PENNZOIL CO /DE/, 10-K405, 1995-02-28

PENNZOIL CO /DE/
10-K405, 1995-02-28
PETROLEUM REFINING

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 COMMISSION FILE NO. 1-5591

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

DELAWARE 74-1597290
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

PENNZOIL PLACE, P.O. BOX 2967
HOUSTON, TEXAS 77252-2967
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including area code: (713) 546-4000

Securities registered pursuant to Section 12(b) of the Act:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------------------------------- -----------------------

Common Stock, par value $0.83 1/3 per share New York Stock Exchange
Pacific Stock Exchange

Debentures New York Stock Exchange

6 1/2% Exchangeable Senior Debentures due January 15, 2003
4 3/4% Exchangeable Senior Debentures due October 1, 2003

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. X

Aggregate market value of the voting stock held by non-affiliates of the
registrant: $2.1 billion as of January 31, 1995.

Number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date, January 31, 1995: Common Stock, par
value $0.83 1/3 per share -- 46,145,528.

DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE PROXY STATEMENT TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A
UNDER THE SECURITIES EXCHANGE ACT OF 1934 IN CONNECTION WITH THE COMPANY'S 1994
ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III
HEREOF (TO THE EXTENT SET FORTH IN ITEMS 10, 11, 12 AND 13 OF PART III OF THIS
ANNUAL REPORT ON FORM 10-K).

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<PAGE> 2

PART I

ITEM 1. BUSINESS AND ITEM 2. PROPERTIES.

Pennzoil Company ("Pennzoil") is an energy company engaged primarily in oil
and gas exploration and production, in processing, refining and marketing of oil
and motor oil and refined products and in fast automotive oil change operations.
Pennzoil's operations are conducted primarily through subsidiaries. Pennzoil
Exploration and Production Company conducts the majority of Pennzoil's oil and
gas exploration and production operations. The refining of oil and the
processing and marketing of motor oil, refined products and industrial
specialties are conducted by Pennzoil Products Company ("PPC"). Jiffy Lube
International, Inc. ("Jiffy Lube") franchises, owns and operates automotive fast
lubrication and fluid maintenance service centers. Richland Development
Corporation ("Richland") manages Pennzoil's real estate holdings and provides
staff support for Pennzoil and its subsidiaries.

In December 1994, Pennzoil merged its Pennzoil Exploration and Production
Company subsidiary into its Pennzoil Petroleum Company ("Pennzoil Petroleum")
subsidiary, and the name of the surviving corporation was subsequently changed
to Pennzoil Exploration and Production Company ("PEPCO").

In October 1994, Pennzoil entered into an agreement with Freeport-McMoRan
Resource Partners, Limited Partnership ("Freeport-McMoRan") providing for the
sale by Pennzoil to Freeport-McMoRan of substantially all the domestic assets of
Pennzoil's sulphur segment. The transaction was completed in January 1995.
Pennzoil continues to own and operate its Antwerp, Belgium sulphur terminal and
the related international sulphur business. Reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Sulphur" for additional information.

As of December 31, 1994, Pennzoil beneficially owned 18,071,036 shares of
common stock of Chevron Corporation ("Chevron"), which have been deposited with
exchange agents for possible exchange for $402.5 million and $500.0 million
principal amount of exchangeable debentures of Pennzoil due January 15, 2003 and
October 1, 2003, respectively, at exchange rates equivalent to $42 1/16 and
$58 13/16 per share of Chevron common stock, respectively. At the current
dividend rate, Pennzoil receives $33.4 million annually in dividends on the
18,071,036 Chevron shares. Reference is made to "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Capital Resources
and Liquidity" for additional information.

INDUSTRY SEGMENT FINANCIAL INFORMATION

The tabular presentation below sets forth certain financial information
regarding Pennzoil's industry segments (i.e., oil and gas, motor oil and refined
products, franchise operations and sulphur). Pennzoil's foreign operations
historically have not been material in relation to consolidated revenues,
operating income and identifiable assets.

<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Oil and Gas............................................. $ 833,938 $ 878,630 $ 568,819
Motor Oil & Refined Products............................ 1,509,694 1,507,563 1,509,777
Franchise Operations.................................... 258,102 219,865 174,386
Sulphur................................................. 71,902 74,021 147,964
Other(1)................................................ 59,673 258,129 105,395
Intersegment sales(2)................................... (170,366) (155,841) (149,660)
---------- ---------- ----------
$2,562,943 $2,782,367 $2,356,681
========== ========== ==========
OPERATING INCOME (LOSS)
Oil and Gas(3).......................................... $ (4,901) $ 159,180 $ 134,655
Motor Oil & Refined Products(4)......................... 41,767 90,029 77,925
Franchise Operations.................................... 2,814 (17,573) (13,422)
Sulphur(5).............................................. (57,407) (20,763) 1,033
Other(1)................................................ 55,598 253,668 88,168
---------- ---------- ----------
Total operating income........................ 37,871 464,541 288,359
Corporate administrative expense........................ 66,324 65,552 65,103
Interest expense, net(3)................................ 476,641 179,548 224,629
Income tax provision (benefit).......................... (221,355) 59,205 (18,783)
---------- ---------- ----------
Income (loss) from continuing operations................ $ (283,739) $ 160,236 $ 17,410
========== ========== ==========
</TABLE>

(Table continued on following page)

1
<PAGE> 3

<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
Oil and Gas(3).......................................... $2,529,188 $2,059,115 $1,988,007
Motor Oil & Refined Products............................ 704,271 656,313 609,753
Franchise Operations.................................... 304,380 305,669 289,791
Sulphur(5).............................................. 53,309 100,888 114,035
Other................................................... 159,306 177,353 176,173
Corporate(3)............................................ 966,009 1,590,766 1,285,097
Intersegment eliminations............................... (653) (3,901) (5,679)
---------- ---------- ----------
$4,715,810 $4,886,203 $4,457,177
========== ========== ==========
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
Oil and Gas(3).......................................... $ 411,597 $ 275,489 $ 175,442
Motor Oil & Refined Products(4)......................... 51,877 27,014 23,415
Franchise Operations.................................... 15,830 14,123 11,344
Sulphur(5).............................................. 54,375 8,386 6,130
Other................................................... 663 805 859
Corporate............................................... 4,844 5,162 5,355
---------- ---------- ----------
$ 539,186 $ 330,979 $ 222,545
========== ========== ==========
CAPITAL EXPENDITURES(6)
Oil and Gas(7).......................................... $ 630,432 $ 360,496 $1,103,212
Motor Oil & Refined Products............................ 40,361 71,535 35,841
Franchise Operations.................................... 18,937 21,701 25,810
Sulphur................................................. 8,548 2,295 2,898
Other................................................... 761 329 2,906
Corporate............................................... 6,458 28,766 1,331
---------- ---------- ----------
$ 705,497 $ 485,122 $1,171,998
========== ========== ==========
</TABLE>

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(1) For 1994 and 1992, these amounts primarily represent dividend income from
Pennzoil's investment in Chevron common stock. For 1993, this amount
primarily represents a pretax gain of $171.6 million from Pennzoil's sale
of 8,158,582 shares of Chevron common stock for a net price of $88.38 per
share and dividend income from Pennzoil's investment in Chevron common
stock.

(2) Substantially all intersegment sales, which are priced at market, are from
the oil and gas segment to the motor oil and refined products segment.

(3) In October 1994, Pennzoil settled a dispute with the Internal Revenue
Service ("IRS") relating to a proposed tax deficiency based on an audit of
Pennzoil's 1988 federal income tax return. In connection with this
settlement, Pennzoil paid $556.0 million to the IRS in October 1994 from
cash, cash equivalents and current marketable securities and other
investments on hand. In addition, as a result of the IRS settlement,
Pennzoil increased the balance of its investment in Pennzoil Petroleum
capital stock for financial reporting purposes and, therefore, the carrying
value of Pennzoil Petroleum's oil and gas properties by $390.3 million, and
such increased investment resulted in a $93.9 million increase in
depreciation, depletion and amortization expense recognized in October 1994
relating to Pennzoil Petroleum's oil and gas properties from the date of
the acquisition of Pennzoil Petroleum to the date of the IRS settlement.
These adjustments resulted in a net increase in property, plant and
equipment of $296.4 million as of September 30, 1994, while interest
charges and depreciation, depletion and amortization expense adjustments
related to the IRS settlement reduced Pennzoil's 1994 pretax income by
$388.2 million. Reference is made to "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Oil and Gas" and Notes
8 and 10 of Notes to Consolidated Financial Statements for additional
information.

(4) As of September 30, 1994, PPC ceased the processing of crude oil at its
refinery in Roosevelt, Utah. In connection therewith, PPC recorded a total
charge of $32.5 million, $24.3 million of which was charged to
depreciation, depletion and amortization expense. Reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Motor Oil & Refined Products" for additional information.

(5) In October 1994, Pennzoil entered into an agreement with Freeport-McMoRan
providing for the sale by Pennzoil to Freeport-McMoRan of substantially all
the domestic assets of Pennzoil's sulphur segment. In connection with this
transaction, Pennzoil's sulphur segment recorded a charge to depreciation,
depletion and amortization expense of $50.2 million in September 1994.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Sulphur" for additional information.

(6) Includes interest capitalized of $9,027,000, $11,420,000 and $8,731,000 in
1994, 1993 and 1992, respectively.

(7) For 1994, capital expenditures for the oil and gas segment include
$230,924,000 allocated to the oil and gas properties added as a result of
the acquisition of Co-enerco Resources Ltd. ("Co-enerco"). Reference is
made to Note 10 of Notes to Consolidated Financial Statements for
additional information. For 1992, capital expenditures for the oil and gas
segment include $1,009,410,000 allocated to the oil and gas properties
added as a result of the acquisition of Pennzoil Petroleum. Reference is
made to "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Resources and Liquidity" and Note 10 of
Notes to Consolidated Financial Statements for additional information.
Capital expenditures for 1994 do not include any amounts paid with respect
to the IRS settlement discussed in footnote (3) above.

Narrative descriptions of these business segments follow, with emphasis on
1994 developments. Unless otherwise indicated by the context, references to
Pennzoil include its subsidiaries.

2
<PAGE> 4

OIL AND GAS

In the oil and gas segment, Pennzoil engages in the acquisition,
exploration, exploitation and development of prospective and proved oil and gas
properties, the production and sale of crude oil, condensate and natural gas
liquids and the production, treatment and sale of natural gas. The bulk of
Pennzoil's production is derived from established fields in Texas, Louisiana,
Utah, Alberta and federal waters offshore Louisiana, Texas and California.

OIL AND GAS RESERVES. The following table sets forth information regarding
Pennzoil's net proved reserves and the present value (discounted at 10%) of the
estimated future net cash flows before deduction of income taxes from the
production and sale of those reserves. The reserves are reported by Ryder Scott
Company Petroleum Engineers, Houston, Texas ("Ryder Scott") and Outtrim Szabo
Associates Ltd., Calgary, Canada ("Outtrim Szabo") in accordance with criteria
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 69,
"Disclosures About Oil and Gas Producing Activities." The summary reports of
Ryder Scott and Outtrim Szabo on the reserve estimates as of December 31, 1994,
which include certain definitions and assumptions, are set forth as exhibits to
this Annual Report on Form 10-K. Such information as to reserve estimates
includes reserves of each of PEPCO, Pennzoil Canada, PPC and Pennzoil. The
summary reports of Ryder Scott on the reserve estimates as of December 31, 1993
and 1992 are included in Pennzoil's previously filed Annual Reports on Form 10-K
for the respective years.

Information regarding ownership interests, prices, costs and other factual
data was furnished to Ryder Scott and Outtrim Szabo by Pennzoil. To facilitate
timely issuance of the reserve estimates, estimated production data were used
for the last few months of each year. Pennzoil believes that use of the actual
production data would not have resulted in any material change in the estimates
of reserves or pretax future net cash flows.

<TABLE>
<CAPTION>
TOTAL PROVED RESERVES
----------------------------
DECEMBER 31
----------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids
(millions of barrels)
United States......................................... 205 199 218
Foreign............................................... 15 2 2
------ ------ ------
220 201 220
====== ====== ======
Natural gas (Bcf)
United States(1)...................................... 1,341 1,453 1,617
Foreign............................................... 204 38 35
------ ------ ------
1,545 1,491 1,652
====== ====== ======
Present value (10% discount rate) of estimated future net
cash flows before deduction of income taxes (in
millions)(2)
United States......................................... $1,778 $2,213 $2,484
Foreign............................................... 180 45 35
------ ------ ------
$1,958 $2,258 $2,519
====== ====== ======
</TABLE>

(Table continued on following page)

3
<PAGE> 5

<TABLE>
<CAPTION>
PROVED DEVELOPED RESERVES
----------------------------
DECEMBER 31
----------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>

Crude oil, condensate and natural gas liquids
(millions of barrels)
United States.................................................. 176 162 181
Foreign........................................................ 15 2 2
------ ------ ------
191 164 183
====== ====== ======
Natural gas (Bcf)
United States(1)............................................... 1,242 1,306 1,412
Foreign........................................................ 192 35 34
------ ------ ------
1,434 1,341 1,446
====== ====== ======
Present value (10% discount rate) of estimated future net cash
flows before deduction of income taxes (in millions)(2)
United States.................................................. $1,696 $2,049 $2,263
Foreign........................................................ 175 40 35
------ ------ ------
$1,871 $2,089 $2,298
====== ====== ======
</TABLE>

- ---------------

(1) United States natural gas reserves for 1994, 1993 and 1992 exclude 161 Bcf,
162 Bcf and 124 Bcf, respectively, of carbon dioxide gas for sale or use in
Pennzoil's operations.

(2) Reference is made to "Supplemental Financial and Statistical Information --
Unaudited -- Oil and Gas Information" on pages F-30 through F-36 hereof for
additional information regarding Pennzoil's proved reserves and estimated
future net revenues therefrom, including presentation of Discounted Future
Net Cash Flows Relating to Proved Oil and Gas Reserves calculated in
accordance with SFAS No. 69.

No significant change in Pennzoil's proved reserves as set forth above has
occurred as a result of any major discovery or other event since December 31,
1994.

No estimates of Pennzoil's total proved net oil or gas reserves have been
filed with or included in reports to any federal authority or agency other than
the Securities and Exchange Commission ("SEC") since January 1, 1994.

4
<PAGE> 6

OIL AND GAS PROPERTIES. The following table shows Pennzoil's developed and
undeveloped oil and gas acreage as of December 31, 1994.

<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
ACREAGE(1) ACREAGE(2)
----------------- -----------------
GROSS NET GROSS NET
----- ----- ----- -----
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
United States
Alabama..................................... 15 7 -- --
Arkansas.................................... 25 5 9 2
Colorado.................................... -- -- 35 35
Kansas...................................... 42 39 1 --
Louisiana................................... 267 209 24 20
Michigan.................................... 1 1 5 3
Mississippi................................. 23 18 14 11
Montana..................................... -- -- 352 169
New Mexico.................................. 35 25 695 692
New York.................................... 16 14 5 4
North Dakota................................ 3 2 -- --
Ohio........................................ 6 6 1 1
Oklahoma.................................... 1 1 8 1
Pennsylvania................................ 187 156 172 149
Texas....................................... 561 411 89 48
Utah........................................ 160 74 51 29
West Virginia............................... 393 360 78 60
United States Waters
Offshore Alabama......................... 14 9 -- --
Offshore Alaska.......................... 7 1 22 4
Offshore California...................... 4 1 11 3
Offshore Louisiana....................... 328 204 97 61
Offshore Mississippi..................... 11 3 11 3
Offshore Texas........................... 71 36 105 96
----- ----- ----- -----
Total United States........................... 2,170 1,582 1,785 1,391
Foreign(3)
Canada...................................... 323 196 918 632
Indonesia................................... -- -- 690 100
Qatar....................................... -- -- 701 701
----- ----- ----- -----
Total Foreign................................. 323 196 2,309 1,433
----- ----- ----- -----
Total......................................... 2,493 1,778 4,094 2,824
===== ===== ===== =====
</TABLE>

- ---------------

(1) Developed acreage represents the spacing units or other acreage assignable
to productive wells.
(2) Undeveloped acreage is acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether such acreage contains
proved reserves.
(3) Acreage in foreign areas other than Canada is operated under production
sharing arrangements, service contracts or other contractual arrangements
not involving lease or fee ownership.

5
<PAGE> 7

The following table shows the approximate number of Pennzoil's productive
oil and gas wells as of year end. Productive wells consist of producing wells
and wells capable of production in commercial quantities.

<TABLE>
<CAPTION>
GROSS WELLS(1) NET WELLS(1)
-------------------------- -----------------------
1994 1993 1992 1994 1993 1992
------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Oil
United States.................... 7,264 7,632 10,528 4,135 4,316 4,667
Foreign.......................... 984 330 356 508 52 57
Natural gas
United States.................... 2,149 2,243 3,068 1,232 1,237 1,373
Foreign.......................... 523 114 119 259 22 26
------ ------ ------ ----- ----- -----
10,920 10,319 14,071 6,134 5,627 6,123
====== ====== ====== ===== ===== =====
</TABLE>

- ---------------

(1) "Gross Wells" includes all wells in which Pennzoil has an interest. "Net
Wells" reflects Pennzoil's percentage ownership interest in each "Gross
Well." One or more completions in the same bore hole are counted as one
well. Any well in which one of multiple completions is an oil completion is
classified as an oil well.

PRODUCTION AND SALES. The following table summarizes the average daily
production of Pennzoil, net of all royalties, overriding royalties and other
outstanding interests for the periods indicated. Natural gas production refers
only to marketable production of natural gas on an "as sold" basis.

<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids (barrels per
day)
United States............................................... 64,140 63,294 38,430
Foreign..................................................... 4,569 979 1,032
------- ------- -------
68,709 64,273 39,462
======= ======= =======

Natural gas (Mcf per day)
United States............................................... 689,461 641,111 443,905
Foreign..................................................... 27,501 8,288 3,656
------- ------- -------
716,962 649,399 447,561
======= ======= =======
</TABLE>

The following table shows the weighted average sales prices received by
Pennzoil for its production and the average production (lifting) costs per unit
of production.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------
UNITED
STATES FOREIGN TOTAL
------ ------ ------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids (per barrel)....... $13.65 $14.96 $13.74
Natural gas (per Mcf)............................................ $ 1.81 $ 1.38 $ 1.79
Production (lifting) costs per equivalent barrel(1)(2)........... $ 3.82 $ 3.43 $ 3.80
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------
UNITED
STATES FOREIGN TOTAL
------ ------ ------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids (per barrel)....... $14.90 $14.45 $14.90
Natural gas (per Mcf)............................................ $ 2.05 $ 1.32 $ 2.04
Production (lifting) costs per equivalent barrel(1)(2)........... $ 4.16 $ 4.02 $ 4.16
</TABLE>

(Table continued on following page)

6
<PAGE> 8

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
----------------------------
UNITED
STATES FOREIGN TOTAL
------ ------ ------
<S> <C> <C> <C>
Crude oil, condensate and natural gas liquids (per barrel)....... $16.97 $16.17 $16.95
Natural gas (per Mcf)............................................ $ 1.81 $ 1.05 $ 1.81
Production (lifting) costs per equivalent barrel(1)(2)........... $ 3.97 $ 4.05 $ 3.98
</TABLE>

- ---------------

(1) For purposes of providing common units of measure, natural gas is converted
to a Btu-equivalent barrel of liquid on the basis of relative energy
content (6 Mcf per barrel).

(2) Production (lifting) costs are costs incurred to operate and maintain wells
and related equipment and facilities. They do not include depreciation,
depletion and amortization of capitalized acquisition, exploration and
development costs, exploration expenses, general and administrative
expenses, interest expense or income tax. Differences between sales prices
and production (lifting) costs do not represent profit.

Pennzoil sells its crude oil and condensate production generally at posted
field prices less any applicable transportation charges, its natural gas liquids
production at negotiated prices and its natural gas production generally under a
combination of 30-day spot, short-term and long-term sales contracts.

Pennzoil has substantial control in marketing its natural gas production.
Pennzoil's natural gas marketing efforts are primarily constrained only by
normal free marketplace competition and by regulatory limitations generally
described below under the caption "Government Regulation." In February 1995,
Pennzoil and Brooklyn Union Gas Co. announced that their subsidiaries, Pennzoil
Gas Marketing Company and BRING Gas Services Corp., would form a 50-50 gas
marketing joint venture. Pennzoil currently expects to contribute approximately
$3 million in cash to the venture and to commit substantially all of its natural
gas production from the continental U.S. to be marketed through the venture.

Since 1986, Pennzoil has restricted spot gas sales from time to time during
periods when prices have fallen below levels considered acceptable. Pennzoil did
not restrict spot gas sales in 1994.

DRILLING ACTIVITY. The following table shows Pennzoil's net productive and
dry exploratory and development wells completed for the periods shown.
Completion occurs upon the installation of permanent equipment for the
production of oil or gas, or, in the case of dry holes, upon reporting
abandonment to the appropriate regulatory agency.

<TABLE>
<CAPTION>
NET EXPLORATORY NET DEVELOPMENT
WELLS WELLS
-------------------- ---------------------
1994 1993 1992 1994 1993 1992
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Oil Wells(1)
United States.................................... 8.2 1.3 0.9 36.1 41.3 18.2
Foreign.......................................... 4.5 -- -- 1.9 -- 0.1
Gas Wells(1)
United States.................................... 22.2 13.0 0.9 45.1 29.7 6.2
Foreign.......................................... 2.8 -- 1.5 1.2 2.2 --
Dry Holes(2)
United States.................................... 7.1 2.6 0.8 1.0 1.0 --
Foreign.......................................... 5.4 2.0 0.1 -- -- 1.0
---- ---- ---- ---- ---- -----
50.2 18.9 4.2 85.3 74.2 25.5
==== ==== ==== ==== ==== =====
</TABLE>

- ------------
(1) For purposes of this tabulation, a productive well is an exploratory or a
development well that is not a dry hole. One or more completions in the
same bore hole are counted as one well. Any well in which one of multiple
completions is an oil completion is classified as an oil well.

(2) A dry hole is an exploratory or development well found to be incapable of
producing either oil or gas in sufficient quantities to justify completion
as an oil or gas well.

As of December 31, 1994, Pennzoil was participating in the drilling or
awaiting completion of 47 gross (41 net) wells onshore and 14 gross (8 net)
wells offshore the United States.

7
<PAGE> 9

EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES. In North America, oil
and gas production volumes rose substantially in 1994 primarily as a result of
accelerated Gulf of Mexico drilling and the addition of the oil and gas
properties of Co-enerco. During the fourth quarter of 1994, Pennzoil produced an
average of approximately 198,000 barrels of oil equivalent ("BOE") per day
compared to an average of approximately 173,000 BOE per day during the first
quarter of 1994. Total production costs and expenses per barrel, excluding
exploration expense and depreciation, depletion and amortization expense, were
reduced 10% in 1994, to $5.32 per BOE.

Pennzoil disposed of approximately 90 producing oil and gas fields in 1994,
continuing its asset highgrading program begun in 1992, and decreasing the
number of producing fields in which Pennzoil had an interest from approximately
800 in early 1993 to approximately 400 at the end of 1994. Reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity -- Assessment of Oil and Gas
Properties" for additional information.

In June 1994, Pennzoil Canada acquired Co-enerco, a Canadian oil and gas
exploration and production company operating in Alberta, northeastern British
Columbia and southeastern Saskatchewan. Pennzoil Canada paid $230.9 million in
cash in connection with the acquisition of Co-enerco and the repayment of Co-
enerco's outstanding bank debt, which was financed primarily through two credit
facilities. Reference is made to Notes 3 and 10 of Notes to Consolidated
Financial Statements for additional information. Total net proved reserves of
15.9 million barrels of oil and 160 billion cubic feet of gas were added through
the Co-enerco acquisition.

Internationally, in September 1994, the State Oil Company of the Azerbaijan
Republic ("SOCAR") and a consortium of foreign oil companies, which includes
Pennzoil, signed an oil production sharing contract for development of the
Azeri, Chirag and a deep-water portion of the Guneshli fields in the Caspian
Sea. The contract was ratified by the National Parliament of the Republic of
Azerbaijan in November 1994 and was made effective in December 1994. The
contract covers the basic tenets of the project, including profit splits,
taxation, project management mechanism, legal issues, hiring practices and other
details. The combined fields are located 120 miles offshore in the southern
portion of the Caspian Sea in approximately 400 feet of water. Aggregate capital
investment for all the participants in the consortium is estimated to be between
$7 and $8 billion over the 30-year life of the project to develop an estimated 4
billion barrels of recoverable reserves. Participants in the development and
their respective interests are SOCAR (20.00%), Amoco (17.01%), British Petroleum
(17.127%), Delta-Nimir (1.68%), Lukoil (10.00%), McDermott (2.45%), Pennzoil
(9.82%), Ramco (2.08%), Statoil (8.563%), Turkish Petroleum Company (1.75%) and
Unocal (9.52%). The contract includes a $300 million bonus to be paid by the
consortium to the government of Azerbaijan in a phased manner over the life of
the project. Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Oil and Gas" for additional
information.

Net reserves to the participants in the production sharing contract will
generally be dependent on the fields' reserves as well as on crude oil prices
and capital and operating expenditures. Pennzoil's 9.82% share has the potential
to add net reserves estimated in the range of 300 million barrels once the area
is developed. A study is under way to determine the feasibility of producing
from an existing platform in the Chirag Field; if feasible, production could
begin by late 1996. The consortium is also studying possible routes for a major
export pipeline, which will be a prerequisite for transporting any oil produced
from the fields to international markets.

Also in Azerbaijan, Pennzoil completed work on a comprehensive gas
gathering and compression system during 1994. This project is designed to
capture, compress and transport to shore approximately 150 million cubic feet
per day of gas that was being vented from the Guneshli Field. The gas
utilization project accounted for approximately $48 million in capital
expenditures for the oil and gas segment in 1994. The project will save
Azerbaijan an estimated $100 million annually that otherwise would have been
spent on imported natural gas. Pennzoil's total investment related to its
Azerbaijan activities, including the gas utilization project, was $166 million
as of December 31, 1994. Pennzoil's investment in the gas utilization project is
being recovered through partial credit toward Pennzoil's portion of the first
bonus payment made by members of the consortium of foreign oil companies to the
government of Azerbaijan, direct hard-currency payments by the

8
<PAGE> 10

Azerbaijan government during 1995 and an interest in another project. Any
remaining balance due from the government of Azerbaijan with respect to the gas
utilization project will be creditable against the remaining bonus payments to
be made to the Azerbaijan government by the consortium. Reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Oil and Gas" for additional information.

In July 1994, Pennzoil Qatar, Inc. ("Pennzoil Qatar"), an indirect wholly
owned subsidiary of Pennzoil, was awarded the rights to explore acreage of Block
8 offshore Qatar. The block is located 50 miles from shore in the Arabian Gulf
and is adjacent to three large producing oil fields. Block 8 is approximately
the size of 117 Gulf of Mexico blocks, with water depths ranging from 100-120
feet. The technology and geological drilling risks involved are similar to the
Gulf of Mexico. Under the production sharing agreement, Pennzoil Qatar has
committed to a seismic acquisition and drilling program over the next four
years. Seismic acquisition is planned for the second quarter of 1995; drilling
will begin late this year or early in 1996, with four wells planned over the
next several years.

In November 1994, Pennzoil Egypt, Inc., an indirect wholly owned subsidiary
of Pennzoil, and its Spanish partner, Repsol Exploracion Egypto S.A., were
selected to explore the Southeast Gulf of Suez Block offshore Egypt. The block,
which is approximately the size of 44 Gulf of Mexico blocks, surrounds the Shoab
Ali oil field, which has significant oil reserves in place. The agreement
requires approval by the Egyptian Oil ministry, cabinet and parliament. The
agreement calls for acquisition of 3-D seismic data and the drilling of one well
over the next two years following final approval of the agreement.

Pennzoil's capital budget currently provides that its capital expenditures,
including interest capitalized, for domestic and international petroleum
exploration and development during 1995 are estimated to be $334.2 million
compared to $399.5 million of capital expenditures in 1994, excluding
expenditures related to the acquisition of Co-enerco. Reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity" for additional information.

Pennzoil conducts or participates in certain offshore oil and gas
operations which are subject to the hazards of marine operations, such as
capsizing, collision and adverse weather and sea conditions, as well as risks of
blowouts and fires, which are generally present in all oil and gas drilling. In
the past, production from offshore blocks has been delayed on several occasions
as a result of pipeline breaks, hurricanes, blowouts and other unforeseen
events. In addition, Pennzoil's foreign oil and gas operations are subject to
certain risks, such as nationalization, confiscation, renegotiation of existing
contracts and currency fluctuations. Pennzoil monitors political, regulatory and
economic developments in any foreign countries in which it operates.

MOTOR OIL & REFINED PRODUCTS

Pennzoil's motor oil and refined products operations are conducted by PPC.
These operations include the procurement and refining of crude oil and the
blending, packaging and marketing of motor oil and refined products.

MANUFACTURING. PPC owns and operates two lube oil and specialty refineries,
one located near Oil City, Pennsylvania ("Rouseville") and the other, operated
by PPC's wholly owned subsidiary, Atlas Processing Company ("Atlas"), located in
Shreveport, Louisiana. The paraffinic lube base stocks produced by these
refineries are used primarily in the blending of motor oil and other lubricants
by PPC's marketing division. The lube oil and specialty refineries also produce
waxes, petrolatums, special cut kerosenes, transformer oils, process oils and
other naphthenic base oils for use in producing industrial specialty products or
for sale to industrial customers. Jet fuel is also supplied by the Atlas
refinery to several commercial airlines.

As of September 30, 1994, PPC ceased the processing of crude oil at its
refinery in Roosevelt, Utah. PPC plans to continue purchasing crude oil from the
Bluebell-Altamont field and other nearby fields and will maintain a
transportation terminal at the refinery site.

9
<PAGE> 11

The following table sets forth information with respect to raw material
supplied and processed, refining capacity and utilization of PPC's refineries
during the years indicated.

<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(BARRELS PER DAY EXCEPT
PERCENTAGES)
<S> <C> <C> <C>
Raw Material
Supplied
Crude oil and condensate
Pennzoil's domestic production.......................... 28,513 22,623 19,829
Purchased from others................................... 29,283 36,062 38,596
Net decrease in inventory................................. 907 537 30
------ ------ ------
58,703 59,222 58,455
====== ====== ======
Processed
Oil City, Pennsylvania.................................... 15,752 15,629 15,576
Shreveport, Louisiana..................................... 38,734 37,356 36,424
Roosevelt, Utah(1)........................................ 4,217 6,237 6,455
------ ------ ------
58,703 59,222 58,455
====== ====== ======
Refining capacity (at year end)
Oil City, Pennsylvania....................................... 16,500 16,500 16,500
Shreveport, Louisiana........................................ 46,200 46,200 46,200
Roosevelt, Utah(1)........................................... -- 8,000 8,000
------ ------ ------
62,700 70,700 70,700
====== ====== ======
Refinery utilization(1)........................................ 85.4% 83.8% 82.7%
====== ====== ======
</TABLE>

- ---------------
(1) As of September 30, 1994, Pennzoil ceased the processing of crude oil at its
refinery in Roosevelt, Utah. Reference is made to "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Motor Oil &
Refined Products" for more information.

PPC purchases from others the requirements of its marketing operations not
produced in its own refineries.

PPC owns and operates two lubricating specialty plants located in Karns
City, Pennsylvania and Dickinson, Texas. These plants manufacture petrolatums,
white oils, ink solvents, sulfonates, waxes and other specialty petroleum
products using feedstocks from PPC's refineries. These products are marketed by
PPC's PENRECO(R) and MAGIE BROS(R) divisions directly to manufacturers and
end-users. Additionally, Pennzoil continues to expand industrial specialty sales
into international markets, particularly in Asia, South America and Central
America.

PPC also owns the Eureka Pipe Line Company, which operates a crude oil
gathering system in West Virginia.

In June 1994, Conoco, Inc. ("Conoco") and Pennzoil agreed to carry out a
joint venture project at Conoco's refinery in Lake Charles, Louisiana. Operating
through a 50-50 joint venture, the companies will construct a new,
state-of-the-art lube oil hydrocracker facility estimated to cost approximately
$500 million, which is expected to be funded with project financing. The
facility will produce more than 16,000 barrels per day of high-quality base
oils, the base ingredient in finished lubricants. Site preparation began in the
third quarter of 1994, and the facility is expected to be completed in early
1997. Conoco is acting as construction manager and operator of the plant with
support positions staffed by both companies. The facility is intended to make
PPC substantially self-sufficient in low-cost, high-quality lube base stocks.
Additionally, engineering design is under way for a residual catalytic cracking
unit at the Atlas refinery, which should substantially lower the effective cost
of base oils produced at the facility.

10
<PAGE> 12

waxes. Pennzoil will transport partially refined feedstock from Utah to its
Rouseville refinery, which will produce paraffinic waxes and related products.
The new wax products, along with certain waxes from Petrolite and existing wax
products from Pennzoil's Atlas and Rouseville refineries, will be sold through
the partnership. More than $23 million will be invested by Pennzoil at its
Rouseville refinery and its packaging plant in nearby Reno, Pennsylvania in
connection with this venture. Marketing will begin in April 1995.

MARKETING. PENNZOIL(R) motor oil and lubricants are produced in six
domestic company-owned and operated blending and packaging plants (Alameda,
California; Portland, Oregon; Shreveport, Louisiana; Rouseville, Pennsylvania;
Vernon, California; and St. Louis, Missouri). In addition, two industrial
packaging plants, one located in Mundy's Corner, Pennsylvania and the other in
Marion, Illinois, produce lubricants for the commercial and industrial markets.

PENNZOIL(R) products are sold in all 50 states through 160 independent
distributors and 66 company-owned distribution facilities. Additionally,
PENNZOIL(R) brand gasoline is marketed through approximately 364 retail outlets
located in Pennsylvania, Ohio, New York, Virginia, West Virginia, Tennessee and
Kentucky. Kerosenes, diesel oils, fuel oils and other distillates are marketed
at both the retail and wholesale levels through distributors.

PPC competes with a number of other companies in the sale of motor oil and
refined products. Competition is based on price, service and quality, with
quality being of particular importance in the case of motor oils and other
petroleum specialty products.

Domestically, growth in the motor oil industry is expected to remain low
for the foreseeable future. Changes in consumer buying habits and in
distribution channels used to bring products to market are expected to continue
to affect all motor oil marketers. Large mass merchandisers and auto parts
chains are expected to increasingly be the channel of choice for consumers who
buy and change their own motor oil. Consumers who have oil changes performed for
them are, in greater numbers, turning to "fast lube" outlets for this service.

PPC is continuing its efforts to maintain PENNZOIL(R) as the leading motor
oil used by the installed market segment (fast lubes, service stations, auto
dealers, etc.). The installed market is expected to grow faster than the
industry as a whole. As consumers become increasingly concerned about the
environmental issues associated with changing their own oil, a continuing shift
to installers, who are generally better prepared to handle the disposition of
used oil and filters, is expected. Approximately 40% of all oil changes are done
by installers. Fast lube operations, by making oil changes convenient for the
consumer, are capturing an even larger share of the installed market by
attracting consumers who no longer change their own oil as well as business from
the other installer outlets (service stations, auto dealers, etc.). This shift,
which has been occurring since the early 1980s, is expected to continue. PPC
remains well-positioned within the installed market segment and is continuing
its efforts to satisfy the needs of this customer group to assure that the
benefits associated with this expected growth will be fully realized.

PPC is also one of America's leading marketers of fuel injector and
carburetor cleaners and other car care products under the GUMOUT(R) name. These
products are sold primarily to the consumer trade in the retail channels, but
GUMOUT(R) has an increasing presence in the installed market. WOLF'S HEAD(R)
lubricants are also marketed as a secondary value-priced line throughout the
U.S., alongside the PENNZOIL(R) lubricants brand.

PENNZOIL(R) motor oil and lubricants are marketed in 58 countries through
41 distributors, three licensees, four joint ventures and nine company-owned
marketing distribution centers. PPC has been active in Europe for many years and
in 1994 reorganized its Northern European operation to further capitalize on the
growth opportunities in that region. Part of that expansion has been focused on
emerging Eastern European countries, as well as a targeted marketing effort to
expand its presence in Italy.

In 1994, PPC purchased the company's partner in Spain, now called Pennzoil
Iberica, to further support the opportunity for increasing volume in Southern
Europe. PPC also entered into an equity position in 1994 with Industria de
Lubricantes Bolivianos S.A., its licensee in Bolivia, and PENNZOIL(R) has become
the second largest selling brand in the market in under a year. The continued
expansion in other areas of South America in 1994 will result in a strong
presence for the PENNZOIL(R) brand in Ecuador, Chile, Colombia,

11
<PAGE> 13

Peru and Argentina in 1995. PPC's position in Australia, where PENNZOIL(R) motor
oil is available in all states, grew steadily in 1994. Construction of a new
refining, blending and packaging plant is scheduled for completion in 1995 by
PPC's licensee in Indonesia, where PPC is the country's only
government-authorized private manufacturer of branded lubricants. PPC's joint
venture operation in India continued to realize substantial growth in sales and
market share during 1994. PPC has also begun the process of expansion into new
markets such as Brazil, Vietnam and China.

PPC considers the above-mentioned trademarks used in its motor oil and
refined products operations to have significant marketing value, primarily in
identifying Pennzoil and its products.

The following table sets forth information with respect to quantities sold
externally by the marketing and manufacturing operations during the years
indicated.

<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(BARRELS PER DAY)
<S> <C> <C> <C>
Gasoline and naphtha................................. 24,168 25,106 23,873
Distillates and gas oils............................. 29,978 28,512 29,038
Lubricating oil and other specialty products......... 23,079 23,072 22,595
Residual fuel oils................................... 3,361 2,160 1,785
------ ------ ------
80,586 78,850 77,291
====== ====== ======
</TABLE>

FRANCHISE OPERATIONS

Jiffy Lube franchises, owns and operates automotive service centers. JIFFY
LUBE(R) service centers offer convenient automotive maintenance services for
which no appointment is required. Jiffy Lube's standard full service includes
oil change and filter replacement, chassis lubrication, checking for proper tire
inflation, window washing, interior vacuuming, checking and topping off of
transmission, differential, windshield washer, battery and power steering fluid
levels and air filter and windshield wiper blade examination. JIFFY LUBE(R)
service centers also provide other authorized services and products at
additional cost.

At December 31, 1994, 1,141 JIFFY LUBE(R) service centers were open
worldwide, including 1,132 in the United States. Domestically, franchisees
operated 706 of the service centers and Jiffy Lube operated the remaining 426.
The service centers generally are clustered in metropolitan areas throughout the
United States.

SULPHUR

OTHER INTERESTS

Richland owns approximately 576,000 acres of surface properties and certain
mineral rights to approximately 726,000 acres in the Raton Basin area of New
Mexico and Colorado. The table included under the caption "Oil and Gas -- Oil
and Gas Properties," showing Pennzoil's developed and undeveloped oil and gas
acreage, includes the mineral rights to 726,000 acres held by Richland in the
Raton Basin.

12
<PAGE> 14

EMPLOYEES

The following table sets forth the number of Pennzoil employees by segment
at December 31 of each of the years indicated:

<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Oil and Gas...................................................... 1,670 1,627 1,544
Motor Oil & Refined Products..................................... 2,860 2,929 2,907
Franchise Operations............................................. 5,090 4,425 3,532
Sulphur.......................................................... 247 257 379
Corporate and Other.............................................. 634 663 763
------ ------ ------
Total.................................................. 10,501 9,901 9,125
====== ====== ======
</TABLE>

The increase in employees as of December 31, 1994 and 1993, respectively,
is primarily attributable to an increase in the number of company-owned service
centers in the franchise operations segment.

Approximately 9% of Pennzoil's employees are represented by various labor
unions. Collective bargaining agreements are in force with most of the unions.

Pennzoil is subject to various federal and state laws and regulations
governing employment practices and working conditions, including Title VII of
the Civil Rights Act of 1964, as amended, the Equal Pay Act of 1963, the Civil
Rights Act of 1991, the Americans with Disabilities Act of 1990, the Family and
Medical Leave Act of 1993, the Drug Free Workplace Act of 1989, the Age
Discrimination in Employment Act of 1967, as amended, the Rehabilitation Act of
1973, as amended, the Vietnam Era Veterans' Readjustment Assistance Act of 1974,
as amended, the Occupational Safety and Health Act of 1970, the Fair Labor
Standards Act of 1938, as amended, the National Labor Relations Act of 1935, as
amended, and Executive Order 11246.

GOVERNMENT REGULATION

Pennzoil's operations are affected from time to time in varying degrees by
political developments and federal and state laws and regulations. In
particular, oil and gas operations and economics are affected by changing price
control, tax and other laws relating to the petroleum industry and by constantly
changing administrative regulations.

NATURAL GAS ACT, NATURAL GAS POLICY ACT AND NATURAL GAS WELLHEAD DECONTROL
ACT. Until recently, Pennzoil and other natural gas producers were subject to
comprehensive sales price and service regulation by the Federal Energy
Regulatory Commission ("FERC") under the Natural Gas Act and the Natural Gas
Policy Act of 1978. However, the Natural Gas Wellhead Decontrol Act of 1989
provided for the phased elimination of all remaining federal natural gas pricing
and sales regulation of "first sales", including all wellhead sales and sales by
nonpipeline marketing entities, by January 1, 1993. As a result, all natural gas
sales by Pennzoil can be made at market prices.

The FERC's jurisdiction over the interstate natural gas transportation
industry was unaffected by the Natural Gas Wellhead Decontrol Act. However, as a
result of "first sale" deregulation and in an effort to increase competition in
the selling and purchasing of natural gas, the FERC has issued a series of
orders that have led to the restructuring of the interstate pipelines' rates and
services and the granting to the pipelines' customers, producers and other
non-pipeline natural gas merchants of open and nondiscriminatory access to the
pipelines' transportation, storage and related services. This restructuring has
occurred over several years, culminating in 1992 with FERC's issuance of Order
No. 636, which caused all interstate pipelines to restructure their services
along open access principles, commencing with the 1993-1994 winter heating
season. In addition to its industry-wide orders such as Order No. 636, numerous
individual pipeline orders were issued in highly contested proceedings. As a
result, numerous appeals of these orders are now pending on appeal, and Pennzoil
cannot predict what action the reviewing courts or FERC may take on these
matters. Under the

13
<PAGE> 15

current arrangements, however, the marketing flexibility of non-pipeline natural
gas merchants such as Pennzoil has been significantly enhanced.

PETROLEUM PRICE CONTROL AND ALLOCATION LAWS. From time to time, the federal
government has imposed allocation and price controls upon firms engaged in
marketing crude oil and other petroleum products. However, since the 1981
lifting of federal price controls, sales of crude oil and other petroleum
products can be made at market prices.

FEDERAL AND STATE PRODUCTION REGULATIONS. Pennzoil's oil and gas
exploration and production operations are subject to various types of regulation
at the federal, state and local levels. Federal regulation of Pennzoil's
offshore Gulf of Mexico leases is accomplished by the Minerals Management
Service of the Department of the Interior ("MMS"). The FERC also has
jurisdiction over certain offshore activities pursuant to the Outer Continental
Shelf Lands Act. State regulation typically includes requiring drilling permits
and the maintenance of bonds in order to drill or operate wells; the regulation
of the location of wells, the method of drilling and casing of wells and the
surface use and restoration of properties upon which wells are drilled; and the
plugging and abandoning of wells. Pennzoil's operations are also subject to
various conservation regulations, including regulation of the size of drilling
and spacing units or proration units, the density of wells that may be drilled
in a given area and the unitization or pooling of oil and gas properties. In
this regard, some states allow the forced pooling or integration of lands and
leases. In addition, state conservation laws establish maximum rates of
production from oil and gas wells, generally prohibit the venting or flaring of
gas and impose certain requirements regarding the ratability of production. The
effect of these regulations may be to limit the amounts of crude oil, condensate
and natural gas Pennzoil can produce from its wells and the number of wells or
the locations at which Pennzoil can drill.

ENVIRONMENTAL MATTERS. Pennzoil's operations in the United States are
subject to numerous federal, state and local laws and regulations controlling
the discharge of materials into the environment or otherwise relating to the
protection of the environment and human health and safety.

The 1990 Amendments to the federal Clean Air Act require, among other
things, more stringent controls on industrial plants in areas of high air
pollution, a tightening of fuel and emission standards for motor vehicles
(including certain requirements to use reformulated gasoline) and the imposition
by the Environmental Protection Agency ("EPA") of restrictions on the emissions
of hazardous air pollutants. While the precise effect of the Clean Air Act
Amendments on Pennzoil and other industrial companies is uncertain because most
of the Act's requirements will be implemented through EPA regulations to be
issued over a period of years, it is likely that the programs governing
hazardous air pollutants and auto fuels and emissions will require changes in
procedures and equipment in certain of Pennzoil's operations that could impose
substantial costs on Pennzoil. For example, in 1993, Pennzoil was required to
incur capital expenditures of $26.6 million for a diesel desulfurization and
dewaxing project at its Atlas refinery in Shreveport, Louisiana.

The U.S. Oil Pollution Act of 1990 ("OPA '90") imposes a variety of
requirements on "responsible parties" (which can include Pennzoil or its
subsidiaries) related to the prevention of oil spills and liability for damages
resulting from such spills. OPA '90 also imposes the obligation on responsible
parties to demonstrate certain levels of financial responsibility. The effect of
OPA '90 on Pennzoil and other offshore oil and gas operators is uncertain
because the MMS has not yet finalized implementing regulations. Pennzoil cannot
predict the final form of the financial responsibility regulations that will be
adopted by the MMS, but such regulations have the potential to result in the
imposition of substantial costs on Pennzoil.

Pennzoil is also subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
the Comprehensive Environmental Response, Compensation, and Liability Act, the
Resource Conservation and Recovery Act and similar state statutes. In response
to liabilities associated with these activities, accruals have been established
when reasonable estimates are possible. Pennzoil adjusts the accruals when new
remediation responsibilities are discovered and probable costs become estimable,
or when current remediation estimates must be adjusted to reflect new
information.

Pennzoil's assessment of the potential impact of these environmental laws
is subject to uncertainty due to the difficult process of estimating and
refining remediation costs that are subject to ongoing and evolving

14
<PAGE> 16

change. Initial estimates of remediation costs reflect a broad-based analysis of
site conditions and potential environmental and human health impacts derived
from preliminary site investigations (including soil and water analysis,
migration pathways and potential risk). Later changes in these initial estimates
may be based on additional site investigations, completion of feasibility
studies (comparing and selecting from among various remediation methods and
technologies) and risk assessments (determining the degree of current and future
risk to the environment and human health, based on current scientific and
regulatory criteria) and finally the actual implementation of the remediation
plan. This process occurs over relatively long periods of time and is influenced
by regulatory and community approval processes and subject to the ongoing
development of remediation technologies. Pennzoil's assessment analysis takes
into account the state of the process each site is in at the time of estimation,
the degree of uncertainty surrounding the estimates for each phase of
remediation and other site specific factors.

Capital outlays of approximately $87.2 million have been made by Pennzoil
since January 1992 with respect to environmental protection. Capital
expenditures for environmental control facilities are currently expected to be
approximately $33 million in 1995. Reference is made to "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Capital
Resources and Liquidity -- Environmental Matters" for additional information.

FRANCHISEE MATTERS. Jiffy Lube is subject to, and devotes substantial
efforts to compliance with, a variety of federal and state laws governing
franchise sales and marketing and franchise trade practices. Although the
regulatory environment differs by state, applicable laws and regulations
generally require disclosure of business information in connection with the sale
of franchises. Certain state regulations also affect the ability of the
franchisor to revoke or refuse to renew a franchise. Jiffy Lube seeks to comply
with applicable regulatory requirements. However, given the scope of Jiffy
Lube's business and the nature of franchise regulations, compliance problems can
be encountered from time to time.

ITEM 3. LEGAL PROCEEDINGS.

(A) CURTAILMENT DAMAGE ACTIONS. Reference is made to Note 8 of Notes to
Consolidated Financial Statements for information regarding a lawsuit in which
Pennzoil has been joined as a defendant for damages allegedly caused by
curtailment of deliveries of gas by United Gas Pipe Line Company in 1974, a
former Pennzoil subsidiary, to its customers.

(B) ENVIRONMENTAL MATTERS. In June 1994, Pennzoil received an
Administrative Complaint from the EPA alleging violation of the Superfund
Amendments and Reauthorization Act in connection with reporting requirements
under this statute, and the EPA regulations relating thereto, with respect to
Pennzoil's refinery in Roosevelt, Utah. The complaint seeks civil penalties of
$329,000. Pennzoil intends to vigorously contest both the alleged liability and
the amount of the proposed penalty. In July 1994, the West Virginia Division of
Environmental Protection opened negotiations with Pennzoil and Pennzoil's
indirect subsidiary Eureka Pipe Line Company ("Eureka") for a consent order
addressing numerous environmental matters relating to operations of Pennzoil and
Eureka. As currently proposed by the state agency, the consent order would
require Eureka to undertake environmental remediation at several locations and
would impose civil penalties of approximately $1.5 million. Pennzoil and Eureka
are investigating the state's position, but currently intend to vigorously
contest many of the state's claims and the amount of any civil penalty assessed.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matter was submitted during the fourth quarter of 1994 to a vote of
security holders.

15
<PAGE> 17

ITEM S-K 401(B). EXECUTIVE OFFICERS OF THE REGISTRANT.

(a) Set forth below are the names and ages of the executive officers of
Pennzoil (at February 21, 1995). Positions, unless otherwise specified, are with
Pennzoil.

DAVID P. ALDERSON, II (45)
Group Vice President -- Finance and Treasurer

CLYDE W. BEAHM (57)
Group Vice President -- Franchise Operations

LINDA F. CONDIT (47)
Corporate Secretary

THOMAS M. HAMILTON (51)
Group Vice President -- Oil and Gas

TERRY HEMEYER (56)
Group Vice President -- Administration

MARK A. MALINSKI (39)
Group Vice President -- Accounting and Controller

JAMES L. PATE (59)(1)
Chairman of the Board,
President and Chief Executive Officer

WILLIAM M. ROBB (50)
Group Vice President -- Products Manufacturing

JAMES W. SHADDIX (48)
General Counsel

WILLIAM E. WELCHER (62)
Group Vice President -- Products Marketing

- ---------------

(1) Director of Pennzoil and member of Executive Committee.

(b) Officers are appointed annually to serve for the ensuing year or until
their successors have been appointed. Officers listed above have held their
present offices for at least the past five years except for those named below,
who have had the business experience indicated during that period. Positions,
unless specified otherwise, are with Pennzoil.

DAVID P. ALDERSON, II -- Group Vice President -- Finance since February 1992 and
Treasurer since August 1989. Senior Vice President -- Finance from March 1990
to February 1992. Assistant Treasurer prior thereto.

CLYDE W. BEAHM -- Group Vice President -- Franchise Operations since July 1992.
Executive Vice President -- Franchise Operations from February 1992 to July
1992. Senior Vice President -- Franchise Operations from May 1991 to February
1992. Vice President -- Quick Lube Operations prior thereto.

LINDA F. CONDIT -- Corporate Secretary since March 1990. Director -- Treasury
Operations prior thereto.

THOMAS M. HAMILTON -- Group Vice President -- Oil and Gas since December 1991.
Chief Executive -- Frontier and International Operating Company of BP
Exploration prior thereto.

TERRY HEMEYER -- Group Vice President -- Administration since February 1992.
Senior Vice President -- Administration from March 1990 to February 1992. Vice
President -- Public Affairs prior thereto.

MARK A. MALINSKI -- Group Vice President -- Accounting since February 1992 and
Controller since March 1990. Senior Vice President -- Accounting from March
1990 to February 1992. Corporate Secretary prior thereto.

JAMES L. PATE -- Chairman of the Board since May 1994 and President and Chief
Executive Officer since March 1990. Chief Operating Officer from February to
March 1990 and Executive Vice President prior thereto.

WILLIAM M. ROBB -- Group Vice President -- Products Manufacturing since October
1992. Executive Vice President -- Manufacturing of Pennzoil Products Company
prior thereto.

JAMES W. SHADDIX -- General Counsel since March 1990. Assistant General Counsel
prior thereto.

WILLIAM E. WELCHER -- Group Vice President -- Products Marketing since October
1992. Executive Vice President -- Marketing of Pennzoil Products Company prior
thereto.

16
<PAGE> 18

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

The following table shows high and low sales prices for the common stock of
Pennzoil as reported on the New York Stock Exchange (consolidated transactions
reporting system), the principal market in which the common stock is traded, and
dividends paid per share for the calendar quarters indicated. The common stock
is also listed for trading on the Pacific Stock Exchange, as well as the
Toronto, London and Swiss stock exchanges.

<TABLE>
<CAPTION>
1994 1993
--------------------------- ----------------------------
MARKET PRICE MARKET PRICE
---------------- ----------------
QUARTER ENDED HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
------------------------------------ ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
March 31............................ $56.38 $49.13 $.75 $59.00 $49.38 $.75
June 30............................. $52.50 $45.75 $.75 $65.75 $56.88 $.75
September 30........................ $52.38 $46.63 $.75 $70.75 $60.50 $.75
December 31......................... $52.88 $43.00 $.75 $66.25 $52.00 $.75
</TABLE>

Pennzoil has paid quarterly dividends for 71 consecutive years.

As of December 31, 1994, Pennzoil had 20,025 record holders of its common
stock.

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<PAGE> 19

ITEM 6. SELECTED FINANCIAL DATA.

The following table contains selected financial data for the five years
indicated.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(EXPRESSED IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................................... $2,562.9 $2,782.4 $2,356.7 $2,314.8 $2,366.7
Income (loss) from
Continuing operations (1)................ $ (283.8) $ 160.3 $ 17.4 $ 40.1 $ 93.8
Discontinued operations (2).............. -- -- 11.7 29.9 --
Extraordinary items (3).................. -- (18.4) (16.6) -- --
Cumulative effect of changes in
accounting principles (4)............. (4.9) -- 115.7 (49.0) --
-------- -------- -------- -------- --------
Net income (loss).......................... $ (288.7) $ 141.9 $ 128.2 $ 21.0 $ 93.8
Earnings (loss) per share
Continuing operations.................... $ (6.16) $ 3.80 $ .43 $ .99 $ 2.37
Discontinued operations (2).............. -- -- .29 .74 --
-------- -------- -------- -------- --------
Earnings (loss) per share before
extraordinary items and cumulative
effect of changes in accounting
principles............................ $ (6.16) $ 3.80 $ .72 $ 1.73 $ 2.37
Extraordinary items (3).................. -- (.44) (.41) -- --
Cumulative effect of changes in
accounting principles (4)............. (.11) -- 2.85 (1.21) --
-------- -------- -------- -------- --------
Total............................ $ (6.27) $ 3.36 $ 3.16 $ .52 $ 2.37
Dividends per common share................. $ 3.00 $ 3.00 $ 3.00 $ 3.00 $ 3.00
Total assets............................... $4,715.8 $4,886.2 $4,457.2 $5,108.0 $5,262.5
Long-term debt, including current
maturities, and capital lease
obligations.............................. $2,254.6 $2,077.8 $2,031.7 $2,321.7 $2,467.5
Total shareholders' equity (5)............. $1,204.3 $1,505.8 $1,180.2 $1,164.1 $1,251.6
</TABLE>

- ---------------

(1) Reference is made to Note 8 of Notes to Consolidated Financial Statements.

(2) Represents results of Purolator Products Company, which was sold in 1992.
Reference is made to Note 11 of Notes to Consolidated Financial Statements.

(3) In 1993 and 1992, Pennzoil redeemed amounts outstanding under several debt
facilities using proceeds from various sources. The premiums and related
unamortized discount and debt issue costs relating to these redemptions
resulted in extraordinary charges of $18.4 million ($28.3 million before
tax), or $.44 per share, in 1993 and $16.6 million ($25.2 million before
tax), or $.41 per share, in 1992.

(4) Reference is made to Notes 2 and 6 of Notes to Consolidated Financial
Statements for discussion of 1994 and 1992 events, respectively. In
December 1991, Pennzoil announced its decision to change its method of
accounting for postretirement benefit costs other than pensions by adopting
the new requirements of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective as of January 1,
1991. Pennzoil recorded a charge of $49.0 million ($74.2 million before
tax), or $1.21 per share, in 1991 to reflect the cumulative effect of the
change in accounting principle for periods prior to 1991.

(5) Reference is made to Note 1 of Notes to Consolidated Financial Statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

Reference is made to Industry Segment Financial Information included in
Item 1, Business and Item 2, Properties and the Consolidated Financial
Statements beginning on page F-3 for additional information.

RESULTS OF OPERATIONS

A net loss of $288.7 million, or $6.27 per share, was recorded for 1994
compared with net income of $141.9 million, or $3.36 per share, for 1993 and
$128.2 million, or $3.16 per share, for 1992. Results for 1994 include net
charges of $210.4 million ($388.2 million before tax), or $4.57 per share,
associated with the

18
<PAGE> 20

settlement of a dispute with the Internal Revenue Service ("IRS") relating to a
proposed tax deficiency based on an audit of Pennzoil's 1988 federal income tax
return. Reference is made to "-- Capital Resources and Liquidity" and Note 8 of
Notes to Consolidated Financial Statements for additional information.

Results of operations for 1994 also include a $21.1 million ($32.5 million
before tax), or $.46 per share, charge associated with the cessation of crude
oil processing at Pennzoil's Roosevelt, Utah refinery, a $32.6 million ($50.2
million before tax), or $.71 per share, charge in connection with the agreement
providing for the sale by Pennzoil to Freeport-McMoRan Resource Partners,
Limited Partnership ("Freeport-McMoRan") of substantially all the domestic
assets of Pennzoil's sulphur segment, and a $9.9 million ($15.2 million before
tax), or $.22 per share, charge to reflect adjustments of recorded values of
certain real estate properties. Reference is made to "-- Motor Oil & Refined
Products", "-- Sulphur" and "-- Other", respectively, for additional
information.

Effective January 1, 1994, Pennzoil changed its method of accounting for
postemployment benefit costs by adopting the new requirements of Statement of
Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits." As a result, Pennzoil recorded a charge of $4.9
million ($7.6 million before tax), or $.11 per share, as of January 1, 1994, to
reflect the cumulative effect of change in accounting principle for the periods
prior to 1994.

In November 1993, Pennzoil sold 8,158,582 shares of Chevron Corporation
("Chevron") common stock in a block trade on the New York Stock Exchange
("NYSE") for a net price of $88.38 per share. The sale resulted in a net
realized gain of $137.0 million ($171.6 million before tax), or $3.25 per share.
Reference is made to "-- Capital Resources and Liquidity" for additional
information.

In September 1993, Pennzoil called for redemption an aggregate of $292.5
million principal amount of indebtedness. The premiums and related unamortized
discount and debt issue costs relating to these redemptions resulted in an
extraordinary charge of $13.7 million ($21.1 million before tax), or $.32 per
share, in 1993. In June 1993, Pennzoil called for redemption $96.1 million
principal amount of indebtedness (which redemption occurred in July 1993). The
premiums and related unamortized discount and debt issue costs relating to these
redemptions resulted in an extraordinary charge of $4.7 million ($7.2 million
before tax), or $.11 per share, in 1993.

In August 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted,
establishing a new 35% corporate income tax rate effective January 1, 1993. As a
result of the increase in the marginal income tax rate and other tax law
changes, Pennzoil recorded a one-time, non-cash charge of $16.0 million, or $.38
per share, in 1993 to adjust its deferred income tax liabilities and assets for
the effect of the change in income tax rates.

In December 1992, Pennzoil announced its decision to change its method of
accounting for income taxes by adopting the new requirements of SFAS No. 109,
"Accounting for Income Taxes," effective as of January 1, 1992. As a result,
Pennzoil recognized an increase to net income of $119.1 million in 1992. Of this
amount, $115.7 million, or $2.85 per share, was reported as the one-time
cumulative effect on prior year results. The remaining $3.4 million, or $.08 per
share, reflected the impact of adoption of this standard on 1992 income from
continuing operations. Reference is made to Note 2 of Notes to Consolidated
Financial Statements for additional information.

In December 1992, Pennzoil sold in initial public offerings all its shares
of capital stock of Purolator Products Company ("Purolator"). Pennzoil recorded
a net gain on the disposition of Purolator of $1.5 million, or $.04 per share,
in 1992. Reference is made to "-- Discontinued Operations" and Note 11 of Notes
to Consolidated Financial Statements for additional information.

In December 1992, Pennzoil called for redemption $272.9 million principal
amount of indebtedness (which redemption occurred in February 1993). As of
December 31, 1992, this indebtedness was defeased by placing funds required for
the redemption with the trustee for the indebtedness. As a result, the funds
deposited with the trustee for the redemption of the debentures and the
principal amount of the indebtedness were not reflected in Pennzoil's
consolidated balance sheet at December 31, 1992. The premiums and related
unamortized discount and debt issue costs relating to this redemption resulted
in an extraordinary charge of $16.6 million ($25.2 million before tax), or $.41
per share, in 1992.

19
<PAGE> 21

Investment and other income, net, for 1994 and 1992 primarily represents
dividend income from Pennzoil's investment in Chevron common stock. Investment
and other income, net, for 1993 primarily represents a pretax gain of $171.6
million from Pennzoil's sale of 8,158,582 shares of Chevron common stock and
dividend income from Pennzoil's investment in Chevron common stock. Pennzoil
beneficially owned 18,071,036 shares of Chevron common stock as of December 31,
1994, after giving effect to a "two-for-one" split of Chevron common stock in
June 1994. The shares of Chevron common stock beneficially owned by Pennzoil are
classified as non-current marketable securities and other investments in the
accompanying consolidated balance sheet. Reference is made to "-- Capital
Resources and Liquidity" for additional information.

OIL AND GAS

The oil and gas segment recorded an operating loss of $4.9 million in 1994,
compared with operating income of $159.2 million in 1993 and $134.7 million in
1992. The reduction in operating income was attributable to weak oil and gas
prices, increased depreciation, depletion and amortization of $93.9 million
related to the settlement of a tax dispute with the IRS, and other nonrecurring
net charges totaling $36.8 million.

In October 1992, Pennzoil completed a tax-free transaction with Chevron,
pursuant to which Pennzoil exchanged 15,750,000 shares of Chevron common stock
beneficially owned by Pennzoil for all the capital stock of Pennzoil Petroleum
Company ("Pennzoil Petroleum"), which owned Gulf of Mexico, Gulf Coast, Permian
Basin and other domestic oil and gas producing properties. The exchange of stock
was accounted for using the purchase method of accounting, and the results of
operations of Pennzoil Petroleum subsequent to October 30, 1992 have been
included in Pennzoil's oil and gas segment results. Included in the assets of
Pennzoil Petroleum at the time of the transfer to Pennzoil was $57.4 million in
cash contributed by Chevron to Pennzoil Petroleum immediately prior to closing,
representing the net cash flow from Pennzoil Petroleum's operations during the
four-month period between the "effective date" and the closing date of the
transaction, after reduction as a result of nonrecurring closing adjustments of
approximately $11 million. As a result of an audit completed during 1993,
Chevron contributed an additional $9.9 million in cash to Pennzoil Petroleum in
1993, representing an adjustment to the initial $57.4 million cash contribution
made by Chevron to Pennzoil Petroleum prior to closing. This additional
contribution from Chevron was accounted for as an adjustment to the original
purchase price of Pennzoil Petroleum. As a result of an audit conducted during
1994, Chevron contributed an additional $6.8 million in cash to Pennzoil
Petroleum in 1994, representing post-closing adjustments related to the
acquisition. Reference is made to Note 10 of Notes to Consolidated Financial
Statements for additional information.

As a result of the IRS settlement in October 1994, Pennzoil increased the
balance of its investment in Pennzoil Petroleum capital stock for financial
reporting purposes and, therefore, the carrying value of Pennzoil Petroleum's
oil and gas properties by $390.3 million, and such increased investment resulted
in a $93.9 million increase in depreciation, depletion and amortization expense
recognized in October 1994 relating to Pennzoil Petroleum's oil and gas
properties from the date of the acquisition of Pennzoil Petroleum to the date of
the IRS settlement. These adjustments resulted in a net increase in property,
plant and equipment of $296.4 million as of September 30, 1994, while interest
charges and depreciation, depletion and amortization expense adjustments related
to the IRS settlement reduced Pennzoil's 1994 pretax income by $388.2 million.
In addition, oil and gas segment earnings will be reduced in future periods by
comparably higher depreciation, depletion and amortization expense as a result
of the increase in the investment in Pennzoil Petroleum's oil and gas
properties. Reference is made to Note 8 of Notes to Consolidated Financial
Statements for additional information.

Oil and gas production volumes increased approximately 10% for 1994
compared to 1993, despite a reduction in production associated with the 1993
sale of a net 60 Bcf of proved natural gas reserves and a net 3 million barrels
of proved oil reserves. The increase in production volumes was primarily as a
result of accelerated Gulf of Mexico drilling and the addition of the oil and
gas properties of Co-enerco Resources Ltd. ("Co-enerco"). Natural gas produced
for sale in 1994 was 716,962 Mcf per day, compared with 649,399 Mcf per day and
447,561 Mcf per day in 1993 and 1992, respectively. Natural gas prices averaged
$1.79 per Mcf in

20
<PAGE> 22

1994 compared to $2.04 per Mcf in 1993 and $1.81 per Mcf in 1992. Liquids
volumes in 1994 were 68,709 barrels per day, compared to 64,273 and 39,462
barrels per day in 1993 and 1992, respectively. The average liquids price
received in 1994 dropped to $13.74 per barrel, compared with $14.90 per barrel
in 1993 and $16.95 per barrel in 1992.

The results of operations from Pennzoil's oil and gas segment are subject
to volatility resulting from changes in crude oil and natural gas prices.
Pennzoil has used in the past, and may use in the future, a limited price-risk
management strategy to provide protection against temporary declines in domestic
natural gas prices. To date, these price-risk management activities have
encompassed no more than 3% of Pennzoil's total annual natural gas production.

In February 1995, Pennzoil and Brooklyn Union Gas Co. announced that their
subsidiaries, Pennzoil Gas Marketing Company and BRING Gas Services Corp., would
form a 50-50 gas marketing joint venture. Pennzoil currently expects to
contribute approximately $3 million in cash to the venture and to commit
substantially all of its natural gas production from the continental U.S. to be
marketed through the venture.

Pennzoil disposed of approximately 90 producing oil and gas fields in 1994,
continuing its asset highgrading program begun in 1992, and decreasing the
number of producing fields in which Pennzoil had an interest from approximately
800 in early 1993 to approximately 400 at the end of 1994. Reference is made to
"-- Capital Resources and Liquidity -- Assessment of Oil and Gas Properties" for
additional information.

Expenses associated with exploration activities in 1994 were $61.0 million
compared with $70.7 million in 1993 and $11.7 million in 1992. Exploration
expenses in 1994 included a $9.6 million charge for impairments of unproved
property costs and an increase in geological and geophysical expenses of $7.2
million over 1993 associated with an increase in Pennzoil's domestic exploration
and development activity and the continuing assessment of its domestic oil and
gas properties. In the early stages of this assessment, Pennzoil curtailed
domestic exploration activity and, as a result, reduced its 1992 capital budget
related to both exploration and development activity and geological and
geophysical expenses. As this assessment has progressed, more exploration and
development activity has occurred in and around core areas.

Operating results for 1994 included a charge of $24.3 million for the
write-down of an investment in a Siberian drilling partnership and $13.8 million
in charges associated with the impending disposition of other various non-core
assets.

Depreciation, depletion and amortization expense in 1994 and 1993 include
charges of $29.8 and $17.7 million, respectively, to increase an impairment
reserve originally established in 1988 related to Pennzoil's net investment in
offshore California producing properties. Generally lower offshore California
oil prices, a reassessment of remaining reserves and revisions to other
projected economic parameters led Pennzoil to determine that additional
impairments were necessary.

In June 1994, Pennzoil Canada, Inc. ("Pennzoil Canada"), an indirect wholly
owned subsidiary of Pennzoil, acquired Co-enerco, a Canadian oil and gas
exploration and production company operating in Alberta, northeastern British
Columbia and southeastern Saskatchewan. Pennzoil Canada paid $230.9 million in
cash in connection with the acquisition of Co-enerco and the repayment of
Co-enerco's outstanding bank debt, which was financed primarily through two
credit facilities. The acquisition of Co-enerco was accounted for using the
purchase method of accounting, and the results of operations of Co-enerco
subsequent to June 30, 1994 have been included in Pennzoil's oil and gas segment
results. Reference is made to Notes 3 and 10 of Notes to Consolidated Financial
Statements for additional information.

In July 1994, Pennzoil Qatar, Inc. ("Pennzoil Qatar"), an indirect wholly
owned subsidiary of Pennzoil, was awarded the rights to explore acreage of Block
8 offshore Qatar. The block is located 50 miles from shore in the Arabian Gulf
and is adjacent to three large producing oil fields. Under the production
sharing agreement, Pennzoil Qatar has committed to a seismic acquisition and
drilling program over the next four years. Seismic acquisition is planned for
the second quarter of 1995; drilling will begin late this year or early in 1996,
with four wells planned over the next several years.

21
<PAGE> 23

In September 1994, the State Oil Company of the Azerbaijan Republic
("SOCAR") and a consortium of foreign oil companies, which includes Pennzoil,
signed an oil production sharing contract for development of the Azeri, Chirag
and a deep-water portion of the Guneshli fields in the Caspian Sea. The contract
was ratified by the National Parliament of the Republic of Azerbaijan in
November 1994 and was made effective in December 1994. Aggregate capital
investment for all the participants in the consortium is estimated to be between
$7 and $8 billion over the 30-year life of this project to develop an estimated
4 billion barrels of recoverable reserves. Pennzoil's 9.82% share has the
potential to add net reserves estimated in the range of 300 million barrels once
the area is developed. The contract includes a $300 million bonus to be paid by
the consortium to the government of Azerbaijan in a phased manner over the life
of the project. The bonus payment is payable in three installments. The first
bonus payment made by the consortium was equal to 50% of the total bonus.
Pennzoil's proportionate share was $17.8 million, of which $11.9 million was
paid in cash and $5.9 million was credited toward Pennzoil's prior investment in
a gas utilization project in Azerbaijan. The second bonus payment, equal to 25%
of the total bonus, will be due 30 days from the date when production in the
contract area reaches an average rate of 40,000 barrels of crude oil per day and
is sustained for a period of 60 days. The remaining bonus payment will be due
within 30 days from the date when crude oil has been exported from the main
export pipeline for a sustained period of 60 days.

In November 1994, Pennzoil Egypt, Inc., an indirect wholly owned subsidiary
of Pennzoil, and its Spanish partner, Repsol Exploracion Egypto S.A., were
selected to explore the Southeast Gulf of Suez Block offshore Egypt. The block,
which is approximately the size of 44 Gulf of Mexico blocks, surrounds the Shoab
Ali oil field, which has significant oil reserves in place. The agreement
requires approval by the Egyptian Oil Ministry, cabinet and parliament. The
agreement calls for acquisition of 3-D seismic data and the drilling of one well
over the next two years following final approval of the agreement.

Capital expenditures for the oil and gas segment in 1994 were $399.5
million, excluding expenditures related to Pennzoil's acquisition of Co-enerco,
compared to $360.5 million in 1993, and $93.8 million in 1992, excluding
expenditures related to Pennzoil's acquisition of Pennzoil Petroleum. Total
capital expenditures for this segment in 1995 are estimated to be $334.2
million. Reference is made to "-- Capital Resources and Liquidity" for
additional information.

MOTOR OIL & REFINED PRODUCTS

Operating income in 1994 for this segment was $41.8 million, compared with
$90.0 million in 1993 and $77.9 million in 1992. Lower earnings in the
manufacturing division in 1994 resulted primarily from a third quarter charge of
approximately $32.5 million associated with the cessation of crude oil
processing at Pennzoil's Roosevelt, Utah refinery. Total processed volume at the
refineries of 58,703 barrels per day in 1994 was 519 barrels per day lower than
1993 but 248 barrels per day higher than 1992. Also contributing to lower
earnings in the manufacturing division were expenses incurred related to the
start-up of a joint venture project with Conoco, Inc. ("Conoco") described
below. Lower earnings in the domestic marketing division primarily resulted from
lower GUMOUT(R) sales volumes and margins and higher advertising expense,
partially offset by higher revenues from all other products. Domestic motor oil
volumes were about 1% higher than 1993 and 1992. Domestic motor oil margins
increased approximately 2% over 1993 margins and approximately 8% over 1992
margins. These margin increases were primarily the result of lower average crude
oil prices in 1994 versus 1993 and 1992. Higher earnings in the international
marketing division resulted primarily from increased revenues partially offset
by higher advertising and selling expenditures. Total international motor oil
and other lubricating product sales volumes, including those sold through
licensees and joint ventures, increased 36% when compared to 1993 and 70% when
compared to 1992.

In June 1994, Conoco and Pennzoil agreed to carry out a joint venture
project at Conoco's refinery in Lake Charles, Louisiana. Operating through a
50-50 joint venture, the companies will construct a new, state-of-the-art lube
oil hydrocracker facility estimated to cost approximately $500 million, which is
expected to be funded with project financing. The facility will produce more
than 16,000 barrels per day of high-quality base oils, the base ingredient in
finished lubricants. Site preparation began in the third quarter of 1994, and
the facility is expected to be completed in early 1997. Conoco is acting as
construction manager and operator of the plant with support positions staffed by
both companies.

22
<PAGE> 24

In September 1994, Pennzoil and the Polymers Division of Petrolite
Corporation ("Petrolite") agreed in principle to form the BARECO(R) Products
Company, a 50-50 partnership aimed at providing a broad line of wax products to
domestic and international purchasers of paraffin, microcrystalline and related
synthetic waxes. Pennzoil will transport partially refined feedstock from Utah
to its Rouseville refinery, which will produce paraffinic waxes and related
products. The new wax products, along with certain waxes from Petrolite and
existing wax products from Pennzoil's Atlas and Rouseville refineries, will be
sold through the partnership. More than $23 million will be invested by Pennzoil
at its Rouseville refinery and its packaging plant in nearby Reno, Pennsylvania
in connection with this venture. Marketing will begin in April 1995.

Capital expenditures for the motor oil and refined products segment were
$40.4 million in 1994, $71.5 million in 1993 and $35.8 million in 1992. The 1993
expenditures included $26.6 million for a diesel desulphurization and dewaxing
project at the Atlas refinery in Shreveport, Louisiana, which was required to
meet requirements promulgated under the 1990 Amendments to the federal Clean Air
Act. Also included were expenditures of $6.3 million for a feasibility study for
the base oil plant joint venture with Conoco and $4.8 million for the
acquisition of property, plant and equipment of a blending plant in Spain
(acquired in the first quarter of 1993). Capital expenditures for 1994 were
primarily at a level to maintain operations. Total capital expenditures for this
segment in 1995 are estimated to be $120.7 million. The 1995 capital budget
includes $41.3 million to begin construction of a refinery complex designed to
convert the Atlas refinery's lube oil by-products into clean burning gasoline
and diesel fuels. This upgrade project will allow Atlas to significantly
diversify its production capabilities and to realize higher profits from
by-products, which are currently sold at low values. The 1995 capital budget
also includes $20.5 million to provide for manufacturing facilities at the
Rouseville refinery and the Reno packaging plant to enable production of
additional waxes in connection with the Petrolite joint venture.

FRANCHISE OPERATIONS

The franchise operations segment, operating through Pennzoil's wholly owned
subsidiary Jiffy Lube International, Inc. ("Jiffy Lube"), recorded operating
income of $2.8 million during 1994, compared to operating losses of $17.6
million in 1993 and $13.4 million in 1992. Operating income in 1994 improved
significantly as a result of improvements in company center revenues and reduced
operating costs. Excluding legal settlement charges, selling, general and
administrative costs were down approximately $1.3 million. Operating results for
1994 include charges of $8.2 million for reserves for identified self-insured
claims, estimated environmental remediation costs, various litigation settlement
charges and other miscellaneous items. As of December 31, 1994, Jiffy Lube
operated 426 company-owned service centers.

Operating results for 1993 included a charge of $10.0 million for estimated
costs associated with centers that Jiffy Lube had decided to eliminate. Jiffy
Lube had determined that these centers were not viable as company-operated
centers and had been unsuccessful in subleasing many of these centers for
alternative uses. This provision for estimated costs takes into consideration
the present value of future lease obligations related to operating leases (less
estimated sublease rental revenue of existing subleases) and the estimated fair
value of land, buildings, leaseholds and leasehold improvements. Additionally,
1993 results included approximately $12.7 million for the settlement of certain
litigation, estimated environmental costs and write-downs of other individually
insignificant investments to reflect Jiffy Lube's estimate of the net
realizability of those investments. Operating results in 1992 included increased
selling and administrative expenses of $6.8 million incurred in connection with
the settlement of certain litigation and increased start-up expenses of $2.6
million incurred in association with the development and installation of a new
point-of-sale system.

Systemwide service center sales reported to Jiffy Lube for the year ended
December 31, 1994 increased $68.1 million, or approximately 12.6%, to $607.5
million, compared with the prior year, and increased $106.9 million, or
approximately 21.4%, compared with 1992. Average ticket prices increased to
$34.09 for the year ended December 31, 1994, compared with $33.60 and $33.23 for
the years ended December 31, 1993 and 1992, respectively.

During the year ended December 31, 1994, Jiffy Lube acquired 22 centers
with estimated values of $5.2 million and real estate with estimated values of
$1.1 million, in exchange for cash of $5.2 million,

23
<PAGE> 25

forgiveness of amounts due Jiffy Lube of $1.1 million, liabilities and debt
assumed of $.6 million and 4 centers with a net book value of $.3 million.
During the year ended December 31, 1993, Jiffy Lube acquired 70 centers with
estimated values of $15.8 million and real estate with estimated values of $.9
million in exchange for cash of $12.2 million, forgiveness of amounts due Jiffy
Lube of $.9 million, liabilities assumed of $.5 million, debt assumed of $.4
million and real estate valued at $1.6 million. During the year ended December
31, 1992, Jiffy Lube acquired 104 service centers with estimated values of $29.7
million in exchange for cash of $16.7 million, forgiveness of amounts due Jiffy
Lube of $2.8 million, liabilities assumed of $8.7 million and debt issued of
$1.5 million.

Capital expenditures for the franchise operations segment were $18.9
million in 1994, compared to $21.7 million and $25.8 million in 1993 and 1992,
respectively. Capital expenditures for 1995 are estimated to be approximately
$48.8 million.

SULPHUR

In October 1994, Pennzoil entered into an agreement with Freeport-McMoRan
providing for the sale by Pennzoil to Freeport-McMoRan of substantially all the
domestic assets of Pennzoil's sulphur segment. The transaction was completed in
January 1995. Pennzoil continues to own and operate its Antwerp, Belgium sulphur
terminal and the related international sulphur business. As consideration under
the agreement, Freeport-McMoRan assumed certain liabilities of Pennzoil relating
to or arising out of the business of Pennzoil's sulphur segment, and Pennzoil
will be entitled to receive a series of quarterly installment payments from
Freeport-McMoRan for periods through December 31, 2014, subject to the
prevailing market price of sulphur. The installment payments, recorded at their
estimated fair value of $22.5 million as of September 30, 1994, may be
terminated earlier by Freeport-McMoRan (through the exercise of a call option
providing for a $65 million payment to Pennzoil), or by Pennzoil (through the
exercise of a put option providing for a $10 million payment to Pennzoil).
Neither the call option nor the put option may be exercised prior to January
1999. In connection with this transaction, Pennzoil's sulphur segment recorded a
charge to depreciation, depletion and amortization expense of $50.2 million in
September 1994.

Excluding the $50.2 million pretax charge, the sulphur segment recorded an
operating loss of $7.2 million in 1994 compared to a loss of $20.8 million in
1993 and operating income of $1.0 million in 1992. The average Green Markets
Tampa Recovered Contract Price range for sulphur in 1994 had a mid-point of
$57.00 per long ton in 1994 compared to a 1993 mid-point of $64.00 per long ton
and a 1992 mid-point of $86.50 per long ton. Intense competition in the domestic
market has pushed sulphur prices down, primarily because of aggressive marketing
by U.S. producers. Partially offsetting these lower sulphur prices in 1994 were
lower unit costs due to reduced workforce expenses and reduced gas and water
treatment costs at the Culberson mine.

During 1994, sulphur sales volumes were 1.2 million long tons compared to
1.1 million long tons in 1993 and 1.7 million long tons in 1992. The lower level
of sales volumes in 1994 and 1993 were primarily due to reduced market share
resulting from lower priced imports from Canada and increased recovered
production domestically.

OTHER

Other operating income in 1994 was $55.6 million, compared to $253.7
million in 1993 and $88.2 million in 1992. Other operating income for 1994
includes a $15.2 million charge to reflect adjustment of recorded values of
certain real estate properties. The higher level of other income in 1993 was
primarily due to the gains of $171.6 million on the sale of shares of Chevron
common stock and $10.5 million on the sale of shares of Pogo Producing Company
common stock. Dividend income on the Chevron common stock was $33.4 million for
1994, $60.2 million for 1993 and $95.7 million for 1992.

24
<PAGE> 26

Other revenues, net of related expenses, are included in the consolidated
statement of income under "Investment and Other Income, Net" which consists of
the following:

<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Interest income.................................... $ 36,841 $ 11,002 $ 8,050
Dividend income.................................... 33,766 60,496 95,722
Realized gains on sales of marketable securities
and other investments............................ 500 182,057 298
Net gains on sales of assets....................... 37,530 35,222 3,198
Settlements and refunds............................ 1,793 824 3,501
Other income (expense), net........................ (22,316) 15,299 23,239
-------- -------- --------
$ 88,114 $304,900 $134,008
======== ======== ========
</TABLE>

Substantially all interest and dividend income is from marketable
securities and other cash investments.

INTEREST CHARGES, NET

Net interest expense for 1994 included interest charges of $294.3 million
associated with the IRS settlement. Reference is made to Note 8 of Notes to
Consolidated Financial Statements for additional information.

Excluding the interest expense associated with the IRS settlement, interest
charges, net of interest capitalized for 1994, increased $2.8 million over 1993
levels and decreased $42.3 million from 1992 levels. The increase in interest
expense for 1994 was primarily due to increased borrowings at higher average
interest rates. The decrease in interest expense from 1992 levels is primarily
due to lower average interest rates.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1994 1993 1992
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Interest expense............................... $191,356 $190,968 $233,360
Interest expense on IRS settlement............. 294,312 -- --
Less: Interest capitalized..................... 9,027 11,420 8,731
-------- -------- --------
$476,641 $179,548 $224,629
======== ======== ========
</TABLE>

DISCONTINUED OPERATIONS

In October 1992, as a result of Pennzoil's conclusion that disposal of
Purolator's filtration products operations would enhance Pennzoil's efforts to
focus on its strategic businesses and to reduce indebtedness, Purolator filed a
registration statement pursuant to which Pennzoil offered to the public all
shares of Purolator stock held by Pennzoil. Accordingly, Purolator's net assets
and results of operations for all periods have been reclassified as discontinued
operations for financial reporting purposes. In December 1992, Pennzoil sold in
initial public offerings all its shares of capital stock of Purolator. The total
amount received by Pennzoil, prior to the payment of expenses, from the net
proceeds of the offerings and the repayment of indebtedness by Purolator was
$206.0 million. Pennzoil recorded a net gain on the disposition of Purolator
stock of $1.5 million ($20.0 million before tax loss), or $.04 per share, in
1992.

Reference is made to "-- Capital Resources and Liquidity -- Environmental
Matters" and Note 8 of Notes to Consolidated Financial Statements for
information concerning an environmental indemnification agreement between
Pennzoil and Purolator entered into in connection with Pennzoil's disposition of
Purolator.

CAPITAL RESOURCES AND LIQUIDITY

CASH FLOW. Pennzoil had cash and cash equivalents of $24.9 million and
$262.3 million at December 31, 1994 and 1993, respectively. Pennzoil's cash flow
from operating activities, excluding the cash payment made to the IRS for taxes
and interest in settlement of a dispute relating to a proposed tax deficiency
based on an

25
<PAGE> 27

audit of Pennzoil's 1988 federal income tax return, was $322.7 million for the
twelve months ended December 31, 1994. Reference is made to Note 8 of Notes to
Consolidated Financial Statements for additional information. Cash flow from
operating activities was $286.9 million for the twelve months ended December 31,
1993. Pennzoil used cash from operating activities, net proceeds from the sales
of marketable securities and proceeds from the sales of assets primarily for
payments relating to the IRS settlement ($556.0 million), capital expenditures
($473.3 million) and the payment of cash dividends ($138.1 million).

INVESTMENT IN CHEVRON CORPORATION. Pennzoil beneficially owned 18,071,036
shares of Chevron common stock as of December 31, 1994, after giving effect to a
"two-for-one" stock split declared by Chevron in June 1994. None of the share or
per-share information related to Pennzoil's investment in Chevron common stock
prior to June 1994 has been adjusted to reflect the "two-for-one" stock split.
The current quarterly dividend rate on Chevron common stock is $.4625 per share.
At the current dividend rate, Pennzoil receives $33.4 million annually in
dividends on the 18,071,036 Chevron shares. All 18,071,036 shares of Chevron
common stock beneficially owned by Pennzoil have been deposited with exchange
agents for possible exchange for Pennzoil exchangeable debentures. See
"-- Exchangeable Debentures."

In November 1993, Pennzoil sold 8,158,582 shares of Chevron common stock in
a block trade on the NYSE for a price of $89.00 per share before commissions
($88.38 per share net of commissions). The sale resulted in a net realized gain
of $137.0 million ($171.6 million before tax), or $3.25 per share. Reference is
made to Note 2 of Notes to Consolidated Financial Statements for additional
information.

EXCHANGEABLE DEBENTURES. In 1993, Pennzoil completed public offerings of
$402.5 million principal amount of its 6 1/2% Exchangeable Senior Debentures due
January 15, 2003 (the "6 1/2% Debentures") and $500.0 million principal amount
of its 4 3/4% Exchangeable Senior Debentures due October 1, 2003 (the "4 3/4%
Debentures"). The 6 1/2% Debentures and the 4 3/4% Debentures are exchangeable
at the option of the holders thereof at any time prior to maturity, unless
previously redeemed, for shares of Chevron common stock beneficially owned by
Pennzoil at exchange rates of 23.774 shares and 17.004 shares, respectively, per
$1,000 principal amount of the 6 1/2% Debentures and the 4 3/4% Debentures (the
equivalent of $42 1/16 per share and $58 13/16 per share, respectively), subject
to adjustment in certain events. In lieu of delivering certificates representing
shares of Chevron common stock in exchange for the 6 1/2% Debentures and the
4 3/4% Debentures, Pennzoil may, at its option, pay to any holder surrendering
the 6 1/2% Debentures and the 4 3/4% Debentures an amount in cash equal to the
market price of the shares for which the 6 1/2% Debentures and the 4 3/4%
Debentures are exchangeable. Pennzoil has deposited all 18,071,036 shares of
Chevron common stock beneficially owned by Pennzoil with exchange agents for
possible exchange for the 6 1/2% Debentures and the 4 3/4% Debentures.

Under the instruments governing the 6 1/2% Debentures and the 4 3/4%
Debentures, Pennzoil may not pledge, mortgage, hypothecate or grant a security
interest in, or permit any mortgage, pledge, security interest or other lien
upon, the shares of Chevron common stock deposited with exchange agents and
deliverable in exchange for the 6 1/2% Debentures and the 4 3/4% Debentures.
Pennzoil may at any time obtain from the exchange agents or otherwise authorize
or direct the exchange agents to release all or part of the 18,071,036 shares of
Chevron common stock deposited with the exchange agents. However, in the event
Pennzoil obtains or otherwise releases any shares of Chevron common stock
subject to exchange, each holder of a 6 1/2% Debenture or a 4 3/4% Debenture
will generally have the right, at such holder's option, to require Pennzoil to
repurchase all or a portion of such holder's debentures at a premium.

ASSESSMENT OF OIL AND GAS PROPERTIES. Pennzoil is continuing its assessment
of its domestic oil and gas properties and its related asset highgrading program
commenced in early 1992. The assessment has resulted in, and is expected to
continue to result in, the categorization of Pennzoil's oil and gas properties
into core and

26
<PAGE> 28

noncore producing areas and core and noncore producing fields within core areas.
In the early stages of the assessment, Pennzoil curtailed domestic exploration
and development activity and, as a result, reduced its 1992 capital expenditures
for domestic exploration and development by approximately one-half, excluding
expenditures related to Pennzoil's acquisition of Pennzoil Petroleum. The
ongoing assessment now includes the properties added in October 1992 as a result
of the acquisition of Pennzoil Petroleum and the properties added in July 1994
as a result of the acquisition of Co-enerco, which have created additional core
areas and enhanced other core areas. As part of its asset highgrading program,
Pennzoil disposed of approximately $35 million of noncore properties and fields
during 1992. No significant gain or loss was realized as a result of these
dispositions. Pennzoil began 1993 with interests in approximately 800 producing
fields, owning small working interests and/or insignificant reserves in the
majority of these fields. In 1993, the asset highgrading program resulted in the
disposal of approximately 300 fields, representing less than 3% of the total
value of Pennzoil's proved oil and gas reserves. Pennzoil realized gains in 1993
of $34.9 million from these asset dispositions on total proceeds of $87.5
million. In addition, four asset exchanges were finalized during 1993 to
increase working interests in core Gulf of Mexico fields.

Pennzoil disposed of approximately 90 producing oil and gas fields in 1994,
continuing its asset highgrading program begun in 1992, and decreasing the
number of producing fields in which Pennzoil had an interest to approximately
400 at the end of 1994. The fields disposed of in 1994 primarily consisted of
noncore properties in the Gulf of Mexico, Permian Basin, Mid-Continent and Gulf
Coast. Pennzoil realized gains in 1994 of $36.0 million from these asset
dispositions on total proceeds of $81.3 million. The 1994 asset dispositions in
the aggregate represented approximately 5% of Pennzoil's total oil and gas
production and approximately 3% of the total value of Pennzoil's proved oil and
gas reserves. If market conditions are favorable, Pennzoil intends to continue
the disposal of noncore properties during 1995 with the goal of retaining about
100 core fields in the United States by late 1995. These 100 core fields are
estimated to generate approximately 90% of Pennzoil's current cash flow and
contain most of Pennzoil's future reserve potential. In addition to dispositions
of producing fields, Pennzoil completed five exchanges of producing fields in
1994, representing approximately $26 million in assets, primarily in the Gulf of
Mexico and Permian Basin. After netting asset dispositions against acquisitions
and including the impact of the acquisition of Co-enerco and exchanges,
Pennzoil's asset highgrading program in 1994 added approximately 32 million
barrels of oil equivalent ("BOE") at a net cost of $149.7 million, for a reserve
replacement cost of $4.68 per BOE.

CREDIT FACILITIES. In August 1994, Pennzoil entered into an amended and
restated credit facility with a group of banks that provides for up to $600
million of unsecured revolving credit borrowings through August 16, 1995, with
any outstanding borrowings on such date being converted into a term credit
facility terminating on September 1, 1996. Pennzoil has the option, subject to
the extension of additional credit by new or existing banks, of increasing the
size of the facility by $100 million. This amended and restated credit facility
replaces and supersedes the previous revolving credit facilities of Pennzoil.
Borrowings under the facility totaled $205.0 million at December 31, 1994.

In June 1994, in connection with its acquisition of Co-enerco, Pennzoil
Canada established a Cdn. $260 million credit facility with a syndicate of
Canadian banks, the borrowings of which are guaranteed by Pennzoil. Also in June
1994, Pennzoil Canada established an additional Cdn. $40 million credit facility
with a Canadian bank, the borrowings of which are guaranteed by Pennzoil. These
facilities provide for borrowings through May 30, 1995, with any outstanding
borrowings on such date being converted into term credit facilities terminating
on May 30, 1996. Borrowings under these facilities can be made in any
combination of U.S. or Canadian dollars and totaled U.S. $185.0 million and U.S.
$10.0 million, respectively, as of December 31, 1994.

In February 1995, Pennzoil's Board of Directors increased the limit on the
aggregate amount of commercial paper that Pennzoil may issue under its domestic
commercial paper program and/or its Euro-commercial paper program from $250.0
million to $500.0 million. Borrowings under Pennzoil's commercial paper
facilities totaled $243.9 million and $249.4 million at December 31, 1994 and
1993, respectively.

27
<PAGE> 29

totaled $93.3 million and $183.6 million at December 31, 1994 and 1993,
respectively. None of the banks under these credit arrangements has any
obligation to continue to extend credit after the maturities of outstanding
borrowings or to extend the maturities of any borrowings.

SETTLEMENT OF IRS DISPUTE. Reference is made to Note 8 of Notes to
Consolidated Financial Statements for information concerning Pennzoil's
settlement in October 1994 of a dispute with the IRS relating to a proposed tax
deficiency based on an audit of Pennzoil's 1988 federal income tax return.

CAPITAL EXPENDITURES. Total capital expenditures for 1994, excluding
expenditures related to Pennzoil's acquisition of Co-enerco, were $474.6
million, including $9.0 million of interest capitalized, representing a decrease
of $10.5 million from comparable 1993 capital expenditure levels.

The table below summarizes the current 1995 capital budget by segment
compared with 1994 and 1993 capital expenditures, excluding expenditures related
to Pennzoil's acquisition of Co-enerco in 1994. The capital budget is reassessed
from time to time, and could, for example, be adjusted to reflect changes in oil
and gas prices and other economic factors.

<TABLE>
<CAPTION>
1995
BUDGET 1994 1993
------ ------ ------
(EXPRESSED IN MILLIONS)
<S> <C> <C> <C>
Oil and Gas.................................... $334.2 $399.5 $360.5
Motor Oil & Refined Products................... 120.7 40.4 71.5
Franchise Operations........................... 48.8 18.9 21.7
Sulphur........................................ -- 8.5 2.3
Corporate and Other............................ 4.3 7.3 29.1
------ ------ ------
$508.0 $474.6 $485.1
====== ====== ======
</TABLE>

Pennzoil currently expects to generate funds for its budgeted 1995 capital
expenditures from a combination of some, or all, of the following: cash flows
from operations, the sale of noncore properties, borrowings under its credit
facilities and arrangements, available cash and proceeds from future debt
issuances.

ENVIRONMENTAL MATTERS. Pennzoil continues to make capital and operating
expenditures relating to the environment, including expenditures associated with
its compliance with federal, state and local environmental regulations. As they
continue to evolve, environmental protection laws are expected to have an
increasing impact on Pennzoil's operations. In connection with pollution
abatement efforts related to current operations, Pennzoil made capital
expenditures of approximately $37 million in 1994 and $35 million in 1993. The
1993 expenditures included $26.6 million for a diesel desulphurization and
dewaxing project at the Atlas refinery in Shreveport, Louisiana, which was
required to meet requirements promulgated under the 1990 Amendments to the
federal Clean Air Act. Capital expenditures for environmental control facilities
are currently expected to be approximately $33 million in 1995. Pennzoil's
recurring operating expenditures relating to environmental compliance activities
are not material.

Pennzoil is subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), the Resource Conservation and Recovery Act and similar state
statutes. In response to liabilities associated with these activities, accruals
have been established when reasonable estimates are possible. Such accruals
primarily include estimated costs associated with remediation. Pennzoil has not
used discounting in determining its accrued liabilities for environmental
remediation, and no claims for possible recovery from third party insurers or
other parties related to environmental costs have been recognized in Pennzoil's
consolidated financial statements. Pennzoil adjusts the accruals when new
remediation responsibilities are discovered and probable costs become estimable,
or when current remediation estimates must be adjusted to reflect new
information.

28
<PAGE> 30

In connection with Pennzoil's disposition of Purolator, Pennzoil and
Purolator entered into an indemnification agreement, pursuant to which Pennzoil
agreed to reimburse Purolator for the costs and expenses of certain
environmental remediation activities at a plant operated by Purolator in Elmira
Heights, New York, and certain environmental remediation activities, if any,
required at one other site located near the Elmira facility and a landfill site
located in Metamora, Michigan. Pennzoil had a reserve of $16.2 million and $16.3
million recorded with respect to its obligations under its indemnification
agreement with Purolator as of December 31, 1994 and 1993, respectively.
Reference is made to Notes 8 and 11 of Notes to Consolidated Financial
Statements for additional information.

Certain of Pennzoil's subsidiaries are involved in matters in which it has
been alleged that such subsidiaries are potentially responsible parties ("PRPs")
under CERCLA or similar state legislation with respect to various waste disposal
areas owned or operated by third parties. In addition, certain of Pennzoil's
subsidiaries are involved in other environmental remediation activities,
including the removal, inspection and replacement, as necessary, of underground
storage tanks. As of December 31, 1994 and 1993, Pennzoil's consolidated balance
sheet included accrued liabilities for environmental remediation of $44.9
million and $33.1 million, respectively, which amounts include reserves with
respect to Pennzoil's obligations under its indemnification agreement with
Purolator referred to in the previous paragraph. Of these reserves, $8.8 million
and $4.8 million are reflected in the consolidated balance sheet as current
liabilities as of December 31, 1994 and 1993, respectively, and $36.1 million
and $28.3 million are reflected as other liabilities as of December 31, 1994 and
1993, respectively. Pennzoil does not currently believe there is a reasonable
possibility of incurring additional material costs in excess of the current
accruals recognized for such environmental remediation activities. With respect
to the sites in which Pennzoil subsidiaries are PRPs, Pennzoil's conclusion is
based in large part on (i) the availability of defenses to liability, including
the availability of the "petroleum exclusion" under CERCLA and similar state
laws, and/or (ii) Pennzoil's current belief that its share of wastes at a
particular site is or will be viewed by the Environmental Protection Agency or
other PRPs as being de minimis. As a result, Pennzoil's monetary exposure is not
expected to be material.

OTHER MATTERS. Pennzoil does not currently consider the impact of inflation
to be significant in the businesses in which Pennzoil operates.

Reference is made to Note 1 of Notes to Consolidated Financial Statements
for a discussion of the impact that a recently issued accounting standard is
expected to have on Pennzoil's consolidated financial statements, when adopted.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The consolidated financial statements of Pennzoil, together with the report
thereon of Arthur Andersen LLP dated February 24, 1995 and the supplementary
financial data specified by Item 302 of Regulation S-K, are set forth on pages
F-1 through F-36 hereof. (See Item 14 for Index.)

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Not Applicable.

29
<PAGE> 31

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information appearing under the captions "Nominees," "Directors with
Terms Expiring in 1996 and 1997" and "Compliance with Section 16(a) of the
Exchange Act" set forth within the section entitled "Election of Directors" in
Pennzoil's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 is incorporated herein by reference.
See also Item S-K 401(b) appearing in Part I of this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION.

The information appearing under the captions "Director Remuneration,"
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" set forth within the section entitled "Election of Directors" in
Pennzoil's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information appearing under the caption "Security Ownership of
Directors and Officers" set forth within the section entitled "Election of
Directors" and under the caption "Security Ownership of Certain Shareholders"
set forth within the section entitled "Additional Information" in Pennzoil's
definitive Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information appearing under the captions "Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" set forth
within the section entitled "Election of Directors" and under the caption
"Security Ownership of Certain Shareholders" set forth within the section
entitled "Additional Information" in Pennzoil's definitive Proxy Statement to be
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 is
incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(A)(1) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Report of Independent Public Accountants............................. F-1
Consolidated Statement of Income..................................... F-3
Consolidated Balance Sheet........................................... F-4
Consolidated Statement of Shareholders' Equity....................... F-6
Consolidated Statement of Cash Flows................................. F-7
Notes to Consolidated Financial Statements........................... F-8
</TABLE>

The supplementary financial data specified by Item 302 of Regulation S-K
are included in the Supplemental Financial and Statistical
Information -- Unaudited beginning on page F-30.

30
<PAGE> 32

(A)(2) FINANCIAL STATEMENT SCHEDULES.

Schedules of Pennzoil and its subsidiaries are omitted because of the
absence of the conditions under which they are required or because the required
information is included in the financial statements or notes thereto.

(A)(3) EXHIBITS.

<TABLE>
<S> <C>
*3(a) -- Restated Certificate of Incorporation of Pennzoil Company, as amended
through September 17, 1993 (Registration No. 33-50953, Exhibit 3(a)).
*3(b) -- By-laws of Pennzoil Company, as amended through May 19, 1994
(Pennzoil Company 10-Q (June 30, 1994), SEC File No. 1-5591, Exhibit
3(a)).
*4(a) -- Indenture dated as of February 15, 1986 (the "1986 Indenture")
between Pennzoil Company and Mellon Bank, N.A., Trustee (Pennzoil
Company 10-Q (June 30, 1986), SEC File No. 1-5591, Exhibit 4(a)).
*4(b) -- Officer's Certificate dated as of March 16, 1987 delivered pursuant
to the terms of the 1986 Indenture setting forth the terms of
Pennzoil Company's 9% Debentures due April 1, 2017 (Pennzoil Company
10-Q (March 31, 1987), SEC File No. 1-5591, Exhibit 4(a)).
*4(c) -- Officer's Certificate dated as of April 14, 1989 delivered pursuant
to the terms of the 1986 Indenture setting forth the terms of
Pennzoil Company's 10 5/8% Debentures due June 1, 2001 (Pennzoil
Company 10-Q (March 31, 1989), SEC File No. 1-5591, Exhibit 4(a)).
*4(d) -- Officer's Certificate dated as of November 14, 1989 delivered
pursuant to the terms of the 1986 Indenture setting forth the terms
of Pennzoil Company's 10 1/8% Debentures due November 15, 2009 and
9 5/8% Notes due November 15, 1999 (Pennzoil Company 10-K (1989), SEC
File No. 1-5591, Exhibit 4(n)).
*4(e) -- Officer's Certificate dated as of November 19, 1990 delivered
pursuant to the terms of the 1986 Indenture setting forth the terms
of Pennzoil Company's 10 1/4% Debentures due November 1, 2005
(Pennzoil Company 10-K (1990), SEC File No. 1-5591, Exhibit 4(n)).
*4(f) -- Instrument of Resignation, Appointment and Acceptance dated as of
April 1, 1991 among Pennzoil Company, Mellon Bank, N.A., as Retiring
Trustee, and Texas Commerce Bank National Association, as Successor
Trustee, under the 1986 Indenture (Pennzoil Company 10-K (1991), SEC
File No. 1-5591, Exhibit 4(p)).
*4(g) -- Indenture dated as of December 15, 1992 (the "1992 Indenture")
between Pennzoil Company and Texas Commerce Bank National
Association, Trustee (Pennzoil Company 10-K (1992), SEC File No.
1-5591, Exhibit 4(o)).
*4(h) -- First Supplemental Indenture dated as of January 13, 1993 to the 1992
Indenture (Pennzoil Company 10-K (1992), SEC File No. 1-5591, Exhibit
4(p)).
*4(i) -- Second Supplemental Indenture dated as of October 12, 1993 to the
1992 Indenture (Pennzoil Company 10-K (1993), SEC File No. 1-5591,
Exhibit 4(i)).
*4(j) -- Rights Agreement dated as of October 28, 1994 between Pennzoil
Company and Chemical Bank, as Rights Agent (Pennzoil Company 8-K
(October 28, 1994), SEC File No. 1-5591, Exhibit 1).
Pennzoil Company agrees to furnish to the Commission upon request a copy
of any agreement defining the rights of holders of long-term debt of
Pennzoil Company and all its subsidiaries for which consolidated or
unconsolidated financial statements are required to be filed, under
which the total amount of securities authorized does not exceed 10%
of the total assets of Pennzoil Company and its subsidiaries on a
consolidated basis.
+*10(a) -- 1978 Stock Option Plan of Pennzoil Company, as amended (Registration
No. 2-67268, Exhibit 4(a)).
+*10(b) -- 1981 Stock Option Plan of Pennzoil Company (Registration No. 2-76935,
Exhibit 4(a)).
</TABLE>

31
<PAGE> 33

<TABLE>
<S> <C>
+*10(c) -- 1982 Stock Option Plan of Pennzoil Company (Pennzoil Company 10-K
(1982), SEC File No. 1-5591, Exhibit 10(e)).
+*10(d) -- Pennzoil Company Salary Continuation Plan (Pennzoil Company 10-K
(1982), SEC File No. 1-5591, Exhibit 10(g)).
+*10(e) -- Pennzoil Company Supplemental Disability Plan effective January 1,
1978 (Pennzoil Company 10-K(1977), SEC File No. 1-5591, Exhibit
5(y)).
+*10(f) -- Pennzoil Company Supplemental Life Insurance Plan effective January
1, 1978, as amended (Pennzoil Company 10-K (1980), SEC File No.
1-5591, Exhibit 10(g)).
+*10(g) -- Pennzoil Company Deferred Compensation Plan (Pennzoil Company 10-K
(1981), SEC File No. 1-5591, Exhibit 10(i)).
+*10(h) -- Specimen of Pennzoil Company Deferred Compensation Agreement
(Pennzoil Company 10-K (1982), SEC File No. 1-5591, Exhibit
10(j)(1)).
+*10(i) -- Specimen of Pennzoil Company agreements regarding certain benefits
payable in the event of a change in control (Pennzoil 10-Q (September
30, 1982), SEC File No. 1-5591, Exhibit 28).
+*10(j) -- Pennzoil Company Section 415 Excess Benefit Agreements (Pennzoil
Company 10-Q (March 31, 1980), SEC File No. 1-5591, Exhibit 5).
+*10(k) -- Pennzoil Company Medical Expenses Reimbursement Plan effective
January 1, 1978 (Pennzoil Company 10-K(1977), SEC File No. 1-5591,
Exhibit 5(v)).
+*10(l) -- Pennzoil Company 1985 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (April 25, 1985), SEC File No.
1-5591, Exhibit B).
+*10(m) -- Pennzoil Company Executive Severance Plan (Pennzoil Company 10-K
(1987), SEC File No. 1-5591, Exhibit 10(t)).
+*10(n) -- 1990 Stock Option Plan of Pennzoil Company (Pennzoil Company
definitive proxy material (April 26, 1990), SEC File No. 1-5591,
Exhibit A).
+*10(o) -- Pennzoil Company 1990 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (April 26, 1990), SEC File No.
1-5591, Exhibit B).
+*10(p) -- 1992 Stock Option Plan of Pennzoil Company (Pennzoil Company
definitive proxy material (April 13, 1993), SEC File No. 1-5591,
Exhibit A).
+*10(q) -- Pennzoil Company 1993 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (April 13, 1993), SEC File No.
1-5591, Exhibit B).
11 -- Computation of Ratio of Earnings to Fixed Charges for the years ended
December 31, 1994, 1993, 1992, 1991 and 1990.
21 -- List of Subsidiaries of Pennzoil Company.
23(a) -- Consent of Arthur Andersen LLP.
23(b) -- Consent of Ryder Scott Company Petroleum Engineers.
23(c) -- Consent of Outtrim Szabo Associates Ltd.
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
99(a) -- Summary of Reserve Report of Ryder Scott Company Petroleum Engineers
as of December 31, 1994 relating to oil and gas reserves.
99(b) -- Summary of Reserve Report of Outtrim Szabo Associates, Ltd. as of
December 31, 1994 relating to oil and gas reserves.
</TABLE>

- ---------------

* Incorporated by reference.

+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.

(B) REPORTS ON FORM 8-K.

During the fourth quarter of 1994, Pennzoil filed a Current Report on Form
8-K with the SEC dated as of October 28, 1994 to report the declaration of a
dividend of one right to purchase preferred stock for each outstanding share of
Pennzoil's common stock.

32
<PAGE> 34

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

PENNZOIL COMPANY

By: JAMES L. PATE
------------------------------------
(JAMES L. PATE, CHAIRMAN OF THE
BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER)

Date: February 27, 1995

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
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
---------- ----- ----
<S> <C> <C>

JAMES L. PATE Principal Executive Officer February 27, 1995
- ----------------------------------------------- and Director
(JAMES L. PATE, CHAIRMAN OF THE BOARD,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER)

MARK A. MALINSKI Principal Accounting Officer February 27, 1995
- -----------------------------------------------
(MARK A. MALINSKI, GROUP VICE PRESIDENT --
ACCOUNTING AND CONTROLLER)

DAVID P. ALDERSON, II Principal Financial Officer February 27, 1995
- -----------------------------------------------
(DAVID P. ALDERSON, II, GROUP VICE PRESIDENT --
FINANCE AND TREASURER)

HOWARD H. BAKER, JR.*
W. J. BOVAIRD*
W. L. LYONS BROWN, JR.*
ERNEST H. COCKRELL*
HARRY H. CULLEN* A majority of the Directors
ALFONSO FANJUL* of the Registrant February 27, 1995
BERDON LAWRENCE*
BRENT SCOWCROFT*
CYRIL WAGNER, JR.*

*By: MARK A. MALINSKI
- -----------------------------------------------
(MARK A. MALINSKI, ATTORNEY-IN-FACT)
</TABLE>

33
<PAGE> 35

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Pennzoil Company:

We have audited the accompanying consolidated balance sheet of Pennzoil
Company (a Delaware corporation) and subsidiaries as of December 31, 1994 and
1993, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1994. 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 the audit to obtain
reasonable assurance about 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.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pennzoil Company and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.

As discussed in Notes 1 and 6 to the Consolidated Financial Statements, the
Company changed its method of accounting for certain investments in debt and
equity securities and postemployment benefits as of January 1, 1994. Also, as
discussed in Note 2 to the Consolidated Financial Statements, as of January 1,
1992, the Company changed its method of accounting for income taxes.

ARTHUR ANDERSEN LLP

Houston, Texas
February 24, 1995

F-1
<PAGE> 36

[THIS PAGE INTENTIONALLY LEFT BLANK]

F-2
<PAGE> 37

PENNZOIL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1994 1993 1992
---------- ---------- ----------
(EXPRESSED IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Net sales.......................................... $2,474,829 $2,477,467 $2,222,673
Investment and other income, net................... 88,114 304,900 134,008
---------- ---------- ----------
2,562,943 2,782,367 2,356,681
COSTS AND EXPENSES
Cost of sales...................................... 1,543,605 1,543,054 1,488,119
Selling, general and administrative expenses....... 388,365 372,473 356,137
Depreciation, depletion and amortization (Note 8).. 539,186 330,979 222,545
Exploration expenses............................... 61,033 70,713 13,821
Taxes, other than income........................... 59,207 66,159 52,803
Interest charges (Note 8).......................... 485,668 190,968 233,360
Interest capitalized............................... (9,027) (11,420) (8,731)
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAX......................................... (505,094) 219,441 (1,373)
Income tax provision (benefit)....................... (221,355) 59,205 (18,783)
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS............. (283,739) 160,236 17,410
DISCONTINUED OPERATIONS (Note 11)
Income from operations, net of taxes............... -- -- 10,208
Gain on disposition................................ -- -- 1,455
---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES......................................... (283,739) 160,236 29,073
Extraordinary items (Note 3)......................... -- (18,380) (16,612)
Cumulative effect of changes in accounting principles
(Notes 2 and 6).................................... (4,948) -- 115,703
---------- ---------- ----------
NET INCOME (LOSS).................................... $ (288,687) $ 141,856 $ 128,164
========== ========== ==========
EARNINGS (LOSS) PER SHARE
Continuing operations.............................. $ (6.16) $ 3.80 $ .43
Discontinued operations............................ -- -- .29
---------- ---------- ----------
Total before extraordinary items and
cumulative effect of changes in
accounting principles.................... (6.16) 3.80 .72
Extraordinary items................................ -- (.44) (.41)
Cumulative effect of changes in accounting
principles...................................... (.11) -- 2.85
---------- ---------- ----------
TOTAL...................................... $ (6.27) $ 3.36 $ 3.16
========== ========== ==========
DIVIDENDS PER COMMON SHARE........................... $ 3.00 $ 3.00 $ 3.00
========== ========== ==========
</TABLE>

See Notes to Consolidated Financial Statements.

F-3
<PAGE> 38

PENNZOIL COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1994 1993
---------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................................ $ 24,884 $ 262,275
Marketable securities and other investments...................... -- 684,308
Receivables...................................................... 460,248 363,287
Inventories
Crude oil, natural gas and sulphur............................ 38,239 38,965
Motor oil and refined products................................ 126,019 123,282
Materials and supplies, at average cost.......................... 29,059 26,792
Deferred income tax.............................................. 19,735 13,587
Other current assets............................................. 30,068 31,306
---------- ----------
TOTAL CURRENT ASSETS..................................... 728,252 1,543,802
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and Gas, successful efforts method of accounting............. 4,806,532 4,102,181
Motor Oil & Refined Products..................................... 864,032 837,932
Franchise Operations............................................. 171,438 154,877
Sulphur.......................................................... 190,109 188,427
Other............................................................ 145,767 179,530
---------- ----------
TOTAL PROPERTY, PLANT AND EQUIPMENT...................... 6,177,878 5,462,947
Less accumulated depreciation, depletion, amortization and
valuation allowances.......................................... 3,349,035 3,138,503
---------- ----------
NET PROPERTY, PLANT AND EQUIPMENT........................ 2,828,843 2,324,444
---------- ----------
OTHER ASSETS
Marketable securities and other investments (Note 1)............. 833,400 654,973
Other............................................................ 325,315 362,984
---------- ----------
TOTAL OTHER ASSETS....................................... 1,158,715 1,017,957
---------- ----------
TOTAL ASSETS....................................................... $4,715,810 $4,886,203
========== ==========
</TABLE>

See Notes to Consolidated Financial Statements.

F-4
<PAGE> 39

PENNZOIL COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1994 1993
---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt............................. $ 1,760 $ 19,568
Notes payable.................................................... 337,212 433,031
Accounts payable................................................. 222,022 196,083
Taxes accrued.................................................... 5,574 93,242
Interest accrued................................................. 33,066 29,538
Payroll accrued.................................................. 24,979 23,103
Other current liabilities........................................ 52,048 26,702
---------- ----------
TOTAL CURRENT LIABILITIES................................ 676,661 821,267
LONG-TERM DEBT, less current maturities............................ 2,174,921 1,973,488
DEFERRED INCOME TAX................................................ 371,644 304,902
OTHER LIABILITIES.................................................. 288,320 280,742
---------- ----------
TOTAL LIABILITIES........................................ 3,511,546 3,380,399
---------- ----------

COMMITMENTS AND CONTINGENCIES (Note 8)

SHAREHOLDERS' EQUITY
Common stock, $0.83 1/3 par -- authorized 75,000,000 shares,
issued 52,208,888 shares...................................... 43,507 43,507
Additional capital............................................... 326,862 327,939
Retained earnings................................................ 1,047,993 1,474,741
Net unrealized holding gain on marketable securities (Note 1).... 112,668 --
Cumulative foreign currency translation adjustment and other..... (848) (2,746)
Common stock in treasury, at cost, 6,081,726 shares in 1994
and 6,298,581 shares in 1993.................................. (325,918) (337,637)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY............................... 1,204,264 1,505,804
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................... $4,715,810 $4,886,203
========== ==========
</TABLE>

See Notes to Consolidated Financial Statements.

F-5
<PAGE> 40

PENNZOIL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1994 1993 1992
-------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ---------- ------- ---------- ------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK, $0.83 1/3 par --
Authorized 75,000,000 shares
Balance January 1 and December 31.. 52,209 $ 43,507 52,209 $ 43,507 52,209 $ 43,507
------ ---------- ------- ---------- ------- ----------
ADDITIONAL CAPITAL
Balance January 1.................. 327,939 293,009 294,256
Shares reissued................. (1,077) 34,930 (1,247)
---------- ---------- ----------
Balance December 31................ 326,862 327,939 293,009
---------- ---------- ----------
RETAINED EARNINGS
Balance January 1.................. 1,474,741 1,459,069 1,452,680
Net income (loss)............... (288,687) 141,856 128,164
Dividends on common stock....... (138,061) (126,184) (121,775)
---------- ---------- ----------
Balance December 31................ 1,047,993 1,474,741 1,459,069
---------- ---------- ----------
NET UNREALIZED HOLDING GAIN ON
MARKETABLE SECURITIES (Note 1)
Balance January 1.................. 106,796 -- --
Change in net unrealized holding
gain.......................... 5,872 -- --
---------- ---------- ----------
Balance December 31................ 112,668 -- --
---------- ---------- ----------
CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENT AND OTHER
Balance January 1.................. (2,746) 705 3,713
Translation adjustment.......... 1,886 (3,446) (3,043)
Change in additional minimum
pension liability............. 12 (5) 35
---------- ---------- ----------
Balance December 31................ (848) (2,746) 705
---------- ---------- ----------
COMMON STOCK IN TREASURY, at cost
Balance January 1.................. (6,299) (337,637) (11,493) (616,041) (11,748) (630,072)
Shares acquired................. (5) (215) -- -- -- --
Shares reissued................. 222 11,934 5,194 278,404 255 14,031
------ ---------- ------- ---------- ------- ----------
Balance December 31................ (6,082) (325,918) (6,299) (337,637) (11,493) (616,041)
------ ---------- ------- ---------- ------- ----------
TOTAL SHAREHOLDERS' EQUITY........... 46,127 $1,204,264 45,910 $1,505,804 40,716 $1,180,249
====== ========== ======= ========== ======= ==========
</TABLE>

See Notes to Consolidated Financial Statements.

F-6
<PAGE> 41

PENNZOIL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1994 1993 1992
---------- ----------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................... $ (288,687) $ 141,856 $ 128,164
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization
(Note 8)..................................... 539,186 330,979 222,545
Dry holes and impairments...................... 34,162 51,140 6,163
Deferred income tax............................ (115,215) (77,475) (27,829)
Tax payment associated with IRS
settlement (Note 8)......................... (261,696) -- --
Extraordinary loss on early extinguishment of
debt........................................ -- 18,380 16,612
Realized gains on sales of marketable
securities and other investments............ (500) (182,057) (298)
Gains on sales of assets....................... (37,530) (35,222) (3,198)
Non-cash and other nonoperating items.......... 86,746 33,592 13,234
Cumulative effect of changes in accounting
principles.................................. 4,948 -- (115,703)
Change in operating assets and liabilities
(Note 1).................................... (194,745) 5,684 (52,793)
---------- ----------- ---------
Net cash provided by (used in) operating
activities................................ (233,331) 286,877 186,897
---------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................ (473,320) (474,992) (143,303)
Acquisition of Co-enerco Resources Ltd. (Note 10)... (230,924) -- --
Investment in discontinued operations (Purolator
Products Company)................................ -- -- (4,270)
Proceeds from disposition of Purolator Products
Company, net..................................... -- -- 205,217
Cash contribution from Chevron to Pennzoil Petroleum
(Note 10)........................................ -- 9,936 57,400
Purchases of marketable securities and other
investments...................................... (480,389) (928,159) (202,857)
Proceeds from sales of marketable securities and
other investments................................ 1,160,106 981,101 199,244
Proceeds from sales of assets....................... 117,090 97,102 37,497
Other investing activities.......................... (41,523) (7,987) (27,311)
---------- ----------- ---------
Net cash provided by (used in) investing
activities................................ 51,040 (322,999) 121,617
---------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (repayments) of notes payable, net......... (95,819) 93,685 48,389
Debt repayments..................................... (401,438) (1,624,612) (319,800)
Proceeds from issuances of debt..................... 579,963 1,630,759 --
Net proceeds from issuance of common stock.......... -- 303,300 --
Dividends paid...................................... (138,061) (126,184) (121,775)
Other financing activities.......................... 255 717 240
---------- ----------- ---------
Net cash provided by (used in) financing
activities................................ (55,100) 277,665 (392,946)
---------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... (237,391) 241,543 (84,432)
CASH AND CASH EQUIVALENTS, beginning of period........ 262,275 20,732 105,164
---------- ----------- ---------
CASH AND CASH EQUIVALENTS, end of period.............. $ 24,884 $ 262,275 $ 20,732
========== =========== =========
</TABLE>

See Notes to Consolidated Financial Statements.

F-7
<PAGE> 42

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --

Principles of Consolidation --

The accompanying consolidated financial statements include all
majority-owned subsidiaries of Pennzoil Company ("Pennzoil"). All significant
intercompany accounts and transactions have been eliminated.

Marketable Securities and Other Investments --

Effective January 1, 1994, Pennzoil changed its method of accounting for
certain investments in debt and equity securities by adopting the requirements
of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." This standard requires that,
except for debt securities classified as "held-to-maturity," investments in debt
and equity securities must be reported at fair value. As a result, Pennzoil's
investment in Chevron Corporation ("Chevron") common stock, which shares are
classified as "available for sale," is reported at fair value, with the
unrealized gain excluded from earnings and reported as a separate component of
shareholders' equity. As of January 1, 1994, Pennzoil beneficially owned
9,035,518 shares of Chevron common stock that were acquired at an average cost
of $67.36 per share. The fair market value for the shares of Chevron common
stock held by Pennzoil as of January 1, 1994 was $87.125 per share based on the
closing transaction price for Chevron shares reported on the New York Stock
Exchange ("NYSE") on December 31, 1993.

After giving effect to a "two-for-one" split of Chevron common stock in
June 1994, Pennzoil beneficially owned 18,071,036 shares of Chevron common stock
as of December 31, 1994, acquired at an average cost of $33.68 per share.

Realized gains on Pennzoil's remaining investment in Chevron common stock
are subject to the exchange rights of holders of Pennzoil's $402.5 million
outstanding principal amount of 6 1/2% Exchangeable Senior Debentures due
January 15, 2003 (the "6 1/2% Debentures") and $500.0 million outstanding
principal amount of 4 3/4% Exchangeable Senior Debentures due October 1, 2003
(the "4 3/4% Debentures"), all of which are exchangeable at the option of the
holders thereof for shares of Chevron common stock owned by Pennzoil. Reference
is made to Note 3 for additional information. The fair market value of the
shares of Chevron common stock held by Pennzoil as of December 31, 1994 was
$43.27 per share, based on the closing transaction price for Chevron common
stock reported on the NYSE on December 30, 1994 of $44.625 per share, reduced by
a $1.355 per share reserve for exchange rights relating to Pennzoil's
outstanding 6 1/2% Debentures and 4 3/4% Debentures.

Adoption of SFAS No. 115 resulted in an increase in shareholders' equity of
$106.8 million as of January 1, 1994, representing the net unrealized gain
related to Pennzoil's investment in Chevron common stock. Prior year financial
statements have not been restated to reflect the new accounting method. As of
December 31, 1994, the net unrealized after-tax gain included in shareholders'
equity related to Pennzoil's investment in Chevron common stock was $112.7
million.

F-8
<PAGE> 43

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The cost, market value and unrealized gains related to Pennzoil's
marketable securities are as follows:

<TABLE>
<CAPTION>
UNREALIZED
AT DECEMBER 31 COST MARKET GAINS
- -------------- -------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
1994
Non-current marketable securities and other
investments:
Chevron Corporation common stock.................... $608,565 $781,902 $173,337
Other marketable securities and investments......... 51,498 51,498 --
-------- -------- --------
Total non-current marketable securities
and other investments............................... $660,063 $833,400 $173,337
======== ======== ========
1993
Current marketable securities and other investments.... $684,308 $684,308 $ --
======== ======== ========
Non-current marketable securities and other
investments:
Chevron Corporation common stock.................... $608,565 $787,220 $178,655
Other marketable securities and investments......... 46,408 46,408 --
-------- -------- --------
Total non-current marketable securities
and other investments............................... $654,973 $833,628 $178,655
======== ======== ========
</TABLE>

In November 1993, Pennzoil sold 8,158,582 shares of Chevron common stock in
a block trade on the NYSE for a price of $89.00 per share before commissions
($88.38 per share net of commissions). The sale resulted in a net realized gain
of $137.0 million ($171.6 million before tax), or $3.25 per share. The cost of
the securities sold is based on the average cost of each security held at the
time of sale.

Pennzoil's investments in debt securities are classified as
"held-to-maturity" based on Pennzoil's ability and intent to hold those
securities to maturity. Such securities are carried at cost, net of unamortized
premium or discount, if any, and consist solely of domestic commercial paper.
All of Pennzoil's "held-to-maturity" securities approximate their fair values
based on the relatively short maturities of those investments and on quoted
market prices, where such prices are available.

Other income effects from marketable securities and other investments are
discussed under the caption "Investment and Other Income, Net" below.

Investment and Other Income, Net --

Other revenues, net of related expenses, are included in "Investment and
Other Income, Net," which consists of the following:

<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Interest income.......................................... $ 36,841 $ 11,002 $ 8,050
Dividend income.......................................... 33,766 60,496 95,722
Realized gains on sales of marketable securities and
other investments...................................... 500 182,057 298
Net gains on sales of assets............................. 37,530 35,222 3,198
Settlements and refunds.................................. 1,793 824 3,501
Other income (expense), net.............................. (22,316) 15,299 23,239
-------- -------- --------
$ 88,114 $304,900 $134,008
======== ======== ========
</TABLE>

Substantially all interest and dividend income is from marketable
securities and other cash investments.

F-9
<PAGE> 44

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Receivables --

Current receivables include trade accounts and notes receivable and are net
of allowances for doubtful accounts of $10.5 million in 1994 and $10.0 million
in 1993. Long-term receivables consist of notes receivable and are net of
allowances for doubtful accounts of $.9 million in 1994 and $4.2 million in
1993.

At December 31, 1994 and 1993, current receivables included notes
receivable of $10.7 million and $12.6 million, respectively. Other assets
included long-term notes receivable of $39.7 million and $44.7 million at
December 31, 1994 and 1993, respectively.

In May 1993, the Financial Accounting Standards Board issued a new standard
on accounting by creditors for impairment of loans. This standard requires
certain impaired loans to be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. Adoption of the standard by
Pennzoil is required no later than the first quarter of 1995, although earlier
implementation is permitted. Pennzoil currently expects to adopt the standard
effective January 1, 1995. Based on a preliminary review, Pennzoil does not
expect that adoption of the standard will have a material effect on its
financial condition or results of operations.

Inventories --

A majority of inventories is reported at cost using the last-in, first-out
("LIFO") method, which is lower than market. Substantially all other inventories
are reported at cost using the first-in, first-out method. Inventories valued on
the LIFO method totaled $122.2 million at December 31, 1994 and $131.2 million
at December 31, 1993. The current cost of LIFO inventories was approximately
$182.5 million and $178.8 million at December 31, 1994 and 1993, respectively.

Oil and Gas Producing Activities and Depreciation, Depletion and
Amortization --

Pennzoil follows the successful efforts method of accounting for oil and
gas operations. Under the successful efforts method, lease acquisition costs are
capitalized. Significant unproved properties are reviewed periodically on a
property-by-property basis to determine if there has been impairment of the
carrying value, with any such impairment charged currently to exploration
expense. All other unproved properties are generally aggregated and a portion of
such costs estimated to be nonproductive, based on historical experience, is
amortized on an average holding period basis.

Exploratory drilling costs are capitalized pending determination of proved
reserves. If proved reserves are not discovered, the exploratory drilling costs
are expensed. Other exploration costs are also expensed. All development costs
are capitalized. Provision for depreciation, depletion and amortization is
determined on a field-by-field basis using the unit-of-production method.
Estimated costs of future dismantlement and abandonment of wells and production
platforms, net of salvage values, are accrued as part of depreciation, depletion
and amortization expense using the unit-of-production method; actual costs are
charged to accumulated depreciation, depletion and amortization. The carrying
amounts of proven properties are reviewed periodically and an impairment reserve
is provided as conditions warrant.

Pennzoil follows the sales method of accounting for natural gas imbalances.
Under the sales method, revenue is recognized on all production delivered by
Pennzoil to its purchasers, regardless of Pennzoil's ownership interest in the
respective property. At December 31, 1994, Pennzoil's gas imbalance reflects a
net underproduced position of 14.4 billion cubic feet of gas. The company
expects to recover this imbalance from its co-owners through future production
or alternative arrangements.

Sulphur properties were generally depreciated and depleted on the
unit-of-production method, except assets having an estimated life less than the
estimated life of the mineral deposits, which were depreciated on

F-10
<PAGE> 45

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the straight-line method. In October 1994, Pennzoil entered into an agreement
with Freeport-McMoRan Resource Partners, Limited Partnership
("Freeport-McMoRan") providing for the sale by Pennzoil to Freeport-McMoRan of
substantially all the domestic assets of Pennzoil's sulphur segment. The
transaction was completed in January 1995. Reference is made to Note 10 for
additional information.

All other properties are depreciated on straight-line or accelerated
methods in amounts calculated to allocate the cost of properties over their
estimated useful lives.

Price Risk Management Activities --

Pennzoil has a formal price risk management program that permits periodic
utilization of financial instruments to hedge a portion of the price risks
associated with fluctuations in crude oil and natural gas prices. Through
December 31, 1994, this program has been limited to the occasional use of swaps
with financial institutions and industry partners, which hedge the sales price
of natural gas. Gains and losses on these instruments are recognized in income
when the associated hedged commodities are sold.

The results of Pennzoil's price risk management activities were not
material to its results of operations during the three-year period ended
December 31, 1994 or to its financial position as of that date.

Environmental Expenditures --

Environmental expenditures are expensed or capitalized in accordance with
generally accepted accounting principles. Liabilities for these expenditures are
recorded when it is probable that obligations have been incurred and the amounts
can be reasonably estimated. Reference is made to Note 8 for a discussion of
amounts recorded for these liabilities.

Intangible Assets --

Substantially all intangible assets, included in other assets in the
accompanying consolidated balance sheet, relate to goodwill recognized in
business combinations accounted for as purchases. Goodwill included in other
assets in the accompanying consolidated balance sheet was $88.2 million at
December 31, 1994 and $86.2 million at December 31, 1993, net of accumulated
amortization of $19.9 million and $17.2 million, respectively. Goodwill is being
amortized on a straight-line basis over periods ranging from 20 to 40 years.
Amortization expense recorded during 1994 and 1993 was $7.1 million and $8.1
million, respectively.

Cash Flow Information --

For purposes of the consolidated statement of cash flows, all highly liquid
investments purchased with a maturity of three months or less are considered to
be cash equivalents. The effect of changes in foreign exchange rates on cash
balances has been immaterial. Cash used in operating activities includes cash
payments for interest (net of amounts capitalized) of $469.3 million, $183.6
million and $228.9 million in 1994, 1993 and 1992, respectively. Interest
capitalized for 1994, 1993 and 1992 was $9.0 million, $11.4 million and $8.7
million, respectively. Income taxes paid, net of refunds, during 1994, 1993 and
1992 were $395.1 million, $5.5 million and $2.2 million, respectively. Cash
payments for interest and income taxes in 1994 include $294.3 million and $261.7
million, respectively, paid to the Internal Revenue Service ("IRS") resulting
from the settlement of a dispute relating to a proposed tax deficiency based on
an audit of Pennzoil's 1988 federal income tax return. Reference is made to Note
8 for additional information.

F-11
<PAGE> 46

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Changes in operating assets and liabilities, net of effects from the
purchases of equity interests in certain businesses acquired, consist of the
following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1994 1993 1992
--------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Receivables
Current federal income taxes receivable............... $(107,404) $ 27,597 $(27,597)
Other receivables..................................... 340 (27,662) (40,062)
Inventories............................................. (577) 3,263 14,285
Payables
Current federal income taxes payable.................. (87,566) 87,566 (4,813)
Accounts payable and accrued liabilities.............. 35,151 (44,760) (5,775)
Other assets and liabilities............................ (34,689) (40,320) 11,169
--------- -------- --------
$(194,745) $ 5,684 $(52,793)
========= ======== ========
</TABLE>

Earnings Per Share --

Earnings per share are computed based on the weighted average shares of
common stock outstanding. The average shares used in earnings per share
computations for the years 1994, 1993 and 1992 were 46,013,506, 42,187,739 and
40,582,451, respectively.

Foreign Operations --

Consolidated income (loss) from continuing operations before income tax
includes losses from foreign operations of $53.4 million, $17.3 million and
$21.7 million in 1994, 1993 and 1992, respectively.

(2) INCOME TAXES --

Accounting for Income Taxes --

In December 1992, Pennzoil announced its decision to change its method of
accounting for income taxes by adopting the requirements of SFAS No. 109,
"Accounting for Income Taxes," effective as of January 1, 1992. Previous 1992
interim period results were restated as a result of the adoption. Prior year
financial statements were not restated to reflect the new accounting method. As
a result of adopting SFAS No. 109, Pennzoil recognized a cumulative, one-time
benefit from the change in accounting principle for periods prior to 1992 of
$115.7 million, or $2.85 per share, as of the first quarter of 1992. In addition
to the cumulative effect, income from continuing operations for the year ended
December 31, 1992, increased $3.4 million ($4.5 million before tax), or $.08 per
share, associated with adopting the new standard.

SFAS No. 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.

F-12
<PAGE> 47

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Federal, State and Foreign --

Federal, state and foreign income tax expense (benefit) for continuing
operations consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1994 1993 1992
--------- --------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Current
United States......................................... $(111,200) $ 133,210 $ 5,562
Foreign............................................... 1,185 710 797
State................................................. 3,875 2,760 2,687
Deferred
United States......................................... (115,067) (80,947) (28,105)
Foreign............................................... (1,306) (236) (447)
State................................................. 1,158 3,708 723
--------- --------- ---------
$(221,355) $ 59,205 $ (18,783)
========= ======== ========
</TABLE>

Reference is made to Note 3 for information regarding the tax benefit
applicable to the extraordinary loss on the early retirement of debt. In
addition, reference is made to Note 6 for information regarding the deferred tax
benefits applicable to the cumulative effect of the change in accounting for
postemployment benefit costs.

Pennzoil's net deferred tax liability is as follows:

<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1993
--------- ---------
(EXPRESSED IN
THOUSANDS)
<S> <C> <C>
Deferred tax liability....................................... $ 613,461 $ 633,285
Deferred tax asset........................................... (277,428) (401,284)
Valuation allowance.......................................... 15,876 59,314
--------- ---------
Net deferred tax liability......................... $ 351,909 $ 291,315
========= =========
</TABLE>

Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1993
--------- ---------
(EXPRESSED IN
THOUSANDS)
<S> <C> <C>
Investment in Chevron common stock........................... $ 56,708 $ 212,998
Unrealized gain on equity securities......................... 60,668 --
Property, plant and equipment................................ 424,603 318,464
Proceeds from issuance of exchangeable debentures
treated as option proceeds................................. 40,953 40,953
Original issue discount on exchangeable debentures........... (36,414) (39,387)
Alternative minimum tax credit carryforward.................. (72,305) (195,048)
Net operating loss carryforwards............................. (22,021) (58,779)
Other, net................................................... (116,159) (47,200)
Valuation allowance.......................................... 15,876 59,314
--------- ---------
Net deferred tax liability......................... $ 351,909 $ 291,315
========= =========
</TABLE>

F-13
<PAGE> 48

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The principal items accounting for the difference in income taxes on income
(loss) from continuing operations computed at the federal statutory rate and as
recorded are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1994 1993 1992
--------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate......... $(176,783) $ 76,804 $ (467)
Increases (reductions) resulting from:
Dividends received deduction........................... (8,306) (14,744) (22,782)
State income taxes, net................................ 3,271 4,204 2,251
Taxes on foreign income in excess of statutory rate.... 1,280 308 231
Amortization of nondeductible goodwill................. 4,848 1,258 1,242
Change in tax law...................................... -- 16,000 --
Reversal of valuation allowance........................ (44,043) (25,500) --
Other, net............................................. (1,622) 875 742
--------- -------- --------
Income tax provision (benefit)........................... $(221,355) $ 59,205 $(18,783)
========= ======== ========
</TABLE>

Reference is made to Note 8 for information regarding a settlement
agreement entered into with the IRS in October 1994 relating to a proposed tax
deficiency based on an audit of Pennzoil's 1988 federal income tax return.

As a result of the IRS settlement, Pennzoil reduced its tax basis in the
shares of Chevron common stock beneficially owned by Pennzoil. In January 1995,
Pennzoil filed an amended 1993 federal income tax return to reflect the increase
in taxable income for the 1993 sale of shares of Chevron common stock, which was
substantially offset by the utilization of a net operating loss carryforward.
Reference is made to Note 1 for additional information. Realization of the net
operating loss carryforward resulted in the reversal of a valuation allowance of
approximately $44 million. The valuation allowance had previously been reduced
in 1993 by $25.5 million to reflect the net operating loss utilization resulting
from the 1993 sale of shares of Chevron common stock on a pre-settlement basis.

As of December 31, 1994, Pennzoil had a United States net operating loss
carryforward of approximately $8 million, which is available to reduce future
regular federal income taxes payable. Additionally, for purposes of determining
alternative minimum tax, an approximately $7 million net operating loss is
available to offset future alternative minimum taxable income. Utilization of
these regular and alternative minimum tax net operating losses, to the extent
generated in separate return years, is limited based on the separate taxable
income of the subsidiary, or its successor, generating the loss. If not used,
these carryovers will expire in the years 2000 to 2006. In addition, Pennzoil
has approximately $72 million of alternative minimum tax credits indefinitely
available to reduce future regular tax liability to the extent it exceeds the
related alternative minimum tax otherwise due. All net operating loss and credit
carryover amounts are subject to examination by the tax authorities.

Pennzoil also has state net operating loss carryforwards, the tax effect of
which was approximately $19 million as of December 31, 1994. A valuation
allowance of approximately $13 million has been established to offset the
portion of the deferred tax asset related to loss carryforwards expected to
expire before their utilization.

F-14
<PAGE> 49

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) DEBT --

Long-term debt outstanding was as follows:

<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1993
---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Debentures and notes
9 5/8% due 1999................................................... $ 200,000 $ 200,000
10 5/8% due 2001.................................................. 150,000 150,000
6 1/2% due 2003................................................... 402,500 402,500
4 3/4% due 2003................................................... 500,000 500,000
10 1/4% due 2005.................................................. 250,000 250,000
10 1/8% due 2009.................................................. 200,000 200,000
9% due 2017....................................................... 38,500 38,500
Revolving credit facilities with banks.............................. 400,000 195,000
Jiffy Lube
Notes............................................................. -- 1,402
Contingent notes.................................................. 9,052 11,546
Mortgages......................................................... 3,143 18,772
Other secured debt................................................ 11,220 13,312
Other (including debenture premiums and discounts).................. 12,266 12,024
---------- ----------
Total long-term debt, including current maturities................ 2,176,681 1,993,056
Less amounts due within one year
Debentures, notes and other....................................... 167 152
Jiffy Lube........................................................ 1,593 19,416
---------- ----------
1,760 19,568
---------- ----------
Total long-term amount............................................ $2,174,921 $1,973,488
========== ==========
</TABLE>

In August 1994, Pennzoil entered into an amended and restated revolving
credit facility with a group of banks that provides for up to $600 million of
unsecured revolving credit borrowings through August 16, 1995, with any
outstanding borrowings on such date being converted into a term credit facility
terminating on September 1, 1996. Pennzoil has the option, subject to the
extension of additional credit by new or existing banks, of increasing the size
of the facility by $100 million. This amended and restated credit facility
replaces and supersedes the previous revolving credit facilities of Pennzoil.
Borrowings under the facility totaled $205.0 million at December 31, 1994. The
average interest rate applicable to amounts outstanding under this facility and
the previous revolving credit facilities of Pennzoil was 4.69% and 3.59% during
1994 and 1993, respectively.

In June 1994, in connection with its acquisition of Co-enerco Resources,
Ltd. ("Co-enerco"), Pennzoil Canada, Inc. ("Pennzoil Canada"), an indirect
wholly owned subsidiary of Pennzoil, established a Cdn. $260 million credit
facility with a syndicate of Canadian banks, the borrowings of which are
guaranteed by Pennzoil. Also in June 1994, Pennzoil Canada established an
additional Cdn. $40 million credit facility with a Canadian bank, the borrowings
of which are guaranteed by Pennzoil. These facilities provide for borrowings
through May 30, 1995, with any outstanding borrowings on such date being
converted into term credit facilities terminating on May 30, 1996. Borrowings
under these facilities can be made in any combination of U.S. or Canadian
dollars and totaled U.S. $185.0 million and U.S. $10.0 million, respectively, as
of December 31, 1994. The average interest rate applicable to amounts
outstanding under this facility was 5.27% during 1994.

F-15
<PAGE> 50

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

paper facilities totaled $243.9 million and $249.4 million at December 31, 1994
and 1993, respectively, and are included in notes payable in the accompanying
consolidated balance sheet. The average interest rates applicable to outstanding
commercial paper were 4.43% and 3.26% during 1994 and 1993, respectively.

Pennzoil has several short-term variable-rate credit arrangements with
certain banks. Pennzoil's Board of Directors has limited borrowings under these
credit arrangements to $200.0 million. Outstanding borrowings totaled $93.3
million and $183.6 million at December 31, 1994 and 1993, respectively, and are
included in notes payable in the accompanying consolidated balance sheet. The
average interest rates applicable to amounts outstanding under these
arrangements were 4.31% and 3.35% during 1994 and 1993, respectively. None of
the banks under these credit arrangements has any obligation to continue to
extend credit after the maturities of outstanding borrowings or to extend the
maturities of any borrowings.

The 6 1/2% Debentures and the 4 3/4% Debentures are exchangeable at the
option of the holders thereof at any time prior to maturity, unless previously
redeemed, for shares of Chevron common stock beneficially owned by Pennzoil at
exchange rates of 23.774 shares and 17.004 shares, respectively, per $1,000
principal amount of the 6 1/2% Debentures and the 4 3/4% Debentures (the
equivalent of $42 1/16 per share and $58 13/16 per share, respectively), subject
to adjustment in certain events. In lieu of delivering certificates representing
shares of Chevron common stock in exchange for the 6 1/2% Debentures and the
4 3/4% Debentures, Pennzoil may, at its option, pay to any holder surrendering
the 6 1/2% Debentures and the 4 3/4% Debentures an amount in cash equal to the
market price of the shares for which the 6 1/2% Debentures and the 4 3/4%
Debentures are exchangeable. Pennzoil has deposited all 18,071,036 shares of
Chevron common stock beneficially owned by Pennzoil with exchange agents for
possible exchange for the 6 1/2% Debentures and the 4 3/4% Debentures.

In 1993 and 1992, Pennzoil redeemed amounts outstanding under several debt
facilities using proceeds from various sources. The premiums and related
unamortized discount and debt issue costs relating to these redemptions resulted
in extraordinary charges of $18.4 million ($28.3 million before tax), or $.44
per share, in 1993 and $16.6 million ($25.2 million before tax), or $.41 share,
in 1992.

At December 31, 1994, maturities of long-term debt for the years ending
December 31, 1995 to 1999 were $1.8 million, $405.8 million, $6.7 million, $2.5
million and $200.4 million, respectively. These maturities include $400 million
in 1996 related to the maturities of Pennzoil's revolving credit facilities.
Such maturities also include $3.9 million and $5.2 million for the years ending
December 31, 1996 and 1997, respectively, related to non-interest bearing
promissory notes of Jiffy Lube International, Inc. ("Jiffy Lube"), a wholly
owned subsidiary of Pennzoil, the payment of which is contingent upon the future
profitability of Jiffy Lube.

(4) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK --

Financial Instruments with Off-Balance-Sheet Risk --

Pennzoil is a party to various financial instruments with off-balance-sheet
risk as part of its normal course of business, including financial guarantees
and contractual commitments to extend financial guarantees, credit and other
assistance to customers, franchisees and other third parties. These financial
instruments involve, to varying degrees, elements of credit risk which are not
recognized in Pennzoil's consolidated balance sheet.

F-16
<PAGE> 51

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The financial guarantees primarily relate to debt and lease obligation
guarantees with expiration dates of up to twenty years issued to third parties
to guarantee the performance of customers and franchisees in the fast lube
industry. Commitments to extend credit are also provided to fast lube industry
participants to finance equipment purchases, working capital needs and, in some
cases, the acquisition of land and construction of improvements. Contractual
commitments to extend credit and other assistance are in effect as long as
certain conditions established in the respective contracts are met. Contractual
commitments to extend financial guarantees are conditioned on the occurrence of
specified events. The largest of these commitments is to provide a guarantee for
letters of credit issued by third parties to meet the reinsurance requirements
of Pennzoil's captive insurance subsidiary. This commitment has no stated
maturity and is expected to vary in amount from year to year to meet the
reinsurance requirements. Reserves established for reported and incurred but not
reported insurance losses in the amount of $35.4 million and $32.3 million have
been recognized in Pennzoil's consolidated balance sheet as of December 31, 1994
and 1993, respectively. The credit risk to Pennzoil is mitigated by the
insurance subsidiary's portfolio of high-quality, short-term investments used to
collateralize the letters of credit. At December 31, 1994, the collateral was
valued at approximately 141% of the credit risk.

In addition, in connection with Pennzoil's disposition of Purolator
Products Company ("Purolator") in 1992, Pennzoil entered into an agreement with
certain banks to provide contingent credit support for a Purolator credit
facility. This obligation was terminated in November 1994 upon the payment in
full of all obligations due under the facility by Purolator and the termination
of the facility.

Also, in connection with Pennzoil's disposition of Purolator in 1992,
Pennzoil entered into an agreement with the Pension Benefit Guaranty Corporation
("PBGC"), pursuant to which Pennzoil agreed that, for up to five years, in the
event of the termination of any or all the employee benefit plans of Purolator
that are subject to Title IV of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the inability of the PBGC in good faith to
collect the amounts of any unfunded benefit liabilities under Purolator's plans
from Purolator or any person controlling Purolator, Pennzoil would guarantee up
to $7.0 million of such unfunded benefit liabilities.

Following are the amounts related to Pennzoil's financial guarantees and
contractual commitments to extend financial guarantees, credit and other
assistance as of December 31, 1994 and 1993.

<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNTS
---------------------
1994 1993
------- -------
(EXPRESSED IN
THOUSANDS)
<S> <C> <C>
Financial guarantees.................................................. $13,981 $16,987
Commitments to extend financial guarantees
Guarantee of letter of credit....................................... 1,353 2,318
Other guarantees.................................................... 29,460 20,708
Commitments to extend credit support, credit and other assistance
Contingent credit support........................................... -- 23,089
Credit and other assistance......................................... 705 2,160
------- -------
Total financial guarantees and commitments.......................... $45,499 $65,262
======= =======
</TABLE>

Pennzoil's exposure to credit losses in the event of nonperformance by the
other parties to these financial instruments is represented by the contractual
or notional amounts. Decisions to extend financial guarantees and commitments
and the amount of remuneration and collateral required are based on management's
credit evaluation of the counterparties on a case-by-case basis. The collateral
held varies but may include accounts receivable, inventory, equipment, real
property, securities and personal assets. Since many of the commit-

F-17
<PAGE> 52

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.

Concentrations of Credit Risk --

Pennzoil extends credit to various companies in the oil and gas, motor oil
and refined products, fast lube and sulphur industries in the normal course of
business. Within these industries, certain concentrations of credit risk exist.
These concentrations of credit risk may be similarly affected by changes in
economic or other conditions and may, accordingly, impact Pennzoil's overall
credit risk. However, management believes that consolidated receivables are well
diversified, thereby reducing potential credit risk to Pennzoil, and that
allowances for doubtful accounts are adequate to absorb estimated losses as of
December 31, 1994. Pennzoil's policies concerning collateral requirements and
the types of collateral obtained for on-balance-sheet financial instruments are
the same as those described above under "Financial Instruments with
Off-Balance-Sheet Risk."

At December 31, 1994, receivables related to these group concentrations in
the oil and gas, motor oil and refined products, fast lube and sulphur
industries were $128.1 million, $223.3 million, $31.8 million and $13.4 million,
respectively, compared with $182.8 million, $181.4 million, $36.9 million and
$8.9 million, respectively, at December 31, 1993.

(5) FAIR VALUE OF FINANCIAL INSTRUMENTS --

The carrying amounts of Pennzoil's short-term financial instruments,
including cash equivalents, current marketable securities and other investments,
trade accounts receivable, trade accounts payable and notes payable, approximate
their fair values based on the short maturities of those instruments and on
quoted market prices, where such prices are available.

The following table summarizes the carrying amounts and estimated fair
values of Pennzoil's other financial instruments.

<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------------- -----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance Sheet Financial Instruments:
Notes receivable......................... $ 49,532 $ 46,776 $ 53,140 $ 53,703
Long-term investments.................... 856,683 856,683 668,626 847,281
Long-term debt........................... 2,176,681 2,195,688 1,993,056 2,182,765
Off-Balance-Sheet Financial Instruments:
Financial guarantees and commitments..... -- 7,162 -- 11,512
</TABLE>

The following methods and assumptions were used to estimate the fair value
of each class of financial instrument included above:

Notes Receivable --

The estimated fair value of notes receivable is based on discounting future
cash flows using estimated year-end interest rates at which similar loans have
been made to borrowers with similar credit ratings for the same remaining
maturities.

F-18
<PAGE> 53

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Long-Term Investments --

The estimated fair value of long-term investments is based on quoted market
prices at year end for those investments, adjusted for any reserves for
debenture exchange rights, where applicable. Reference is made to Note 1 for
additional information.

Long-Term Debt --

The estimated fair value of Pennzoil's long-term debt is based on quoted
market prices or, where such prices are not available, on estimated year-end
interest rates of debt with the same remaining average maturities and credit
quality.

Off-Balance-Sheet Financial Instruments --

The estimated fair value of certain financial guarantees written and
commitments to extend financial guarantees is based on the estimated cost to
Pennzoil to obtain third party letters of credit to relieve Pennzoil of its
obligations under such guarantees or, in the case of certain lease guarantees
related to Jiffy Lube franchisees, the present value of expected future cash
flows using a discount rate commensurate with the risks involved. Reference is
made to Note 4 for further information regarding off-balance-sheet financial
instruments.

(6) BENEFIT PLANS --

Retirement Plans --

Substantially all employees are covered by non-contributory retirement
plans which provide benefits based on the participants' years of service and
compensation or stated amounts for each year of service. Annual contributions to
the plans are made in accordance with the minimum funding provisions of ERISA
where applicable, but not in excess of the maximum amount that can be deducted
for federal income tax purposes.

Net periodic pension cost for 1994, 1993 and 1992 included the following
components:

<TABLE>
<CAPTION>
1994 1993 1992
-------- ------- -------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the
year........................................... $ 8,878 $ 7,892 $ 7,208
Interest cost on projected benefit obligations... 11,429 9,802 8,913
Expected return on plan assets................... (11,312) (9,753) (9,325)
Net amortization and deferral.................... 1,672 158 (456)
-------- ------- -------
Net periodic pension cost.............. $ 10,667 $ 8,099 $ 6,340
======== ======= =======
</TABLE>

Actual return on plans' assets was $4.6 million, $2.6 million and $6.2
million in 1994, 1993 and 1992, respectively.

Assumptions used were:

<TABLE>
<CAPTION>
AS OF DECEMBER 31
-----------------------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Discount rates........................................ 8.50% 7.50% 8.25%
Weighted average rates of increase in compensation
levels.............................................. 6.30% 6.40% 7.60%
Expected long-term rate of return on assets........... 9.00% 8.00% 8.00%
</TABLE>

F-19
<PAGE> 54

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table sets forth the plans' funded status and amounts
recognized in the consolidated balance sheet:

<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------------------- --------------------------------------
PLANS WHERE PLANS WHERE PLANS WHERE PLANS WHERE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS TOTAL ACCUMULATED BENEFITS TOTAL
BENEFITS EXCEED ASSETS PLANS BENEFITS EXCEED ASSETS PLANS
------------- ------------- -------- ------------- ------------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value
of benefit
obligations:
Vested benefit
obligation........ $41,419 $ 73,388 $114,807 $43,266 $ 71,525 $114,791
======= ========= ======== ======= ========= ========
Accumulated benefit
obligation........ $44,049 $ 87,520 $131,569 $46,351 $ 87,825 $134,176
======= ========= ======== ======= ========= ========
Projected benefit
obligation........ $44,060 $ 103,679 $147,739 $46,384 $ 104,697 $151,081
Plan assets at fair
value................ 54,436 78,197 132,633 55,194 69,906 125,100
------- --------- -------- ------- --------- --------
Projected benefit
obligation (in excess
of) less than plan
assets............... 10,376 (25,482) (15,106) 8,810 (34,791) (25,981)
Unrecognized net
(gain) loss.......... (7,436) (596) (8,032) (5,725) 9,717 3,992
Prior service cost not
yet recognized in net
periodic pension
cost................. 5,458 13,270 18,728 5,382 14,309 19,691
Unrecognized net
obligation (asset)... (1,637) 149 (1,488) (1,865) 174 (1,691)
Minimum liability
adjustment........... -- (168) (168) -- (7,328) (7,328)
------- --------- -------- -------- --------- --------
Pension (liability)
asset recognized in
the Consolidated
Balance Sheet........ $ 6,761 $ (12,827) $ (6,066) $ 6,602 $ (17,919) $(11,317)
======= ========= ======== ======= ========= ========
</TABLE>

The plans' assets include equity securities, common trust funds and various
debt securities.

Unrecognized prior service cost is amortized on a straight-line basis over
a period equal to the average of the expected future service of active employees
expected to receive benefits under the respective plans.

Postretirement Health Care and Life Insurance Benefits --

Pennzoil sponsors several unfunded defined benefit postretirement plans
covering most salaried and hourly employees. The plans provide medical and life
insurance benefits and are, depending on the type of plan, either contributory
or non-contributory. The accounting for the health care plans anticipates future
cost-sharing changes that are consistent with Pennzoil's expressed intent to
increase, where possible, contributions from future retirees to a minimum of 30%
of the total annual cost. Furthermore, Pennzoil's future contributions for both
current and future retirees have been limited, where possible, to 200% of the
average 1992 benefit cost.

F-20
<PAGE> 55

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Net periodic postretirement benefit cost for 1994, 1993 and 1992 included
the following components:

<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits attributed to service
during the period................................. $1,096 $1,085 $ 895
Interest cost on accumulated postretirement benefit
obligation........................................ 5,222 5,644 5,343
Amortization of unrecognized net losses............. 259 297 112
------ ------ ------
Net periodic postretirement benefit cost............ $6,577 $7,026 $6,350
====== ====== ======
</TABLE>

The following table sets forth the plans' combined status reconciled with
the amount included in the consolidated balance sheet at December 31, 1994 and
1993:

<TABLE>
<CAPTION>
1994 1993
-------- --------
(EXPRESSED IN
THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.......................................... $ 49,991 $ 59,163
Fully eligible active plan participants........... 6,039 6,910
Other active plan participants.................... 10,223 11,972
-------- --------
Total accumulated postretirement benefit
obligation........................................ 66,253 78,045
Unrecognized net loss from changes in assumptions... (3,576) (17,526)
-------- --------
Accrued postretirement benefit cost................. $ 62,677 $ 60,519
======== ========
</TABLE>

For measurement purposes, a 10% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1995; the rate was assumed
to decrease gradually to 6% through the year 2002 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amount of the obligation and periodic cost reported. An increase in the
assumed health care cost trend rates by 1% in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1994 by $2.7
million and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year then ended by $.3 million.

The weighted-average discount rates used in determining the accumulated
postretirement benefit obligation as of December 31, 1994 and 1993 were 8.5% and
7.5%, respectively.

Contribution Plans --

Pennzoil has defined contribution plans covering substantially all
employees who have completed one year of service. Employee contributions of not
less than 1% to not more than 6% of each covered employee's compensation are
matched between 50% and 100% by Pennzoil. The cost of such company contributions
totaled $10.0 million in 1994, $9.4 million in 1993 and $9.1 million in 1992.

Postemployment Benefits --

Effective January 1, 1994, Pennzoil changed its method of accounting for
postemployment benefit costs by adopting the new requirements of SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." This standard requires
employers to recognize the obligation to provide postemployment benefits if the
obligation is attributable to employees' services already rendered, employees'
rights to those benefits accumulate or vest, payment of the benefits is probable
and the amounts can be reasonably estimated. If those four conditions are not
met, the employer should recognize the obligation to provide postemployment
benefits

F-21
<PAGE> 56

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

when it is probable that a liability has been incurred and the amount can be
reasonably estimated. Pennzoil recorded a charge of $4.9 million ($7.6 million
before tax), or $.11 per share, as of January 1, 1994 to reflect the cumulative
effect of the change in accounting principle for periods prior to 1994.

(7) CAPITAL STOCK AND STOCK OPTIONS --

Pennzoil's Restated Certificate of Incorporation authorizes the issuance of
up to 9,747,720 shares of preferred stock. None of these shares were issued or
outstanding at December 31, 1994. Pursuant to its authority to divide the
preferred stock into a series, the Board of Directors in October 1994 designated
750,000 shares of preferred stock as a series of "Series A Junior Participating
Preferred Stock." The Series A Junior Participating Preferred Stock is issuable
upon the exercise of certain rights to purchase the Series A Junior
Participating Preferred Stock ("Rights"). One Right was distributed with respect
to each share of Pennzoil common stock outstanding at the close of business on
November 11, 1994, and Rights are issuable with all subsequently issued shares
of Pennzoil common stock prior to the date the Rights become exercisable or
expire. The Rights are not currently exercisable or transferable apart from the
Pennzoil common stock. Each Right entitles the holder to purchase from Pennzoil
a unit consisting of one one-hundredth of a share of Series A Junior
Participating Preferred Stock at $140 per share upon the occurrence of certain
specified events.

Pennzoil's Restated Certificate of Incorporation authorizes the issuance of
up to 27,862,924 shares of preference common stock. None of these shares were
issued or outstanding at December 31, 1994. Dividend rights on any preference
common stock are junior to the rights of any Pennzoil preferred stock and senior
to the rights of Pennzoil common stock.

In September 1993, Pennzoil completed the sale, pursuant to underwritten
public offerings, of 5,000,000 shares of its common stock at a price of $62.50
per share. The net proceeds from the sale of the shares of Pennzoil common stock
offered, prior to the payment of expenses, totaled approximately $303.3 million.
Primarily utilizing funds from such offerings, Pennzoil redeemed an aggregate of
$292.5 million principal amount of Pennzoil's debentures. Reference is made to
Note 3 for additional information. Pro forma earnings per share for the year
ended December 31, 1993, assuming the stock offering and redemption of
debentures had occurred at the beginning of 1993, were $3.43 per share.

At December 31, 1994, Pennzoil had 2,774,187 shares of common stock
reserved for issuance upon the grant and exercise of stock options and the grant
and maturity of conditional stock awards. An additional 850,000 shares of
Pennzoil common stock were reserved for issuance upon the grant and exercise of
stock options in February 1995.

At December 31, 1994, Pennzoil had nonqualified and incentive stock option
plans covering a total of 2,601,982 shares of Pennzoil common stock (compared to
2,620,565 shares at December 31, 1993), of which 621,633 shares were available
for granting of options. Options granted under the plans have a maximum term of
ten years and are exercisable under the terms of the respective option
agreements at the market price of the common stock at the date of grant, subject
to antidilution adjustments in certain circumstances. At December 31, 1994,
expiration dates for the outstanding options ranged from December 1997 to August
2004 and the average exercise price per share was $63.75. Payment of the
exercise price may be made in cash or in shares of Pennzoil common stock
previously owned by the optionee, valued at the then-current market value.

F-22
<PAGE> 57

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Additional information with respect to the stock option plans is as
follows:

<TABLE>
<CAPTION>
NUMBER OF SHARES OPTION PRICE
UNDER OPTION RANGE PER SHARE
---------------- --------------------
<S> <C> <C>
Outstanding at December 31, 1993....................... 2,015,425 $29.3928 to $80.8125
Granted.............................................. 2,000 $50.5000 to $54.3750
Exercised............................................ 9,376 $29.3928
Lapsed............................................... 18,493 $29.3928 to $80.3750
Expired.............................................. 9,207 $29.3928 to $80.3750
---------
Outstanding at December 31, 1994....................... 1,980,349 $48.3750 to $80.8125
=========
Exercisable at December 31, 1994....................... 1,566,530 $48.3750 to $80.8125
=========
</TABLE>

In 1994, there were 20,620 units of common stock granted to selected
employees under Pennzoil's conditional stock award programs. Awards under the
programs are made in the form of units which entitle the recipient to receive,
at the end of a specified period, subject to certain conditions of continued
employment, a number of shares of Pennzoil common stock equal to the number of
units granted. At December 31, 1994, units covering 79,778 shares of Pennzoil
common stock were outstanding (compared to 73,853 shares at December 31, 1993).
In 1994, 14,695 shares of Pennzoil common stock were distributed to selected
employees upon maturity of awards granted under Pennzoil's conditional stock
award programs.

(8) COMMITMENTS AND CONTINGENCIES --

Tax Dispute --

In 1988, Pennzoil received $3.0 billion from Texaco Inc. ("Texaco") in
settlement of all litigation between Pennzoil and Texaco arising out of Texaco's
tortious interference with Pennzoil's contractual rights to purchase a minority
interest in Getty Oil Company. From 1989 through 1991, Pennzoil acquired
32,944,100 shares of Chevron common stock with approximately $2.2 billion of the
net Texaco settlement proceeds. For financial reporting purposes, Pennzoil
reported an extraordinary gain of $1.656 billion (after expenses and estimated
current and deferred taxes), or $42.62 per share, associated with the $3.0
billion in cash received from Texaco in April 1988. For federal income tax
purposes, Pennzoil originally reported that it recognized no gain upon receipt
of the $3.0 billion and that $366 million in legal and other costs incurred in
the Texaco litigation was fully deductible. Pennzoil's reporting position was
based on its belief that, under Section 1033 of the Internal Revenue Code, the
$3.0 billion received from Texaco was an amount realized as a result of the
involuntary conversion of property and that the Chevron shares were similar or
related in service or use to the property converted by Texaco. A corollary of
this position is that Pennzoil would have no tax basis in the Chevron shares.
During 1990 and 1991, Pennzoil recalculated its 1988 federal income tax
liability to recognize approximately $800 million of income, representing the
excess of the $3.0 billion received from Texaco over the amount expended to
acquire Chevron shares. As a result of these adjustments, current taxes were
increased, and deferred taxes were decreased, by $120.4 million in 1990 and
$13.2 million in 1991. In addition, Pennzoil paid interest on such taxes of
$17.6 million during 1990 and $3.7 million in 1991.

In January 1994, Pennzoil received a letter and examination report from the
District Director of the IRS that proposed a tax deficiency based on an audit of
Pennzoil's 1988 federal income tax return. The examination report proposed two
principal adjustments with which Pennzoil disagreed.

The first adjustment challenged Pennzoil's position under Section 1033 of
the Internal Revenue Code that (i) at least $2.2 billion of the $3.0 billion
cash payment received from Texaco in 1988 in settlement of litigation was
realized as a result of the involuntary conversion of property and (ii) the
shares of Chevron common stock purchased with $2.2 billion of the net Texaco
settlement proceeds were similar or related in service or use to the property
converted by Texaco. The proposed tax deficiency relating to this proposed

F-23
<PAGE> 58

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

adjustment was $550.9 million, net of available offsets. Pennzoil estimated that
the additional after-tax interest on this proposed deficiency was approximately
$234.3 million as of December 31, 1993.

The second adjustment proposed by the IRS would have permanently
capitalized, rather than allow Pennzoil to deduct, approximately $366 million
incurred by Pennzoil in 1988 and earlier years for litigation and related
expenses in connection with the Texaco settlement, even if it were determined
that the entire $3.0 billion was includable in Pennzoil's 1988 taxable income.
The proposed tax deficiency relating to the disallowance of deductions was
$124.6 million, and the estimated additional after-tax interest on this proposed
deficiency was approximately $46.7 million as of December 31, 1993.

In October 1994, Pennzoil entered into a settlement agreement with the IRS
to treat $618 million of the $2.2 billion as proceeds from an involuntary
conversion; to reduce such amount by $72 million of litigation costs; to
recognize the balance of the settlement proceeds as taxable income in 1988; and
to allow the balance of the litigation costs as deductions in 1988. As a result,
Pennzoil sustained a tax deficiency for 1988 of $261.7 million (net of available
offsets), plus interest, and its tax basis in each Chevron share was its cost
less $8.28 (after giving effect to a "two-for-one" stock split of Chevron common
stock which occurred in June 1994). Total interest charges on the tax deficiency
were $294.3 million, resulting in a total cash payment to the IRS of $556.0
million in October 1994.

In October 1992, Pennzoil completed a tax-free transaction with Chevron,
pursuant to which Pennzoil exchanged 15,750,000 shares of Chevron common stock
beneficially owned by Pennzoil for all the capital stock of Pennzoil Petroleum
Company ("Pennzoil Petroleum"), which owned Gulf of Mexico, Gulf Coast, Permian
Basin and other domestic oil and gas producing properties. Reference is made to
Note 10 for additional information. Under the liability method of accounting for
income taxes adopted by Pennzoil in December 1992, the excess of the amount of
Pennzoil's investment in Pennzoil Petroleum capital stock for financial
reporting purposes over the tax basis of such investment was not expected to
result in future income tax liability. Accordingly, deferred income taxes
attributable to the Chevron common stock exchanged in 1992, which taxes were
originally provided when the Texaco settlement proceeds were received in 1988,
were reflected as a reduction of the cost of Pennzoil's investment in Pennzoil
Petroleum. As a result of the IRS settlement, Pennzoil increased the balance of
its investment in Pennzoil Petroleum capital stock for financial reporting
purposes and, therefore, the carrying value of Pennzoil Petroleum's oil and gas
properties by $390.3 million, and such increased investment resulted in a $93.9
million increase in depreciation, depletion and amortization expense recognized
in October 1994 relating to Pennzoil Petroleum's oil and gas properties from the
date of the acquisition of Pennzoil Petroleum to the date of the IRS settlement.
These adjustments resulted in a net increase in property, plant and equipment of
$296.4 million as of September 30, 1994, while interest charges and
depreciation, depletion and amortization expense adjustments related to the IRS
settlement reduced Pennzoil's 1994 pretax income by $388.2 million. After
consideration of available tax offsets, the IRS settlement resulted in a 1994
after-tax charge of $210.4 million, or $4.57 per share.

Curtailment Litigation --

United Gas Pipe Line Company ("United"), a former subsidiary of Pennzoil,
curtailed deliveries of natural gas to its customers in accordance with
priorities contained in its tariffs during the 1970s and early 1980s. Several
lawsuits filed by industrial and power plant "direct sale" customers for damages
allegedly caused by curtailments were brought against United, and Pennzoil was
joined as a defendant in five of these suits. The only remaining suit against
United involving Pennzoil is an action filed in the United States District Court
for the Southern District of Mississippi on November 14, 1974 by Mississippi
Power Co. ("MPCo"), which alleges damages of approximately $44.7 million and
seeks to have such damages trebled pursuant to federal antitrust laws. In
related proceedings before the Federal Energy Regulatory Commission ("FERC"),
MPCo has introduced evidence indicating that its claimed damages (before
trebling) have increased to approximately $88.2 million. In 1977, the judge in
the MPCo case referred certain issues to the FERC and

F-24
<PAGE> 59

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

stayed all proceedings pending action by the FERC. No action has been taken
since 1977 to remove the stay. Pennzoil believes that it has no liability for
any action it has taken or omitted to take, that it can successfully defend
itself in the action and that the final outcome of the case will not have a
material adverse effect on its financial condition or results of operations.

Environmental Matters --

In connection with Pennzoil's disposition of Purolator, Pennzoil and
Purolator entered into an indemnification agreement pursuant to which Pennzoil
agreed to reimburse Purolator for the costs and expenses of certain
environmental remediation activities at a plant operated by Purolator in Elmira
Heights, New York, and certain environmental remediation activities, if any,
required at one other site located near the Elmira facility and a landfill site
located in Metamora, Michigan. Pennzoil had a reserve of $16.2 million and $16.3
million recorded with respect to its obligations under its indemnification
agreement with Purolator as of December 31, 1994 and 1993, respectively.
Reference is made to Note 11 for additional information.

Certain of Pennzoil's subsidiaries are involved in matters in which it has
been alleged that such subsidiaries are potentially responsible parties ("PRPs")
under CERCLA or similar state legislation with respect to various waste disposal
areas owned or operated by third parties. In addition, certain of Pennzoil's
subsidiaries are involved in other environmental remediation activities,
including the removal, inspection and replacement, as necessary, of underground
storage tanks. As of December 31, 1994 and 1993, Pennzoil's consolidated balance
sheet included accrued liabilities for environmental remediation of $44.9
million and $33.1 million, respectively, which amounts include reserves with
respect to Pennzoil's obligations under its indemnification agreement with
Purolator referred to in the previous paragraph. Of these reserves, $8.8 million
and $4.8 million are reflected on the consolidated balance sheet as current
liabilities as of December 31, 1994 and 1993, respectively, and $36.1 million
and $28.3 million are reflected as other liabilities as of December 31, 1994 and
1993, respectively. Pennzoil does not currently believe there is a reasonable
possibility of incurring additional material amounts in excess of the current
accruals recognized for such environmental remediation activities. With respect
to the sites in which Pennzoil subsidiaries are PRPs, Pennzoil's conclusion is
based in large part on (i) the availability of defenses to liability, including
the availability of the "petroleum exclusion" under CERCLA and similar state
laws, and/or (ii) Pennzoil's current belief that its share of wastes at a
particular site is or will be viewed by the Environmental Protection Agency or
other PRPs as being de minimis. As a result, Pennzoil's monetary exposure is not
expected to be material.

Franchisee Litigation --

Certain current and former franchisees of Jiffy Lube have brought suit
against Jiffy Lube to challenge various matters relating to the
franchisor-franchisee relationship. Certain of the suits have included
allegations against Pennzoil and/or Pennzoil Products Company, a wholly owned
subsidiary of Pennzoil, as well. Pennzoil does not believe that the final
outcome of these cases will have a material adverse effect on its financial
condition or results of operations.

F-25
<PAGE> 60

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9) LEASES --

As Lessee --

Pennzoil leases various assets and office space with lease periods of 1 to
20 years. Additionally, Jiffy Lube leases sites and equipment which are
subleased to franchisees or used in the operation of automotive fast lubrication
and fluid maintenance service centers operated by Jiffy Lube. The typical lease
period for the service centers is 20 years with escalation clauses generally
increasing the lease payments by 9% every third year, with some leases
containing renewal options generally for periods of five years. These leases,
excluding leases for land that are classified as operating leases, are accounted
for as capital leases and are capitalized using interest rates appropriate at
the inception of each lease.

Certain operating and capital lease payments are contingent upon such
factors as the consumer price index or the prime interest rate with any future
changes reflected in income as accruable. The effects of these changes are not
considered material.

Total operating lease rental expenses for Pennzoil (exclusive of oil and
gas lease rentals) were $63.5 million, $59.6 million and $56.2 million for 1994,
1993 and 1992, respectively. Non-current capital lease obligations are
classified as other liabilities in the accompanying consolidated balance sheet.

Future minimum commitments under noncancellable leasing arrangements as of
December 31, 1994 are as follows:

<TABLE>
<CAPTION>
AMOUNTS PAYABLE
AS LESSEE
-------------------------
CAPITAL OPERATING
LEASES LEASES
--------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
YEAR ENDING DECEMBER 31:
1995................................................................ $ 11,246 $ 47,972
1996................................................................ 11,271 40,253
1997................................................................ 11,494 34,262
1998................................................................ 11,747 31,457
1999................................................................ 11,828 26,743
Thereafter.......................................................... 101,334 138,812
--------- ---------
Net minimum lease payments.......................................... $ 158,920 $ 319,499
=========
Less interest....................................................... 81,032
---------
Present value of net minimum lease payments at December 31, 1994.... $ 77,888
=========
</TABLE>

Assets recorded under capital lease obligations of $62.4 million and $18.2
million at December 31, 1994 are classified as property, plant and equipment and
other assets, respectively, in the accompanying consolidated balance sheet.

As Lessor --

Pennzoil, through Jiffy Lube, owns or leases numerous service center sites
which are leased or subleased to franchisees. Buildings owned or leased that
meet the criteria for direct financing leases are carried at the gross
investment in the lease less unearned income. Unearned income is recognized in
such a manner as to produce a constant periodic rate of return on the net
investment in the direct financing lease. Any buildings leased or subleased that
do not meet the criteria for a direct financing lease and any land leased or
subleased are accounted for as operating leases. The typical lease period is 20
years and some leases contain renewal options. The franchisee is responsible for
the payment of property taxes, insurance and maintenance costs related to the
leased property. The net investment in direct financing leases is classified as
other assets in the accompanying consolidated balance sheet.

F-26
<PAGE> 61

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Future minimum lease payment receivables under noncancellable leasing
arrangements as of December 31, 1994 are as follows:

<TABLE>
<CAPTION>
AMOUNTS RECEIVABLE
AS LESSOR
-----------------------
DIRECT
FINANCING OPERATING
LEASES LEASES
------- --------
<S> <C> <C>
(EXPRESSED IN
THOUSANDS)
YEAR ENDING DECEMBER 31:
1995................................................................. $ 4,961 $ 10,944
1996................................................................. 5,040 10,817
1997................................................................. 5,153 10,530
1998................................................................. 5,293 9,850
1999................................................................. 5,370 9,836
Thereafter........................................................... 49,679 82,492
------- --------
Net minimum lease payment receivables................................ $75,496 $134,469
========
Less unearned income................................................. 35,022
-------
Net investment in direct financing leases at December 31, 1994....... $40,474
=======
</TABLE>

(10) ACQUISITIONS AND DIVESTITURES --

Acquisition of Pennzoil Petroleum --

Included in the assets of Pennzoil Petroleum at the time of the transfer to
Pennzoil was $57.4 million in cash contributed by Chevron to Pennzoil Petroleum
immediately prior to closing, representing the net cash flow from Pennzoil
Petroleum's operations during the four-month period between the "effective date"
and the closing date of the transaction, after reduction as a result of
nonrecurring closing adjustments of approximately $11 million. As a result of an
audit completed during 1993, Chevron contributed an additional $9.9 million in
cash to Pennzoil Petroleum in 1993, representing an adjustment to the initial
$57.4 million cash contribution made by Chevron to Pennzoil Petroleum prior to
closing. This additional contribution from Chevron was accounted for as an
adjustment to the original purchase price of Pennzoil Petroleum. As a result of
an audit conducted during 1994, Chevron contributed an additional $6.8 million
in cash to Pennzoil Petroleum in 1994, representing post-closing adjustments
related to the acquisition.

F-27
<PAGE> 62

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following unaudited pro forma information has been prepared assuming
that the acquisition of Pennzoil Petroleum had occurred at the beginning of the
period presented. Permitted pro forma adjustments include only the effects of
events directly attributable to a transaction that are factually supportable and
expected to have a continuing impact. Pro forma adjustments reflecting
anticipated "efficiencies" in operations resulting from a transaction are, under
most circumstances, not permitted. As a result of the limitations imposed with
regard to the types of permitted pro forma adjustments, Pennzoil believes that
this unaudited pro forma information is not indicative of future results of
operations, nor the results of historical operations had the acquisition of
Pennzoil Petroleum been consummated as of the assumed dates.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1992
-------------------------
(UNAUDITED)
(EXPRESSED IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
<S> <C>
Revenues..................................................... $ 2,659,032
-----------
Income before extraordinary item and
cumulative effect.......................................... $ 42,417
-----------
Net income................................................... $ 141,508
-----------
Earnings per share........................................... $ 3.49
-----------
Average shares outstanding................................... 40,582
===========
</TABLE>

Acquisition of Co-enerco Resources Ltd. --

In June 1994, Pennzoil Canada acquired Co-enerco, a Canadian oil and gas
exploration and production company operating in Alberta, northeastern British
Columbia and southeastern Saskatchewan. Pennzoil Canada paid $230.9 million in
cash in connection with the acquisition of Co-enerco and the repayment of Co-
enerco's outstanding bank debt, which was financed primarily through two credit
facilities. Reference is made to Note 3 for additional information. The
acquisition of Co-enerco was accounted for using the purchase method of
accounting, and the results of operations of Co-enerco subsequent to June 30,
1994 have been included in Pennzoil's oil and gas segment results.

Sale of Domestic Sulphur Assets --

F-28
<PAGE> 63

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11) DISCONTINUED OPERATIONS --

Filtration Products Segment --

In connection with Pennzoil's disposition of Purolator, Pennzoil and
Purolator entered into an indemnification agreement with respect to certain
environmental matters. Reference is made to Note 8 for additional information.
In addition, Pennzoil entered into an agreement with certain banks to provide
contingent credit support for a Purolator credit facility and an agreement with
a government agency with respect to guarantees of benefits under certain of
Purolator's employee benefit plans. Reference is made to Note 4 for additional
information.

Income from discontinued operations is as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1992
------------
(EXPRESSED
IN
THOUSANDS)
<S> <C>
Operating revenues.............................................. $402,856
========
Income from operations before income taxes...................... $ 17,999
Income tax provision............................................ 7,791
--------
Income from operations.......................................... 10,208
Gain on disposition............................................. 1,455
--------
Income from discontinued operations............................. $ 11,663
========
</TABLE>

(12) SEGMENT FINANCIAL INFORMATION --

Information with respect to revenues, operating income and other data by
industry segment is presented in Item 1, Business and Item 2, Properties of this
Annual Report on Form 10-K.

F-29
<PAGE> 64

PENNZOIL COMPANY AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED

QUARTERLY RESULTS(1) --

<TABLE>
<CAPTION>
EARNINGS (LOSS)
PER SHARE(3)
INCOME (LOSS) ----------------------
BEFORE BEFORE
EXTRAORDINARY EXTRAORDINARY
ITEMS AND NET ITEMS AND NET
OPERATING CUMULATIVE INCOME CUMULATIVE INCOME
REVENUES INCOME (LOSS)(2) EFFECT (LOSS) EFFECT (LOSS)
----------- ---------------- -------------- --------- ------------- ------
1994 (EXPRESSED IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
First Quarter.......... $ 622,076 $ 75,819 $ 10,738 $ 5,790 $ .24 $ .13
Second Quarter......... 651,809 87,410 16,810 16,810 .37 .37
Third Quarter.......... 631,654 (167,844) (299,802) (299,802) (6.51) (6.51)
Fourth Quarter......... 657,404 42,486 (11,485) (11,485) (.25) (.25)
---------- ---------- ---------- --------- ------- ------
$2,562,943 $ 37,871 $ (283,739) $(288,687) $ (6.16) $(6.27)
========== ========== ========== ========= ======= ======
1993
First Quarter.......... $ 650,541 $ 94,694 $ 21,525 $ 21,525 $ .53 $ .53
Second Quarter......... 685,177 113,997 34,239 29,515 .84 .72
Third Quarter.......... 655,867 103,934 12,036 (1,620) .29 (.04)
Fourth Quarter......... 790,782 151,916 92,436 92,436 2.01 2.01
---------- ---------- ---------- --------- ------- ------
$2,782,367 $ 464,541 $ 160,236 $ 141,856 $ 3.80 $ 3.36
========== ========== ========== ========= ======= ======
</TABLE>

- ---------------

(1) Reference is made to Notes 1, 2, 3, 8 and 10 of Notes to Consolidated
Financial Statements for information on items affecting quarterly results.

(2) Operating income (loss) is defined as net revenues less costs and operating
expenses.

(3) The total of the 1993 quarterly earnings (loss) per share amounts presented
does not equal the annual 1993 earnings per share amount primarily due to
the issuance of 5 million shares of Pennzoil's common stock during September
1993. Reference is made to Note 7 of Notes to Consolidated Financial
Statements for additional information.

OIL AND GAS INFORMATION

Estimated Quantities of Proved Oil and Gas Reserves

Presented on the following page are Pennzoil's estimated net proved oil and
gas reserves as of December 31, 1994, 1993 and 1992. Reserves in the United
States are located onshore in all the main producing states (except Alaska) and
offshore Alabama, California, Louisiana, Mississippi and Texas. Foreign reserves
are located in Canada.

F-30
<PAGE> 65

PENNZOIL COMPANY AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)

OIL AND GAS INFORMATION (CONTINUED)

The estimates of proved oil and gas reserves have been prepared by Ryder
Scott Company Petroleum Engineers ("Ryder Scott") and Outtrim Szabo Associates,
Ltd. ("Outtrim Szabo") and are based on data supplied by Pennzoil. The reports
of Ryder Scott and Outtrim Szabo, which include a description of the basis used
in preparing the estimated reserves, are included as exhibits to Pennzoil's
Annual Reports on Form 10-K for the respective years. Oil includes crude oil,
condensate and natural gas liquids.

PROVED OIL RESERVES
(MILLIONS OF BARRELS)

<TABLE>
<CAPTION>
1994 1993 1992
------------------------ ------------------------ ------------------------
UNITED UNITED UNITED
STATES FOREIGN TOTAL STATES FOREIGN TOTAL STATES FOREIGN TOTAL
------ ------- ----- ------ ------- ----- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped
reserves
Beginning of year.............. 199 2 201 218 2 220 137 2 139
Revisions of previous
estimates
-- economics............... 6 -- 6 (14) -- (14) 1 -- 1
-- performance and other... 2 (2) -- 7 -- 7 1 -- 1
Extensions and discoveries... 19 1 20 15 -- 15 8 -- 8
Estimated production......... (24) (2) (26) (24) -- (24) (15) -- (15)
Purchases of minerals in
place(1)(2)................ 7 16 23 5 -- 5 93 -- 93
Sales of minerals in
place(2)................... (4) -- (4) (8) -- (8) (7) -- (7)
--- -- --- --- -- --- --- -- ---
End of year.................... 205 15 220 199 2 201 218 2 220
=== == === === == === === == ===
Proved developed reserves
Beginning of year.............. 162 2 164 181 2 183 108 2 110
End of year.................... 176 15 191 162 2 164 181 2 183
</TABLE>

PROVED NATURAL GAS RESERVES
(BILLIONS OF CUBIC FEET)

<TABLE>
<CAPTION>
1994 1993 1992
------------------------ ----------------------- ------------------------
UNITED UNITED UNITED
STATES FOREIGN TOTAL STATES FOREIGN TOTAL STATES FOREIGN TOTAL
------ ------- ----- ------ ------- ----- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proved developed and undeveloped
reserves
Beginning of year.............. 1,453 38 1,491 1,617 35 1,652 892 34 926
Revisions of previous
estimates
-- economics............... (5) (2) (7) (7) -- (7) 5 (2) 3
-- performance and other... 20 (8) 12 6 1 7 4 2 6
Extensions and discoveries... 200 27 227 117 5 122 78 2 80
Estimated production......... (244) (12) (256) (220) (3) (223) (161) (1) (162)
Purchases of minerals in
place(1)(2)................ 14 163 177 91 -- 91 823 -- 823
Sales of minerals in
place(2)................... (97) (2) (99) (151) -- (151) (24) -- (24)
----- --- ----- ----- -- ----- ----- -- -----
End of year...................... 1,341 204 1,545 1,453 38 1,491 1,617 35 1,652
===== === ===== ===== == ===== ===== == =====
Proved developed reserves(3)
Beginning of year.............. 1,306 35 1,341 1,412 34 1,446 803 34 837
End of year.................... 1,242 192 1,434 1,306 35 1,341 1,412 34 1,446
</TABLE>

- ---------------
(1) Purchases of minerals in place for 1994 include proved developed and
undeveloped reserves attributable to Co-enerco as of the date of
acquisition. Purchases of minerals in place for 1992 include proved
developed and undeveloped reserves attributable to Pennzoil Petroleum as of
the date of acquisition.

(2) Purchases and sales of minerals in place for 1994 include 8 million barrels
of oil and 14 billion cubic feet ("Bcf") of natural gas and 2 million
barrels of oil and 31 Bcf of natural gas, respectively, associated with
asset exchanges. Purchases and sales of minerals in place for 1993 include
5 million barrels of oil and 91 Bcf of natural gas and 4 million barrels of
oil and 93 Bcf of natural gas, respectively, associated with asset
exchanges.

(3) United States natural gas reserves for 1994, 1993 and 1992 exclude 161 Bcf,
162 Bcf and 124 Bcf, respectively, of carbon dioxide gas for sale or use in
company operations.

F-31
<PAGE> 66

PENNZOIL COMPANY AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)

OIL AND GAS INFORMATION (CONTINUED)

Capitalized Costs and Costs Incurred Relating to Oil and Gas Producing
Activities

The following table shows the aggregate capitalized costs related to oil
and gas producing activities and related accumulated depreciation, depletion and
amortization and valuation allowances.

<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1993
------- -------
(EXPRESSED IN
MILLIONS)
<S> <C> <C>
Capitalized costs
Proved properties..................................................... $ 4,638 $ 3,869
Unproved properties................................................... 169 233
------- -------
4,807 4,102
Accumulated depreciation, depletion, amortization and valuation
allowances......................................................... (2,495) (2,372)
------- -------
$ 2,312 $ 1,730
======= =======
</TABLE>

The following table shows costs incurred in oil and gas producing
activities (whether charged to expense or capitalized).

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------
1994 1993 1992
-------------------- -------------------- -----------------------
UNITED UNITED UNITED
STATES FOREIGN(1) TOTAL STATES FOREIGN(1) TOTAL STATES FOREIGN TOTAL
---- ---- ---- ---- ---- ---- ------ --- ------
(EXPRESSED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Costs incurred in oil and gas
producing activities
Property acquisition(2)
Unproved.............. $ 6 $100 $106 $ 4 $110 $114 $ 12 $ 1 $ 13
Proved................ 13 189 202 2 -- 2 999 -- 999
Exploration............. 149 12 161 97 7 104 23 2 25
Development............. 177 11 188 160 -- 160 67 5 72
---- ---- ---- ---- ---- ---- ------ --- ------
$345 $312 $657 $263 $117 $380 $1,101 $ 8 $1,109
==== ==== ==== ==== ==== ==== ====== == ======
</TABLE>

- ---------------

(1) Costs incurred for unproved property acquisition during 1994 and 1993
include approximately $48 million and $98 million, respectively, related to
the gas utilization project in Azerbaijan. Total costs incurred during 1994
and 1993 include $50 million and $114 million, respectively, related to
Pennzoil's Azerbaijan activities. Pennzoil's investment in the gas
utilization project is being recovered through partial credit toward
Pennzoil's portion of the first bonus payment made by members of the
consortium of foreign oil companies to the government of Azerbaijan, direct
hard currency payments by the Azerbaijan government during 1995 and an
interest in another project. Any remaining balance due from the government
of Azerbaijan with respect to the gas utilization project will be
creditable against the remaining bonus payments to be made to the
Azerbaijan government by the consortium. Total costs incurred for North
America in 1994, including the acquisition of Co-enerco, were $602 million.

(2) Costs incurred for property acquisitions in 1994 include $231 million
attributable to the acquisition of Co-enerco. Costs incurred for property
acquisitions in 1992 include $1,009 million attributable to the acquisition
of Pennzoil Petroleum. Reference is made to Note 10 of Notes to
Consolidated Financial Statements for additional information.

F-32
<PAGE> 67

PENNZOIL COMPANY AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)

OIL AND GAS INFORMATION (CONTINUED)

Results of Operations From Oil and Gas Producing Activities

This information is similar to the disclosures set forth in the "Industry
Segment Financial Information" set forth on pages 1 and 2 herein but differs in
several respects as to the level of detail, geographic presentation and income
taxes. Income taxes were determined by applying the applicable statutory rates
to pretax income with adjustment for tax credits and other allowances. Income
tax provisions involved certain allocations among geographic areas based on
management's assessment of the principal factors giving rise to the tax
obligation.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------
1994 1993 1992
---------------------- ---------------------- ----------------------
UNITED UNITED UNITED
STATES FOREIGN TOTAL STATES FOREIGN TOTAL STATES FOREIGN TOTAL
------ ------- ----- ------ ------- ----- ------ ------- -----
(EXPRESSED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales
Outside customers............ $675 $ 13 $688 $731 $ 11 $742 $424 $ 8 $432
Other segments, at market.... 146 -- 146 137 -- 137 137 -- 137
---- ---- ---- ---- ---- ---- ---- ---- ----
821 13 834 868 11 879 561 8 569
---- ---- ---- ---- ---- ---- ---- ---- ----
Costs and expenses
Production costs
Operating expenses........ 213 11 224 218 3 221 134 2 136
Production, severance and
property taxes.......... 38 -- 38 43 -- 43 29 -- 29
Technical support and
other(1).................. 80 24 104 93 17 110 74 8 82
Exploration expenses,
including dry holes....... 48 13 61 69 2 71 9 3 12
Depreciation, depletion,
amortization and valuation
provisions(2)............. 396 16 412 273 2 275 174 1 175
---- ---- ---- ---- ---- ---- ---- ---- ----
775 64 839 696 24 720 420 14 434
---- ---- ---- ---- ---- ---- ---- ---- ----
Pretax results of operations... 46 (51) (5) 172 (13) 159 141 (6) 135
Income tax expense (benefit)... 20 (15) 5 60 (4) 56 47 (1) 46
---- ---- ---- ---- ---- ---- ---- ---- ----
Results of operations.......... $ 26 $(36) $(10) $112 $ (9) $103 $ 94 $ (5) $ 89
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>

- ---------------

(1) Foreign technical support and other during 1994 and 1993 includes
approximately $9 million and $7 million, respectively, related to Pennzoil's
Azerbaijan activities.

(2) In October 1994, Pennzoil settled a dispute with the IRS relating to a
proposed tax deficiency based on an audit of Pennzoil's 1988 federal income
tax return. As a result of the IRS settlement, Pennzoil increased the
balance of its investment in Pennzoil Petroleum capital stock for financial
reporting purposes and, therefore, the carrying value of Pennzoil
Petroleum's oil and gas properties by $390.3 million, and such increased
investment resulted in a $93.9 million increase in depreciation, depletion
and amortization expense recognized in October 1994 relating to Pennzoil
Petroleum's oil and gas properties from the date of the acquisition of
Pennzoil Petroleum to the date of the IRS settlement. Reference is made to
Notes 8 and 10 for additional information.

F-33
<PAGE> 68

PENNZOIL COMPANY AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)

OIL AND GAS INFORMATION (CONTINUED)

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves (Standardized Measure)

The Standardized Measure is determined on a basis which presumes that
year-end economic and operating conditions will continue over the periods during
which year-end proved reserves would be produced. Neither the effects of future
inflation nor expected future changes in technology and operating practices have
been considered.

The Standardized Measure is determined as the excess of future cash inflows
from proved reserves less future costs of producing and developing the reserves,
future income taxes and a discount factor. Future cash inflows represent the
revenues that would be received from production of year-end proved reserve
quantities assuming the future production would be sold at year-end prices plus
any fixed and determinable future escalations (but not escalations based on
inflation) of natural gas prices provided by existing contracts. As a result of
the continued volatility in oil and natural gas markets, future prices received
from oil, condensate and natural gas sales may be higher or lower than current
levels.

Future production costs include the estimated expenditures related to
production of the proved reserves plus any production taxes without
consideration of inflation. Future development costs include the estimated costs
of drilling development wells and installation of production facilities, plus
the net costs associated with dismantlement and abandonment of wells and
production platforms, assuming year-end costs continue without inflation. Future
income taxes were determined by applying current legislated statutory rates to
the excess of (a) future cash inflows, less future production and development
costs, over (b) the tax basis in the properties involved plus existing net
operating loss carryforwards. Tax credits are considered in the computation of
future income tax expenses. The discount was determined by applying a discount
rate of 10% per year to the annual future net cash flows.

F-34
<PAGE> 69

PENNZOIL COMPANY AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)

OIL AND GAS INFORMATION (CONTINUED)

The Standardized Measure does not purport to be an estimate of the fair
market value of Pennzoil's proved reserves. An estimate of fair market value
would also take into account, among other things, the expected recovery of
reserves in excess of proved reserves, anticipated changes in future prices and
costs and a discount factor more representative of the time value of money and
the risks inherent in producing oil and gas. In the opinion of Pennzoil's
management, the estimated fair value of Pennzoil's oil and gas properties is in
excess of the amounts set forth below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------
1994 1993
------------------------------- -------------------------------
UNITED UNITED
STATES FOREIGN TOTAL STATES FOREIGN TOTAL
------- ------- ------- ------- ------- -------
(EXPRESSED IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Future cash inflows.............. $ 5,262 $ 459 $ 5,721 $ 5,868 $ 84 $ 5,952
Future production costs.......... (2,031) (183) (2,214) (1,971) (7) (1,978)
Future development costs(1)...... (493) (13) (506) (492) (2) (494)
------- ------- ------- ------- ------- -------
Future net cash flows before
income taxes................... 2,738 263 3,001 3,405 75 3,480
10% annual discount for estimated
timing of net cash flows before
income taxes................... (960) (83) (1,043) (1,192) (30) (1,222)
------- ------- ------- ------- ------- -------
Present value of future net cash
flows before income taxes...... 1,778 180 1,958 2,213 45 2,258
Future income tax expense
discounted at 10%(2)........... (389) (35) (424) (509) (26) (535)
------- ------- ------- ------- ------- -------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves............... $ 1,389 $ 145 $ 1,534 $ 1,704 $ 19 $ 1,723
======= ===== ======= ======= ===== =======
</TABLE>

- ---------------

(1) Includes future dismantlement and abandonment costs, net of salvage values.

(2) Future income taxes before discount were $670 million (U.S.) and $53 million
(foreign) and $896 million (U.S.) and $35 million (foreign) for 1994 and
1993, respectively.

F-35
<PAGE> 70

PENNZOIL COMPANY AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)

OIL AND GAS INFORMATION (CONTINUED)

Changes in the Standardized Measure

The following table sets forth the principal elements of the changes in the
Standardized Measure for the years presented. All amounts are reflected on a
discounted basis.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1994 1993 1992
------ ------ ------
(EXPRESSED IN MILLIONS)
<S> <C> <C> <C>
Standardized measure -- beginning of period.................... $1,723 $1,955 $1,124
Revisions --
Net changes in prices, net of production costs............... (403) (179) 134
Revisions of quantity estimates.............................. 24 (33) 23
Changes in estimated future development costs................ (72) (12) (10)
Accretion of discount........................................ 226 252 141
Changes in production rates (timing) and other............... (92) (79) (72)
------ ------ ------
Net Revisions........................................ (317) (51) 216
------ ------ ------
Extensions, discoveries and improved recovery, net of future
production and development costs............................. 322 275 103
Sales and transfers, net of production costs................... (539) (564) (373)
Development costs incurred during the period that reduced
future development costs..................................... 149 147 51
Net change in estimated future income taxes.................... 111 29 (279)
Purchases of reserves in place................................. 173 162 1,157
Sales of reserves in place..................................... (88) (230) (44)
------ ------ ------
Standardized measure -- end of period.......................... $1,534 $1,723 $1,955
====== ====== ======
</TABLE>

F-36
<PAGE> 71

EXHIBIT INDEX

<TABLE>
<S> <C>
*3(a) -- Restated Certificate of Incorporation of Pennzoil Company, as amended
through September 17, 1993, (Registration No. 33-50933, Exhibit
3(a)).
*3(b) -- By-laws of Pennzoil Company, as amended through May 19, 1994
(Pennzoil Company 10-Q (June 30, 1994), SEC File No. 1-5591, Exhibit
3(a)).
*4(a) -- Indenture dated as of February 15, 1986 (the "1986 Indenture")
between Pennzoil Company and Mellon Bank, N.A., Trustee (Pennzoil
Company 10-Q (June 30, 1986), SEC File No. 1-5591, Exhibit 4(a)).
*4(b) -- Officer's Certificate dated as of March 16, 1987 delivered pursuant
to the terms of the 1986 Indenture setting forth the terms of
Pennzoil Company's 9% Debentures due April 1, 2017 (Pennzoil Company
10-Q (March 31, 1987), SEC File No. 1-5591, Exhibit 4(a)).
*4(c) -- Officer's Certificate dated as of April 14, 1989 delivered pursuant
to the terms of the 1986 Indenture setting forth the terms of
Pennzoil Company's 10 5/8% Debentures due June 1, 2001 (Pennzoil
Company 10-Q (March 31, 1989), SEC File No. 1-5591, Exhibit 4(a)).
*4(d) -- Officer's Certificate dated as of November 14, 1989 delivered
pursuant to the terms of the 1986 Indenture setting forth the terms
of Pennzoil Company's 10 1/8% Debentures due November 15, 2009 and
9 5/8% Notes due November 15, 1999 (Pennzoil Company 10-K (1989), SEC
File No. 1-5591, Exhibit 4(n)).
*4(e) -- Officer's Certificate dated as of November 19, 1990 delivered
pursuant to the terms of the 1986 Indenture setting forth the terms
of Pennzoil Company's 10 1/4% Debentures due November 1, 2005
(Pennzoil Company 10-K (1990), SEC File No. 1-5591, Exhibit 4(n)).
*4(f) -- Instrument of Resignation, Appointment and Acceptance dated as of
April 1, 1991 among Pennzoil Company, Mellon Bank, N.A., as Retiring
Trustee, and Texas Commerce Bank National Association, as Successor
Trustee, under the 1986 Indenture (Pennzoil Company 10-K (1991), SEC
File No. 1-5591, Exhibit 4(p)).
*4(g) -- Indenture dated as of December 15, 1992 (the "1992 Indenture")
between Pennzoil Company and Texas Commerce Bank National
Association, Trustee (Pennzoil Company 10-K (1992), SEC File No.
1-5591, Exhibit 4(o)).
*4(h) -- First Supplemental Indenture dated as of January 13, 1993 to the 1992
Indenture (Pennzoil Company 10-K (1992), SEC File No. 1-5591, Exhibit
4(p)).
*4(i) -- Second Supplemental Indenture dated as of October 12, 1993 to the
1992 Indenture (Pennzoil Company 10-K (1993), SEC File No. 1-5591,
Exhibit 4(i)).
*4(j) -- Rights Agreement dated as of October 28, 1994 between Pennzoil
Company and Chemical Bank, as Rights Agent (Pennzoil Company 8-K
(October 28, 1994), SEC File No. 1-5591, Exhibit 1).
Pennzoil Company agrees to furnish to the Commission upon request a copy
of any agreement defining the rights of holders of long-term debt of
Pennzoil Company and all its subsidiaries for which consolidated or
unconsolidated financial statements are required to be filed, under
which the total amount of securities authorized does not exceed 10%
of the total assets of Pennzoil Company and its subsidiaries on a
consolidated basis.
+*10(a) -- 1978 Stock Option Plan of Pennzoil Company, as amended (Registration
No. 2-67268, Exhibit 4(a)).
+*10(b) -- 1981 Stock Option Plan of Pennzoil Company (Registration No. 2-76935,
Exhibit 4(a)).
+*10(c) -- 1982 Stock Option Plan of Pennzoil Company (Pennzoil Company 10-K
(1982), SEC File No. 1-5591, Exhibit 10(e)).
+*10(d) -- Pennzoil Company Salary Continuation Plan (Pennzoil Company 10-K
(1982), SEC File No. 1-5591, Exhibit 10(g)).
+*10(e) -- Pennzoil Company Supplemental Disability Plan effective January 1,
1978 (Pennzoil Company 10-K(1977), SEC File No. 1-5591, Exhibit
5(y)).
+*10(f) -- Pennzoil Company Supplemental Life Insurance Plan effective January
1, 1978, as amended (Pennzoil Company 10-K (1980), SEC File No.
1-5591, Exhibit 10(g)).
</TABLE>
<PAGE> 72

<TABLE>
<S> <C>
+*10(g) -- Pennzoil Company Deferred Compensation Plan (Pennzoil Company 10-K
(1981), SEC File No. 1-5591, Exhibit 10(i)).
+*10(h) -- Specimen of Pennzoil Company Deferred Compensation Agreement
(Pennzoil Company 10-K (1982), SEC File No. 1-5591, Exhibit
10(j)(1)).
+*10(i) -- Specimen of Pennzoil Company agreements regarding certain benefits
payable in the event of a change in control (Pennzoil 10-Q (September
30, 1982), SEC File No. 1-5591, Exhibit 28).
+*10(j) -- Pennzoil Company Section 415 Excess Benefit Agreements (Pennzoil
Company 10-Q (March 31, 1980), SEC File No. 1-5591, Exhibit 5).
+*10(k) -- Pennzoil Company Medical Expenses Reimbursement Plan effective
January 1, 1978 (Pennzoil Company 10-K(1977), SEC File No. 1-5591,
Exhibit 5(v)).
+*10(l) -- Pennzoil Company 1985 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (April 25, 1985), SEC File No.
1-5591, Exhibit B).
+*10(m) -- Pennzoil Company Executive Severance Plan (Pennzoil Company 10-K
(1987), SEC File No. 1-5591, Exhibit 10(t)).
+*10(n) -- 1990 Stock Option Plan of Pennzoil Company (Pennzoil Company
definitive proxy material (April 26, 1990), SEC File No. 1-5591,
Exhibit A).
+*10(o) -- Pennzoil Company 1990 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (April 26, 1990), SEC File No.
1-5591, Exhibit B).
+*10(p) -- 1992 Stock Option Plan of Pennzoil Company (Pennzoil Company
definitive proxy material (April 13, 1993), SEC File No. 1-5591,
Exhibit A).
+*10(q) -- Pennzoil Company 1993 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (April 13, 1993), SEC File No.
1-5591, Exhibit B).
11 -- Computation of Ratio of Earnings to Fixed Charges for the years ended
December 31, 1994, 1993, 1992, 1991 and 1990.
21 -- List of Subsidiaries of Pennzoil Company.
23(a) -- Consent of Arthur Andersen LLP.
23(b) -- Consent of Ryder Scott Company Petroleum Engineers.
23(c) -- Consent of Outtrim Szabo Associates Ltd.
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
99(a) -- Summary of Reserve Report of Ryder Scott Company Petroleum Engineers
as of December 31, 1994 relating to oil and gas reserves.
99(b) -- Summary of Reserve Report of Outtrim Szabo Associates Ltd. as of
December 31, 1994 relating to oil and gas reserves.
</TABLE>

- ---------------

* Incorporated by reference.

+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.

<PAGE> 1

EXHIBIT 11

PENNZOIL COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1994 1993 1992 1991 1990
--------- -------- -------- -------- --------
(DOLLAR AMOUNTS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations........................... $(283,739) $160,236 $ 17,410 $ 40,098 $ 93,768
--------- -------- -------- -------- --------
Income tax provision (benefit)
Federal and foreign.................. (226,388) 52,737 (22,193) (23,988) 6,006
State................................ 5,033 6,468 3,410 3,928 1,917
--------- -------- -------- -------- --------
Total income tax provision
(benefit).................. (221,355) 59,205 (18,783) (20,060) 7,923
Interest charges....................... 497,799 199,410 243,351 260,069 247,107
--------- -------- -------- -------- --------
Income (loss) before income taxes and
interest charges..................... $ (7,295) $418,851 $241,978 $280,107 $348,798
========= ======== ======== ======== ========
Fixed charges.......................... $ 506,826 $210,830 $252,082 $270,516 $261,740
========= ======== ======== ======== ========
Ratio of earnings to fixed charges..... -- 1.99 -- 1.04 1.33
========= ======== ======== ======== ========
Amount by which fixed charges exceed
earnings............................. $ 514,121 $ -- $ 10,104 $ -- $ --
========= ======== ======== ======== ========
</TABLE>

DETAIL OF INTEREST AND FIXED CHARGES

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(DOLLAR AMOUNTS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest charges per Consolidated
Statement of Income which includes
amortization of debt discount, expense
and premium........................... $485,668 $190,968 $233,360 $253,943 $244,194
Add portion of rental expense
representative of interest
factor(1)............................. 21,158 19,862 18,722 16,573 14,987
Add interest charges of affiliate on
supported debt........................ -- -- -- -- 2,559
-------- -------- -------- -------- --------
Total fixed charges........... 506,826 210,830 252,082 270,516 261,740
Less interest capitalized per
Consolidated Statement of Income...... 9,027 11,420 8,731 10,447 13,321
Less outside investors' portion of
interest charges of affiliate on
supported debt........................ -- -- -- -- 1,312
-------- -------- -------- -------- --------
Total interest charges........ $497,799 $199,410 $243,351 $260,069 $247,107
======== ======== ======== ======== ========
</TABLE>

- ---------------

(1) Interest factor based on management's estimates and approximates one-third
of rental expense.

<PAGE> 1

EXHIBIT 21

SUBSIDIARIES OF PENNZOIL COMPANY
(AS OF DECEMBER 31, 1994)

<TABLE>
<CAPTION>
PZL PARENT
----- -----
<S> <C> <C>
Duval Corporation of Indonesia (Delaware).............................. 100%
Duval Sales International, S.A. (Belgium).............................. 100%
Jiffy Lube International, Inc. (Nevada)................................ 100%
American Oil Change Corporation (Delaware)........................ 100%
Heritage Merchandising Co., Inc. (Virginia)....................... 100%
Jiffy Lube International of Maryland, Inc. (Maryland)............. 100%
Pennzoil Exploration and Production Company (Delaware)................. 100%
Cachuma Gas Processing Company (Delaware)......................... 100%
Capitan Oil Pipeline Company (Delaware)........................... 100%
Pennzoil Gas Marketing Company (Delaware)......................... 100%
Pennzoil International Company (Delaware)......................... 100%
Pennzoil Caspian Corporation (British Virgin Islands)........ 100%
Pennzoil Qatar, Inc. (Delaware).............................. 100%
Pennzoil Siberia Corporation (British Virgin Islands)........ 100%
Pennzoil Petroleum Pipeline Company (Delaware).................... 100%
Pennzoil Petroleums Ltd. (Delaware)............................... 100%
Pennzoil Canada, Inc. (Alberta).............................. 100%
Sisquoc Gas Pipeline Company (Delaware)........................... 100%
Pennzoil Products Company (Nevada)..................................... 100%
Atlas Processing Company (Delaware)............................... 100%
Excel Paralubes (Texas General Partnership).................. 50%
Pennzoil Iberica (Spain).......................................... 100%
Pennzoil Overseas B.V. (Netherlands).............................. 100%
Pennzoil Deutschland GmbH Mineralolvertrieb (Germany)........ 100%
Pennzoil Europe B.V. (Netherlands)........................... 100%
Pennzoil Products Australia Company (Nevada)...................... 100%
Pennzoil Wax Partner Company (Nevada)............................. 100%
The Eureka Pipe Line Company (West Virginia)...................... 100%
UMW Pennzoil Distributors SDN. BHD. (Malaysia).................... 50%
Richland Development Corporation (Nevada).............................. 100%
Inco Real Estate Company (Nevada)................................. 100%
Savannah Company Limited (Bermuda)................................ 100%
Vermejo Park Corporation (Delaware)............................... 100%
Vermejo Minerals Corporation (Delaware)...................... 100%
</TABLE>

<PAGE> 1

EXHIBIT 23(a)

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the
incorporation of our report dated February 24, 1995, included herein, into
Pennzoil Company's previously filed Registration Statements on Form S-8 Nos.
2-67268, 2-76935, 2-95869, 33- 24261, 33-40192, 33-51473, 33-53783 and on Form
S-3 Nos. 33-50029 and 33-50953.

ARTHUR ANDERSEN LLP

Houston, Texas
February 24, 1995

<PAGE> 1
EXHIBIT 23(b)

RYDER SCOTT COMPANY FAX (713) 651-0849
PETROLEUM ENGINEERS

1100 LOUISIANA SUITE 3800 HOUSTON, TEXAS 77002-5218 TELEPHONE (713) 651-9191

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS

We hereby consent to the incorporation by reference in Pennzoil Company's
previously filed Registration Statements on Form S-8 Nos. 2-67268, 2-76935,
2-95869, 33-24261, 33-40192, 33-51473, 33-53783 and on Form S-3 Nos. 33-50029
and 33-50953 of our summary report dated January 30, 1995 included as Exhibit
99(a) to this Annual Report on Form 10-K and the data extracted from our
reports and the references to our firm appearing in "Item 1. Business and Item
2. Properties" under the captions "Oil and Gas - Oil and Gas Reserves" and "-
Exploration, Development and Production Activities", in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the captions "Oil and Gas" and "Capital Resources and Liquidity - Assessment of
Oil and Gas Properties" and in "Supplemental Financial and Statistical
Information - Unaudited - Oil and Gas Information" in such Annual Report on
Form 10-K.

RYDER SCOTT COMPANY
PETROLEUM ENGINEERS

Houston, Texas
February 24, 1995

<PAGE> 1
EXHIBIT 23(c)

OUTTRIM SZABO ASSOCIATES LTD. Petroleum Consultants
Calgary, Alberta
440,333 - 5th Avenue S. W., Calgary, Alberta, Canada T2P 3B6
Phone (403) 266-8680 Fax (403) 266-1887

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS

We hereby consent to the incorporation by reference in
Pennzoil Company's previously filed Registration Statements on Form S-8 Nos.
2-67268, 2-76935, 2-95869, 33-24261, 33-40192, 33-51473, 33-53783 and on Form
S-3 Nos. 33-50029 and 33-50953 of our summary report dated February 17, 1995
included as Exhibit 99 (b) to this Annual Report on Form 10-K and the data
extracted from our reports and the references to our firm appearing in "Item 1.
Business and Item 2. Properties" under the captions "Oil and Gas - Oil and Gas
Reserves" and " - Exploration, Development and Production Activities", in Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations under the captions "Oil and Gas" and "Capital Resources and
Liquidity - Assessment of Oil and Gas Properties" and in "Supplemental
Financial and Statistical Information - Unaudited - Oil and Gas Information" in
such Annual Report on Form 10-K.

OUTTRIM SZABO ASSOCIATES LTD.

/s/ COLIN P. OUTTRIM

Calgary, Alberta, Canada Colin P. Outtrim, P.Eng.
February 17, 1995 President

<PAGE> 1
Exhibit 24

POWER OF ATTORNEY

WHEREAS, PENNZOIL COMPANY, a Delaware corporation (Company), intends to
file with the Securities and Exchange Commission (Commission) under the
Securities Exchange Act of 1934, as amended (Act), an Annual Report on Form
10-K for the fiscal year ended December 31, 1994, as prescribed by the
Commission pursuant to the Act and the rules and regulations of the Commission
promulgated thereunder, with any and all exhibits and other documents relating
to said Annual Report;

NOW, THEREFORE, the undersigned in his capacity as a director or
officer, or both, as the case may be, of the Company, does hereby appoint DAVID
P. ALDERSON, II, MARK A. MALINSKI and JAMES L. PATE and each of them severally,
his true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead in his capacity as a director or officer, or both, as
the case may be, of the Company, said Annual Report, any and all amendments to
said Annual Report and all instruments as said attorneys or any of them shall
deem necessary or incidental in connection therewith and to file the same with
the Commission. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of the undersigned in any and all
capacities every act whatsoever necessary or desirable as the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys and each of them.

IN WITNESS WHEREOF, the undersigned has executed this instrument on
this 19th day of January, 1995.

/s/ HOWARD H. BAKER, JR.
-----------------------------
Howard H. Baker, Jr.
<PAGE> 2
POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this instrument on
this 13th day of January, 1995.

/s/ W. J. BOVAIRD
-----------------------------
W. J. Bovaird
<PAGE> 3

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this instrument on
this 27th day of January, 1995.

/s/ W. L. LYONS BROWN, JR.
------------------------------
W. L. Lyons Brown, Jr.
<PAGE> 4

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this instrument on
this 27th day of January, 1995.

/s/ ERNEST H. COCKRELL
-----------------------------
Ernest H. Cockrell
<PAGE> 5

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this instrument on
this 16th day of January, 1995.

/s/ HARRY H. CULLEN
-----------------------------
Harry H. Cullen
<PAGE> 6

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this instrument on
this 13th day of January, 1995.

/s/ ALFONSO FANJUL
-----------------------------
Alfonso Fanjul
<PAGE> 7

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this instrument on
this 13th day of January, 1995.

/s/ CHARLES BERDON LAWRENCE
-------------------------------
Charles Berdon Lawrence
<PAGE> 8

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this instrument on
this 27th day of January, 1995.

/s/ BRENT SCOWCROFT
-----------------------------
Brent Scowcroft
<PAGE> 9

POWER OF ATTORNEY

IN WITNESS WHEREOF, the undersigned has executed this instrument on
this 27th day of January, 1995.

/s/ CYRIL WAGNER, JR.
-----------------------------
Cyril Wagner, Jr.

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 24,884
<SECURITIES> 0
<RECEIVABLES> 470,722
<ALLOWANCES> 10,474
<INVENTORY> 164,258
<CURRENT-ASSETS> 728,252
<PP&E> 6,177,878
<DEPRECIATION> 3,349,035
<TOTAL-ASSETS> 4,715,810
<CURRENT-LIABILITIES> 676,661
<BONDS> 2,174,921
<COMMON> 43,507
0
0
<OTHER-SE> 1,160,757
<TOTAL-LIABILITY-AND-EQUITY> 4,715,810
<SALES> 2,474,829
<TOTAL-REVENUES> 2,562,943
<CGS> 1,543,605
<TOTAL-COSTS> 1,604,638
<OTHER-EXPENSES> 598,393
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 476,641
<INCOME-PRETAX> (505,094)
<INCOME-TAX> (221,355)
<INCOME-CONTINUING> (283,739)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (4,948)
<NET-INCOME> (288,687)
<EPS-PRIMARY> (6.27)
<EPS-DILUTED> (6.27)

</TABLE>

<PAGE> 1

EXHIBIT 99(a)

RYDER SCOTT COMPANY FAX (713) 651-0849
PETROLEUM ENGINEERS
1100 LOUISIANA SUITE 3800 HOUSTON, TEXAS 77002-5218
TELEPHONE (713) 651-9191

January 30, 1995

Pennzoil Company
Post Office Box 2967
Houston, Texas 77001

Gentlemen:

At your request we have prepared an estimate of the reserves,
future production, and income attributable to certain leasehold and royalty
interests of Pennzoil Company including Pennzoil Exploration and Production
Company, Pennzoil Petroleums, Ltd. (excluding those properties purchased from
Co-enerco Resources Ltd.), Pennzoil Products Company, and Pennzoil Company
(formerly Proven Properties, Inc.) (collectively referred to herein as the
Company) as of December 31, 1994. In accordance with the requirements of FASB
69, our estimates of the Company's net proved reserves as of December 31, 1991,
1992, 1993, and 1994, as contained in this report and our previous reports, are
presented in attached Table No. 1 together with a tabulation of the components
of the differences in the estimates as of such dates. The Company's reserves
in the United States are located in all the main producing states (except
Alaska), and in state and federal waters offshore Alabama, California,
Louisiana, and Texas. The Company's foreign reserves are located in Canada.

The estimated reserve volumes and future income amounts
presented in this report are related to hydrocarbon prices. December 1994
hydrocarbon prices were used in the preparation of this report as required by
Securities and Exchange Commission (SEC) and Financial Accounting Standards
Bulletin No. 69 (FASB 69) guidelines; however, actual future prices may vary
significantly from December 1994 prices. Therefore, volumes of reserves
actually recovered and amounts of income actually received may differ
significantly from the estimated quantities presented in this report. Our
estimates of the proved net reserves attributable to the interests of the
Company as of December 31, 1994 are shown below:

<TABLE>
<CAPTION>
Proved Net Reserves
As of December 31, 1994
-------------------------------------------
Liquid, Barrels Gas, MMCF
--------------------- ---------------
<S> <C> <C>
Developed and Undeveloped
United States 204,518,402 1,341,370
Foreign 1,639,361 35,091
----------- ---------
Total Worldwide 206,157,763 1,376,461

Developed
United States 176,074,795 1,242,256
Foreign 1,635,344 31,179
----------- ---------
Total Worldwide 177,710,139 1,273,435
</TABLE>

The "Liquid" reserves shown above are comprised of crude oil,
condensate, and natural gas liquids. Natural gas liquids comprise 18 percent
of the Company's developed liquid reserves and 16 percent of the Company's
developed and undeveloped liquid reserves. All hydrocarbon liquid reserves are
expressed in standard 42 gallon barrels. All gas volumes are hydrocarbon sales
gas
<PAGE> 2
Pennzoil Company
January 30, 1995
Page 2

expressed in MMCF at the pressure and temperature bases of the area where the
gas reserves are located. Our estimates of hydrocarbon sales gas reserves as
of December 31, 1994 do not include 160,678 MMCF of carbon dioxide which is
also sales gas. Revenues from carbon dioxide sales are included in our
estimates of future cash inflows as of December 31, 1994. In addition, the
Company owns 83,819 long tons of sulfur reserves as of December 31, 1994 which
are not shown above; however, the revenue from these sulfur reserves is
included in the cash inflow data in this report.

The proved reserves presented in this report comply with the
SEC's Regulation S-X Part 210.4-10 Sec. (a) as clarified by subsequent
Commission Staff Accounting Bulletins, and are based on the following
definitions and criteria:

Proved reserves of crude oil, condensate, natural gas, and
natural gas liquids are estimated quantities that geological and
engineering data demonstrate with reasonable certainty to be
recoverable in the future from known reservoirs under existing
conditions. Reservoirs are considered proved if economic
producibility is supported by actual production or formation tests.
In certain instances, proved reserves are assigned on the basis of a
combination of core analysis and electrical and other type logs which
indicate the reservoirs are analogous to reservoirs in the same field
which are producing or have demonstrated the ability to produce on a
formation test. The area of a reservoir considered proved includes
(1) that portion delineated by drilling and defined by fluid contacts,
if any, and (2) the adjoining portions not yet drilled that can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of data on fluid
contacts, the lowest known structural occurrence of hydrocarbons
controls the lower proved limit of the reservoir. Proved reserves are
estimates of hydrocarbons to be recovered from a given date forward.
They may be revised as hydrocarbons are produced and additional data
become available. Proved natural gas reserves are comprised of
non-associated, associated, and dissolved gas. An appropriate
reduction in gas reserves has been made for the expected removal of
natural gas liquids, for lease and plant fuel, and the exclusion of
non-hydrocarbon gases if they occur in significant quantities and are
removed prior to sale. Reserves that can be produced economically
through the application of improved recovery techniques are included
in the proved classification when these qualifications are met: (1)
successful testing by a pilot project or the operation of an installed
program in the reservoir provides support for the engineering analysis
on which the project or program was based, and (2) it is reasonably
certain the project will proceed. Improved recovery includes all
methods for supplementing natural reservoir forces and energy, or
otherwise increasing ultimate recovery from a reservoir, including (1)
pressure maintenance, (2) cycling, and (3) secondary recovery in its
original sense. Improved recovery also includes the enhanced recovery
methods of thermal, chemical flooding, and the use of miscible and
immiscible displacement fluids. Estimates of proved reserves do not
include crude oil, natural gas, or natural gas liquids being held in
underground storage. Depending on the status of development, these
proved reserves are further subdivided into:

(i) "developed reserves" which are those proved reserves
reasonably expected to be recovered through existing wells
with existing equipment and operating methods, including (a)
"developed producing reserves" which are those proved
developed reserves reasonably expected to be produced from
existing completion intervals now open for production in
existing wells, and (b) "developed non-producing reserves"
which are those proved developed reserves which exist behind
the casing of existing wells which are reasonably expected to
be produced through these wells in the predictable future
where the cost of making such hydrocarbons available for
production should be relatively small compared to the cost of
a new well; and
<PAGE> 3
Pennzoil Company
January 30, 1995
Page 3

(ii) "undeveloped reserves" which are those proved reserves
reasonably expected to be recovered from new wells on
undrilled acreage, from existing wells where a relatively
large expenditure is required, and from acreage for which an
application of fluid injection or other improved recovery
technique is contemplated where the technique has been proved
effective by actual tests in the area in the same reservoir.
Reserves from undrilled acreage are limited to those drilling
units offsetting productive units that are reasonably certain
of production when drilled. Proved reserves for other
undrilled units are included only where it can be demonstrated
with reasonable certainty that there is continuity of
production from the existing productive formation.

Because of the direct relationship between volumes of proved
undeveloped reserves and development plans, we include in the proved
undeveloped category only reserves assigned to undeveloped locations that we
have been assured will definitely be drilled and reserves assigned to the
undeveloped portions of secondary or tertiary projects which we have been
assured will definitely be developed.

The Company has interests in certain tracts which have
substantial additional hydrocarbon quantities which cannot be classified as
proved and consequently are not included herein. The Company has active
exploratory and development drilling programs which may result in the
reclassification of significant additional volumes to the proved category.

In accordance with the requirements of FASB 69, our estimates
of future cash inflows, future costs, and future net cash inflows before income
tax as of December 31, 1994 from this report and as of December 31, 1993 from
our previous report are presented below.

<TABLE>
<CAPTION>
Total Worldwide
As of December 31<F1>
----------------------------------------------
1994 1993
-------------------- --------------------
<S> <C> <C>
Future Cash Inflows $5,326,553,844 $5,952,316,500

Future Costs
Production $2,041,184,473 $1,978,446,786
Development 493,685,669 493,541,577
-------------- --------------
Total Costs $2,534,870,142 $2,471,988,363

Future Net Cash Inflows
Before Income Tax $2,791,683,702 $3,480,328,137

Present Value at 10%
Before Income Tax $1,810,037,273 $2,257,766,836

__________________________________

<FN>

<F1> The cash inflow data for December 31, 1994 include revenues from 160,678 net MMCF of carbon dioxide reserves which have a
future net cash inflow before income tax of $38,780,628 and present value at 10 percent before income tax of $14,153,613.
The cash inflow data for December 31, 1993 include revenues from 161,674 net MMCF of carbon dioxide reserves which have a
future net cash inflow before income tax of $40,598,126 and present value at 10 percent before income tax of $14,445,148.
</FN>

</TABLE>

Our estimates as of December 31, 1994 and 1993 of future cash inflows,
future costs, future net cash inflows before income tax, and present value at 10
percent before income tax are

<PAGE> 4
Pennzoil Company
January 30, 1995
Page 4

shown individually for total worldwide, total United States (onshore and
offshore), and foreign areas in Table No. 2 which is attached.

The future cash inflows are gross revenues before any
deductions and include the British Columbia Cost of Service Allowance for
certain Canadian properties. The production costs were based on current data
and include production taxes in the United States, certain foreign taxes where
applicable, ad valorem taxes, and certain other items such as transportation
and processing costs, and the Alberta Royalty Tax Credit where applicable, in
addition to the operating costs directly applicable to the individual leases or
wells. The development costs were based on current data and include
dismantlement and abandonment costs net of salvage for properties where such
costs are relatively significant.

The Company furnished us with gas prices in effect at December
31, 1994 and with its forecasts of future gas prices which take into account
SEC guidelines, current market prices, contract prices, and fixed and
determinable price escalations where applicable. In accordance with SEC
guidelines, the future gas prices used in this report make no allowances for
future gas price increases which may occur as a result of inflation nor do they
account for seasonal variations in gas prices which may cause future yearly
average gas prices to be somewhat different than December gas prices. For gas
sold under contract, the contract gas price including fixed and determinable
escalations exclusive of inflation adjustments, was used until the contract
expires and then was adjusted to the current market price for the area and held
at this adjusted price to depletion of the reserves.

The Company furnished us with liquid prices in effect at
December 31, 1994 and these prices were held constant to depletion of the
properties. In accordance with SEC guidelines, changes in liquid prices
subsequent to December 31, 1994 were not considered in this report.

The Alberta Royalty Tax Credit and the British Columbia Cost
of Service Allowance were applied in our estimates of future net income from
the Company's properties in Canada.

Operating costs for the leases and wells in this report were
based on the operating expense reports of the Company and include only those
costs directly applicable to the leases or wells. When applicable, the
operating costs include a portion of general and administrative costs allocated
directly to the leases and wells under terms of operating agreements.
Development costs were furnished to us by the Company and are based on
authorizations for expenditure for the proposed work or actual costs for
similar projects. The current operating and development costs were held
constant throughout the life of the properties. For properties located
onshore, this study did not consider the salvage value of the lease equipment
or the abandonment cost since both are relatively insignificant and tend to
offset each other. The estimated net cost of abandonment after salvage was
included for offshore properties where abandonment costs net of salvage are
significant. The estimates of the offshore net abandonment costs furnished by
the Company were accepted without independent verification. No deduction was
made for indirect costs such as general administration and overhead expenses,
loan repayments, interest expenses, and exploration and development
prepayments. The Company supplied data on accumulated gas production
imbalances which were taken into account in our estimates of future production
and income.

the accounts, records, geological and engineering data and reports, and other
data required for this investigation. The ownership interests, prices, and
other factual data furnished by the Company were accepted without independent
verification. The estimates presented in this report are based on data
available through December 1994.

The reserves included in this report are estimates only and
should not be construed as being exact quantities. They may or may not be
actually recovered, and if recovered, the revenues therefrom and the actual
costs related thereto could be more or less than the estimated amounts.
Moreover, estimates of reserves may increase or decrease as a result of future
operations.

In general, we estimate that future gas production rates will
continue to be the same as the average rate for the latest available 12 months
of actual production until such time that the well or wells are incapable of
producing at this rate. The well or wells were then projected to decline at
their decreasing delivery capacity rate. Our general policy on estimates of
future gas production rates is adjusted when necessary to reflect actual gas
market conditions in specific cases. The future production rates from wells
now on production may be more or less than estimated because of changes in
market demand or allowables set by regulatory bodies. Wells or locations which
are not currently producing may start producing earlier or later than
anticipated in our estimates of their future production rates.

While it may reasonably be anticipated that the future prices
received for the sale of production and the operating costs and other costs
relating to such production may also increase or decrease from existing levels,
such changes were, in accordance with rules adopted by the SEC, omitted from
consideration in making this evaluation.

Neither we nor any of our employees have any interest in the
subject properties and neither the employment to make this study nor the
compensation is contingent on our estimates of reserves and future cash inflows
for the subject properties.

Very truly yours,

RYDER SCOTT COMPANY
PETROLEUM ENGINEERS

/s/ RAYMOND V. CRUCE
Raymond V. Cruce, P.E.
Chairman and CEO
RVC/sw
<PAGE> 6
TABLE NO. 1

PENNZOIL COMPANY
PROVED NET RESERVE DATA

<TABLE>
<CAPTION>
United States
Total Onshore Foreign
Total Worldwide and Offshore Canada
------------------------- ------------------------- -------------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Proved Liquid<F1> Reserves,
Millions of Barrels
- ------------------------------------
Developed and Undeveloped
Beginning of Year 200.9 220.2 139.0 198.9 218.0 136.8 2.0 2.2 2.2
Revisions<F2> 7.9 -7.3 2.3 7.9 -7.3 2.0 Neg Neg 0.3
Extensions and Discoveries 18.0 15.5 7.5 17.9 15.4 7.5 0.1 0.1 Neg
Improved Recovery 0.6 0.0 0.0 0.6 0.0 0 0 0 0
Estimated Production -24.6 -24.3 -14.6 -24.3 -24.0 -14.3 -0.3 -0.3 -0.3
Purchase of Reserves In-Place<F4> 7.6 5.2 92.5 7.6 5.2 92.5 0 0 0
Sales of Reserves In-Place -4.2 -8.4 -6.5 -4.1 -8.4 -6.5 -0.1 Neg 0
----- ----- ----- ----- ----- ----- ---- ---- ----
End of Year 206.2 200.9 220.2 204.5 198.9 218.0 1.7 2.0 2.2

Developed
Beginning of Year 164.2 182.5 110.3 162.3 180.3 108.1 1.9 2.2 2.2
End of Year 177.7 164.2 182.5 176.1 162.3 180.3 1.6 1.9 2.2

Net Proved Gas<F3> Reserves,
Billions of Cubic Feet
- ------------------------------------
Developed and Undeveloped
Beginning of Year 1,491 1,652 926 1,453 1,617 892 38 35 34
Revisions 12 0 9 15 -1 9 -3 1 Neg
Extensions and Discoveries 203 122 80 200 117 78 3 5 2
Improved Recovery Neg 0 0 Neg 0 0 0 0 0
Estimated Production -247 -223 -162 -244 -220 -161 -3 -3 -1
Purchase of Reserves In-Place<F4> 14 91 823 14 91 823 0 0 0
Sales of Reserves In-Place -97 -151 -24 -97 -151 -24 Neg 0 0
----- ----- ---- ----- ----- ----- ---- ---- ----
End of Year 1,376 1,491 1,652 1,341 1,453 1,617 35 38 35

Developed
Beginning of Year 1,341 1,446 837 1,306 1,412 803 35 34 34
End of Year 1,273 1,341 1,446 1,242 1,306 1,412 31 35 34

__________________________________
<FN>

<F1> Liquid reserves shown above are comprised of crude oil, condensate, and
natural gas liquids.
<F2> Revisions in 1993 include a reduction of 13.7 million barrels and 7 billion
cubic feet which is the results of depressed oil and condensate prices on
December 31, 1993.
<F3> Excludes carbon dioxide reserve and production data.
<F4> Purchase of reserves in place in 1992 for Worldwide and United States
includes 91.9 million barrels, 800 billion cubic feet, and 57,248 long
tons of sulfur attributable to Pennzoil Petroleum Company at October 30,
1992.
</FN>
</TABLE>
<PAGE> 7

TABLE NO. 2

PENNZOIL COMPANY
Cash Inflow and Cost Data <F1>
(millions of U.S. dollars)

<TABLE>
<CAPTION>
United States
Total Worldwide Onshore and Offshore Canada
As of December 31 As of December 31 As of December 31
------------------------------ ----------------------------- -------------------------
1994 1993 1994 1993 1994 1993
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Future Cash Inflows<F2> $5,327 $5,952 $5,262 $5,868 $65 $84

Future Costs
Production<F3> -$2,041 -$1,978 -$2,031 -$1,971 -$10 -$ 7
Development<F4> -494 -494 -493 -492 -1 -2
------- ------- ------- ------- ---- ----

Total Costs -$2,535 -$2,472 -$2,524 -$2,463 -$11 -$ 9

Future Cash Inflows
Before Income Tax $2,792 $3,480 $2,738 $3,405 $54 $75

Present Value @ 10%
Before Income Tax $1,810 $2,258 $1,777 $2,213 $33 $45

__________________________________

<FN>

<F1> Data for 1994 and 1993 include cash inflows and costs attributable to carbon dioxide reserves located in the United States.
The 1994 carbon dioxide reserves account for $38.8 million of cash inflows before income tax and $14.2 million of present
value at 10% before income tax. The 1993 carbon dioxide reserves account for $40.6 million of future cash inflows before
income tax and $14.4 million of present value at 10% before income tax.

<F2> Gross revenues are before any deductions. Gross revenues include British Columbia Producer Cost of Service Allowance.

<F3> Includes production taxes in the U.S.A., certain foreign taxes where applicable, ad valorem taxes, certain other items such
as transportation and processing charges, and Alberta Royalty Tax Credit where applicable.

<F4> Includes future dismantlement and abandonment costs net of salvage for offshore properties where such costs are relatively
significant.

</FN>
</TABLE>

<PAGE> 1

EXHIBIT 99(b)

OUTTRIM SZABO ASSOCIATES LTD.
Calgary, Alberta Petroleum Consultants
440, 333 - 5th Avenue S. W., Calgary, Alberta, Canada T2P 3B6
Phone (403) 266-8680 Fax (403) 266-1887

February 17, 1995

Pennzoil Company
Post Office Box 2967
Houston, Texas
77252-2967

RE: EVALUATION OF THE INTERESTS OF PENNZOIL CANADA INC.
EFFECTIVE DECEMBER 31, 1994

Gentlemen:

At your request we have prepared an estimate of the reserves,
future production and income attributable to certain leasehold and royalty
interests of Pennzoil Canada Inc. hereafter referred to as "the Company" with
an effective date of December 31, 1994. In accordance with the requirements of
FASB 69, our estimates of the Company's net proved reserves as of December 31,
1993 and 1994 as contained in this report and our previous reports are
presented in attached Table No. 1 together with a tabulation of the components
of the differences in the estimates as of such date. The assets evaluated
herein are attributable to the acquisition of Co-enerco Resources Ltd.

The estimated reserve volumes and future income amounts
presented in this report are related to hydrocarbon prices. December, 1994
hydrocarbon prices were used in the preparation of this report as required by
Securities and Exchange Commission (SEC) and Financial Accounting Standards
Bulletin No. 69 (FASB 69) guidelines; however, actual future prices may vary
significantly from December, 1994 prices. Therefore, volumes of reserves
actually recovered and amounts of income actually received may differ
significantly from the estimated quantities presented in this report. Our
estimates of the proved net reserves attributable to the interests of the
Company as of December 31, 1994 are shown below:

<TABLE>
<CAPTION>
Proved Net Reserves
as of December 31, 1994
-------------------------------------
Liquid, Barrels Gas, MMcf
<S> <C> <C>
Developed and Undeveloped:
Canada 13,910,337 168,600

Developed:
Canada 13,713,031 160,825
</TABLE>
<PAGE> 2
-2-

The "Liquid" reserves shown above are comprised of crude oil,
condensate and natural gas liquids. Natural gas liquids (excluding condensate)
comprise 4.5 percent of the Company's developed liquid reserves and 4.7 percent
of the Company's developed and undeveloped liquid reserves. All hydrocarbon
liquid reserves are expressed in standard 42 gallon barrels. All gas volumes
are hydrocarbon sales gas expressed in MMcf at the pressure and temperature
bases of the area where the gas reserves are located. In addition, the Company
owns 326 long tons of sulphur reserves as of December 31, 1994 which are not
shown above; however, the revenue from these sulphur reserves is included in
the cash inflow data in this report.

The proved reserves presented in this report comply with the
SEC's Regulation S-X Part 210.4-10 Sec. (a) as clarified by subsequent
Commission Staff Accounting Bulletins and are based on the following
definitions and criteria:

Proved reserves are those reserves estimated as recoverable
under current technology and anticipated economic conditions, from that portion
of a reservoir which can be reasonably evaluated as economically productive on
the basis of analysis of drilling, geological, geophysical and engineering
data, including the reserves to be obtained by enhanced recovery processes
demonstrated to be economically and technically successful in the subject
reservoir.

Proved producing reserves are those reserves that are actually
on production or, if not producing, that could be recovered from existing wells
or facilities and where the reasons for the current non-producing status is the
choice of the owner rather than the lack of markets or some other reasons. An
illustration of such a situation is where a well or zone is capable but is shut
in because its deliverability is not required to meet contract commitments.

Proved non-producing reserves are those reserves that are not
currently producing either due to lack of facilities and/or markets.

Proved undeveloped reserves are proved reserves which are
expected to be recovered from new wells on undrilled acreage, or from existing
wells where a relatively major expenditure is required for recompletion.
Reserves on undrilled acreages are limited to those drilling units offsetting
productive units, which are reasonably certain of production when drilled.

Due to the direct relationship between volumes of proved
undeveloped reserves and development plans, we include in the proved
undeveloped category only reserves assigned to undeveloped locations that we
have been assured will be drilled.

The Company has interests in certain tracts which have been
evaluated as having probable additional hydrocarbon quantities which are not
classified as proved and consequently are not included herein. Future
development activity may result in these reserves being reclassified as proved.

In accordance with the requirements of FASB 69, our estimates
of future cash inflows, future costs and future net cash inflows before income
tax as of December 31, 1994 from this report and as of December 31, 1993 are
presented below.
<PAGE> 3
- 3 -

<TABLE>
<CAPTION>
Total Pennzoil Canada Inc.
as of December 31
-----------------------------------
1994 1993
<S> <C> <C>
Future Cash Inflows 393,199,271 0

Future Costs:
Production 171,841,724 0
Development 11,992,604 0
Total Costs 183,834,328 0

Future Net Cash Inflows
Before Income Tax 209,365,254 0

Present Value at 10%
Before Income Tax 147,510,537 0
</TABLE>

Our estimates as of December 31, 1994 and 1993 of future cash
inflows, future costs, future net cash inflows before income tax, and present
value at 10 percent before income tax are shown individually for Pennzoil
Canada Inc. in Table No. 2, attached hereto.

The future cash inflows are gross revenues before any
deductions and include the British Columbia Cost of Service Allowance for
certain Canadian properties. The production costs were based on current data
and include the operating costs directly applicable to the individual leases or
wells and the Alberta Gas Cost Allowance. The development costs were based on
current data and include dismantlement and abandonment costs net of salvage for
properties where such costs are relatively significant.

In accordance with SEC guidelines, the future gas prices used
in this report make no allowances for future gas price increase which may occur
as a result of inflation nor do they account for seasonal variations in gas
prices which may cause future yearly average gas prices to be somewhat
different than December gas prices. No gas contract pricing has been used
which would cause future pricing to change from the December, 1994 actual
pricing.

The Company has provided liquid prices in effect as at
December 31, 1994 and these prices were held constant to depletion of the
properties. In accordance with SEC guidelines, changes in liquid prices
subsequent to December 31, 1994 were not considered in this report.

certain circumstances, Outtrim Szabo was required to develop the capital cost
forecasts for future developments. The current operating and development costs
were held constant throughout the life of the properties. For all properties,
the salvage value of the lease equipment or the abandonment cost are relatively
insignificant and tend to offset each other. No deduction was made for
indirect costs such as general administration and overhead expenses, loan
repayments, interest expenses and exploration and development prepayments.

The estimates of reserves presented herein are based upon a
detailed study of the properties in which the Company owns an interest;
however, we have not made any field examination of the properties. No
consideration was given in this report to potential environmental liabilities
which may exist nor were any costs included for potential liability to restore
and clean up damages, if any, caused by past operating practices. The Company
has informed us that they have furnished us all of the accounts, records,
geological and engineering data and reports and other data required for this
investigation. The ownership interests, prices and other factual data
furnished by the Company were accepted without independent verification. The
estimates presented in this report are based on data available through
December, 1994.

The reserves included in this report are estimates only and
should not be construed as being exact quantities. They may or may not be
actually recovered and, if recovered, the revenues therefrom and the actual
costs related thereto could be more or less than the estimated amounts.
Moreover, estimates of reserves may increase or decrease as a result of future
operations.

Production forecasts were designed based on contract
information for each area, the future productive capability of each well or
evaluation entity was based on the current capability, various test data
available on the wells, adjacent control wells and similar developments in the
area.

Neither we nor any of our employees have any interest in the
subject properties and neither the employment to make this study nor the
compensation is contingent on our estimates or reserves and future cash inflows
for the subject properties.

Yours truly,

OUTTRIM SZABO ASSOCIATES LTD.

/s/ COLIN P. OUTTRIM
Colin P. Outtrim, P.Eng.
President
CPO/eb
atts.
<PAGE> 5

TABLE NO. 1

PENNZOIL CANADA INC.
Proved Net Reserve Data

<TABLE>
<CAPTION>
Canada
-----------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
NET PROVED LIQUID<F1> RESERVES,
THOUSANDS OF BARRELS

Developed and Undeveloped:
Beginning of Period - July 1, 1994 15,882.5 0 0
Revisions -2,008.2 0 0
Extensions and Discoveries 1,094.6 0 0
Improved Recovery 0 0 0
Estimated Production -1,071.0 0 0
Purchase of Reserves In-Place 44.5 0 0
Sales of Reserves In-Place -32.0 0 0
-------- ---- ----
End of Year 13,910.3 0 0

Developed:
Beginning of Period - July 1, 1994 15,352.9 0 0
End of Year 13,713.0 0 0

NET PROVED GAS RESERVES,
BILLIONS OF CUBIC FEET

Developed and Undeveloped:
Beginning of Period - July 1, 1994 159.6 0 0
Revisions -5.9 0 0
Extensions and Discoveries 23.7 0 0
Improved Recovery 0 0 0
Estimated Production -9.4 0 0
Purchase of Reserves In-Place 3.1 0 0
Sales of Reserves In-Place -2.5 0 0
-------- ---- ----
End of Year 168.6 0 0

Developed:
Beginning of Period 152.1 0 0
End of Year 160.8 0 0

<FN>

<F1> Liquid reserves shown above are comprised of crude oil, condensate and natural gas liquids.

</FN>
</TABLE>

<PAGE> 6

TABLE NO. 2

PENNZOIL CANADA INC.
Cash Inflow and Cost Data<F1>
(Millions of U.S. Dollars)

<TABLE>
<CAPTION>
As of December 31, 1994
Canada
-------------------------------
1994 1993

<S> <C> <C>
Future Cash Inflows<F1> 393.2 0

Future Costs:
Production 171.8 0
Development 12.0 0
----- ----

Total Costs 183.8 0

Future Cash Inflows
Before Income Tax 209.4 0

Present Value at 10%
Before Income Tax 147.5 0

<FN>
<F1> These assets represent the purchase of Co-enerco Resources Ltd. effective
July 1, 1994.
Gross revenues are before any deductions. Gross revenues include British
Columbia Producer Cost of Service Allowance and Alberta Gas Cost Allowance.
</FN>
</TABLE>