death. Provided that the Executive is insurable
at reasonable premium rates, the Corporation shall cause to be obtained and
maintained during the term of this Agreement a life insurance policy naming
beneficiaries specified by the Executive, which life insurance policy shall
provide a lump sum payment of not less than two times the Executive's salary to
such beneficiaries in the event that the Executive dies during the term of this
Agreement. This insurance policy shall be in addition to and not in
substitution for any insurance policies provided to the Executive under the
Corporation's benefit plans and programmes.
2.5 Termination of Agreement by the Corporation for Cause
The Corporation may terminate this Agreement at any time without
notice in the event the Executive shall be convicted of a criminal act of
dishonesty resulting or intended to result directly or indirectly in gain or
personal enrichment of the Executive at the expense of the Corporation, or for
other sufficient cause pursuant to written notice setting forth particulars of
such cause.
<PAGE> 6
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2.6 Severance Entitlement Upon Termination of Employment of the Executive
(a) The provisions of sub-section 2.6(c) shall not apply to, and
the Executive shall not be entitled to receive any severance
payments or other benefits as provided for in this Agreement
as a result of any circumstance where the termination of the
Executive's employment arises from the occurrence of any event
described in any of sections 2.2, 2.3, 2.4 or 2.5 hereof.
(b) The provisions of sub-section 2.6(c) shall, except as
specifically provided in sub-section 2.6(a) hereof, apply in
all circumstances where the Executive's employment with the
Corporation terminates, including, without limiting the
generality of the foregoing, any of the following
circumstances:
(i) where the Corporation terminates the employment of
the Executive for any reason other than for cause;
or,
(ii) where the Executive, by notice in writing to the
Corporation, terminates his employment with the
Corporation within ninety (90) days following
constructive dismissal of the Executive;
(iii) where the Executive, by notice in writing to the
Corporation, terminates his employment with the
Corporation within ninety (90) days following a
change of control of the Corporation as described in
section 1(c)(i).
(c) In the event of the termination of the Executive's employment
as provided in sub-section 2.6(b) hereof, the following
provisions shall apply:
(i) the Executive shall be entitled to receive and the
Corporation shall forthwith pay to the Executive, a
retiring allowance (hereinafter called the "Retiring
Allowance") in an undiscounted cash amount equal to
one (1) month's base salary multiplied by the number
of years of service of the Executive with the
Corporation subject to a minimum entitlement and
payment equal to twenty-four (24) months' base salary
and a maximum entitlement and payment equal to thirty
(30) months' base salary;
(ii) in addition, the Executive shall be entitled to
receive and the Corporation shall forthwith pay to
the Executive an undiscounted cash amount equal to
the value to the Executive of all those benefits
plans and programmes provided by the Corporation and
listed in Schedule "A" attached hereto for a period
of time equal to one (1)
<PAGE> 7
- 7 -
month for every year of service of the Executive with
the Corporation with a minimum entitlement and
payment equal to twenty-four (24) months of benefits
value and a maximum entitlement and payment equal to
thirty (30) months of benefits value. All amounts
payable under this sub-section 2(c)(ii) shall be
determined by a Fellow of the Canadian Institute of
Actuaries acceptable to the Corporation and the
Executive;
(iii) in addition, the Executive shall be entitled to
receive and the Corporation shall forthwith pay to
the Executive an undiscounted amount equal to the
product obtained by multiplying by two (2) the
Executive's target bonus under the Corporation's
Total Compensation Plan or such other similar plan
that may have replaced the Total Compensation Plan
for the year in which his employment is terminated;
(iv) the Executive shall also be entitled to receive on
termination the normal and any supplementary pension
benefits in effect on the date of this Agreement
according to the terms of the Corporation's
registered pension plans and executive superannuation
undertakings, or according to similar provisions of
any successor plan, of which the Executive is a
member at the date of termination of the Executive's
employment (collectively hereinafter called the
"Plans"). The Executive's total pension entitlement
shall be determined on the basis that the Executive
had two (2) additional years of credited service and
age under the Plans in which he is participating at
his date of termination of employment over and above
his actual age or years of credited service. In
addition, such additional years of credited service
shall be included for the purpose of determining
final or best average earnings assuming that the
Executive's monthly base salary at the date of
termination of employment would have continued
unchanged during the period of additional credited
service. Any portion of the total pension entitlement
of the Executive not eligible to be paid under the
provisions of the registered pension plans of the
Corporation shall be payable as supplementary
payments in accordance with the
<PAGE> 8
- 8 -
executive superannuation undertakings. If the
Executive has not vested in any or all of the Plans
on the date of termination of his employment, he
shall be or shall be deemed to be vested in any of
the Plans in which he is not vested on the date of
termination of his employment;
(v) all options for the purchase of shares of the
Corporation which have been granted by the
Corporation to the Executive prior to January 31,
1995 under the Executive Stock Option Plan (1990) or
(1994) but not yet vested shall immediately vest on
the date of termination of the Executive and the
Executive shall be entitled to exercise all such
options for the purchase of shares of the Corporation
for a period of five (5) years from the date of
termination of the Executive whether the options
vested on or before the date of termination of the
Executive;
(vi) all options for the purchase of shares of the
Corporation granted by the Corporation to the
Executive since January 1, 1995 under the Incentive
Stock Option Plan (1994) or otherwise (including,
without limitation, those options granted to the
Executive on January 31, 1995) to the date of
termination of the Executive but not yet vested shall
immediately vest on the date of termination of the
Executive and the Executive shall be entitled to
exercise any or all such options for the purchase of
shares of the Corporation for a period of one (1)
year from the date of termination of the Executive
whether such options vested on or before the date of
termination of the Executive;
(vii) the Corporation and the Executive agree that the
provisions of section 2.6(c) are fair and reasonable
and that the amounts payable by the Corporation to
the Executive pursuant to section 2.6(c) are
reasonable estimates of the damages which will be
suffered by the Executive in the event of the
termination of his employment with the Corporation in
any and all of the circumstances set out in section
2.6(b) and shall not be construed as a penalty; and,
(viii) all amounts paid by the Corporation to the Executive
pursuant to section 2.6(c) shall satisfy and forever
discharge all liabilities, claims
<PAGE> 9
- 9 -
or actions that the Executive may or shall have
against the Corporation arising from the termination
of employment of the Executive whether at common law
or under statute or otherwise and such payment shall
be made against delivery by the Executive to the
Corporation of a release in form and terms reasonably
satisfactory to the Corporation and the Executive.
2.7 Executive Superannuation Funding
The Corporation shall maintain in place and continue to fund the
obligations of the Corporation to the Executive under the executive
superannuation undertakings for service prior to January 1, 1996 referred to in
section 2.6(c)(iv) substantially in accordance with the terms of the Retirement
Compensation Arrangement Trust Agreement made as of January 25, 1995 between
the Corporation and The Canada Trust Company.
2.8 Directors' and Officers' Liability Insurance
Unless otherwise agreed between the parties hereto, Gulf shall
purchase and maintain, or cause to be purchased and maintained, while the
Executive remains an officer of Gulf and for a period of 10 years thereafter,
directors' and officers' errors and omissions insurance for the benefit of the
Executive on terms no less favourable in terms of coverage, and amounts, to the
extent available on reasonable commercial terms, than such insurance maintained
in effect by the Corporation on the date hereof.
3. INTEGRATION
Except for the Executive's rights to continued participation in the
Corporation's employee benefit plans, including, without limitation, the
Corporation's or its affiliates' stock option plans and savings plans and
conditions of employment generally available to other Executives of the
Corporation or its affiliates, this Agreement contains the entire agreement
between the parties and supersedes all prior oral and written agreements,
understandings, commitments and practices between the parties, including all
prior employment agreements, whether or not fully performed by the Executive
before the date of this Agreement. No amendments to this Agreement may be made
except in writing signed by both parties.
<PAGE> 10
- 10 -
4. CONFIDENTIAL INFORMATION
In the event of termination of employment of the Executive, the
Executive agrees to keep confidential all information of a confidential or
proprietary nature concerning the Corporation, its subsidiaries and affiliates
and their respective operations, assets, finances, business and affairs and
further agrees not to use such information for personal advantage or the
advantage of an employer, provided that nothing herein shall prevent disclosure
of information which is publicly available or which is required to be disclosed
under appropriate statues, rules of law or legal process.
5. SEVERABILITY
The invalidity and unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provisions of this
Agreement, which shall remain in full force and effect.
6. BENEFIT OF AGREEMENT
This Agreement shall enure to and be binding upon the Corporation and
its successors and the Executive and his legal representatives but otherwise it
is not assignable. It shall be a condition of any transfer by the Corporation
of the Executive to any affiliate or associate of the Corporation that, on
request of the Executive, such affiliate or associate agree to observe all the
covenants of and be bound by all obligations imposed on the Corporation under
this Agreement. The failure to do so shall be deemed to constitute a
constructive dismissal of the Executive for the purposes of section 2.6.
<PAGE> 11
- 11 -
7. CHOICE OF LAW
This Agreement shall be governed and interpreted in accordance with
the laws of the Province of Alberta, which Province shall be the sole and
proper forum with respect to any suit brought with respect to this Agreement.
8. COPY OF AGREEMENT
The Executive hereby acknowledges having received a copy of this
Agreement duly signed by the Corporation.
IN WITNESS WHEREOF the parties hereto have duly executed and delivered
this Agreement.
GULF CANADA RESOURCES LIMITED
/s/ Andrew Wiswell
/s/ Richard Auchinleck
/s/ A.P. Scott /s/ Harry Herbst
- ------------------------------ HARRY R. HERBST
Witness
<PAGE> 1
EXHIBIT 23.2
[ERNST & YOUNG LETTERHEAD]
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the incorporation in this Annual Report (Form 10-K) of Gulf
Canada Resources Limited (the "Company") of our report dated February 18, 1998,
with respect to the consolidated financial statements of the Company for the
year ended December 31, 1997.
We further consent to the reference to our firm under the caption "Experts", in
the Short Form Shelf Prospectuses of the Company dated October 22, 1997 relating
to the offering of Debt Securities from time to time in one or more series in
aggregate principal amount of up to US$250 million filed with the Alberta
Securities Commission and the United States Securities and Exchange Commission
and in the Registration Statement (Form S-8 No. 333-7644) and related prospectus
pertaining to the 1994 Incentive Stock Option Plan of the Company, and to the
incorporation by reference of our report dated February 18, 1998 with respect to
the consolidated financial statements of the Company for the year ended December
31, 1997 included in this annual report (Form 10-K) in each such prospectus.
/s/ ERNST & YOUNG
Chartered Accountants
Calgary, Canada
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AND CONSOLIDATED STATEMENT OF
EARNINGS AND RETAINED EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-K.
<MULTIPLIER> 1,000,000
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<SECURITIES> 0
<RECEIVABLES> 346
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 655
<PP&E> 7,577
<DEPRECIATION> 1,841
<TOTAL-ASSETS> 6,629
<CURRENT-LIABILITIES> 666
<BONDS> 2,785
0
577
<COMMON> 1,660
<OTHER-SE> 213
<TOTAL-LIABILITY-AND-EQUITY> 6,629
<SALES> 1,254
<TOTAL-REVENUES> 1,677
<CGS> 0
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