Dear Shareholder,
For Crown Energy Corporation, 1995 was a year of significant
progress toward bringing our premium asphalt product to
market. I came to Crown Energy in January 1996 to lead the
company in its commercialization efforts after serving as
president of ARCO Oil and Gas, and as executive vice
president/member of the board of Atlantic Richfield Company.
Having observed firsthand the quality of Crown's raw
material and the excellent potential of the company's
proprietary technology, I am delighted to become a part of
this unique and dynamic opportunity, and to be associated
with an innovative company that has such potential to become
the standard by which others are judged. In the United
States, 90 percent of the surfaced roads are paved with
asphalt, and as these surfaces age, there is a constant
demand for their replacement. Crown Energy stands ready to
meet the needs of the market with a premium asphalt product
that not only is also high in quality, but costs less. The
product meets new federal standards without additives or
modifiers, requiring only a separation process and no
refining. It has been a year of preparation, and Crown
Energy is arming itself to transform this exceptional
revenue potential into bottom-line reality. With a
commitment to larger scale success, Crown's executive
management team will continue to draw upon the sound
business principles that have led the company this far.
Setting the Standard. In the pursuit of a long-lasting road
surface with lower maintenance costs, quality standards for
asphalt have risen, with much of the asphalt produced
currently requiring the addition of costly modifiers to
comply with federal regulations. Since 1994, Crown has
extensively tested asphalt taken from Asphalt Ridge near
Vernal, Utah and discovered that it easily meets the federal
criteria for performance-grade (PG-modified) asphalt.
Crown's product requires no additives or expensive modifiers
because it is naturally suitable as a binding agent upon
separation. With an impressive inventory of surface minable
reserves, Crown uses a low-temperature, low-cost, patented
separation method to capitalize on a resource that nature
has generously provided. Location, Location,
Location...Crown also enjoys a distinct advantage in terms
of its location. First, Utah contains approximately 90
percent of all known U.S. oil sand deposits, which consists
of over 28 billion barrels of oil. Crown's leased properties
at Asphalt Ridge represents one of Utah's premier deposits,
where the richness of the deposits is apparent on much of
the land's surface. Extensive reserve studies estimate
surface minable reserves to be approximately 140 million
barrels, of which Crown controls over 100 million barrels.
In addition to a production cost advantage, Crown's location
provides close proximity to ready markets, posing an
economical transportation scenario. Many of the markets
targeted by Crown must presently ship asphalt from as far
away as Alberta, Canada, and Trinidad. With our centralized
location, we expect to deliver our product more quickly and
cost-effectively. Following the successful completion of
its commercial-size demonstration plant in 1994, Crown is
now developing its first permanent production facility at
its Asphalt Ridge oil sand deposit. The facility, located on
a portion of Crown's 7,000 acres, is designed to initially
process approximately 1,900 tons of oil sands per day for an
average daily production of 1,000 barrels of asphalt. Now
gearing up for commercial production, Crown anticipates
shipping its product in 1997 and expanding its output to
2,000 barrels per day in 1998.Meeting the Demand . . .
Naturally! The natural suitability of Crown's product is
attractive to a market segment accustomed to paying $25-$40
per barrel. Not only is Crown's output superior as a base
(unmodified) product, but also it can be produced at a
significantly lower production cost, boding well for Crown's
ability to enter the market and distinguish itself. The
overall asphalt paving market is growing at a modest annual
rate of approximately 1.2 percent while the PG-modified
market is growing more rapidly averaging 30 to 40 percent in
the region. This growth rate is attributable to two factors.
First, the federal government has issued and codified more
stringent highway road performance standards, requiring many
asphalt producers to improve the quality of their product
before bringing it to market. The new standards support
Crown's product in PG-modified markets due to its high
quality and serviceability. As the new standards are
implemented in 1996 and beyond, annual demand for PG-modified
asphalt nationally is expected to reach 8.4 million
barrels by 1998. Second, after years of asphalt pavement
failure problems due to weather, temperature, traffic
density and quality variations in the asphalt binders,
project engineers are changing from a "least installed" cost
philosophy to one based on "life cycle" cost. Both the
private and public sectors are recognizing that an increased
initial investment in materials and methods of construction
can result in extended road life (30 years in some cases)
and a significant reduction in the frequency and cost of
road repair and maintenance. Local And Regional Support
local and state officials have been very receptive and
excellent to work with as we near completion of our
permitting process. County officials have been equally
receptive and are enthusiastic about the opportunity to
introduce new, real wealth into the regional economy in a
way that only industry can deliver. Attesting to the
strength of Crown's technology, the State of Utah has
executed an unprecedented agreement with Crown for resource
evaluation and subsequent development of lands held in trust
by the state that are known to contain large amounts of
surface minable oil sands. Additionally, county commissions
in the area have promoted the development of regional oil
sands. Crown has reached an agreement with Uintah County in
which the county will assist in mine preparation by removing
overburden in exchange for raw product to be used on local
roads. These agreements are creating a win-win situation
for all involved, as the community continues to support and
encourage the company's efforts to commercialize this
plentiful resource. It is gratifying to contribute to a
regional economy in an age when corporate downsizing is so
prevalent, especially by making highest and best use of a
resource that is so abundant. Exploring Other Markets crown
seeks not only to redefine the asphalt market, but is also
considering the feasibility of offering a new source of
feedstock to regional refiners within our freight-logical
market. As our evolving market advantage becomes even more
attractive and the potential for further expansion
materializes, we will consider strategic alliances that may
provide a cost-effective vehicle for the company's entry
into international markets. Going forward, we are
confident that strong levels of demand will support the
expansion of the production capacity at Asphalt Ridge. By
launching a right-sized' facility with ample room to grow,
Crown intends to optimize its leadership position, remaining
responsive to market demand, while avoiding overexpansion
and unnecessary debt. As we finalize our funding
arrangements within the next several months, our objective
is to structure financing that is in the best interest of
our shareholders and long-term success. We extend our thanks
to those of you who have shown your unwavering support for
Crown Energy over the years. We look forward to maximizing
long-term shareholder value and reporting our progress
throughout 1996.
Sincerely,
/s/James A. Middleton
James A. Middleton
Chairman and CEO
