SHELL OIL CO, 10-K, 1998-03-06

SHELL OIL CO
10-K, 1998-03-06
PETROLEUM REFINING

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<PAGE> 1
1997
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K
------------------------
(Mark One)
X
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to

Commission File Number 1-2475

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

<TABLE>
<S> <C>
DELAWARE 13-1299890
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ONE SHELL PLAZA, HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 241-6161
</TABLE>

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
<S> <C>
7 1/4% DEBENTURES DUE 2002 NEW YORK STOCK EXCHANGE
GUARANTEES --
EVIDENCING GUARANTEE OF 7 1/2% GUARANTEED
SINKING FUND DEBENTURES DUE 1999 OF
SHELL PIPE LINE CORPORATION NEW YORK STOCK EXCHANGE
</TABLE>

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
------------------------

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No___ .

Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not applicable.

State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. None.

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Outstanding as of February
28, 1998 -- 1,000 shares of Common Stock, of a par value of $10.00 a share.
------------------------

OMISSION OF CERTAIN INFORMATION

In accordance with General Instruction J of Form 10-K, the registrant is
omitting Items 4, 10, 11, 12 and 13 (and related Exhibits) because:

(1) Royal Dutch Petroleum Company, a Netherlands company, and The "Shell"
Transport and Trading Company, p.l.c., an English company, each of which is a
reporting company under the Securities Exchange Act of 1934 that has filed all
material required to be filed by it pursuant to Section 13, 14, or 15(d) thereof
and is named in conjunction with the registrant's description of its business,
own directly or indirectly 60 percent and 40 percent, respectively, of the
shares of all the companies of Royal Dutch/Shell Group of Companies, including
all the equity securities of the registrant; and

(2) during the preceding thirty-six calendar months and any subsequent
period of days, there has not been any material default in the payment of
principal, interest, sinking or purchase fund installment, or any other material
default not cured within thirty days with respect to any indebtedness of the
registrant or its subsidiaries, and there has not been any material default in
the payment by the registrant or its subsidiaries of rentals under material
long-term leases.
------------------------

DOCUMENTS INCORPORATED BY REFERENCE: None

================================================================================
<PAGE> 2

PART I

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that
are based on management's current expectations, estimates and projections about
the industries in which Shell Oil operates. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "projects," and "estimates," and
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, and
are subject to the safe harbors created thereby. These statements are not
guarantees of future performance and involve risks and uncertainties and are
based on a number of assumptions that could ultimately prove inaccurate and,
therefore, there can be no assurance that they will prove to be accurate. Actual
results and outcomes may vary materially from what is expressed or forecast in
such statements. Among the factors that could cause actual results to differ
materially are changes in crude oil and natural gas prices, refining margins and
marketing margins, and chemical prices; changes in competitive or economic
conditions affecting supply and demand for oil, gas and Shell Oil's oil and
chemical products in one or more markets; failure to achieve expected production
from existing and future oil and gas development projects; delays in
development, construction or start-up of planned projects due to regulatory or
technical problems; disruption, interruption or other production problems at
Shell Oil's production or manufacturing facilities; liability for remedial
actions or requirements which result in higher costs, significant investment or
product changes under existing or future environmental regulations; liability
resulting from pending or future litigation; and other changes in fiscal, legal
or regulatory regimes which significantly affect costs. In addition, such
statements could be affected by general domestic and international economic and
political conditions. Shell Oil undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.

ITEMS 1 AND 2. BUSINESS AND PROPERTIES.

Shell Oil Company was incorporated under the laws of the State of Delaware
on February 8, 1922. It has its principal executive offices at One Shell Plaza,
Houston, Texas 77002, and its telephone number is (713) 241-6161. Unless
otherwise required by the context, the term "Company" as used herein refers to
Shell Oil Company and the term "Shell Oil" refers to the Company and its
consolidated subsidiaries.

The Company is wholly owned by Shell Petroleum Inc., a Delaware
corporation, whose shares are directly or indirectly owned 60 percent by Royal
Dutch Petroleum Company, The Hague, The Netherlands, and 40 percent by The
"Shell" Transport and Trading Company, p.l.c., London, England. Royal Dutch
Petroleum Company and The "Shell" Transport and Trading Company, p.l.c., are
holding companies which together directly or indirectly own securities of
companies of the Royal Dutch/Shell Group of Companies, the members of which are
severally engaged throughout the greater part of the world in oil, natural gas,
chemicals, coal and other businesses.

Shell Oil is engaged, principally in the United States, in the exploration
for, and development, production, purchase, transportation and marketing of,
crude oil and natural gas, and the purchase, manufacture, transportation and
marketing of oil and chemical products. In addition, Shell Oil is engaged in the
exploration for, and production of, crude oil and natural gas outside the United
States.

The three major reporting segments of Shell Oil's businesses are Oil and
Gas Exploration and Production, Oil Products and Chemical Products. Compared
with other integrated enterprises in the petroleum industry, the Company
believes that in 1997, domestically, Shell Oil ranked fourth in the net
production* of crude oil and natural gas liquids, fifth in net production* of
natural gas, first in refined products sold and second in refinery processing
intakes*. Additionally, within the petroleum industry, Shell Oil is a leader in
the domestic manufacturing and marketing of chemicals.

At December 31, 1997, Shell Oil had 19,904 employees.

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

* Including Shell Oil's share of companies accounted for using the equity
method.

2
<PAGE> 3

FINANCIAL INFORMATION BY MAJOR BUSINESS SEGMENT

Information on revenue, operating profit, net income, identifiable assets
and capital expenditures of each business segment is reported in this item. The
discussion of segment results included in Management's Discussion and Analysis
of Financial Condition and Results of Operations appearing in Item 7 of this
report is incorporated herein by reference. Income taxes are allocated to
segments on the basis of contributions to taxable income reduced by applicable
tax credits. Segment revenues, operating profit and assets outside the United
States are not of a level which requires separate geographical reporting.

The following is a summarized disaggregation of Shell Oil's consolidated
net income for each of the past three years.

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(millions of dollars)
<S> <C> <C> <C>
SEGMENT NET INCOME (LOSS)
Oil and Gas Exploration and Production............ $1,378 $1,349 $ 621
Oil Products...................................... 442 383 474
Chemical Products................................. 457 243 694
Other............................................. (14) (29) (78)
------ ------ ------
TOTAL................................... 2,263 1,946 1,711
NONALLOCATED COSTS..................................... 159 (75) 191
------ ------ ------
NET INCOME.............................. $2,104 $2,021 $1,520
====== ====== ======
</TABLE>

OIL AND GAS EXPLORATION AND PRODUCTION

General

During 1997, Shell Oil finalized two joint ventures involving its
exploration and production properties. In March of 1997, Shell Oil combined its
producing assets in the Permian Basin of West Texas/Southeast New Mexico with
those of Amoco Corporation (Amoco) in a limited partnership, Altura Energy, Ltd
(Altura), owned 36 percent by Shell Oil and 64 percent by Amoco. In June 1997,
Aera Energy LLC (Aera) was formed and began operations by combining Shell Oil's
California exploration and production operations with those of Mobil Corporation
(Mobil). Shell Oil owns 58.6 percent of Aera. Both ventures are accounted for by
Shell Oil using the equity method of accounting and, as such, the results of
operations of these ventures are not reflected directly in the results of
operations of Shell Oil. As a result, significant variations will exist in
year-to-year comparative data.

Hereafter, Shell Oil data and disclosure shall not include data or
disclosure regarding equity companies or their results of operations except as
and when specifically indicated. In the narrative, the term "E&P Equity
Companies" shall be used to refer to such companies, and the term "Total Shell
Oil E&P" shall be used, in any context, to refer to results or disclosure
concerning Shell Oil and its E&P Equity Companies; in the financial statements
and the tabular disclosures, the results of operations of E&P Equity Companies
shall be included only in lines containing disclosures about equity companies.

3
<PAGE> 4

Total revenues, operating profit and segment income for Oil and Gas
Exploration and Production activities for each of the past three years, together
with capital expenditures and related identifiable assets at the end of each
year, were as set out below. For additional information, see Note 18 of the
Notes to Consolidated Financial Statements included in Item 14a.

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(millions of dollars)
<S> <C> <C> <C>
REVENUES
Sales and other operating revenue................ $ 2,961 $ 3,010 $ 1,764
Other revenue.................................... 344 55 90
Intersegment transfers........................... 2,578 3,123 2,659
------- ------- -------
TOTAL REVENUES......................... 5,883 6,188 4,513
COSTS AND EXPENSES
Costs and operating expenses..................... 2,812 2,943 2,293
Depreciation, depletion, amortization and
retirements.................................... 1,147 1,375 1,533
------- ------- -------
OPERATING PROFIT....................... 1,924 1,870 687
Allocated corporate expenses..................... 43 39 40
Allocated income taxes........................... 593 559 66
Minority interest................................ 45 44 42
Equity in net income of others................... (137) (123) (83)
------- ------- -------
INCOME FROM ONGOING OPERATIONS......... 1,380 1,351 622
Other charges*................................... 2 2 1
------- ------- -------
SEGMENT NET INCOME..................... $ 1,378 $ 1,349 $ 621
======= ======= =======
CAPITAL EXPENDITURES.................................. $ 2,182 $ 2,053 $ 1,395
======= ======= =======
IDENTIFIABLE ASSETS AT DECEMBER 31.................... $13,123 $12,557 $11,976
======= ======= =======
</TABLE>

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

* Amounts associated with major product classifications for which there has been
no revenue stream or investment in the last five years.

Exploration and Production Operations

Domestically, Total Shell Oil E&P produces crude oil (including
condensate), natural gas and natural gas liquids in 12 states, the Gulf of
Mexico and offshore California. In 1997, domestic onshore production accounted
for 50 percent of Total Shell Oil E&P's crude oil production and 29 percent of
its natural gas production. The Gulf of Mexico, California and Texas are Total
Shell Oil E&P's principal areas of production activity, providing about 92
percent of its combined oil and gas production on a crude oil equivalent basis.
The majority of Total Shell Oil E&P oil and gas production interests are
acquired under leases (including many leases on federal onshore and offshore
tracts); such leases are generally obtained for an initial fixed term which is
automatically extended by the establishment of production for so long as
production continues, subject to compliance with the terms of the lease
(including, in the case of federal leases, extensive regulations imposed by
federal law). Total Shell Oil E&P also has international oil and gas production.

Domestic Offshore Oil and Gas

In the Gulf of Mexico during 1997, Shell Oil acquired interests in 323
tracts at a bonus cost of $157 million. Shell Oil now holds interests in 1,023
tracts in the Gulf, 696 of which are in water depths exceeding 1,500 feet,
comprising more than one-fifth of the industry's deepwater leaseholds.

Exploration and development of offshore acreage continued in 1997 with
Shell Oil participating in the drilling of 99 gross wells, of which 68 were
classified as successful, meaning, in the case of development wells, producing
or capable of production, and in the case of exploratory wells, proving
commercial reserves (successful wells).

4
<PAGE> 5

Development activity in Shell Oil's Deepwater operations in 1997 continued
at a brisk pace. Debottlenecking and expansion of production facilities at the
Auger Field have increased crude oil production capacity by over 40 percent to
approximately 100,000 barrels per day; natural gas production capacity doubled
to approximately 300 million cubic feet per day. First production was achieved
at Ram/Powell (Shell Oil interest 38 percent), from a tension leg platform
(TLP), located in 3,200 feet of water. Peak production from Ram/Powell is
expected to reach more than 60,000 barrels of oil and more than 200 million
cubic feet of gas per day. Plans to increase the production capacity for natural
gas at Ram/Powell to 260 million cubic feet per day are being evaluated. Shell
Oil's Mensa field (Shell Oil interest 100 percent), developed using subsea
technology, began production in 1997. Peak production from Mensa, located in
5,300 feet of water, is expected to reach 300 million cubic feet of natural gas
per day, through a 68-mile flowline connected to a conventional platform in
shallower water. The Troika field (Shell Oil interest 33 1/3 percent), a 5 well
subsea development located in 2800 feet of water, began production in late 1997.
Troika is connected via flowline to Shell Oil's Bullwinkle platform, some 14
miles away. Peak gross production rates are forecast at 80,000 barrels of oil
and 140 million cubic feet of natural gas per day. Construction work continued
on the TLP for the Ursa project, (Shell Oil interest, 45.4 percent). Ursa will
be developed in a water depth of approximately 4,000 feet, a world record depth
for a TLP. TLP installation is expected in early 1999 and first production in
mid-1999. Peak production is expected to reach 150,000 barrels of oil and 400
million cubic feet of natural gas per day.

Domestic Onshore Oil and Gas

During 1997, Shell Oil participated in drilling 106 gross wells onshore, of
which 77 were classified as successful.

E&P Equity Companies' operations include significant enhanced and
supplemental recovery operations to produce crude oil which could not be
recovered by natural reservoir forces. These recovery operations accounted for
41 percent of Total Shell Oil E&P domestic crude oil production in 1997.
Activities include steam injection to produce heavy, more viscous crude oil,
carbon dioxide (CO(2)) injection for increased recovery of lighter oil and
supplemental water injection. Steam injection methods, primarily in California,
accounted for 18 percent of domestic crude oil production in 1997, down 5
percent from 1996. Also, in 1997, CO(2) injection projects in West Texas
accounted for 21,214 barrels per day or approximately 5 percent of domestic
crude oil production.

During 1997, Shell Oil expanded its natural gas marketing and
transportation activities. Shell Oil's initial expansion of its natural gas
marketing and transportation activities began in 1995 with the formation of
Coral Energy, L.P. (Coral), a joint venture with Tejas Gas Corporation (Tejas),
a natural gas pipeline company engaged in the business of purchasing, gathering,
processing, treating, storing, transporting and marketing natural gas. Shell Oil
has continued to market substantially all of its natural gas production through
Coral. In 1997, Shell Canada acquired 12 percent ownership of Coral. Also in
1997, in two separate transactions, Shell Oil acquired 100 percent ownership of
Corpus Christi Natural Gas Company, L.P. Its activities include natural gas
transportation, processing, hub services and marketing, primarily in South
Texas. In early 1998, Shell Oil acquired all of the outstanding common stock of
Tejas, including Tejas' 44 percent ownership of Coral, as further discussed in
Note 12 of the Notes to Consolidated Financial Statements included in item 14a.
Following this transaction, Shell Oil combined its natural gas business, Coral,
Corpus Christi Natural Gas and Tejas into a single natural gas and natural gas
liquids business.

The expansion of gas transportation activities began in 1996 as Shell Oil
began building, in some cases with partners, an infrastructure of natural gas
pipelines in the Gulf of Mexico to serve the needs of Shell Oil and third
parties. In 1997, two new systems in the western and central Gulf began
operations. In addition, a system to serve deepwater producers was expanded, and
in 1998 a system to serve the eastern portion of the Gulf is expected to be
completed. These activities will also be included in the new natural gas and
natural gas liquids business.

In December 1997, Shell Oil signed a letter of intent to combine its South
Louisiana onshore properties with those of The Meridian Resource Corporation.
The transaction is expected to be completed in the first half of 1998.

5
<PAGE> 6

International Oil and Gas

Effective January 1, 1997, Shell Oil integrated its international oil and
gas new business development activities with those of other Royal Dutch/Shell
Group companies. Shell Oil has, however, retained its international producing
properties located in Brazil, Cameroon, China and Yemen and its equity interest
in Shell Exploration and Production Holdings, B.V.

Results of Operations and Costs

Results of operations for oil and gas producing activities, as prescribed
by Statement of Financial Accounting Standards No. 69, "Disclosures about Oil
and Gas Producing Activities," are shown below. These results exclude related
activities, such as the purchase and resale of natural gas, and revenues and
expenses associated with certain non-hydrocarbon products, such as sulfur and
carbon dioxide, which are included in the Segment Net Income data set forth
above and in Note 18 of the Notes to Consolidated Financial Statements included
in Item 14a of this report. Also excluded are research, corporate overhead and
interest costs.

(millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.......................... $1,933 $ 58 $1,991 $2,114 $ 66 $2,180 $1,236 $ 46 $1,282
Transfers...................... 1,602 378 1,980 2,143 418 2,561 1,976 304 2,280
------ ---- ------ ------ ---- ------ ------ ---- ------
Total Revenues............ 3,535 436 3,971 4,257 484 4,741 3,212 350 3,562
Production costs............... 868 94 962 1,104 94 1,198 1,039 85 1,124
Exploration expenses........... 334 3 337 293 34 327 194 52 246
Depreciation, depletion and
amortization................. 1,019 109 1,128 1,212 127 1,339 1,371 119 1,490
Income tax expense............. 423 14 437 503 29 532 29 28 57
------ ---- ------ ------ ---- ------ ------ ---- ------
Results of Operations..... $ 891 $216 $1,107 $1,145 $200 $1,345 $ 579 $ 66 $ 645
------ ---- ------ ------ ---- ------ ------ ---- ------
Shell Oil's interest in results
of operations of equity
companies.................... 169 82 251 -- 48 48 -- 36 36
------ ---- ------ ------ ---- ------ ------ ---- ------
Total..................... $1,060 $298 $1,358 $1,145 $248 $1,393 $ 579 $102 $ 681
====== ==== ====== ====== ==== ====== ====== ==== ======
</TABLE>

The weighted average price per unit of Shell Oil production of crude oil
and condensate, natural gas liquids and natural gas available for market, as
well as production expenses and results of operations for Shell Oil oil and gas
producing activities on a per barrel of equivalent net hydrocarbon production
basis, for each of the past three years were as follows:

6
<PAGE> 7

Capitalized costs related to oil and gas producing activities at year end,
and costs incurred in oil and gas property acquisition, exploration and
development activities for each year are shown below. These amounts do not
include costs of carbon dioxide and other non-hydrocarbon projects which for
segment reporting are included in the Oil and Gas Exploration and Production
data presented in Notes 13 and 18 of the Notes to Consolidated Financial
Statements.

<TABLE>
<CAPTION>
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
U.S. INT'L TOTAL U.S. INT'L TOTAL U.S. INT'L TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- --------
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CAPITALIZED COSTS
Proved properties......... $12,645 $1,542 $14,187.. $21,085 $1,474 $22,559 $20,893 $1,423 $22,316
Unproved properties....... 1,126 7 1,133.. 1,195 15 1,210 866 22 888
Support equipment and
facilities............. 635 12 647.... 530 10 540 416 9 425
------- ------ ------- ------- ------ ------- ------- ------ -------
Total Capitalized
Costs............. 14,406 1,561 15,967.. 22,810 1,499 24,309 22,175 1,454 23,629
Accumulated depreciation,
depletion and
amortization........... 8,006 983 8,989.. 13,125 890 14,015 12,671 775 13,446
------- ------ ------- ------- ------ ------- ------- ------ -------
NET CAPITALIZED
COSTS............. $ 6,400 $ 578 $6,978.. $ 9,685 $ 609 $10,294 $ 9,504 $ 679 $10,183
------- ------ ------- ------- ------ ------- ------- ------ -------
Shell Oil's interest in
net capitalized costs
of equity companies.... 2,901 107 3,008.. -- 115 115 -- 148 148
------- ------ ------- ------- ------ ------- ------- ------ -------
Total................ $ 9,301 $ 685 $ 9,986 $ 9,685 $ 724 $10,409 $ 9,504 $ 827 $10,331
======= ====== ======= ======= ====== ======= ======= ====== =======

COSTS INCURRED IN PROPERTY
ACQUISITION, EXPLORATION
AND DEVELOPMENT
ACTIVITIES*
Acquisition of
properties
Proved............... $ 7 $ -- $7...... $ 205 $ -- $ 205 $ 15 $ -- $ 15
Other................ 172 -- 172.... 140 -- 140 64 (1) 63

Exploration costs...... 638 9 647.... 583 42 625 423 58 481
Development costs...... 1,262 63 1,325.. 1,157 39 1,196 1,015 29 1,044
------- ------ ------- ------- ------ ------- ------- ------ -------
Costs Incurred....... $ 2,079 $ 72 $2,151.. $ 2,085 $ 81 $ 2,166 $ 1,517 $ 86 $ 1,603
Shell Oil's share of
costs incurred by
equity companies..... 150 6 156.... -- 6 6 -- 146 146
------- ------ ------- ------- ------ ------- ------- ------ -------
Total................ $ 2,229 $ 78 $2,307.. $ 2,085 $ 87 $ 2,172 $ 1,517 $ 232 $ 1,749
======= ====== ======= ======= ====== ======= ======= ====== =======
</TABLE>

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

* Costs have been categorized on the basis of Financial Accounting Standards
Board definitions which include costs of oil and gas producing activities
whether capitalized or charged to expense as incurred.

7
<PAGE> 8

Shell Oil's oil and gas exploration and development net wells drilled and
the wells which were successful were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
U.S. INT'L TOTAL U.S. INT'L TOTAL U.S. INT'L TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET WELLS DRILLED
Exploratory
Oil and Gas Wells......... 32 -- 32 22 -- 22 27 -- 27
Dry Holes................. 14 -- 14 27 1 28 17 2 19
Development
Oil and Gas Wells......... 99 11 110 447 7 454 242 6 248
Dry Holes................. 6 -- 6 13 -- 13 3 -- 3
OIL AND GAS WELLS PRODUCING OR
CAPABLE OF PRODUCING
Gross Wells
Oil....................... 2,645 446 3,091 20,946 399 21,345 22,406 411 22,817
Gas....................... 1,458 30 1,488 1,572 30 1,602 1,675 27 1,702
Net Wells
Oil....................... 1,803 119 1,922 13,071 107 13,178 13,548 111 13,659
Gas....................... 942 9 951 1,042 9 1,051 1,114 8 1,122
Number of net oil and gas
wells above completed in
more than one producing
formation................. 223 10 233 419 10 429 384 1 385
</TABLE>

As of December 31, 1997, Shell Oil's interest in wells which were in the
process of being drilled was as follows:

<TABLE>
<CAPTION>
EXPLORATORY DEVELOPMENT TOTAL
------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
WELLS IN PROCESS OF BEING DRILLED
United States....................... 11 7.3 29 22.0 40 29.3
International....................... -- -- 5 1.7 5 1.7
---- ---- ---- ---- ---- ----
Total.......................... 11 7.3 34 23.7 45 31.0
==== ==== ==== ==== ==== ====
</TABLE>

Acreage in which Shell Oil had an interest at the end of each of the
periods indicated was as follows:

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(thousands of acres)
<S> <C> <C> <C> <C> <C>
UNDEVELOPED ACREAGE
Gross
United States
Onshore........................... 2,007 2,068 1,563 1,542 1,354
Offshore.......................... 5,919 5,238 4,668 2,797 4,086
International........................ 3,409 3,409 48,241 37,685 37,823
------ ------ ------ ------ ------
TOTAL........................ 11,335 10,715 54,472 42,024 43,263
====== ====== ====== ====== ======
Net
United States
Onshore........................... 890 1,383 1,135 955 960
Offshore.......................... 5,919 5,223 4,543 2,717 3,717
International........................ 1,484 1,484 14,116 23,125 13,780
------ ------ ------ ------ ------
TOTAL........................ 8,293 8,090 19,794 26,797 18,457
====== ====== ====== ====== ======
PRODUCING OIL AND GAS ACREAGE
Gross
United States........................ 1,588 2,929 2,339 1,281 1,329
International........................ 100 123 100 90 69
------ ------ ------ ------ ------
TOTAL........................ 1,688 3,052 2,439 1,371 1,398
====== ====== ====== ====== ======
Net
United States........................ 1,199 2,448 1,973 1,003 1,072
International........................ 25 48 25 23 20
------ ------ ------ ------ ------
TOTAL........................ 1,224 2,496 1,998 1,026 1,092
====== ====== ====== ====== ======
</TABLE>

8
<PAGE> 9

Net production (after deducting interests of others, including royalty) was
as follows for the periods indicated:

<TABLE>
<CAPTION>
LIQUIDS (THOUSANDS OF BARRELS DAILY)
NATURAL GAS (MILLIONS OF CUBIC FEET DAILY) 1997 1996 1995 1994 1993
------------------------------------------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
NET CRUDE OIL AND CONDENSATE PRODUCED
Consolidated Companies
United States
Gulf of Mexico............................ 197 161 154 133 113
California................................ 56 132 128 133 140
Louisiana................................. 7 9 10 9 8
Michigan.................................. 7 7 7 7 8
Texas..................................... 10 44 47 48 50
Other..................................... 17 23 25 25 30
----- ----- ----- ----- -----
Total United States....................... 294 376 371 355 349
International.................................. 57 58 51 43 61
----- ----- ----- ----- -----
Total consolidated companies.............. 351 434 422 398 410
Shell Oil's interest in production of equity
companies
United States
California................................ 80 -- -- -- --
Texas..................................... 34 -- -- -- --
Other..................................... 2 -- -- -- --
----- ----- ----- ----- -----
Total United States....................... 116 -- -- -- --
International.................................. 40 38 34 31 29
----- ----- ----- ----- -----
Total equity companies.................... 156 38 34 31 29
----- ----- ----- ----- -----
TOTAL CRUDE OIL AND CONDENSATE PRODUCED............. 507 472 456 429 439
NATURAL GAS LIQUIDS PRODUCED
Predominantly domestic
Consolidated companies............................ 73 75 70 61 54
Shell Oil's interest in production of equity
companies...................................... 8 -- -- -- --
----- ----- ----- ----- -----
TOTAL NATURAL GAS LIQUIDS PRODUCED.................. 81 75 70 61 54
----- ----- ----- ----- -----
TOTAL LIQUIDS PRODUCED.............................. 588 547 526 490 493
===== ===== ===== ===== =====
NET NATURAL GAS PRODUCED*
Consolidated Companies
United States
Gulf of Mexico............................ 1,216 1,135 1,012 785 741
Louisiana................................. 52 49 87 120 129
Michigan.................................. 82 99 103 107 120
Texas..................................... 267 360 382 345 370
Other..................................... 28 155 180 205 115
----- ----- ----- ----- -----
Total United States....................... 1,645 1,798 1,764 1,562 1,475
International.................................. 86 82 61 67 39
----- ----- ----- ----- -----
TOTAL CONSOLIDATED COMPANIES.............. 1,731 1,880 1,825 1,629 1,514
Shell Oil's interest in production of equity
companies
United States
California................................ 29 -- -- -- --
Texas..................................... 41 -- -- -- --
Other..................................... 13 -- -- -- --
Total United States....................... 83 -- -- -- --
International.................................. 124 98 55 53 44
----- ----- ----- ----- -----
Total equity companies.................... 207 98 55 53 44
----- ----- ----- ----- -----
TOTAL NATURAL GAS PRODUCED.......................... 1,938 1,978 1,880 1,682 1,558
===== ===== ===== ===== =====
NET NATURAL GAS AVAILABLE FOR MARKET, EXCLUDING
CONSUMED IN OPERATIONS (DOES NOT INCLUDE SHELL
OIL'S SHARE OF PRODUCTION FROM EQUITY
COMPANIES)........................................ 1,618 1,720 1,699 1,473 1,361
</TABLE>

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

* Natural gas is reported on the basis of actual or calculated volumes which
remain after removal of liquefiable hydrocarbons by lease or field separation
facilities and of non-hydrocarbons where they occur in sufficient quantities
to render the gas unmarketable.

9
<PAGE> 10

Proved Reserve Estimates

Oil and gas proved reserves cannot be measured exactly. Reserve estimates
are based on many factors related to reservoir performance which require
evaluation by the engineers interpreting the available data, as well as price
and other economic factors. The reliability of these estimates at any point in
time depends on both the quality and quantity of the technical and economic
data, the production performance of the reservoirs as well as extensive
engineering judgment. Consequently, reserve estimates are subject to revision as
additional data become available during the producing life of a reservoir. When
a commercial reservoir is discovered, proved reserves are initially determined
based on limited data from the first well or wells. Subsequent data may better
define the extent of the reservoir and additional production performance, well
tests and engineering studies will likely improve the reliability of the reserve
estimate. The evolution of technology may also result in the application of
improved recovery techniques such as supplemental or enhanced recovery projects,
or both, which have the potential to increase reserves beyond those envisioned
during the early years of a reservoir's producing life.

Shell Oil reports its reserve position annually. Revisions to reserves are
based on engineering analyses of individual reservoirs at the field level. Prior
to finalizing the annual reserve report, a team of senior technical employees of
Shell Oil reviews the reserve estimates, procedures and explanations of
revisions for proven reservoirs.

Proved reserves are those quantities which, upon analysis of geological and
engineering data, appear with reasonable certainty to be recoverable in the
future from known oil and gas reservoirs under current prices and costs as of
the date the estimate is made. For major revisions, extensions and discoveries,
proved reserves must also be recoverable under future prices and costs
forecasted by Shell Oil. Proved developed reserves are those reserves which can
be expected to be recovered through existing wells with existing equipment and
operating methods. Proved undeveloped reserves are those reserves which are
expected to be recovered from new wells on undrilled acreage or from existing
wells where a relatively major expenditure is required.

Net proved reserves represent the estimated recoverable volumes after
deducting from gross proved reserves the portion due land owners or others as
royalty or operating interests.

Estimated quantities of net proved oil, natural gas liquids and natural gas
reserves and of changes in net quantities of proved developed and undeveloped
reserves for each of the periods indicated were as follows:

<TABLE>
<CAPTION>
CONSOLIDATED
COMPANIES EQUITY COMPANIES
--------------------------- --------------------------
U.S. INT'L TOTAL U.S. INT'L TOTAL TOTAL
---- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
CRUDE OIL AND CONDENSATE (MILLIONS OF
BARRELS)
Proved Developed and Undeveloped:
Reserves at January 1, 1995........... 1,810 118 1,928 -- 68 68 1,996
Changes resulting from:
Revisions of previous estimates... (41) 7 (34) -- -- -- (34)
Improved recovery................. 16 -- 16 -- -- -- 16
Purchases of reserves*............ 2 -- 2 -- 13 13 15
Extensions and discoveries........ 145 10 155 -- -- -- 155
Sales of reserves................. (17) -- (17) -- -- -- (17)
Production........................ (135) (19) (154) -- (8) (8) (162)
------ ---- ------ ------ ---- ----- -----
Reserves at December 31, 1995......... 1,780 116 1,896 73 73 1,969
Changes resulting from:
Revisions of previous estimates... (3) 9 6 -- -- -- 6
Improved recovery................. 82 -- 82 -- -- -- 82
Purchases of reserves*............ 43 -- 43 -- -- -- 43
Extensions and discoveries........ 62 16 78 -- -- -- 78
Sales of reserves................. (15) -- (15) -- -- -- (15)
Production........................ (137) (21) (158) -- (26) (26) (184)
------ ---- ------ ------ ---- ----- -----
Reserves at December 31, 1996......... 1,812 120 1,932 -- 47 47 1,979
</TABLE>

(Footnotes on following page)

10
<PAGE> 11

<TABLE>
<CAPTION>
CONSOLIDATED
COMPANIES EQUITY COMPANIES
--------------------------- --------------------------
U.S. INT'L TOTAL U.S. INT'L TOTAL TOTAL
---- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Changes resulting from:
Revisions of previous estimates... (51) 14 (37) 35 45 80 43
Improved recovery................. 1 -- 1 1 -- 1 2
Extensions and discoveries........ 211 25 236 -- -- -- 236
Sales of reserves................. (26) -- (26) -- -- -- (26)
Transfers between
consolidated/equity companies... (994) -- (994) 897 -- 897 (97)
Production........................ (107) (21) (128) (43) (15) (58) (186)
------ ---- ------ ------ ---- ----- -----
Reserves at December 31, 1997......... 846 138 984 890 77 967 1,951
Proved Developed Crude Oil and
Condensate Reserves at:
December 31, 1995..................... 1,124 80 1,204 -- 34 34 1,238
December 31, 1996..................... 1,157 92 1,249 -- 9 9 1,258
December 31, 1997..................... 395 106 501 653 51 704 1,205
NATURAL GAS LIQUIDS (MILLIONS OF
BARRELS)
Proved Developed and Undeveloped:
Reserves at January 1, 1995........... 230 1 231 -- -- -- 231
Changes resulting from:
Revisions of previous estimates... 7 -- 7 -- -- -- 7
Extensions and discoveries........ 28 -- 28 -- -- -- 28
Sales of reserves................. (1) -- (1) -- -- -- (1)
Production........................ (26) -- (26) -- -- -- (26)
------ ---- ------ ------ ---- ----- -----
Reserves at December 31, 1995......... 238 1 239 -- -- -- 239
Changes resulting from:
Revisions of previous estimates... (5) -- (5) -- -- -- (5)
Extensions and discoveries........ 19 -- 19 -- -- -- 19
Sales of reserves................. (1) -- (1) -- -- -- (1)
Production........................ (28) -- (28) -- -- -- (28)
------ ---- ------ ------ ---- ----- -----
Reserves at December 31, 1996......... 223 1 224 -- -- -- 224
Changes resulting from:
Revisions of previous estimates... 16 -- 16 (1) -- (1) 15
Extensions and discoveries........ 26 -- 26 -- -- -- 26
Sales of reserves................. (2) -- (2) -- -- -- (2)
Transfers between
consolidated/equity companies... (49) -- (49) 45 -- 45 (4)
Production........................ (26) -- (26) (3) -- (3) (29)
------ ---- ------ ------ ---- ----- -----
Reserves at December 31, 1997......... 188 1 189 41 -- 41 230
Proved Developed Natural Gas Liquids
Reserves at:
December 31, 1995..................... 163 1 164 -- -- -- 164
December 31, 1996..................... 161 1 162 -- -- -- 162
December 31, 1997..................... 118 1 119 35 -- 35 154
NATURAL GAS (BILLIONS OF CUBIC FEET)**
Proved Developed and Undeveloped:
Reserves at January 1, 1995........... 5,546 265 5,811 -- 306 306 6,117
Changes resulting from:
Revisions of previous estimates... (76) 24 (52) -- -- -- (52)
Purchases of reserves*............ 7 -- 7 -- 128 128 135
Extensions and discoveries........ 731 -- 731 -- -- -- 731
Sales of reserves................. (182) -- (182) -- -- -- (182)
Production........................ (644) (22) (666) -- (20) (20) (686)
------ ---- ------ ------ ---- ----- -----
Reserves at December 31, 1995......... 5,382 267 5,649 -- 414 414 6,063
Changes resulting from:
Revisions of previous estimates... 212 10 222 -- -- -- 222
Improved recovery................. 6 -- 6 -- -- -- 6
Purchases of reserves*............ 144 -- 144 -- -- -- 144
Extensions and discoveries........ 594 -- 594 -- -- -- 594
Sales of reserves................. (420) -- (420) -- -- -- (420)
Production........................ (658) (30) (688) -- (52) (52) (740)
------ ---- ------ ------ ---- ----- -----
Reserves at December 31, 1996......... 5,260 247 5,507 -- 362 362 5,869
Changes resulting from:
Revisions of previous estimates... 8 42 50 40 115 155 205
Improved recovery................. -- -- -- 1 -- 1 1
Purchases of reserves*............ 8 -- 8 -- -- -- 8
Extensions and discoveries........ 592 -- 592 1 -- 1 593
Sales of reserves................. (81) -- (81) (7) -- (7) (88)
Transfers between
consolidated/equity companies... (582) -- (582) 533 -- 533 (49)
Production........................ (601) (31) (632) (29) (45) (74) (706)
------ ---- ------ ------ ---- ----- -----
Reserves at December 31, 1997......... 4,604 258 4,862 539 432 971 5,833
</TABLE>

(Footnotes on following page)

11
<PAGE> 12

<TABLE>
<CAPTION>
CONSOLIDATED
COMPANIES EQUITY COMPANIES
--------------------------- --------------------------
U.S. INT'L TOTAL U.S. INT'L TOTAL TOTAL
---- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Proved Developed Natural Gas Reserves
at:
December 31, 1995..................... 3,464 267 3,731 -- 112 112 3,834
December 31, 1996..................... 3,272 247 3,519 -- 59 59 3,578
December 31, 1997..................... 3,017 258 3,275 380 233 613 3,888
</TABLE>

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

* Includes the net effect of exchanges of reserves with other companies.

** Natural gas is reported on the basis of actual or calculated volumes which
remain after removal of liquefiable hydrocarbons by lease or field separation
facilities and of non-hydrocarbons where they occur in sufficient quantities
to render the gas unmarketable. Natural gas reserve volumes include
liquefiable hydrocarbons approximating five percent of total gas reserves
which are recoverable at natural gas processing plants downstream from the
lease or field separation facilities. Such recoverable liquids also have been
included in natural gas liquids reserve volumes.

Standardized Measure

The following disclosures concerning the standardized measure of future
cash flows from proved oil and gas reserves are presented in accordance with
Statement of Financial Accounting Standards No. 69. As prescribed by this
Statement, the amounts shown are based on prices and costs at the end of each
period, currently enacted tax rates and a 10 percent annual discount factor.
Since prices and costs do not remain static, and no price or cost changes have
been considered, the results are not necessarily indicative of the fair market
value of estimated proved reserves, but they do provide a common benchmark which
may enhance the users' ability to project future cash flows.

For this purpose, individual estimates of production quantities, revenues
and costs were developed for major fields and combinations of smaller, closely
related fields. These fields contained approximately 80 percent of Total Shell
Oil E&P's total estimated proved reserves. Estimates for the remaining fields
were developed in the aggregate by major geographic regions. Extensive judgments
are involved in estimating the timing of production and the costs that will be
incurred throughout the remaining lives of these fields. Therefore, the results
may not be comparable to estimates disclosed by other oil and gas producers.

12
<PAGE> 13

The standardized measure of discounted future net cash flows related to
proved oil and gas reserves at the end of each year was as follows:

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
FROM PROVED OIL AND GAS RESERVES

<TABLE>
<CAPTION>
CONSOLIDATED COMPANIES EQUITY COMPANIES
-------------------------- --------------------------
U.S. INT'L TOTAL U.S. INT'L TOTAL TOTAL
------- ------ ------- ------- ------ ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1997
Future cash inflows.................. $27,085 $2,619 $29,704 $13,838 $2,574 $16,412 $46,116
Future production and development
costs.............................. 9,535 887 10,422 7,028 1,311 8,339 18,761
Future income tax expense............ 5,380 498 5,878 1,864 562 2,426 8,304
------- ------ ------- ------- ------ ------- -------
Future net cash flows*............... 12,170 1,234 13,404 4,946 701 5,647 19,051
10% annual discount for estimated
timing of cash flows............... 3,859 375 4,234 2,348 249 2,597 6,831
------- ------ ------- ------- ------ ------- -------
Standardized measure of discounted
future net cash flows.............. $ 8,311 $ 859 $ 9,170 $ 2,598 $ 452 $ 3,050 $12,220
======= ====== ======= ======= ====== ======= =======
AT DECEMBER 31, 1996
Future cash inflows.................. $63,131 $3,414 $66,545 -- $3,231 $ 3,231 $69,776
Future production and development
costs.............................. 17,468 917 18,385 -- 1,368 1,368 19,753
Future income tax expense............ 14,952 805 15,757 -- 776 776 16,533
------- ------ ------- ------- ------ ------- -------
Future net cash flows*............... 30,711 1,692 32,403 -- 1,087 1,087 33,490
10% annual discount for estimated
timing of cash flows............... 12,202 483 12,685 -- 419 419 13,104
------- ------ ------- ------- ------ ------- -------
Standardized measure of discounted
future net cash flows.............. $18,509 $1,209 $19,718 -- $ 668 $ 668 $20,386
======= ====== ======= ======= ====== ======= =======
AT DECEMBER 31, 1995
Future cash inflows.................. $41,076 $2,640 $43,716 -- $2,767 $ 2,767 $46,483
Future production and development
costs.............................. 16,447 869 17,316 -- 1,034 1,034 18,350
Future income tax expense............ 7,051 467 7,518 -- 713 713 8,231
------- ------ ------- ------- ------ ------- -------
Future net cash flows*............... 17,578 1,304 18,882 -- 1,020 1,020 19,902
10% annual discount for estimated
timing of cash flows............... 7,125 399 7,524 -- 368 368 7,892
------- ------ ------- ------- ------ ------- -------
Standardized measure of discounted
future net cash flows.............. $10,453 $ 905 $11,358 -- $ 652 $ 652 $12,010
======= ====== ======= ======= ====== ======= =======
</TABLE>

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

* Future net cash flows were estimated using year-end prices and costs, and
currently enacted tax rates. Total Shell Oil E&P domestic and international
weighted average crude oil prices at year-end 1997 were $14.21 and $15.93 per
barrel, respectively, compared to year-end 1996 prices of $21.35 and $23.51
per barrel, respectively, and year-end 1995 prices of $15.14 and $18.54 per
barrel, respectively.

13
<PAGE> 14

The aggregate change in the standardized measure of discounted future net
cash flows was a decrease of $8,166 million in 1997, an increase of $8,376
million in 1996, and an increase of $2,598 million in 1995. The principal
sources of change were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(millions of dollars)
<S> <C> <C> <C>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED
FUTURE NET CASH FLOWS
Sales and transfers of oil and gas produced, net of
production costs..................................... $(3,794) $(3,543) $(2,438)
Net changes in prices and costs........................ (13,802) 11,662 2,530
Extensions, discoveries, additions and improved
recovery, less related costs......................... 2,628 3,006 1,840
Net purchases and sales of reserves.................... (1,084) (237) (238)
Development costs incurred during the period........... 1,470 1,196 1,044
Revisions of previous reserve estimates................ 514 400 (50)
Accretion of discount.................................. 3,021 1,582 1,205
Net change in income taxes............................. 4,717 (4,923) (1,209)
</TABLE>

OIL PRODUCTS

General

The Oil Products business is engaged in the refining, transporting and
marketing of oil products, principally in the United States. This segment is
oriented toward light fuel products; accordingly, refineries are designed to
produce large quantities of motor gasoline and other light fuels. During 1997,
Shell Oil was a leading U.S. marketer of gasoline and an important supplier of
aviation fuels, lubricants, distillates and asphalts.

Total revenues, operating profit and segment income for Oil Products'
activities for each of the past three years, together with capital expenditures
and related identifiable assets at the end of each year, were as set out below.
For additional information, see Note 18 of the Notes to Consolidated Financial
Statements included in Item 14a.

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(millions of dollars)
<S> <C> <C> <C>
REVENUES
Sales and other operating revenue.............. $20,491 $21,465 $17,375
Other revenue.................................. 15 17 11
Intersegment transfers......................... 1,541 1,265 969
------- ------- -------
TOTAL REVENUES....................... 22,047 22,747 18,355

COSTS AND EXPENSES
Costs and operating expenses................... 21,075 21,746 17,212
Depreciation, depletion, amortization and
retirements.................................. 438 391 365
------- ------- -------
OPERATING PROFIT..................... 534 610 778
Allocated corporate expenses................... 39 36 34
Allocated income taxes......................... 136 196 232
Minority interest.............................. 8 5 --
Equity in net (income) loss of others.......... (82) (13) 55
------- ------- -------
INCOME FROM ONGOING OPERATIONS....... 433 386 457
Other charges (credits)*....................... (9) 3 (17)
------- ------- -------
SEGMENT NET INCOME................... $ 442 $ 383 $ 474
======= ======= =======

CAPITAL EXPENDITURES................................ $ 554 $ 726 $ 1,065
======= ======= =======

IDENTIFIABLE ASSETS AT DECEMBER 31.................. $ 9,277 $ 9,326 $ 8,763
======= ======= =======
</TABLE>

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

* Amounts associated with major product classifications for which there has been
no revenue stream or investment in the last five years.

14
<PAGE> 15

On January 15, 1998, Shell Oil and Texaco Inc. (Texaco) reached agreement
on the formation and operational start up of Equilon Enterprises LLC, (Equilon),
a Delaware limited liability company. Equilon is a joint venture which combines
major elements of both companies' western and midwestern United States refining
and marketing businesses and their nationwide trading, transportation and
lubricants businesses. Shell Oil owns 56 percent and Texaco owns 44 percent of
Equilon.

Equilon will continue to use these assets in the refining, marketing,
trading, transportation and lubricants businesses and will market petroleum and
other products directly and through independent wholesalers and retailers.
Equilon will have exclusive rights to use the Shell and Texaco brands on refined
oil product sales in those areas of the United States where Equilon is
authorized to conduct its respective businesses.

Under the terms of a consent agreement accepted by the Federal Trade
Commission and similar agreements with the attorneys general of California,
Hawaii, Oregon and Washington, certain assets will be divested, including Shell
Oil's Anacortes, Washington refinery, certain Texaco and Shell Oil marketing
assets in southern California and Hawaii, and certain pipeline interests.

Texaco, Shell Oil and Saudi Refining, Inc. (a corporate affiliate of Saudi
Aramco) are finalizing agreements for a separate joint venture involving their
eastern United States and Gulf Coast refining and marketing businesses. The
parties are optimistic that this second transaction will be concluded early in
1998. This venture is planned to be owned 35 percent by Shell Oil, 32.5 percent
by Texaco and 32.5 percent by Saudi Refining, Inc. (such ownership to be subject
to adjustment in the future based on the performance of the assets).

Supplies

During 1997, Shell Oil supplemented its own crude oil production to meet
its requirements by the purchase of crude oil from both domestic and
international sources. About 34 percent of Shell Oil's net crude supply came
from sources outside the United States; approximately 25 percent was purchased
from government oil companies in three foreign countries and 9 percent was
purchased from other international sources, including companies affiliated with
the Royal Dutch/Shell Group of Companies.

Net sources of crude oil were as follows for the periods indicated:

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(thousands of barrels daily)
<S> <C> <C> <C> <C> <C>
NET SOURCES OF CRUDE OIL
United States.............................. 664 623 547 561 527
International.............................. 337 320 294 329 339
----- ----- ----- ----- -----
TOTAL................................. 1,001 943 841 890 866
===== ===== ===== ===== =====
</TABLE>

Manufacturing

During 1997, Shell Oil owned and operated refining facilities located at
Martinez, California; Wood River, Illinois; Norco, Louisiana; Odessa, Texas; and
Anacortes, Washington. Additionally, the Company and a subsidiary of Mexico's
national oil company Petroleos Mexicanos (Pemex) are in a 50/50 joint venture at
the Deer Park, Texas refinery; Shell Oil operates the refinery on behalf of the
venture.

In 1996, Shell Oil's chemical products business segment acquired a refinery
in Mobile, Alabama. The refinery acquisition was made to assure the chemical
products segment advantaged feedstocks for its olefins operations at chemical
plants at Norco, Louisiana and Deer Park, Texas. Operating statistics for this
refinery are included in the Refinery Processing Intakes and Other Refinery
Statistics tables in this section; however, revenues and costs attributable to
this refinery are reflected in the chemical products business segment.

15
<PAGE> 16

Refinery processing intakes of crude oil, natural gas liquids and other raw
materials for the manufacture of petroleum products at refineries and certain
other refinery statistics were as follows for the periods indicated:

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----- ---- ---- -------- --------
(thousands of barrels daily)
<S> <C> <C> <C> <C> <C>
REFINERY PROCESSING INTAKES
Anacortes, Washington............................ 113 114 105 107 107
Deer Park, Texas*................................ 131 126 101 112 142
Martinez, California............................. 161 150 165 161 168
Mobile, Alabama**................................ 67 29 -- -- --
Norco, Louisiana................................. 256 250 236 239 232
Odessa, Texas.................................... 25 24 24 24 26
Wood River, Illinois............................. 292 278 256 262 243
----- ---- ---- ------- ------
TOTAL....................................... 1,045 971 887 905 918
===== ==== ==== ======= ======
OTHER REFINERY STATISTICS*
Operable capacity of crude oil distillation units
at beginning of year........................... 988 907*** 856 847 892***
Refinery intakes to crude oil distillation
units.......................................... 984 901 821 850 854
Refinery crude oil distillation unit intakes as a
percent of operable capacity at beginning of
year........................................... 99.6% 99.3% 95.9% 100.4% 95.7%
Own net produced crude oil and natural gas
liquids as a percent of intakes to crude oil
distillation units............................. 43.1% 56.5% 59.9% 54.0% 54.3%
</TABLE>

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

* Reflects the Company's 50% equity interest in the Deer Park Refinery,
effective April 1, 1993.

** The Mobile plant was purchased in August, 1996.

*** Adjusted to reflect the Company's purchase of the Mobile plant in August,
1996, and the Company's 50% equity interest in the Deer Park Refinery,
effective April 1, 1993.

Transportation

At December 31, 1997, Shell Oil's wholly owned pipeline system consisted of
approximately 6,321 miles of pipelines of various sizes, of which 2,971 miles
were crude gathering and trunk lines, 3,069 miles were product lines, 264 miles
were natural gas lines and 17 miles were carbon dioxide lines. In addition Shell
Oil had varying stock, partnership or undivided interests in pipelines
consisting of approximately 3,334 miles of crude lines, 7,402 miles of product
lines, 791 miles of carbon dioxide lines and 353 miles of natural gas lines.
Shell Oil also engages tankers and barges by a variety of methods, including
spot charters, short-term and long-term charters, contracts of affreightment and
other contractual arrangements for transportation of crude oil and products. Oil
products are also delivered to customers by truck and rail.

In 1997, in the Gulf of Mexico, four new joint ventures as well as Shell
Oil's wholly owned Auger pipeline system significantly increased ability to
serve Shell Oil's needs and those of other Gulf of Mexico producers. Pipeline
capacity was increased by 900,000 barrels per day. For 1998 one joint venture
has planned an expansion and one new pipeline will be constructed for Ursa
production.

In January 1997, Shell Pipe Line Corporation leased the Department of
Energy's Strategic Petroleum Reserve storage facility located at St. James,
Louisiana. This facility provides two million barrels of above ground storage
tankage, is connected to four major pipelines and has two marine docks. It is
strategically located between Capline's five million barrel storage facility and
LOCAP's two million barrel storage facility and will provide receipt, storage
and delivery services for the increasing supply of domestic and foreign crude
oil projected for this area.

16
<PAGE> 17

Marketing

During 1997, Shell Oil distributed oil products principally under the
"Shell" symbol or other trademarks in which the word "Shell" appears. Oil
marketing operations were carried out through transportation systems, terminals,
bulk distributing plants and, at the end of 1997, approximately 9,300 service
stations displaying Shell trademarks. These stations are located in 40 states
and the District of Columbia.

The number of service stations was as follows at the end of the periods
indicated:

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SERVICE STATIONS*
Leased or owned.............................. 3,900 3,900 3,900 4,000 3,900
Jobber and other............................. 5,400 5,000 4,700 4,600 4,800
------ ------ ------ ------ ------
TOTAL................................... 9,300 8,900 8,600 8,600 8,700
====== ====== ====== ====== ======
- ------------
* Rounded to nearest hundred.
</TABLE>

Shell Oil's refined product revenues and sales volumes were as follows for
the periods indicated:

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(millions of dollars)
<S> <C> <C> <C> <C> <C>
REFINED PRODUCT REVENUES
Automotive gasoline.................... $ 9,029 $ 8,660 $ 7,642 $ 6,818 $ 6,687
Jet fuel............................... 1,491 1,523 1,119 1,160 1,242
Kerosene, heating and diesel oils...... 1,484 1,230 601 462 449
Heavy fuel oils........................ 325 374 454 404 423
Propane and other LPG.................. 675 718 451 398 419
Asphalt................................ 342 309 284 240 230
Lubricants, grease, process oils and
wax................................. 601 604 614 596 551
Coke................................... 74 60 29 20 22
All other products..................... 965 1,119 922 962 763
------- ------- ------- ------- -------
TOTAL............................. $14,986 $14,597 $12,116 $11,060 $10,786
======= ======= ======= ======= =======
(thousands of barrels daily)
REFINED PRODUCT SALES VOLUMES
Automotive gasoline.................... 804 751 750 685 638
Jet fuel............................... 163 154 139 145 143
Kerosene, heating and diesel oils...... 166 124 73 59 54
Heavy fuel oils........................ 58 60 82 87 103
Propane and other LPG.................. 101 114 98 88 89
Asphalt................................ 46 45 42 40 37
Lubricants, grease, process oils and
wax................................. 18 18 19 19 17
Coke................................... 30 25 14 6 6
All other products..................... 123 130 131 143 113
------- ------- ------- ------- -------
TOTAL............................. 1,509 1,421 1,348 1,272 1,200
======= ======= ======= ======= =======
</TABLE>

CHEMICAL PRODUCTS

Shell Oil is a major producer primarily in the United States of olefins,
aromatics, phenol, detergent alcohols, ethylene oxide and derivatives,
thermoplastic elastomers, epoxy and specialty resins, oxygenated and hydrocarbon
solvents and polyester resins. These basic chemical products are used in many
consumer and industrial products and processes. They are sold primarily to
industrial markets in the United States through Shell Oil's own sales force;
some products are also sold through distributors. Approximately 17 percent of
chemical sales are outside the United States. Chemical products are delivered to
customers principally by rail,

17
<PAGE> 18

truck, ship and pipeline. In addition, petrochemicals are manufactured by a
joint venture with Saudi Basic Industries Corporation and sold in worldwide
markets. Catalysts are manufactured and sold through joint ventures with
affiliated and other parties. To further improve long-term profitability, Shell
Oil continues to pursue new business ventures and growth opportunities in areas
that complement its strengths in technology and feedstocks.

Total revenues, operating profit and segment net income for Chemical
Products' activities for each of the past three years, together with capital
expenditures and related identifiable assets at the end of each year, were as
set out below. For additional information, see Note 18 of the Notes to
Consolidated Financial Statements included in Item 14a.

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(millions of dollars)
<S> <C> <C> <C>
REVENUES
Sales and other operating revenue.................... $4,725 $4,305 $4,841
Other revenue........................................ (2) 8 15
Intersegment transfers............................... 489 213 152
------ ------ ------
TOTAL REVENUES............................. 5,212 4,526 5,008

COSTS AND EXPENSES
Costs and operating expenses......................... 4,246 3,958 3,778
Depreciation, depletion, amortization and
retirements........................................ 270 271 273
------ ------ ------
OPERATING PROFIT........................... 696 297 957
Allocated corporate expenses......................... 22 23 17
Allocated income taxes............................... 246 78 371
Minority interests................................... 9 -- --
Equity in net income of others....................... (55) (57) (135)
------ ------ ------
INCOME FROM ONGOING OPERATIONS............. 474 253 704
Other charges*....................................... 17 10 10
------ ------ ------
SEGMENT NET INCOME......................... $ 457 $ 243 $ 694
====== ====== ======
CAPITAL EXPENDITURES...................................... $ 348 $ 582 $ 422
====== ====== ======
IDENTIFIABLE ASSETS AT DECEMBER 31........................ $5,342 $5,089 $4,836
====== ====== ======
</TABLE>

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

* Amounts associated with major product classifications for which there has been
no revenue stream or investment in the last five years.

Chemical sales revenues were as follows for the periods indicated:

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(millions of dollars)
<S> <C> <C> <C> <C> <C>
Primaries (olefins, aromatics)......... $1,543 $1,411 $1,184 $1,024 $ 869
Intermediates and solvents............. 1,665 1,505 1,644 1,314 1,211
Polymers............................... 1,268 1,309 1,861 1,550 1,434
Other.................................. 131 27 82 78 84
------ ------ ------ ------ ------
$4,607 $4,252 $4,771 $3,966 $3,598
====== ====== ====== ====== ======
</TABLE>

Shell Oil owns and operates manufacturing facilities located at Mobile,
Alabama; Martinez, California; Lakeland, Florida; Argo and Wood River, Illinois;
Geismar, Norco, Taft and Reserve, Louisiana; Belpre, Ohio; Deer Park, Texas; Pt.
Pleasant, West Virginia; and Altamira, Mexico. In 1997, Shell Oil completed and
began operation of the 200 million-pound-a-year polyester resins plant in
Altamira, Mexico. Also in 1997, construction of a 200 million-pound-per-year
Corterra(R) Polymers unit began at Geismar, Louisiana; this unit is scheduled
for completion in 1999. Corterra Polymers is a new proprietary material which is
targeted initially to the needs of the carpet and textile industries. To support
the new facility, Shell Oil is also building

18
<PAGE> 19

additional production capacity for 160 million pounds of 1,3 propanediol (PDO)
per year at Geismar. PDO is a key raw material for Corterra Polymers with
additional uses for PDO being developed, such as polyol monomer, a reactant and
solvent. Also at Geismar, construction began for a 50 million-pound-per-year
plant for the manufacture of Carilon(R) Polymers. Applications for Carilon
Polymers include automotive components, industrial pipe and liners, electrical
connectors and enclosures, industrial packaging, protective coatings and
high-strength fibers. At the Deer Park Chemical Plant, a June 1997 explosion and
fire damaged an olefins unit. The unit was rebuilt and began operations in
February 1998. Also at Deer Park, design and engineering work has begun for the
construction of additional phenol capacity, with the unit scheduled to begin
operation in late 1999, adding 500 million pounds per year of phenol capacity
and 300 million pounds per year of acetone capacity.

OTHER BUSINESSES

A subsidiary of Shell Oil, established primarily to provide traditional
business services and business infrastructure support to Shell Oil, has begun
marketing its services to external customers. A small but growing portion of
this subsidiary's revenues are being generated from third party customers.

OTHER MATTERS

General

The business affairs, operations and earnings of Shell Oil continue to be
affected by political developments and by legislation, regulation and other
actions taken by federal, state and local governments, and by governmental
entities outside the United States, particularly those directly or indirectly
affecting oil and natural gas production, transportation, purchase or sale; the
refining, manufacture, transportation or marketing of petroleum and chemical
products; environmental issues related to all of the preceding (as discussed in
"Environmental Matters" following); or restrictions or requirements imposed on
companies because of foreign ownership or affiliations. As such matters could
subject Shell Oil to changes in operations, as well as to litigation and claims
of a character which have not existed in the past, Shell Oil is unable to
predict the overall effect of the preceding on its operations and earnings.

Environmental Matters

Federal environmental laws and regulations including the National
Environmental Policy Act; the Clean Air Act; the Clean Water Act; the Safe
Drinking Water Act; the Resource Conservation and Recovery Act; the Toxic
Substances Control Act; the Comprehensive Environmental Response, Compensation
and Liability Act; and their implementing regulations, as well as numerous state
and local environmental laws, continue to have a significant impact on Shell
Oil's operations. Additional information concerning the effect that compliance
with such environmental requirements may have on capital expenditures, earnings
and competitive position, including information concerning allegations or claims
received regarding site cleanup obligations, is incorporated herein by reference
from Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Environmental Matters (pages 33-34), and Item 3. Legal
Proceedings (pages 20-22).

Competition

All phases of the businesses in which Shell Oil is engaged are highly
competitive. Shell Oil competes at various levels with both petroleum and
non-petroleum companies in providing energy and other products to the consumer.

The Oil and Gas Exploration and Production segment competes with numerous
other companies in the industry to locate and to obtain new sources of supply
and to produce oil and gas in a cost-effective and efficient manner. The
principal methods of competition include geological, geophysical and engineering
research and technology, experience and expertise, and economic analysis in
connection with property acquisitions.

19
<PAGE> 20

Competitive methods in the Oil and Chemical Products segments consist of
product improvement and new product development through research and technology,
and efficient manufacturing and distribution systems. In the marketing phase of
the business, competitive factors include product quality and reliability,
price, advertising and sales promotion, and development of customer loyalty to
Shell products.

Research

Total research and development expenses charged to income (including
applicable operating taxes and depreciation) in 1997 amounted to $199 million,
compared with $173 million in 1996 and $167 million in 1995. In 1997, about 63
percent was spent on Shell Oil sponsored research and development activities
relating to the improvement of existing, and the development of new, products
and processes, as compared to 66 percent in 1996 and 74 percent in 1995. The
remainder in each period was spent primarily on oil and gas exploration and
production activities.

The Company and another company of the Royal Dutch/Shell Group of Companies
have an arrangement whereby each will perform for, and exchange with, the other,
research services in petroleum technology, chemicals and other fields. In
addition, certain subsidiaries of the Company have technology sharing agreements
with certain other affiliates.

ITEM 3. LEGAL PROCEEDINGS

Since 1984, the Company has been named as a defendant in numerous product
liability cases, including class actions, involving the failure of residential
plumbing systems constructed with polybutylene plastic pipe. The Company has
also been sued regarding failures in polybutylene pipe connecting users with
utility water lines and polybutylene pipe used in municipal water distribution
systems. The polybutylene pipe was manufactured primarily by United States Brass
Corporation and Vanguard Plastics, Inc. using polybutylene resin supplied by the
Company to fabricate the pipe and initially, in the case of residential plumbing
systems, polyacetal resin supplied by E.I. DuPont de Nemours and Company
(DuPont) and Hoechst Celanese Corporation (Hoechst Celanese) to fabricate the
pipe fittings. The plaintiffs in the litigation claim property damages and, in
some cases, fraud and intentional misrepresentation seeking punitive damages.
The Company's position is, and most of the judgments to date have confirmed
that, most of the leaks in residential plumbing systems have occurred due to the
failure of the polyacetal insert fittings. Polyacetal is no longer used to
manufacture insert fittings for these systems and during 1996, the Company
announced it would no longer sell polybutylene resin for use in the domestic
pipe market. The Company, DuPont & Hoechst Celanese have agreed on a mechanism
to fund the payment of most of the residential plumbing claims in the United
States as the result of two class action settlements (the "class action
settlement"). The class action settlement provides for the creation of an entity
to receive and handle claims and for a $950 million fund to pay such claims,
which claims may be filed until 2009, depending on various factors. If the
settlement funds are exhausted, additional funds may be provided by the
defendants or claimants who have not received their full benefits under the
class action settlement may seek their remedy in a new court proceeding at that
time. Additionally, a small percentage of defendants have opted out of the class
action settlement and some have asserted their claims outside such settlement.
Significant issues remain to be resolved as to how costs will be shared among
the defendants. One fittings co-defendant has agreed to fund 10% of all acetal
fitting costs related to the class action settlement; the Company and the other
fittings co-defendant have agreed to arbitrate to determine how the remaining
acetal fittings portion of the cost of the class action settlement will be
shared between them. Additionally, in matters outside the residential plumbing
claims and the class action settlement, claims continue to be filed involving
problems with polybutylene pipe used in municipal water distribution systems.
The Company will continue to defend these matters vigorously but it cannot
currently predict when or how polybutylene related matters will finally be
resolved.

In December 1993, a Los Angeles County Superior Court jury, in two
consolidated lawsuits against the Company and its subsidiary involving the
condition of the Dominguez oil field, returned a verdict against "Shell" in the
amount of $46.9 million compensatory damages and $173 million punitive damages.
Plaintiffs allege they were defrauded, that the oil and gas lease was breached,
and that soil contamination on the property constitutes a continuing trespass.
In January of 1998, the California Court of Appeal reversed the

20
<PAGE> 21

jury's verdicts of fraud, breach of lease and continuing trespass and reversed
the $220 million judgment. While plaintiffs are expected to seek further review
of this appellate decision, the Company believes that the Court of Appeal was
clearly correct in all its holdings and its decision will be sustained in full.

The Company, along with its parent companies and other affiliated
companies, was sued in the United States District Court for the Southern
District of New York in January of 1995 by Union Carbide Corporation concerning
a proposed joint venture between affiliates of the Company and another company
involving their polyolefins businesses. The plaintiff alleged, among other
things, that the new venture caused a breach of certain contractual obligations
of the Company to Union Carbide. The Company strongly contests these
allegations. Trial of the matter is scheduled for later in 1998.

Numerous lawsuits have been filed and demands made against Shell Oil, as
well as other large producers, by federal and state governmental parties and
private parties alleging underpayment of oil and gas royalty. While significant
amounts have been alleged to be due in connection with these claims, numerous
factual issues distinguish each claim and such issues must be individually
analyzed in each case. In February 1998, Shell Oil was advised of the Department
of Justice's intention to intervene in private litigation asserting underpayment
of royalties due the federal government on production from offshore and onshore
federal lands. This litigation includes allegations under the False Claims Act
which allows recovery of treble damages. Based on progress to date in analyzing
and resolving these matters, Shell Oil believes that it can defend successfully
that its past royalty payments have been made on a fair and legally justifiable
basis and expects to resolve these issues over time, as the result of
negotiation or litigation if necessary.

In 1995, the Company received a Notice of Violation/Finding of Violation
from the EPA Region V alleging violations under the Clean Air Act and the
Illinois State Implementation Plan by the Shell Wood River Refining Company
("Wood River"). The Company and the EPA are engaging in discussions regarding
the allegations of the notice. Wood River received a letter from the Office of
the United States Attorney, Southern District of Illinois, informing of that
office's consideration of filing federal charges against Wood River alleging
violations of the Migratory Bird Treaty Act. Wood River and the U.S. Attorney's
Office are engaging in discussions seeking to resolve this matter.

The Company and its subsidiary, Shell Oil Products Company, received a
notice of violation from the California Environmental Protection Agency alleging
that between January 3, 1994 and November 26, 1995, the Company underadditized
5,900,273 gallons of gasoline at its non-proprietary terminals and 2,437,662
gallons at its proprietary terminals in violation of state law. Shell Pipe Line
Corporation received a notice of violation from the California Environmental
Protection Agency alleging that Shell underadditized certain gallons of gasoline
in 1996 contrary to state law. The Company and the Agency are currently
discussing the scope and resolution of these alleged violations.

The Company has received numerous claims concerning potential liabilities
in connection with environmental laws involving past and present operating and
waste disposal locations (as further discussed in the Environmental Matters
section of the Management Discussion and Analysis, pages 33-34). At the
Company's former Torrance, California Plant, remediation studies have progressed
sufficiently to enable the Company to conclude that it is unlikely a material
liability exists concerning that site. At the Rocky Mountain Arsenal in Colorado
where the Company accrued $500 million to pay for its share of clean up costs,
the balance remaining as of December 31, 1997 was $195 million, which the
Company believes will be adequate to meet its obligations in connection with the
site.

Numerous federal, state and local income, property and excise tax returns
of Shell Oil are being examined by the respective taxing authorities, and
certain interpretations by Shell Oil of the complex tax statutes, regulations
and practices are being challenged in administrative proceedings and in federal
and state actions. Specifically, on October 16, 1997, the United States District
Court in Delaware issued an opinion holding that certain income tax credits
recorded by Shell Oil in previous years arising out of production of oil from
tar sands were denied because the Court determined that Shell Oil had used the
wrong definition of tar sands production to calculate the same. Shell Oil is
currently examining the effect of this decision on other previously recorded tar
sands tax credits. However, Shell Oil believes that the District Court decision
was incorrect and intends to vigorously appeal such decision. In any case, Shell
Oil believes that many of its tar

21
<PAGE> 22

sands tax credits are validly claimed under the alternative definition asserted
by the government in the District Court case.

It is not possible for the Company to predict with precision what the final
effect of the foregoing litigation will be on the Company. However, while
periodic results may be significantly affected by costs in excess of provisions
related to one or more of these proceedings, based on developments to date, the
Company does not anticipate a material adverse effect on its financial position.

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

Not applicable.

22
<PAGE> 23

PART II

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

The Company's common stock is not publicly traded.

Cash dividends were paid quarterly as follows:

<TABLE>
<CAPTION>
1997 1996
----------------------------------------- -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
----- ------ ----- ------ ----- ------ ----- ------
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash dividends.............. $400 $400 $400 $400 $350 $350 $400 $400
</TABLE>

ITEM 6. SELECTED FINANCIAL DATA.

Selected financial data is presented below for the periods indicated.

<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(millions of dollars)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues.............................. $28,959 $29,151 $24,650 $21,581 $21,092
Costs and expenses.................... 26,855 27,130 23,130 21,073 20,311
------- ------- ------- ------- -------
Net income............................ $ 2,104 $ 2,021 $ 1,520 $ 508 $ 781
======= ======= ======= ======= =======
BALANCE SHEET DATA
Total assets.......................... $29,601 $28,709 $27,021 $26,379 $26,851
Gross investment*..................... 38,540 42,779 41,150 40,045 39,822
Total debt............................ 4,124 3,212 3,251 2,995 3,014
Deferred income tax liability......... 3,339 3,229 2,841 3,137 3,754
Shareholder's equity.................. 14,878 14,374 13,853 13,733 14,624
STATEMENT OF CASH FLOWS
Cash provided by operating
activities.......................... $ 3,321 $ 4,124 $ 3,473 $ 3,014 $ 3,172
Capital expenditures.................. 3,131 3,414 2,957 2,451 1,981
Cash dividends........................ 1,600 1,500 1,400 1,400 763
</TABLE>

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

* Gross investment consists of gross assets less current liabilities.

The above financial results and historical data should not be construed as
necessarily indicative of future financial results; see Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.

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

KEY FINANCIAL RESULTS

-- Net income in 1997 was a record $2,104 million, compared with net income
of $2,021 million in 1996 and $1,520 million in 1995.

-- Adjusted net income, which excludes special items, was a record $1,890
million in 1997, compared with $1,860 million in 1996 and $1,408 million
in 1995.

-- Cash flows from operating activities in 1997 were $3,321 million,
compared with $4,124 million in 1996 and $3,473 million in 1995.

-- Revenues in 1997 were $29.0 billion, down from $29.2 billion in 1996,
but up from $24.6 billion in 1995.

23
<PAGE> 24

-- Shareholder's equity was $14.9 billion at the end of 1997, up from $14.4
billion in 1996 and $13.9 billion in 1995.

-- Net income as a percent of net investment was 10.6 percent in 1997,
compared with 10.5 percent in 1996 and 8.0 percent in 1995.

-- Total debt at the end of 1997 was $4,124 million compared with $3,212
million in 1996 and $3,251 million at year-end 1995. At that level, it
represented 21.7 percent of total capital, compared with 18.3 percent at
year-end 1996 and 19.0 percent at the end of 1995.

OIL AND GAS EXPLORATION AND PRODUCTION

<TABLE>
<CAPTION>
INCOME HIGHLIGHTS 1997 1996 1995
----------------- ------ ------ ----
<S> <C> <C> <C>
Income from Ongoing Operations............................. $1,380 $1,351 $622
Other Charges*............................................. (2) (2) (1)
------ ------ ----
Segment Net Income......................................... 1,378 1,349 621
Special Items (includes "Other Charges")................... 96 37 51
------ ------ ----
Adjusted Net Income........................................ $1,282 $1,312 $570
====== ====== ====
</TABLE>

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

* Amounts associated with major product classifications for which there has been
no revenue stream or investment in the last five years.

Oil and Gas Exploration and Production income from ongoing operations was
$1,380 million in 1997, compared with $1,351 million in 1996 and $622 million in
1995. Income from ongoing operations excludes charges to segment net income
which are associated with major product classifications for which there has been
no revenue stream or investment for the past five years. Segment net income in
1997 was $1,378 million, compared with $1,349 million in 1996 and $621 million
in 1995.

Adjusted net income, which excludes special items, was $1,282 million in
1997, a decrease of $30 million from 1996, but an increase of $712 million over
1995. The $30 million decline, 1997 to 1996, was due to lower crude oil prices
and natural gas production, and higher operating costs which more than offset
the benefits from increased domestic crude oil and natural gas liquids
production.

Shell Oil domestic crude oil prices fell about $6.50 per barrel during 1997
and continued to decline into 1998. While this resulted in lower earnings during
the second half of 1997, earnings benefits from increased domestic crude oil
production almost offset the effects of this sharp price decline.

Special items increased segment net income by $96 million in 1997, $37
million in 1996 and $51 million in 1995. Special items in 1997 included gains
totaling $55 million from the sale of oil and gas assets, the effects from
favorable resolution of litigation of $33 million, and tax credits and
adjustments of $24 million. Partially offsetting these benefits was a total of
$14 million in charges, representing a retroactive adjustment to ownership at a
producing location and an asset write-off. Special items in 1996 included gains
totaling $48 million related to the sale of oil and gas properties, and $45
million from prior-year tax adjustments. Partially offsetting these benefits
were $30 million in charges against litigation and royalty reserves, and a $24
million asset write-off. Special items in 1995 included a benefit from tax
losses totaling $125 million and an additional $30 million benefit as the result
of prior-year tax adjustments. Also benefiting net income in 1995 were gains
totaling $51 million related to the sale of oil and gas properties and the
receipt of $21 million in compensation related to a previously expropriated
international asset. Partially offsetting these benefits were a $145 million
after-tax charge related to the adoption of Statement of Financial Accounting
Standards No. 121 and $26 million in provisions for litigation and property
damages.

Cash provided by operating activities was $2,680 million in 1997, compared
with $2,493 million in 1996, and $1,923 million in 1995.

24
<PAGE> 25

Production -- Domestic net crude oil production, on a barrels per day
basis, averaged 410,000 in 1997, 376,000 in 1996 and 371,000 in 1995. Domestic
production has now increased for the fourth consecutive year. In 1997,
production increased 9 percent over 1996.

International net production, on a barrels per day basis, averaged 57,000
in 1997, down 1,000 from 1996, but up 6,000 over 1995. While production was
essentially the same in 1997 as in 1996, the increased production in 1996 over
1995 was primarily attributable to new production in China.

Average net domestic natural gas production was 1,728 million cubic feet
per day in 1997. Production declined from both 1996 and 1995 levels by 4 percent
and 2 percent, respectively.

Net natural gas liquids production, on a barrels per day basis, was 81,000
in 1997, up 6,000 over 1996 and 11,000 over 1995. The 1997 average price of
$15.02 was $.95 lower than 1996, but $3.02 higher than 1995.

As indicated above, in the 1997 to 1996 comparison, Shell Oil's production
of domestic crude oil increased 9 percent and natural gas declined 4 percent.
These results, which were below previously anticipated increases, occurred
despite very strong increases in deepwater production and were caused by
operational shutdowns to modify facilities to provide for future increases in
production, steeper than expected production declines in certain mature fields,
property sales, and fewer attractive property acquisition opportunities, as well
as normal declines in other fields. Based upon current results from existing
operations, existing and planned developments, and assuming no reductions in
existing production except due to normal declines in producing fields, Shell
Oil's anticipated average annual production growth rate through 2001 is 10 to 15
percent for oil and 7 to 10 percent for gas.

Domestic crude oil and gas production numbers include Shell Oil's net
production plus a prorata share, based on ownership interest, of domestic equity
companies' production. Equity companies are those companies in which Shell Oil
has significant influence but not control.

Costs and Expenses -- Comparative data between 1997 and the previous two
years has been greatly affected by the new alliances which began operations in
1997. These two alliances, Altura Energy, Ltd. (Altura) and Aera Energy, LLC,
(Aera) began operations in March and June 1997, respectively, and were accounted
for on an equity basis after those dates. The discussion and year to year
comparative analysis of costs and expenses that follow have been substantially
impacted. Certain lines on the consolidated financial statements and certain
notes thereto also have been significantly affected by the formation of these
ventures. Production costs in 1997 totaled $962 million, down $236 million from
1996 and $162 million from 1995. However, after restating 1996 costs as though
such ventures had been in existence in 1996, production costs increased due to a
higher activity level of workovers.

Shell Oil exploration expenses of $337 million in 1997, including dry hole
costs of $146 million, increased $10 million over 1996 and $91 million over
1995. Exclusive of dry holes, 1997 exploration costs increased $3 million over
1996 and $41 million over 1995. The higher level of exploration costs, in both
1997 and 1996 over 1995, reflects a more aggressive spending program in the Gulf
of Mexico which more than offset the reduction in spending due to the formation
of the ventures.

Depreciation, depletion and amortization costs were $1,147 million in 1997,
down $228 million from 1996, and $386 million from 1995. 1995 numbers include
the impact from the adoption of Statement of Financial Accounting Standards No.
121. After adjusting for the effects of the ventures formation in the 1997 to
1996 comparison, depreciation, depletion and amortization costs were still lower
in 1997 due primarily to lower rates, offset in part by higher production.

Property sales resulted in gains totaling $36 million in 1997, $48 million
in 1996, and $51 million in 1995.

New Developments -- Operations began in Altura in March 1997. This new
alliance combined Shell Oil's producing assets in the Permian Basin of West
Texas/Southeast New Mexico with those of Amoco Corporation (Amoco). This new
limited partnership is owned approximately 36 percent by Shell Oil and
approximately 64 percent by Amoco. The aim of this new venture is to create an
entrepreneurial environment that will support the quest for cost leadership in
the basin. In June 1997, operations began in Aera, which combined Mobil Oil
Corporation (Mobil) California exploration and production operations with those
of
25
<PAGE> 26

CalResources, a subsidiary of Shell Oil; the new venture is owned approximately
59 percent by Shell Oil and 41 percent by Mobil. Aera also offers opportunities
to reduce costs, as well as to leverage complementary skills and competencies.
Both Aera and Altura are accounted for by Shell Oil using the equity method of
accounting.

In late 1997, Shell Oil and Tejas Gas Corporation ("Tejas") entered into a
merger agreement pursuant to which Shell Oil would acquire all of the
outstanding common stock of Tejas for $61.50 per share which, on a fully diluted
common stock basis, would represent an aggregate common stock purchase price of
approximately $1.45 billion. In addition, Shell Oil would assume Tejas' balance
sheet debt and preferred stock of approximately $900 million. The transaction
was completed in early 1998. Prior to this transaction, Shell Oil, Tejas and
Shell Canada jointly owned Coral Energy, L.P. ("Coral"), a gas marketing
enterprise, with an ownership interest of 44 percent, 44 percent and 12 percent,
respectively. Shell Oil accounted for its investment in Coral using the equity
method of accounting. With the completion of the Tejas acquisition, Shell Oil
will fully consolidate its now 88 percent ownership interest in Coral.

Development activity in our Deepwater operations in 1997 continued at a
brisk pace. Debottlenecking and expansion of production facilities at the Auger
Field have increased crude oil production capacity by over 40 percent to
approximately 100,000 barrels per day; natural gas production capacity doubled
to approximately 300 million cubic feet per day. First production was achieved
at Ram/Powell (Shell Oil interest 38%), from a tension leg platform (TLP),
located in 3,220 feet of water. Peak production from Ram/Powell is expected to
reach more than 60,000 barrels of oil and more than 200 million cubic feet of
gas per day. Plans to increase the production capacity for natural gas at
Ram/Powell to 260 million cubic feet per day are being evaluated. Shell Oil's
Mensa field (Shell Oil interest 100%), developed using subsea technology, began
production in 1997. Peak production from Mensa, located in 5,300 feet of water,
is expected to reach 300 million cubic feet of natural gas per day, through a
68-mile flowline connected to a conventional platform in shallower water. The
Troika field (Shell Oil interest 33 1/3%), a 5 well subsea development located
in 2,800 feet of water, began production in late 1997. Troika is connected via
flowline to Shell Oil's Bullwinkle platform, some 14 miles away. Peak gross
production rates are forecast at 80,000 barrels of oil and 140 million cubic
feet of natural gas per day.

Construction work continued on the TLP for the Ursa project, (Shell Oil
interest, 45.4%). Ursa will be developed in a platform world record water depth
of approximately 4,000 feet, with TLP installation and first production planned
by mid-1999. Peak production is expected to reach 150,000 barrels of oil and 400
million cubic feet of natural gas per day.

Capital Expenditures -- Capital spending for Oil and Gas Exploration and
Production was $2,182 million in 1997, compared with $2,053 million in 1996 and
$1,395 million in 1995. The increase in 1997 over both 1996 and 1995 was due to
higher spending for production drilling and development in the Gulf of Mexico
and for gas pipeline facilities to accommodate deepwater production. Significant
resources were also expended on Shell Oil's growing investment in the midstream
business, including the acquisition of Corpus Christi Natural Gas. The higher
level of capital spending is expected to continue in the years to come as Shell
Oil develops the deepwater Gulf of Mexico projects. In 1998, capital spending
for the midstream will also increase as the result of the Tejas acquisition,
including the acquisition of Tejas' 44 percent ownership interest in Coral.

Hydrocarbon Reserves -- In 1997, reserve additions, mainly from
discoveries, extensions, improved recovery techniques and revisions to previous
reserve estimates, were 357 million barrels on a crude oil equivalent basis.
These additions were more than offset by producing property sales of 44 million
equivalent barrels, and by production during the year. In 1996 and 1995,
reserves also declined. Reserve numbers include a prorata share based on Shell's
ownership interest of equity company reserves.

Net wells drilled in 1997 totaled 162, down 355 from 1996 and 135 from
1995.

26
<PAGE> 27

OIL PRODUCTS

<TABLE>
<CAPTION>
INCOME HIGHLIGHTS 1997 1996 1995
----------------- ---- ---- ----
<S> <C> <C> <C>
Income from Ongoing Operations.............................. $433 $386 $457
Other Charges*.............................................. 9 (3) 17
---- ---- ----
Segment Net Income.......................................... 442 383 474
Special Items (includes "Other Charges").................... 84 (9) 177
---- ---- ----
Adjusted Net Income......................................... $358 $392 $297
==== ==== ====
</TABLE>

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

* Amounts associated with major product classifications for which there has been
no revenue stream or investment in the last five years.

Oil Products income from ongoing operations in 1997 was $433 million,
compared with $386 million in 1996 and $457 million in 1995. Segment net income
in 1997 was $442 million, compared with $383 million in 1996 and $474 million in
1995.

Adjusted net income, which excludes special items, was $358 million in
1997, a decrease of $34 million from 1996, but $61 million higher than 1995.
Results were lower in 1997 compared to 1996 due to higher operating and selling
costs which more than offset the benefit from improved refined product margins.
In 1997, margins improved during the second half of the year due to lower crude
oil prices and purchase costs. Fixed operating costs increased significantly in
1997, primarily due to marketing "brand" initiatives, and from costs related to
work towards the formation of new refining and marketing alliances. Sales of
branded automotive gasoline improved about 3 percent.

Special items in 1997 benefited segment income $84 million, the result of a
tax adjustment and gains on asset sales. In 1996, special items reduced segment
net income by $9 million due to $20 million in charges against property damage
and litigation reserves, offset in part by a $10 million gain on a property
sale. Special items improved segment net income in 1995 by $177 million,
primarily due to a gain of $166 million from the partial liquidation of crude
oil and refined product inventories valued on a last-in, first-out (LIFO) basis.

Cash flow provided by operating activities was $743 million in 1997, down
$19 million from 1996 and $387 million from 1995. Capital expenditures in 1997
of $554 million declined $172 million from 1996 and were $511 million lower than
1995. Expenditures were lower in 1997 than planned, due mainly to reduced
spending in the transportation and retail marketing areas. In 1995, spending
included the coker and "clean fuels" project at the Martinez, California
refinery, completed in 1996.

Refined Product Sales Volumes -- Total 1997 refined product sales volumes
were 1,509,000 barrels per day, up from 1,421,000 in 1996 and 1,348,000 in 1995.
Automotive gasoline sales volumes in 1997 increased over 1996 and 1995. Volumes
sold through branded service stations in 1997 were up about 3 percent over both
1996 and 1995.

Jet fuel sales increased compared with 1996 and 1995, up 6 percent and 17
percent, respectively. Other light products, including kerosene, heating and
diesel oil sales increased 34 percent over 1996 and 127 percent over 1995,
reflecting in part the benefits derived from the new coking units at both
Martinez and Deer Park. Conversely, residuals sales volumes were down 3 percent
from 1996 and 29 percent from 1995.

Overall, lubricants sales volumes in 1997 were flat compared to 1996 and
down 5 percent compared to 1995.

Refined Product Prices -- Average refined product selling prices dropped 2
cents per gallon in 1997 from 1996, but increased 6 cents per gallon over 1995.
Average automotive gasoline selling prices decreased 2 cents per gallon from
1996, but were up 7 cents per gallon over 1995.

New Developments -- In January 1998, the formation of the Shell Oil and
Texaco Inc. (Texaco) western United States downstream alliance, Equilon
Enterprises, LLC, was announced. This new equity company has begun operations
and combines major elements of the two companies' western and midwestern U.S.
refining

27
<PAGE> 28

and marketing businesses and their nationwide trading, transportation and
lubricants businesses. Shell Oil owns 56 percent of the venture and Texaco 44
percent.

A joint venture, expected to be formed in early 1998, will combine Shell
Oil's and Star Enterprise's eastern and Gulf Coast U.S. refining and marketing
businesses. This venture is planned to be owned 35 percent by Shell Oil, 32.5
percent by Texaco and 32.5 percent by Saudi Refining, Inc. (such ownership to be
subject to adjustment in the future based on the performance of the assets.)

These ventures will have the exclusive rights to use the Shell and Texaco
brands on refined oil products sold in their respective authorized area of
operations.

Incidental to the formation of these ventures, Shell Oil has been required
to divest its Anacortes refinery which is now being independently operated and
held for sale in 1998. Shell Oil's 50/50 joint venture with Petroleos Mexicanos
(Pemex) at the Deer Park, Texas refinery is not a part of these ventures.

CHEMICAL PRODUCTS

<TABLE>
<CAPTION>
INCOME HIGHLIGHTS 1997 1996 1995
----------------- ---- ----- ----
<S> <C> <C> <C>
Income from Ongoing Operations.............................. $474 $ 253 $704
Other Charges*.............................................. (17) (10) (10)
---- ----- ----
Segment Net Income.......................................... 457 243 694
Special Items (includes "Other Charges").................... (9) (108) (31)
---- ----- ----
Adjusted Net Income......................................... $466 $ 351 $725
==== ===== ====
</TABLE>

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

* Amounts associated with major product classifications for which there has been
no revenue stream or investment in the last five years.

Chemical Products income from ongoing operations in 1997 was $474 million,
compared with $253 million in 1996 and a record $704 million in 1995. Segment
net income in 1997 was $457 million, compared with $243 million in 1996 and $694
million in 1995.

Adjusted net income, which excludes special items, was $466 million in
1997, an increase of $115 million over 1996, but down $259 million from 1995.

The improvement in adjusted net income in 1997 over 1996 was primarily
attributable to increased sales volumes of intermediates and polymers, improved
margins for primary chemicals, and lower costs related to litigation, which more
than offset the effects of production losses at Deer Park. The 1995 record year
was due to strong margins across most product lines.

Special items reduced segment net income $9 million in 1997, $108 million
in 1996, and $31 million in 1995. Special items in 1997 consisted primarily of
charges related to environmental cleanup costs. In 1996, charges against income
totaled $167 million, including additional provisions for product liability and
an asset write-off. Partially offsetting these charges were favorable insurance
recoveries and prior-period tax adjustments. In 1995, special items reduced
income by $31 million due to $22 million in charges related to environmental
provisions, $5 million for asset write-offs, and a $4 million dispute
settlement.

Cash provided by operating activities in 1997 was $554 million, compared
with $729 million in 1996 and $952 million in 1995.

Results at Sadaf, our 50 percent owned Saudi Arabian petrochemical venture,
improved slightly in 1997 over 1996, but were significantly below 1995. Improved
Sadaf earnings in 1997 were due to higher sales volumes. During the first
quarter of 1997, production began in the completed expanded facilities for the
manufacture of ethylene dichloride and caustic soda, while late in 1997, the new
MTBE plant began continuous operations.

28
<PAGE> 29

Total chemical sales volumes in 1997 improved 2 percent over 1996 and 4
percent over 1995, reflecting higher sales of intermediates and polymers.

Capital spending for Chemical Products was $348 million in 1997, compared
with $582 million in 1996 and $422 million in 1995. Capital spending declined in
1997 compared with 1996 primarily due to the deferral of selected projects into
1998. 1997 capital spending included Shell Oil's first chemical plant outside
the United States in Altamira, Mexico and investments in facilities planned to
be on stream in 1999 to develop two new core businesses, Corterra(R) Polymers
and Carilon(R) Polymers.

In June 1997, an explosion and fire occurred in an olefins unit at our Deer
Park Chemical Plant in Texas. Although production volumes were reduced during
the second half of the year, the majority of our customers' olefins needs were
met. Production resumed during February 1998.

OTHER SEGMENT

<TABLE>
<CAPTION>
INCOME HIGHLIGHTS 1997 1996 1995
----------------- ---- ---- ----
<S> <C> <C> <C>
Segment Net Loss............................................ $(14) $(29) $(78)
Special Items............................................... -- (4) (74)
---- ---- ----
Adjusted Net Loss........................................... $(14) $(25) $ (4)
==== ==== ====
</TABLE>

The Other operating segment incurred a net loss of $14 million in 1997,
compared with net losses of $29 million in 1996 and $78 million in 1995. In
1997, the loss was attributable to new business venture costs and losses
incurred on real estate properties held for sale. In 1996, the loss was mainly
due to settlement costs associated with an exited business. The loss in 1995 was
mainly due to special items, which included an $84 million write-down of real
estate property held for sale, and a $15 million charge related to the adoption
of Statement of Financial Accounting Standards No. 121, partially offset by a
tax benefit totaling $25 million.

NONALLOCATED CORPORATE COSTS

<TABLE>
<CAPTION>
INCOME HIGHLIGHTS 1997 1996 1995
----------------- ----- ----- -----
<S> <C> <C> <C>
Nonallocated Costs......................................... $(159) $ 75 $(191)
Special Items.............................................. 43 245 (11)
----- ----- -----
Adjusted Nonallocated Costs................................ $(202) $(170) $(180)
===== ===== =====
</TABLE>

Corporate items not allocated to the operating segments reduced net income
$159 million in 1997, benefited net income $75 million for the year 1996 and
reduced net income $191 million in 1995.

Special items in 1997 benefited $50 million from a prior year tax
adjustment, offset in part by a loss of $7 million on an asset sale. In 1996,
special items included gains from insurance recoveries and the benefit from
prior-year tax adjustments. In 1995, special items included asset write-offs of
$34 million, partially offset by a gain from an insurance settlement. Excluding
these effects, corporate costs, primarily related to financing, increased in
1997 compared to 1996 due primarily to higher interest expense resulting from a
higher average debt level.

CAPITAL RESOURCES AND LIQUIDITY

Cash provided by operating activities continued to be the primary source of
funding for Shell Oil's capital investment program, dividends and other needs.
In 1997, cash provided by operating activities totaled $3,321 million, down $803
million from 1996, but exceeded cash used for investing activities in 1997 by
$482 million. Similarly, cash provided by operating activities in 1996 totaled
$4,124 million and exceeded cash used for investing activities by $1,354
million. In 1995, cash provided by operating activities totaled $3,473 million
and exceeded investing activities by $790 million. Total debt in 1997 increased
$912 million from 1996 to $4,124 million, with the debt-to-total-capital ratio
increasing to 21.7 percent. In addition, cash dividends increased to $1,600
million in 1997, compared with $1,500 million in 1996 and $1,400 million in
1995.

29
<PAGE> 30

Cash Provided by Operating Activities -- In 1997, cash provided by
operating activities amounted to $3,321 million, compared with $4,124 million in
1996 and $3,473 million in 1995. The decline in cash provided by operating
activities in 1997 from both 1996 and 1995 was due largely to higher working
capital requirements, including inventories.

Cash Used for Investing Activities -- The major use of cash flows from
operating activities was for capital expenditures, which amounted to $3,131
million in 1997, $3,414 million in 1996, and $2,957 million in 1995. Proceeds
from property sales in 1997 totaled $169 million and in 1996 totaled $743
million. The increase in net cash used for investing activities in 1997 over
1996 was primarily due to lower proceeds from asset sales.

Debt Obligations -- At year-end 1997, Shell Oil had increased its total
debt by $912 million, compared with a decrease of $39 million in 1996 and an
increase of $256 million in 1995. Shell Oil's ratio of total-debt-
to-total-capital was 21.7 percent at the end of 1997, compared with 18.3 percent
at the end of 1996 and 19.0 percent at the end of 1995. Debt is expected to rise
in 1998, the result of the acquisition of Tejas. In addition to the purchase of
the common stock of Tejas valued at approximately $1.45 billion, balance sheet
debt and preferred stock of approximately $900 million will be assumed. Of the
total Shell Oil debt outstanding at year end 1997, $1,993 million or 48 percent
was borrowed on commercial terms from affiliated companies.

Capital Spending -- Shell Oil's capital spending of $3,131 million in 1997
was about $300 million lower than planned at the beginning of the year, due to
lower project expenditures in oil and chemical products. In 1997, exploration
and production activities accounted for 70 percent of total capital
expenditures, compared with 61 percent in 1996 and 47 percent in 1995. These
outlays were primarily in the United States. Oil and Chemical Products accounted
for 29 percent of total spending in 1997, compared with 38 percent in 1996 and
50 percent in 1995.

Capital and exploratory expenditures of $5.3 billion are planned for 1998,
which includes approximately $1.45 billion for the acquisition of Tejas. About
$2.7 billion is allocated for exploration and production activities, equivalent
to the 1997 level. Increases in Gulf of Mexico deepwater activity and new Tejas
spending are being partially offset by reduced spending in the onshore and
shallow regions of the Gulf. Oil Products expenditures are budgeted for $600
million in 1998, while Chemical Products expenditures are expected to be about
$600 million, up $200 million over 1997 levels.

Dividends -- Cash dividends were $1,600 million in 1997, increasing $100
million over 1996 and $200 million over 1995.

Liquidity -- Internally generated cash, access to outside financing based
on strong credit ratings, and prudent management of working capital are the
essential components of Shell Oil's liquidity position. Cash and cash
equivalents amounted to $342 million at year-end 1997, a decrease of $51 million
from 1996 and $79 million from 1995.

Shell Oil's strategy continues to rely mainly on internally generated cash
to finance routine operating requirements and capital spending. Short-term
borrowings will generally be used to fund interim working capital needs and
unusual requirements. As of December 31, 1997, unused revolving credit
agreements of $559 million were available for general corporate purposes,
including support of commercial notes. The Company plans to manage the level of
backup facilities consistent with its cash and cash equivalents balances. As of
the end of 1997, $500 million of a $1.0 billion shelf registration remained,
allowing future flexibility in the public debt markets.

While operating working capital increased in 1997 compared to 1996, total
working capital at the end of 1997, including financing related items, decreased
$964 million due primarily to an increase in short term debt of $1,121 million
over 1996. Shell Oil's liquidity position is considerably stronger than
indicated by these working capital levels because of relatively lower historical
costs assigned to inventories under LIFO accounting procedures. The year-end
inventory values included in working capital were below their current costs by
$519 million at the end of 1997, $978 million in 1996 and $672 million in 1995.

Disclosures Concerning Market Risk -- As further discussed in Note 10 of
the Notes to Consolidated Financial Statements, from time to time Shell Oil
utilizes financial derivatives with the intention of

30
<PAGE> 31

minimizing its borrowing costs and reducing price volatility risks on certain
commodities -- primarily the products Shell Oil sells (crude oil, natural gas,
refined products and certain chemical products) and, to a lesser extent, the raw
materials which Shell Oil purchases. Shell Oil also enters into a relatively
small number of derivatives transactions for trading purposes. All derivative
products are straightforward futures, options and swaps, with no leverage or
multiplier features.

The Exploration and Production operating segment is a producer of crude oil
and thus benefits when market prices rise but is harmed when such prices
decline. This segment also produces natural gas and natural gas liquids
products, which are subject to similar variations in price and which produce
similar impacts.

During 1997, the Oil Products operating segment was a consumer of crude
oil, and it refined quantities that exceeded those produced by the Exploration
and Production segment. Thus Shell Oil was a net purchaser of crude oil. The Oil
Products segment both buys and sells refined petroleum products, the prices of
which are also subject to market variations. This segment was a net seller of
such products*. The Chemical Products operating segment also produces and sells
basic chemical products, the prices of which are subject to market variations.

Shell Oil accepts the market price risk on most of the volumes which it
sells. However, Shell Oil has employed commodity derivative instruments in the
form of futures contracts, swaps and options to, in substance, either fix the
ultimate cost of certain future purchases of crude oil and refined products or
the ultimate sales prices of certain future sales of crude oil and refined
products. These derivative instruments are generally for a term of less than one
year and cover volumes substantially below anticipated purchases or sales.

During 1997, the Oil Products segment carried out selected commodity trades
involving crude oil and refined petroleum products in a trading-for-profit mode.
Also during 1997, a Shell Oil subsidiary was established to offer price risk
management products to the chemical industry.

Shell Oil continually evaluates the relative costs and benefits of
available derivative products in the context of its business operations and
existing market conditions, in search of opportunities to improve business
results by prudent use of such risk management products. During 1997, Shell Oil
had a gain of $32 million in connection with its overall commodity derivatives
transactions.

Shell Oil uses a "Value-at-Risk" (VAR) model to determine the maximum
potential one-day loss in the fair value of its commodity derivative financial
instrument positions. The quantification of market risk using VAR provides a
consistent measure of risk across diverse energy markets and products. The VAR
model estimates were made using a variance/co-variance model and assuming normal
market conditions and a 95 percent confidence level for a one-day holding
period. Shell Oil's computations are based on the interrelationship between
movements in underlying commodity prices and exposure to particular price
indices. The value-at-risk on Shell Oil commodity derivative financial
instrument positions was $952 thousand at December 31, 1997.

Shell Oil has effectively converted its long-term debt and certain other
long-term obligations which require payment of fixed rates of interest to
floating rate obligations through interest rate swap transactions. These
transactions require Shell Oil to pay floating rates of interest on notional
amounts of principal to counterparties. The counterparties, in turn, pay to
Shell Oil fixed rates of interest on the same notional amounts of principal. As
a result of these transactions, Shell Oil's earnings and cash flows would be
negatively impacted should short-term market interest rates increase. Decreases
in short-term market rates would result in an improvement in earnings and cash
flow to the extent the fixed rates received exceeded the commercial
paper-related rates paid and reduced the cost of underlying debt. In addition,
decreases in long-term market interest rates would have the effect of increasing
the fair value of Shell Oil's long-term debt and other long-term, fixed rate
obligations. During 1997 the combined effect of these transactions was a pre-tax
decrease in

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

* See disclosure in Oil Products, New Developments, page 27 of this Management's
Discussion and Analysis regarding the formation of Equilon and the planned
formation of another joint venture by mid-year 1998.

31
<PAGE> 32

interest expense of $12.4 million. The following interest rate table shows the
Shell Oil swaps that were in effect and their fair value as of December 31,
1997:

INTEREST RATE SWAPS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
"NOTIONAL"
PRINCIPAL FAIR VALUE
(MILLIONS INTEREST UNDERLYING INTEREST (MILLIONS OF
OF DOLLARS) MATURITY PAID OBLIGATIONS RECEIVED DOLLARS)
----------- -------- -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
125 1998 CP* 6.95% bonds 6.32% $ 0.6
125 1998 CP* 6.95% bonds 6.29% 0.5
235 1999 CP* Preferred stock (6.1%)** 6.08% 0.8
250 1999 CP* 6.625% bonds 6.1% 1.5
96 2000 CP* Production payment (6.45%)** 5.9% 0.1
100 2001 CP* Fixed coupon preferred stock 6.6% 2.2
250 2002 CP* 6.7% bonds 6.3% 3.7
184 2008 CP* Obligation of investee (6.47%)** 6.4% 4.0
151 2013 CP* Obligation of investee (6.64%)** 6.6% 4.9
185 2015 CP* Building lease (9.8%)** 7.1% 13.7
85 2017 CP* Building lease (8.4%)** 7.1% 8.8
---- -----
Total $1,786 $40.8
==== =====
</TABLE>

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

* Pay rates are negotiated based on commercial paper rates; the weighted
average rate paid was 5.5%.
** Imputed interest rates.

In January 1998, Shell Oil concluded its acquisition of Tejas. This
transaction also resulted in the acquisition of a greater ownership interest in
Coral. Tejas' and Coral's results of operations are subject to certain market
risk factors such as the price of natural gas, changes in particular price
indices and basis exposure. Each company has risk management policies and
procedures in place to minimize exposure to market risk which include the use of
commodity derivatives financial instrument positions. Both companies take
positions in natural gas futures, swaps and options for both trading and
not-for-trading purposes, and Coral has a small crude oil derivatives position.
Coral enters into foreign currency transactions to hedge its exposure on certain
Canadian natural gas transactions; Tejas is a party to interest rate swaps
entered into to hedge its interest rate exposure on its outstanding long-term
indebtedness. These derivative products are straightforward futures, options and
swaps and do not contain leverage or multiplier features.

While the accounts of Tejas and Coral were not consolidated in the
financial statements of Shell Oil as of December 31, 1997, Shell Oil has
obtained from such companies necessary information to make disclosure regarding
the value-at-risk of their positions at December 31, 1997. In the aggregate,
such positions are not material to Shell Oil. Commodity contracts and positions
of both Tejas and Coral at December 31, 1997 had a value-at-risk of $14.4
million; Tejas' interest rate swap position at December 31, 1997 had a value-
at-risk of $1.4 million and foreign currency contracts and positions of Coral at
December 31, 1997 had a value-at-risk of $3 million. The value-at-risk data for
both companies was compiled using a methodology which is consistent with Shell
Oil's methodology as described above.

32
<PAGE> 33

On a pro forma basis, assuming the acquisition of Tejas had occurred at
January 1, 1997, the estimated maximum potential one-day loss in fair value,
calculated using the Shell Oil VAR model was as set forth in the following
table:

PRO FORMA VALUE-AT-RISK
AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
VAR
CATEGORY (MILLIONS OF DOLLARS)
-------- ---------------------
<S> <C>
Commodity Derivatives....................................... $15.3
Interest Rate Swaps......................................... 5.4
Foreign Currency Derivatives................................ 3.0
-----
Total............................................. $23.7
=====
</TABLE>

The VAR model is a risk analysis tool and does not purport to represent
actual losses in fair value that may be incurred by Shell Oil.

ENVIRONMENTAL MATTERS

Shell Oil continues to make substantial capital and operating expenditures
relating to the environment. Included within such expenditures are costs of
compliance with federal, state and local laws, regulations and permit
requirements concerning reduction of releases into air and water, disposal and
handling of wastes, and corrective action and other cleanup obligations under
law and by contract at operating locations, at previously owned or operated
properties and at off-premises sites.

Discussions are ongoing with governmental agencies as to the scope and
magnitude of Shell Oil's present closure and post-closure Resource Conservation
and Recovery Act (RCRA) and similar state or local remediation obligations at
operating locations. While Shell Oil anticipates that those discussions may
result in corrective action being required at its manufacturing locations, Shell
Oil does not currently expect that the costs of taking corrective action over
time will be material to Shell Oil's consolidated financial position or
operating income in any year. RCRA also imposes obligations with respect to
closure of a RCRA covered facility (i.e., a facility at which certain wastes are
treated, stored or disposed of) and in certain cases for a 30-year post-closure
period. In 1997, pursuant to the requirements of certain federal and state laws
which determine how such calculations are made, Shell Oil confirmed its ability
to pay $192 million ($165 million Oil Products, $19 million Chemical Products)
for RCRA-related closure, post-closure and liability costs ($8 million). While
the ultimate timing and amount of closure and post-closure costs as required by
RCRA cannot be precisely estimated at this time, management does not currently
anticipate that they will materially adversely affect Shell Oil's consolidated
financial position or operating income in any year.

Shell Oil has established a reserve calculated to provide for RCRA closure
and post-closure costs over the estimated useful life of its covered facilities.
Shell Oil also recognizes certain abandonment and restoration obligations in
connection with its oil and gas operations. Reserves are established and built
over the estimated life of production with the intention to provide for the
estimated costs of carrying out required statutory and lease obligations to plug
and abandon wells and otherwise restore property by the time oil and gas
production ceases.

Shell Oil has received allegations or claims under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) or similar state
statutes that it is involved at 235 sites. Approximately 142 of these sites are
alleged to involve Oil Products operations, 65 Chemical Products operations and
28 E&P operations. In a number of instances more than one business is alleged to
be involved. As of December 1997, discussions or activities concerning 81 of
these sites were active involving Shell Oil, other potentially responsible
parties and relevant agencies or claimants; at a number of these sites, matters
remain in the early investigation stages. Ninety-three sites were considered
inactive, meaning that no discussions or activity were pending or had occurred
for more than one year and 61 sites were considered settled. In 1996 Shell Oil
reported 228 such sites, 71 of which were active, 94 inactive and 63 settled.

33
<PAGE> 34

The complexities of CERCLA regulations, particularly in relation to joint
and several liability and multiple cleanup options, as well as the incomplete
factual data at some sites, make it impossible to predict with certainty the
total cleanup costs Shell Oil will incur. However, Shell Oil believes the
following to be true: at the majority of the above referenced sites, Shell Oil
should have responsibility for only a small percentage share of the total
cleanup costs (and other viable potentially responsible parties (PRPs) have
already been identified to lessen the potential burden of joint and several
liability at such sites); the CERCLA sites will be cleaned up over time and not
simultaneously; and, basis its current knowledge, Shell Oil has established
reserves for such sites reflecting Shell Oil's share of the probable cleanup
costs. Changes to reserves are recorded as new information enables Shell Oil to
better estimate the cost of cleanup at these sites. For the past two years,
Shell Oil expenses in connection with CERCLA sites (including additions to
reserves) have not been material and, while operating income could be
significantly adversely affected in a particular period based on developments
not currently anticipated, Shell Oil does not currently believe costs related to
CERCLA cleanup will materially adversely affect Shell Oil's financial position.

While certain environmental expenditures are discrete and readily
identifiable, others must be reasonably estimated or allocated based on
technical and financial judgments as developed over time, affecting comparisons
in certain years. All estimates are stated on a before tax basis. Consistent
with the preceding, Shell Oil estimates that environmental capital expenditures
in 1997 were about $140 million ($95 million Oil Products, $20 million Chemical
Products and $25 million Exploration & Production), about $15 million below 1996
as certain air related expenditures were completed. 1996 total expenditures were
$155 million (Oil Products $108 million; Chemical Products $19 million and
Exploration & Production $28 million). Environmental capital expenditures are
expected to be about $150 million in 1998 and $100 million per year over the
last two years of the decade, attributable primarily to Clean Air Act
regulations relating to control of conventional and toxic emissions. Shell Oil's
operating, maintenance and administrative costs related to environmental
protection and remediation of waste disposal sites were approximately $789
million in 1997 (including a pro rata share based on ownership percentage of
such costs incurred by equity companies); (Oil Product's costs were $588
million; Chemical Products' $133 million and Exploration & Production's $68
million). Total 1996 costs (stated on the same basis) were $765 million (Oil
Products' costs were $590 million; Chemical Product's $110 million and
Exploration & Production's $65 million). These costs do not include amounts
expended or reserved for restoration and abandonment of oil and gas properties.
Future capital and expense numbers will reflect not only changes in known
regulations and remedies (to improve efficiency and cost effectiveness) but will
also reflect that significant assets which were formerly a part of Shell Oil
have become or will become assets of joint ventures accounted for as equity
companies.

The federal Clean Air Act and related state laws such as the California air
emission standards, the federal Oil Pollution Act, reauthorization of RCRA and
CERCLA, underground produced water injection regulations under the Safe Drinking
Water Act, and numerous related state and local laws affecting all aspects of
the environment are expected to have a pronounced effect on all areas of Shell
Oil and its equity companies' operations over the next decade as we and those
with whom we do business strive to adapt to evolving requirements. Shell Oil
intends to continue its efforts to implement process redesign and operating
efficiencies to comply with these laws in the most efficient and cost-effective
manner. Shell Oil is unable to predict with certainty the effect that compliance
with above described environmental requirements, particularly laws and
regulations not yet finalized, may have upon its competitive position or future
earnings. However, while operating income may be materially adversely affected
in particular periods as the result of environmental expenses, based on the
facts, law and technologies in existence as of this date, including a belief
that all major competitors will incur comparably significant costs to comply
with these laws, Shell Oil believes that it can comply fully without material
adverse impact on its financial position.

OTHER MATTERS

The potential for year 2000 problems has been identified and a managed
program initiated with the aim of assessing and containing the impact of such
problems on Shell Oil operations and ensuring business continuity. No material
concerns have yet surfaced as the result of this ongoing program.

34
<PAGE> 35

In addition to economic conditions and other matters discussed above
affecting Shell Oil, the operations, earnings and financial condition of Shell
Oil may be affected by the matters discussed in Note 16 of the Notes to
Consolidated Financial Statements and Item 3. Legal Proceedings (pages 20-22),
as well as by political development, litigation, and legislation, regulation and
other actions taken by federal, state, local governmental entities, and by
governments outside the United States.

ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

Shell Oil faces market risk from commodity price variations, particularly
in the products it sells, but also in the raw materials it purchases. It also
incurs certain market risks related to interest rate variations.

Shell Oil has attempted to hedge a portion of these risks by entering into
certain derivative instruments "for purposes other than trading." On a limited
basis, Shell Oil has also entered into derivative contracts on a "for trading"
basis. For further disclosure, please see additional discussion in Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Disclosures Concerning Market Risk included in Item 7 (pages
30-33), and Note 10 of the Notes to Consolidated Financial Statements included
in Item 14a.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Consolidated Financial Statements, the Notes to Consolidated Financial
Statements and the Report of Independent Accountants are included in Item 14a of
this report. The Quarterly Results of Operations are reported in Note 20 of the
Notes to Consolidated Financial Statements included in Item 14a. Information on
Oil and Gas producing activities is included in Items 1 and 2.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

35
<PAGE> 36

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Not applicable.

ITEM 11. EXECUTIVE COMPENSATION.

Not applicable.

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

Not applicable.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Not applicable.

36
<PAGE> 37

PART IV

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

a. CERTAIN DOCUMENTS FILED AS PART OF THIS REPORT

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 38
Consolidated Statement of Income and Earnings Reinvested for
the years 1997, 1996 and 1995............................. 39
Consolidated Balance Sheet at December 31, 1997 and 1996.... 40
Consolidated Statement of Cash Flows for the years 1997,
1996 and 1995............................................. 41
Notes to Consolidated Financial Statements.................. 42
</TABLE>

b. REPORTS ON FORM 8-K

None. However, on January 30, 1998, the Company filed a report on Form 8-K
regarding its acquisition and disposition of assets incidental to the formation
of Equilon Enterprises LLC on January 15, 1998. As an attachment to such 8-K,
the Company included the Asset Transfer and Liability Assumption Agreement dated
as of January 15, 1998 setting forth the terms of such acquisition and
disposition.

c. EXHIBITS*

3. Copy of Restated Articles of Incorporation of the Registrant
effective December 8, 1986 and Copy of By-Laws of the Registrant, as
amended through December 8, 1986, are incorporated by reference to
Item 14c of the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.

4. The Registrant will provide to the Securities and Exchange
Commission, upon request, copies of instruments defining the rights of
holders of long-term debt listed in Note 9 of the Notes to
Consolidated Financial Statements.

10. Material Contracts:

(i) Copy of letter agreement dated February 5, 1998 between the
Company and Shell Internationale Research Maatschappij, B.V.
continuing for the calendar year 1998 the Agreement for Research
Services dated January 1, 1960, as amended.

(ii) Composite copy of the Agreement for Research Services dated
January 1, 1960, as amended through August 19, 1982 is incorporated by
reference to Item 14 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1993.

21. Subsidiaries of the Registrant

23. Consent of Independent Accountants

24. Powers of Attorney

27. Financial Data Schedule
- ------------

* Copies of Exhibits may be obtained for 25 cents per page, prepaid, by writing
to the Corporate Secretary.

d. FINANCIAL STATEMENT SCHEDULES

The schedules filed by the Company are listed in Item 14a above. No
separate financial statements are required to be included because reporting
tests are not met. Certain schedules have been omitted because the required
information is shown in the financial statements or notes thereto.

37
<PAGE> 38

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND
SHAREHOLDER OF SHELL OIL COMPANY

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14a on page 37 present fairly, in all material respects,
the financial position of Shell Oil Company and its subsidiaries at December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for the impairment of long-lived assets in 1995
to comply with the provisions of Statement of Financial Accounting Standards No.
121.

PRICE WATERHOUSE LLP
Houston, Texas
February 6, 1998

38
<PAGE> 39

SHELL OIL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME AND EARNINGS REINVESTED
(Millions of dollars)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
REVENUES
Sales and other operating revenue.................... $32,173 $32,450 $27,668
Less: Consumer excise and sales taxes................ 3,905 3,627 3,370
------- ------- -------
28,268 28,823 24,298
Equity in income of affiliates....................... 533 193 162
Interest and other income............................ 158 135 190
------- ------- -------
Total........................................... 28,959 29,151 24,650
------- ------- -------

COSTS AND EXPENSES
Purchased raw materials and products................. 18,440 18,355 14,225
Operating expenses................................... 3,560 3,773 3,826
Selling, general and administrative expenses......... 974 1,012 1,203
Exploration, including exploratory dry holes......... 332 319 238
Research expenses.................................... 164 136 124
Depreciation, depletion, amortization and
retirements........................................ 1,895 2,066 2,303
Interest and discount amortization................... 205 203 216
Operating taxes...................................... 362 452 483
------- ------- -------
Total........................................... 25,932 26,316 22,618
------- ------- -------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST.......... $ 3,027 $ 2,835 $ 2,032
Federal and other income taxes....................... 860 763 468
Minority Interest in income of subsidiaries.......... 63 51 44
------- ------- -------
NET INCOME................................................ $ 2,104 $ 2,021 $ 1,520
======= ======= =======

EARNINGS REINVESTED
Balance at beginning of year......................... $12,168 $11,647 $11,527
Net Income........................................... 2,104 2,021 1,520
Dividends -- Cash.................................... (1,600) (1,500) (1,400)
------- ------- -------
Balance at end of year............................. $12,672 $12,168 $11,647
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

39
<PAGE> 40

SHELL OIL COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
(Millions of dollars, except per share amounts)

<TABLE>
<CAPTION>
AS OF DECEMBER 31
---------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................... $ 342 $ 393
Receivables and prepayments, less allowance for
doubtful accounts................................ 3,414 4,076
Owing by related parties.......................... 280 300
Inventories of oils and chemicals................. 974 631
Inventories of materials and supplies............. 218 219
------- -------
Total Current Assets......................... 5,228 5,619
Investments............................................ 6,456 2,018
Long-Term Receivables and Deferred Charges............. 1,150 1,080
Property, Plant and Equipment at cost, less accumulated
depreciation, depletion and amortization.............. 16,767 19,992
------- -------
Total........................................ $29,601 $28,709
======= =======

LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable -- trade......................... $ 2,257 $ 2,568
Other payables and accruals....................... 1,281 1,505
Income, operating and consumer taxes.............. 186 416
Owing to related parties.......................... 303 86
Short-term debt................................... 3,539 2,418
------- -------
Total Current Liabilities.................... 7,566 6,993
Long-Term Debt......................................... 585 794
Deferred Income Taxes.................................. 3,339 3,229
Long-Term Liabilities.................................. 2,154 2,458
Minority Interest...................................... 1,079 861
Shareholder's Equity
Common stock -- 1,000 shares of $10 per share par
value authorized and outstanding................. -- --
Capital in excess of par value.................... 2,206 2,206
Earnings reinvested............................... 12,672 12,168
------- -------
Total Shareholder's Equity................... 14,878 14,374
------- -------
Total........................................ $29,601 $28,709
======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

40
<PAGE> 41

SHELL OIL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................... $ 2,104 $ 2,021 $ 1,520
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, amortization and
retirements................................. 1,895 2,066 2,303
Dividends in excess of (less than) equity
income...................................... (145) (115) (51)
(Increases) decreases in working capital:
Receivables and prepayments.............. 558 (845) (441)
Inventories.............................. (342) (49) (8)
Payables and accruals.................... (548) 461 403
Deferred income taxes......................... 110 388 (296)
Minority interest in income of subsidiaries... 63 51 44
Other non-current items....................... (374) 146 (1)
------- ------- -------
Net Cash Provided by Operating
Activities............................. 3,321 4,124 3,473
------- ------- -------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES
Capital expenditures............................... (3,131) (3,414) (2,957)
Proceeds from property sales and salvage........... 169 743 202
Other investments and advances..................... 123 (99) 72
------- ------- -------
Net Cash Used for Investing Activities... (2,839) (2,770) (2,683)
------- ------- -------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Proceeds from issuance of long-term debt........... 297 387 135
Principal payments on long-term debt............... (505) (293) (276)
Proceeds from sales of redeemable securities
of subsidiaries.................................. 215 111 190
Dividends.......................................... (1,600) (1,500) (1,400)
Dividends to minority interests.................... (60) (50) (37)
Increase (decrease) in short-term obligations...... 1,120 (37) 402
------- ------- -------
Net Cash Used for Financing Activities... (533) (1,382) (986)
------- ------- -------
NET CASH FLOWS
Decrease in Cash and Cash Equivalents.............. $ (51) $ (28) $ (196)
======= ======= =======

CASH AND CASH EQUIVALENTS
Balance at beginning of year....................... $ 393 $ 421 $ 617
Decrease in cash and cash equivalents.............. (51) (28) (196)
------- ------- -------
Balance at end of year................... $ 342 $ 393 $ 421
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

41
<PAGE> 42

SHELL OIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ACCOUNTING POLICIES

Shell Oil Company (the Company) is wholly owned by Shell Petroleum Inc., a
Delaware corporation, whose shares are directly or indirectly owned 60 percent
by Royal Dutch Petroleum Company, The Hague, The Netherlands, and 40 percent by
The "Shell" Transport and Trading Company, p.l.c., London, England.

This summary of the major accounting policies of Shell Oil Company and its
consolidated subsidiaries (Shell Oil) is presented to assist the reader in
evaluating Shell Oil's financial statements and other data contained in this
report.

Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and subsidiaries in which the Company
directly or indirectly owns more than a 50 percent voting interest. Investments
in entities in which the Company has a significant ownership interest, generally
20 to 50 percent, and in entities where the Company has greater than 50 percent
ownership but as a result of contractual agreement or otherwise, does not
exercise control, are accounted for using the equity method. Other investments
are carried at cost. Intercompany accounts and transactions are eliminated.

Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Reclassifications -- Certain 1996 and 1995 amounts have been reclassified
to conform with current year presentation.

Cash Equivalents -- Cash equivalents consist of highly liquid investments
that are readily convertible into cash and have a maturity of three months or
less at date of acquisition.

Inventories -- Inventories of oils and chemicals are valued at the lower of
cost, predominantly on a last-in, first-out (LIFO) basis, or market, and include
certain costs directly related to the production process. Materials and supplies
are carried at average cost or less.

Derivatives

Interest rate swaps (not for trading). Shell Oil has chosen to convert
certain of its fixed rate long-term obligations to variable interest rates by
entering into interest rate swaps. Under these swaps Shell Oil pays to
counterparties variable rates of interest on notional principal amounts (equal
to the principal amounts of Shell Oil's obligations) and the counterparty pays
to Shell Oil fixed rates of interest on those same notional principal amounts.

Shell Oil accounts for interest rate swaps on a current basis as net
decreases or increases in interest expense. Interest expense is reported in
Shell Oil's results of operations as interest and discount amortization.

Commodity price swaps and futures (not for trading). Shell Oil utilizes
commodity price swaps to reduce crude oil, natural gas and refined petroleum
product price risks by entering into price swaps with counterparties and by
purchasing or selling futures on established exchanges. Shell Oil takes both
fixed and variable positions, depending upon anticipated future physical
purchases and sales of these commodities. Open positions are accounted for as
hedges with gains or losses deferred until corresponding physical transactions
occur or until corresponding positions expire or close.

Commodity options (not for trading). Shell Oil enters into both put and
call refined petroleum product, natural gas and crude oil transactions in order
to fix the future cost of acquiring products or the future proceeds to be
derived from selling products. Open options are accounted for as hedges with
gains and losses deferred until corresponding physical transactions occur or
until corresponding positions expire or close. Transaction fees connected with
option contracts are expensed as incurred.

42
<PAGE> 43

Commodity swaps, options and futures (trading). Shell Oil enters into
refined petroleum product, natural gas and crude oil swaps, options and futures
for purposes of earning profits. All such positions are accounted for on a
mark-to-market basis with unrealized gains enhancing income and losses charged
against income in each business period. In addition, a subsidiary of the Company
offers price risk management services to the petrochemical industry through
swaps and options of selected chemical products. The company's open positions
involving such transactions are marked to market at the close of each business
period.

Exploration and Development -- The "successful efforts" method of
accounting is used for oil and gas exploration, development and production
activities.

Property Acquisition Costs -- Costs of acquiring developed or
undeveloped leaseholds including lease bonus, brokerage and other fees are
capitalized. The costs of undeveloped properties which become productive
are transferred to a producing property account.

Exploratory Costs -- Costs of exploratory wells are initially
capitalized, but should the efforts be determined to be unsuccessful, they
are then charged against income. All other exploratory costs are charged to
income as incurred.

Development Costs -- Costs of development wells, including dry holes,
platforms, well equipment and attendant production facilities are
capitalized.

Depreciation, Depletion and Amortization -- Depreciation, depletion and
amortization of the capitalized cost of producing properties, both tangible and
intangible, are provided on a unit of production basis. On a field basis,
developed reserves are used for drilling and development costs, and total proved
reserves are used for producing leasehold costs. Amortization of unproven
leasehold costs from the date of acquisition is based primarily upon experience
in establishing rates in order to fully amortize the cost of those leases that
may be productive over the holding period. Estimated dismantlement, restoration
and abandonment costs and estimated residual salvage values are taken into
account in determining amortization and depreciation provisions.

Other plant and equipment are depreciated on a straight-line basis over
their estimated useful lives. Gains and losses are not recognized for normal
retirements of properties, plant and equipment subject to composite group
amortization or depreciation. Gains or losses from abnormal retirements or sales
are recognized currently in income. Expenditures for maintenance and repairs are
expensed as incurred.

Environmental Costs -- Environmental costs relating to current operations
are expensed or capitalized, as appropriate, depending on whether such costs
provide future economic benefits. Liabilities are recognized when the costs are
considered probable and can be reasonably estimated. Measurement of liabilities
is based on currently enacted laws and regulations, existing technology and
undiscounted, site-specific costs. Environmental liabilities in connection with
properties which are sold or closed are realized upon such sale or closure, to
the extent they are probable and estimable and not previously reserved. In
assessing environmental liabilities, no set-off is made for potential insurance
recoveries. Recognition of any joint and several liability is based upon Shell
Oil's best estimate of its final pro rata share of the liability. All
liabilities are monitored and adjusted regularly as indicated by new facts or
changes in law or technology.

2. IMPAIRMENT OF LONG-LIVED ASSETS

Effective with the fourth quarter 1995, Shell Oil adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of affected assets may not be recoverable.

Total 1995 charges resulting from adoption of the Standard increased
depreciation, depletion and amortization expenses by $223 million, and selling,
general and administrative expenses by $23 million. The affected assets were
primarily oil and gas producing properties.

43
<PAGE> 44

During 1996, certain oil and gas producing properties were reclassified as
"assets to be disposed of" and, under the provisions of SFAS No. 121, were
written down to their estimated net realizable value resulting in a $38 million
charge to depreciation, depletion and amortization expenses.

None of Shell Oil's assets were determined to be impaired during 1997.

3. INTEREST

Interest costs were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(millions of dollars)
<S> <C> <C> <C>
Interest incurred........................................ $205 $203 $216
Interest paid............................................ 225 207 228
</TABLE>

4. FOREIGN CURRENCY TRANSACTIONS

The U.S. Dollar is the functional currency for each of Shell Oil's foreign
operations. The net after-tax effects of foreign currency transactions were a
loss of $3 million in 1997, a gain of $3 million in 1996 and a loss of $2
million in 1995.

5. TRANSACTIONS WITH RELATED PARTIES

Shell Oil has entered into transactions with related parties including
companies affiliated with the Royal Dutch/Shell Group. Such transactions were in
the ordinary course of business and included the purchase, sale and
transportation of crude oil and natural gas, and petroleum and chemical
products. The aggregate amount of such transactions was as follows:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(millions of dollars)
<S> <C> <C> <C>
Sales and other operating revenue.................... $2,402 $2,216 $1,003
Purchases and transportation......................... 1,843 1,260 752
</TABLE>

These amounts are commingled with other revenues and costs and the profit
thereon is not accurately determinable without effort and expense
disproportionate to the relative importance of such amount.

The Company is also a partner in international joint ventures with
affiliates of the Royal Dutch/Shell Group. Such joint ventures are engaged in
the exploration for and development and production of crude oil and natural gas.
The Company has also entered into arrangements with affiliated companies for the
sharing of research services in petroleum technology, chemicals and other
fields.

Shell Oil markets substantially all of its natural gas production through
Coral Energy, L.P. ("Coral"), a gas marketing enterprise. At December 31, 1997,
Coral was jointly owned by Shell Oil, Shell Canada and Tejas Gas Corporation
("Tejas") and accounted for by Shell Oil using the equity method. Shell Oil's
sales to Coral in 1997 and 1996 included in the table above were $1,398 million
and $1,346 million, respectively. Shell Oil's purchases from Coral in 1997 and
1996 included in the table above were $448 million and $622 million,
respectively.

Shell Oil supplements its short-term financing with borrowings at market
rates and terms from a company affiliated with the Royal Dutch/Shell Group. At
December 31, 1997 and 1996 the amounts borrowed from such affiliate were
approximately $2,000 million and $800 million, respectively. These amounts are
included in the Commercial notes amounts shown in Note 8 of the Notes to
Consolidated Financial Statements.

6. INVENTORIES OF OILS AND CHEMICALS

Inventories are carried predominantly on a LIFO basis which was lower than
current cost by $519 million at December 31, 1997, $978 million at December 31,
1996, and $672 million at December 31, 1995. Partial

44
<PAGE> 45

liquidations of inventories valued on a LIFO basis improved 1997, 1996 and 1995
net income by $2 million, $11 million and $167 million, respectively.

7. RECEIVABLES AND PREPAYMENTS

Receivables, prepayments and allowances for doubtful accounts as of
December 31, 1997 and 1996 consisted of the following:

<TABLE>
<CAPTION>
1997 1996
-------- --------
(millions of dollars)
<S> <C> <C>
Trade receivables........................................... $2,169 $2,677
Other receivables........................................... 789 1,049
Prepayments................................................. 476 368
------ ------
3,434 4,094
Less: Allowance for Doubtful Accounts
Balance beginning of year.............................. 18 19
Provision......................................... 21 15
Net write-offs.................................... (19) (16)
------ ------
Balance end of year.................................... 20 18
------ ------
Total........................................ $3,414 $4,076
====== ======
</TABLE>

8. SHORT-TERM DEBT

Debt due within one year from December 31 consisted of the following:

<TABLE>
<CAPTION>
1997 1996
------- -------
(millions of dollars)
<S> <C> <C>
Commercial notes............................................ $2,322 $1,202
Bank loans.................................................. 30 30
Industrial Revenue Bonds.................................... 881 713
------ ------
3,233 1,945
Current maturities of long-term debt........................ 306 473
------ ------
Total........................................ $3,539 $2,418
====== ======
</TABLE>

The weighted average interest rate on short-term debt outstanding was 5.47
percent at December 31, 1997 and 5.42 percent at December 31, 1996.

45
<PAGE> 46

9. LONG-TERM DEBT

Long-term debt as of December 31 consisted of the following:

<TABLE>
<CAPTION>
1997 1996
------- -------
(millions of dollars)
<S> <C> <C>
Shell Oil Company:
6% Notes Due 1997......................................... $ -- $ 250
6.95% Notes Due 1998...................................... 250 250
6 5/8% Notes Due 1999..................................... 250 250
6.70% Notes Due 2002...................................... 250 250
Production Payment.......................................... -- 194
Industrial Revenue Bonds.................................... -- 6
Other....................................................... 141 67
------ ------
891 1,267
Less: Amounts due within one year.......................... 306 473
------ ------
Total........................................ $ 585 $ 794
====== ======
</TABLE>

Shell Oil had $559 million of unused revolving credit agreements in place
as of December 31, 1997, which were available for general corporate purposes,
including support of commercial notes. None of the agreements require
compensating balances. Under the agreements, interest will be based on rates in
effect at the time of borrowing.

The amounts of long-term debt maturities during each of the next five years
are $306 million, $287 million, $30 million, $23 million and $243 million,
respectively.

In previous years, the Company purchased U.S. government securities and
deposited them in irrevocable trusts to be used to fund the scheduled principal
and interest payments on certain portions of the Company's long-term debt. Such
government securities and debt were removed from the balance sheet, and at
December 31, 1997, $52 million of such defeased debt remained outstanding.

10. FINANCIAL INSTRUMENTS

Derivative Financial Instruments

Shell Oil uses interest rate swaps to minimize its borrowing costs, and
derivative commodity instruments to reduce price volatility risks on
commodities -- primarily crude oil, natural gas and refined products, as further
discussed below. At December 31, 1997, the notional principal amounts of
interest rate swaps outstanding were $1,786 million, all of which were
classified as for "purposes other than trading" under the provisions of
Statement of Financial Accounting Standards No. 119. At December 31, 1997, Shell
Oil held commodity derivatives positions having notional amounts of $285
million. Of that amount, $263 million was classified as for "purposes other than
trading."

Interest Rate Swaps. Shell Oil enters into interest rate swaps with the
intent of minimizing its borrowing costs. Most of Shell Oil's long-term interest
bearing liabilities reflected on its consolidated balance sheet are fixed rate
instruments. Shell Oil also has other long-term obligations not reflected on its
balance sheet which involve annual fixed rate payments. Shell Oil uses interest
rate swaps to modify the interest rate characteristics of these obligations from
fixed rates of interest to variable rates of interest, with the ultimate intent
of minimizing the interest expense associated with the underlying obligations.
All such interest rate swaps require the counterparty to the swap to pay to
Shell Oil a fixed rate of interest on "notional" amounts of principal, and for
Shell Oil to pay to the counterparty a variable rate of interest on the same
amounts of "notional" principal, i.e., "fixed rate to variable rate." In all
cases, Shell Oil remains obligated to pay to the holder of the underlying
obligation the fixed rate owing.

Both the payment of interest to the holder of the underlying obligation and
the payment of the variable rate to the counterparty are recognized as current
charges to interest expense by Shell Oil. Additionally, the

46
<PAGE> 47

receipt of the fixed rate payment from the counterparty is recognized by Shell
Oil as a current reduction of interest expense. The effect of this accounting is
the current recognition of the net increase or decrease to interest expense
resulting from the swap of fixed rates to variable rates.

The terms of the swaps related to the fixed rate bonds and notes issued by
Shell Oil, including the mechanism by which the variable interest rate paid by
Shell Oil to the counterparty is determined, are indicated in the accompanying
Interest Rate Swaps table. During 1997, the net effect of these transactions was
that Shell Oil paid 5.51% and received 6.18% effective rates of interest. On the
swaps designed to convert on a notional basis the imputed fixed interest
component of the other obligations of Shell Oil as shown in the Interest Rate
Swaps table to a variable rate, Shell Oil paid 5.58% and received 6.50%
effective rates of interest. The combined effect of these transactions,
accounted for as described above, was a net pretax decrease in interest expense
of $12.4 million and $11.4 million in 1997 and 1996, respectively. The fair
value of these interest rate swaps was $40.8 million and $6.0 million at
year-end 1997 and 1996, respectively. These values were derived from quotes from
the counterparties and from a third-party of prices to "buy out" and cancel such
swaps. However, assuming no default or other failure by either party to meet
contractual requirements, the swaps are noncancellable until the underlying
obligation expires. Shell Oil believes that over time variable rate terms are
more favorable to Shell Oil than are fixed rates. Therefore, this fair value
number has only limited economic significance unless an intention exists to
attempt to buy out these swaps.

Shell Oil bears two different risks under these interest rate swaps. There
is a credit risk that payment due to Shell Oil from the counterparty will not be
made. In such case, Shell Oil loses any benefit of the swap differential between
the fixed rate specified under the terms of the swap and the floating rate.
However, the counterparties to these contractual arrangements are major
financial institutions. Shell Oil does not anticipate nonperformance by
counterparties to these contracts and no material loss would be expected from
such nonperformance. Shell Oil also bears the market risk that changes in
floating interest rates may result in greater total costs than would have arisen
on the fixed rate and other obligations alone.

INTEREST RATE SWAPS
- --------------------------------------------------------------------------------

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

* Pay rates are negotiated based on commercial paper rates; the weighted
average rate paid was 5.5%.
** Imputed interest rates.

Derivative Commodity Instruments. Shell Oil uses derivative instruments in
certain instances to reduce price volatility risk on commodities -- primarily
crude oil, natural gas and refined products. Generally, Shell Oil's strategy is
to hedge its exposure to price variances by locking in prices for future
purchases and sales. Shell Oil accounts for such commodity derivatives as
hedges. During 1997 Shell Oil continued to execute on a limited basis commodity
transactions which were not hedges but were entered into as trading
transactions. Shell Oil accounts for such transactions, which are limited to
straightforward futures, options and swaps transactions with no leverage or
multiplier features, on a mark-to market basis, recognizing gains or losses each
business period.

47
<PAGE> 48

Usually, such derivatives are for terms of less than one year and cover
volumes substantially below anticipated sales. The exposure on such commodities
derivatives includes the credit risk that the counterparty will not pay if the
market declines below the established fixed price. In such case, Shell Oil loses
the benefit of the derivative differential on the volume of commodities covered
by the derivatives. In any case, Shell Oil would continue to receive market
price on actual volumes. Shell Oil also bears the risk that it could lose the
benefit of market improvements over the fixed derivative price for the term and
volume of the derivative securities (as such improvements would accrue to the
benefit of the counterparty). In certain instances involving very small volumes
relative to Shell Oil's gross purchases and sales, Shell Oil enters into
derivative contracts to hedge its exposure under short-term fixed price purchase
or sale commitments. In such cases, Shell Oil swaps its fixed price commitment
for a floating price, the net economic result being that its covered purchases
and sales are at market price.

During 1997, Shell Oil had a gain of $32 million in connection with its
commodity derivatives. At December 31, 1997, there were open positions covering
11.7 million barrels of crude oil and refined petroleum products, 81 million
pounds of ethylene and 13,803 mmcf of natural gas. Of these positions, 11.2
million barrels of crude oil and refined products and all natural gas positions
were entered into for "purposes other than trading." The average fair value
during 1997 of the positions "held for trading purposes" was immaterial.
Positions held for trading purposes generated a net gain of $0.9 million for the
year.

In all cases involving credit risk on derivative securities, it is always
possible that Shell Oil will make payments when due, and that the counterparty
will subsequently default on payments due Shell Oil, translating into higher
costs or further reduced revenues over time. However, Shell Oil believes its
credit analysis regarding counterparties and the terms, nature and size of its
derivative portfolio significantly reduce this risk.

Fair Value of Financial Instruments

At December 31, 1997 and 1996, the estimated fair values, determined
primarily by market quotes, of Shell Oil's financial instruments were as
follows:

<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(millions of dollars)
<S> <C> <C> <C> <C>
Investments............................... $356 $356 $448 $448
Long-term debt............................ 585 595 794 803
Interest rate swaps....................... -- 41 -- 6
Derivative commodity instruments.......... -- 285 -- 212
</TABLE>

As indicated in the table, the fair value of outstanding commodity
derivatives at December 31, 1997 was $285 million.

The reported amounts of financial instruments such as cash equivalents,
marketable securities, accounts and notes receivable/payable and short-term debt
approximate fair value because of their short maturities.

48
<PAGE> 49

11. TAXES

Operating and income taxes incurred by Shell Oil were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(millions of dollars)
<S> <C> <C> <C>
OPERATING TAXES
Real and personal property............................ $139 $ 166 $ 177
Sales and use......................................... 77 105 138
Oil and gas production................................ 41 65 52
Payroll............................................... 69 75 81
Franchise............................................. 32 33 29
Import and export duties.............................. 2 2 2
Other................................................. 2 6 4
---- ----- -----
TOTAL....................................... $362 $ 452 $ 483
==== ===== =====
FEDERAL AND OTHER INCOME TAXES
Current
U.S. federal..................................... $648 $ 295 $ 667
Foreign.......................................... 98 88 76
State and local.................................. 40 51 35
---- ----- -----
786 434 778
Deferred
U.S. federal..................................... 58 316 (332)
State and other.................................. 16 13 22
---- ----- -----
74 329 (310)
---- ----- -----
TOTAL....................................... $860 $ 763 $ 468
==== ===== =====
</TABLE>

Deferred income taxes are provided for the temporary differences between
the tax basis of Shell Oil's assets and liabilities and the amounts reported in
the financial statements. Significant components of deferred tax liabilities and
assets as of December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
1997 1996
-------- --------
(millions of dollars)
<S> <C> <C>
Deferred tax liabilities:
Items associated with capitalized costs and
write-offs........................................... $3,930 $3,830
Other.................................................. 534 404
------ ------
Total deferred tax liabilities.................... $4,464 $4,234
====== ======
Deferred tax assets:
Other postretirement obligations....................... $ 326 $ 323
Environmental and other reserves....................... 312 393
Loss carryforwards..................................... 345 140
Other.................................................. 488 454
------ ------
Total deferred tax assets......................... $1,471 $1,310
Valuation allowance......................................... 102 88
------ ------
Net deferred tax assets..................................... $1,369 $1,222
------ ------
Net deferred tax liabilities................................ $3,095 $3,012
------ ------
</TABLE>

Receivables and prepayments included $244 million and $217 million of net
current deferred tax assets as of December 31, 1997 and 1996, respectively.

49
<PAGE> 50

Total income taxes paid in the years 1997, 1996 and 1995 were $958 million,
$579 million and $648 million, respectively. Total income tax expense for the
years 1997, 1996 and 1995 was equivalent to effective tax rates of 28.4, 26.9
and 23.0, percent, respectively, on earnings before income taxes and minority
interest of $3,027 million, $2,835 million and $2,032 million, respectively.
Reconciliation to the expected tax at the U.S. statutory rate (35 percent) is as
follows:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(millions of dollars)
<S> <C> <C> <C>
Expected tax at U.S. statutory rate...................... $1,059 $ 992 $ 711
State and foreign tax.................................... 12 21 47
Prior year adjustment.................................... (50) (151) (57)
Tax credits.............................................. (82) (96) (65)
Benefit of tax losses.................................... (74) -- (150)
Other.................................................... (5) (3) (18)
------ ----- -----
TOTAL..................................... $ 860 $ 763 $ 468
====== ===== =====
</TABLE>

Shell Oil has tax loss carryforwards of $986 million expiring as follows:
1998 ($7 million); 1999 ($316 million); 2000 ($4 million); 2002 ($405 million);
2008 ($20 million); 2011 ($51 million) and 2012 ($183 million).

Shell Oil Company is included in the consolidated federal income tax return
of its parent, Shell Petroleum Inc. (SPI). Federal income tax amounts are
allocated among members of the consolidated tax group based on separate return
calculations. No Federal income tax balances were owing to SPI at December 31,
1997 and 1996.

12. INVESTMENTS

Investments in companies accounted for using the equity method and other
investments accounted for at cost are as follows:

<TABLE>
<CAPTION>
1997 1996
------ ------
(millions of
dollars)
<S> <C> <C>
Equity method affiliates.................................... $5,852 $1,402
Other affiliates, at cost................................... 28 2
------ ------
5,880 1,404
Other investments........................................... 576 614
------ ------
Total............................................. $6,456 $2,018
====== ======
</TABLE>

Equity method affiliates

The equity method of accounting is used for investments in entities where
Shell Oil has a voting stock interest between 20 and 50 percent and in entities
where Shell Oil has greater than 50 percent ownership interest but, as a result
of contractual agreement or otherwise, does not exercise control. At December
31, 1997, such investments included: Altura Energy, Ltd. and Aera Energy, LLC,
domestic oil and gas exploration and production companies; Saudi Petrochemical
Company, a petrochemical company in Saudi Arabia; Shell Exploration and
Production Holdings, B.V., a Dutch holding company with oil and gas producing
operations in the Danish North Sea; Deer Park Refining Limited Partnership, a
domestic refining operation; Coral Energy, L.P., a domestic gas marketing
company; and investments in several pipelines.

Dividends received on these investments in 1997, 1996 and 1995 were $388
million, $78 million and $111 million, respectively. Undistributed earnings of
these equity affiliates included in Shell Oil's retained earnings at December
31, 1997 were $186 million.

50
<PAGE> 51

Summarized financial information for these investments and Shell Oil's
equity share thereof is as follows:

<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ----------------
EQUITY EQUITY EQUITY
TOTAL SHARE TOTAL SHARE TOTAL SHARE
------ ------ ------ ------ ------- ------
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
COMPANIES ACCOUNTED FOR ON AN
EQUITY BASIS
Current assets...................... $2,609 $1,236 $1,272 $ 647 $ 1,043 $ 508
Noncurrent assets................... 12,365 5,944 6,256 2,948 5,402 2,520
Current liabilities................. 1,691 805 1,259 641 1,265 608
Noncurrent liabilities.............. 3,366 1,544 3,439 1,593 3,064 1,399
Deferred income taxes............... 425 156 438 160 252 84
Revenues............................ 8,963 4,303 5,304 2,885 3,452 1,281
Net income.......................... 1,388 599 452 212 595 171
</TABLE>

At December 31, 1997, the unamortized excess of Shell Oil's investment in
Altura Energy, Ltd., Aera Energy, LLC and Shell Exploration and Production, B.V.
was $893 million, $122 million and $191 million, respectively.

1997 Investments in affiliates

During 1997 and included in the tables above, Shell Oil invested in two new
exploration and production oil and gas companies, Altura Energy, Ltd. (Altura)
and Aera Energy, LLC (Aera).

Altura. Altura was formed and began operations in March 1997 by combining Shell
Oil's exploration and producing operations located in the Permian Basin of West
Texas/Southeast New Mexico with those of Amoco Corporation (Amoco). Altura is
owned approximately 36 percent by Shell Oil and 64 percent by Amoco. The
transaction for the formation of Altura was reflected on the consolidated
balance sheet of Shell Oil as a decrease in property, plant and equipment of
$1,767 million and a corresponding increase in investments of $1,767 million.

Aera. Aera was formed and began operations in June 1997 by combining the
California exploration and production operations of CalResources, a subsidiary
of Shell Oil, with the California exploration and production operations of Mobil
Corporation (Mobil). Shell Oil owns 58.6 percent of Aera but does not exercise
control and therefore accounts for its investment using the equity method of
accounting. The transaction for the formation of Aera was reflected on the
consolidated balance sheet of Shell Oil as primarily a decrease in property,
plant and equipment of $2,363 million and a corresponding increase in
investments of $2,363 million.

The impact on the 1997 Shell Oil consolidated results of operations had
these alliances occurred on January 1, 1997 was insignificant.

1998 Investments in affiliates

Equilon Enterprises LLC. In January 1998 Shell Oil and Texaco Inc. reached
agreement on the formation and operational start up of Equilon Enterprises LLC
(Equilon). Equilon is a joint venture, which combines major elements of both
company's western and midwestern United States refining and marketing businesses
and both company's nationwide trading, transportation and lubricants businesses.
Shell Oil owns 56 percent of Equilon but will not exercise control and will
account for its investment in Equilon using the equity method of accounting.

Pending Eastern U.S. Oil Products Venture. Shell Oil, Texaco and Saudi Refining,
Inc. (a corporate affiliate of Saudi Aramco) are finalizing agreements for a
separate joint venture involving their eastern United States and Gulf Coast
refining and marketing businesses. It is anticipated this transaction will be
concluded in early 1998. This venture is planned to be owned 35 percent by Shell
Oil, 32.5 percent by Texaco and 32.5 percent by Saudi Refining, Inc.

51
<PAGE> 52

Tejas Gas Corporation. In January 1998, Shell Oil acquired all of the
outstanding common stock of Tejas Gas Corporation ("Tejas") for $61.50 per share
which, on a fully diluted common stock basis, represented an aggregate common
stock purchase price of approximately $1.45 billion. In addition, Shell Oil
assumed Tejas' balance sheet debt and preferred stock of approximately $900
million. Shell Oil accounted for this transaction using the purchase method of
accounting.

Coral Energy, LP. During 1997, Shell Oil, Tejas and Shell Canada jointly owned
Coral Energy, LP (Coral) with an ownership interest of 44 percent, 44 percent
and 12 percent, respectively. Shell Oil accounted for its investment in Coral
using the equity method of accounting and Shell Oil's equity share of Coral is
included in the tables above. With the completion of the Tejas acquisition,
Shell Oil will account for its now 88 percent ownership in Coral on the
consolidated basis of accounting.

13. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, including capitalized lease assets, were as
follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------- ----------------------------
COST RESERVE* NET COST RESERVE* NET
------- -------- ------- ------- -------- -------
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Exploration and Production
Oil and gas.................. $16,251 $ 9,146 $ 7,105 $24,576 $14,171 $10,405
Other energy................. 113 13 100 93 9 84
Oil and Chemical manufacturing
facilities................... 11,384 5,371 6,013 11,019 4,936 6,083
Marketing facilities........... 3,403 905 2,498 3,255 819 2,436
Transportation facilities...... 1,288 599 689 1,194 586 608
Other.......................... 833 471 362 918 542 376
------- ------- ------- ------- ------- -------
TOTAL................ $33,272 $16,505 $16,767 $41,055 $21,063 $19,992
======= ======= ======= ======= ======= =======
</TABLE>

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

* Accumulated depreciation, depletion and amortization.

14. POSTRETIREMENT BENEFITS

The Company and certain of its subsidiaries currently provide health care
benefits for retired employees and their dependents. Eligibility for such
benefits requires retirement from the Company with entitlement to an immediate
pension generally upon the earlier of the attainment of age 50, when such age
plus years of service equals 80, or the attainment of age 65. Other
postretirement benefits provided by the Company include life insurance plans.
These life insurance plans are primarily funded by employees; as a result, the
cost of such plans to the Company is not material.

The health care plans for retired employees and their dependents are
unfunded defined benefit plans. The benefit is defined as the Company's
contributions to such plans. Annually, retirees are advised of the amount of the
Company's monthly contribution to the plans for the following year and the
monthly amount such retirees must pay for the particular coverage desired.
Coverage under the plans is arranged through insurance companies. The Company's
portion of premium payments was $39 million in 1997, $40 million in 1996, and
$41 million in 1995.

The assumed annual health care cost trend rate used in measuring the
accumulated postretirement benefit obligation (APBO) was 7.5% in 1997, 7% in
1998, and gradually declines to 5% by the year 2002, remaining at that level
thereafter. Increasing the assumed health care cost trend rate by one percentage
point in each year would increase the APBO by approximately $115 million and the
aggregate of the 1997 service cost and interest cost components of expense by
$11 million. The APBO as of December 31, 1997 and 1996

52
<PAGE> 53

was based on discount rates of 7% and 7.5%, respectively. Unrecognized net gains
or losses in excess of 10% of the APBO (corridor) are amortized over three
years.

Net postretirement benefits cost consisted of the following:

<TABLE>
<CAPTION>
1997 1996
---- ----
(millions of
dollars)
<S> <C> <C>
Service cost for benefits earned............................ $ 18 $ 18
Interest cost on the APBO................................... 56 54
Net amortization and deferral............................... (39) (29)
---- ----
TOTAL................................................ $ 35 $ 43
==== ====
</TABLE>

The postretirement benefits plan status at December 31 was as follows:

<TABLE>
<CAPTION>
1997 1996
---- ----
(millions of
dollars)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees.................................................. $442 $437
Fully eligible active plan participants................... 60 53
Other active plan participants............................ 356 286
---- ----
TOTAL................................................ $858 $776
Unrecognized gain from past experience different from that
assumed and from changes in assumptions................... 90 175
Prior service gain not yet recognized in net periodic
postretirement benefit cost............................... 15 17
---- ----
ACCRUED POSTRETIREMENT BENEFIT COST.................. $963 $968
==== ====
</TABLE>

15. PENSION PLANS AND PROVIDENT FUND

The Shell Pension Plan covers employees of the Company and certain
subsidiaries. Benefits are based on years of service and the employee's average
final compensation. Company contributions to the Shell Pension Trust are based
on the projected unit credit actuarial method using rates determined to be
reasonable by an independent actuary. The methodology meets the requirements of
the Employee Retirement Income Security Act. There were no contributions to the
Shell Pension Trust in 1997 and 1996 due to the full-funding limitation of the
applicable tax law.

53
<PAGE> 54

The plan's funded status at December 31 was as follows:

<TABLE>
<CAPTION>
1997 1996
------- -------
(millions of dollars)
<S> <C> <C>
Actuarial present value:
Accumulated benefit obligation including vested benefits
of $4,025 and $3,748 for 1997 and 1996, respectively... $4,426 $4,079
------ ------
Projected benefit obligation.............................. $5,080 $4,648
Plan assets at fair value, primarily common stocks and fixed
income investments........................................ 5,980 5,278
------ ------
Plan assets in excess of projected benefit obligation....... $ 900 $ 630
Remaining unrecognized net asset existing at date of initial
application of SFAS No. 87................................ (17) (30)
Unrecognized net (gain)/loss from past experience different
from that assumed and effects of changes in assumptions... (421) (159)
Prior service cost not yet recognized in net periodic
pension
cost...................................................... 152 171
------ ------
NET PREPAID PENSION EXPENSE....................... $ 614 $ 612
====== ======
</TABLE>

Shell Oil also has a Benefit Restoration Plan and a Senior Staff Plan. The
Benefit Restoration Plan generally provides for payments of amounts in excess of
limits imposed by federal tax law on benefit payments under the Shell Pension
Plan. The Senior Staff Plan provides for defined monthly supplemental pension
payments to members of the senior staff (consisting of certain officers and
other high-ranking employees). Both of these plans are unfunded. The accumulated
benefit obligation for these plans totaled $297 million and $253 million at
December 31, 1997 and 1996, respectively. The projected benefit obligation for
these plans totaled $329 million and $284 million at December 31, 1997 and 1996,
respectively. Of the 1997 projected benefit obligation amount, $196 million will
be expensed in the future and $133 million of unfunded accrued pension cost is
included in liabilities on the consolidated balance sheet. The estimated
additional minimum pension liability recorded at December 31, 1997 and 1996 was
$135 million and $155 million, respectively.

The components of net pension expense for the Shell Pension Plan, Benefit
Restoration Plan and Senior Staff Plan were:

<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -----
(millions of dollars)
<S> <C> <C> <C>
Service cost -- benefits earned during the period........ $ 107 $ 114 $ 79
Interest cost on projected benefit obligation............ 359 345 336
Actual return on plan assets*............................ (1,005) (783) (912)
Net amortization and deferral*........................... 580 389 515
------- ----- -----
NET PENSION EXPENSE............................... $ 41 $ 65 $ 18
======= ===== =====
</TABLE>

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

* Estimated long-term rates of return on plan assets of 9.5 percent in 1997,
1996 and 1995 were used in determining pension expense for the period. The
difference between actual return and estimated return is included in Net
amortization and deferral.

Current year pension expense is based on measurements of the projected
benefit obligation and the market-related value of plan assets as of the end of
the previous year. The projected benefit obligation as of December 31, 1997 and
1996 was based on discount rates of 7 percent and 7.5 percent, respectively, and
an average long-term rate of compensation growth of 5 percent for 1997 and 1996.

The Shell Provident Fund covers employees of the Company and certain
subsidiaries after stated periods of service, and provides for contributions by
the employing company based on a stated percentage of the employees' salaries
and wages. Employees may also contribute amounts up to a stated percentage.

54
<PAGE> 55

Total costs of these plans were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(millions of dollars)
<S> <C> <C> <C>
Pension plans............................................... $ 41 $ 65 $ 18
Provident Fund.............................................. 102 100 101
---- ---- ----
TOTAL................................................ $143 $165 $119
==== ==== ====
</TABLE>

In addition, several subsidiary companies have separate pension plans using
actuarial rates and assumptions determined to be appropriate to those companies.
Such plans are not material and were excluded from the above disclosures.

16. CONTINGENCIES AND OTHER MATTERS

Shell Oil is subject to a number of possible loss contingencies. These
include actions based upon environmental laws involving present and past
operating and waste disposal locations and related private claims, contract and
product liability actions and federal, state and private actions challenging the
correctness of oil and gas royalty calculations. In addition, federal, state and
local income, property and excise tax returns are being examined and certain
interpretations by Shell Oil of complex tax statutes, regulations and practices
are being challenged.

Since 1984, the Company has been named with others as a defendant in
numerous product liability cases, including class actions, involving the failure
of residential plumbing systems constructed with polybutylene plastic pipe. The
Company has also been sued regarding failures in polybutylene pipe connecting
users with utility water lines and polybutylene pipe used in municipal water
distribution systems. The Company fabricated the resin for this pipe. Two other
substantial manufacturers made the resins for the polyacetal insert fittings
used in many of the residential plumbing systems (the fittings co-defendants)
and are also defendants in those cases. The Company and the fittings
co-defendants have agreed on a mechanism to fund the payment of most of the
residential plumbing claims in the United States as the result of two class
action settlements (the "class action settlement"). The class action settlement
provides for the creation of an entity to receive and handle claims and for a
$950 million fund to pay such claims, which claims may be filed until 2009,
depending on various factors. If the settlement funds are exhausted, additional
funds may be provided by the defendants, or claimants who have not received
their full benefits under the class action settlements may seek their remedy in
a new court proceeding at that time. One fittings co-defendant has agreed to
fund 10% of all acetal fittings costs related to the class action settlement;
the Company and the other fittings co-defendant have agreed to arbitration to
determine how the remaining acetyl fittings portion of the costs will be shared
between them. Additionally, claims continue to be filed involving problems with
polybutylene pipe used in municipal water distribution systems. The Company will
continue to defend these matters vigorously but it cannot currently predict when
or how polybutylene related matters will finally be resolved.

In an October 1997 decision by the United States District Court in
Delaware, certain income tax credits recorded by Shell Oil in previous years
arising out of production of oil from tar sands were denied because the Court
determined that Shell Oil used the wrong definition of tar sands production to
calculate the same. Shell Oil is currently examining the effect of this decision
on other previously recorded tar sands tax credits. However, Shell Oil believes
that the District Court decision was incorrect and intends to vigorously appeal
such decision. In any case, Shell Oil believes that many of its tar sands tax
credits are validly claimed under the alternative definition asserted by the
government in the District Court case.

The Company's assessment of these matters is continuing. Future provisions
may be required as administrative and judicial proceedings progress and the
scope and nature of remediation programs and related costs estimates are
clarified. However, while periodic results may be significantly affected by
costs in excess of provisions related to one or more of these proceedings, based
upon developments to date, the management of the Company anticipates that it
will be able to meet related obligations without a material adverse effect on
its financial position.

55
<PAGE> 56

17. COMMITMENTS

Shell Oil conducts a portion of its operations using leased facilities,
including service stations, barges, tankers and drilling rigs. Future minimum
payments under operating leases with initial or remaining terms of one year or
more consisted of the following at December 31, 1997:

<TABLE>
<CAPTION>
OPERATING
LEASES
---------
(millions
of
dollars)
<S> <C>
1998........................................................ $ 267
1999........................................................ 197
2000........................................................ 160
2001........................................................ 154
2002........................................................ 149
Thereafter.................................................. 936
------
Total minimum lease payments...................... $1,863
======
</TABLE>

The composition of total rental expense for all operating leases, except
those with terms of a month or less that were not renewed, was as follows:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(millions of dollars)
<S> <C> <C> <C>
Minimum rentals........................................... $286 $345 $381
Contingent rentals
(Generally based on sales volumes)...................... 3 2 2
Less: sublease rentals.................................... (36) (36) (41)
---- ---- ----
Total........................................... $253 $311 $342
==== ==== ====
</TABLE>

Under long-term agreements with an offshore port and certain pipeline
companies in which stock interests are held, Shell Oil may be required to
advance funds against future transportation charges in the event such companies
are unable to meet their financial obligations. Also, at December 31, 1997,
Shell Oil had commitments related to agreements for the future purchase of
materials and services, and for the acquisition and construction of facilities,
all made in the normal course of business. Additionally, at December 31, 1997,
Shell Oil had guaranteed $10 million of debt and other obligations of others.
All such commitments and guarantees are expected to be fulfilled with no adverse
consequences material to Shell Oil's operations or financial condition.

18. OPERATING SEGMENTS INFORMATION

Shell Oil is engaged, principally in the United States, in the exploration
for, and development, production, purchase, transportation and marketing of,
crude oil and natural gas, and the purchase, manufacture, transportation and
marketing of oil and chemical products. These activities are conducted through
three major business segments -- Oil and Gas Exploration and Production, Oil
Products and Chemical Products as follows:

Oil and Gas Exploration and Production explores for and develops and
produces crude oil, natural gas and natural gas liquids primarily in the
offshore Gulf of Mexico and the continental United States. This segment is
also engaged on a limited and selective basis in production activities
outside the United States, including ventures with companies of the Royal
Dutch/Shell Group of Companies.

Oil Products transports, refines and markets crude oil and petroleum
products principally in the United States. This segment is oriented toward
light fuel products; accordingly, refineries are designed to

56
<PAGE> 57

produce large quantities of motor gasoline and other light fuels. Shell Oil
is a leading marketer of gasoline in the United States and an important
supplier of aviation fuel, lubricants and asphalt. In 1997, Shell Oil's own
net produced crude oil and natural gas liquids was equivalent to about 43
percent of its intakes into its crude oil distillation units. Shell Oil
further supplements its own crude oil production to meet its refinery
requirements by the purchase of crude oil from both domestic and
international sources. During 1997, 34 percent of Shell Oil's net crude oil
supply came from sources outside the United States; approximately 25
percent was purchased from government oil companies in three foreign
countries and 9 percent was purchased from other international sources
including companies affiliated with the Royal Dutch/Shell Group of
Companies.

Chemical Products is a major producer primarily in the United States
of olefins, aromatics, phenol, detergent alcohols, ethylene oxide and
derivatives, thermoplastic elastomers, epoxy and specialty resins,
oxygenated and hydrocarbon solvents and polyester resins. These basic
chemical products are used in many consumer and industrial products and
processes. They are sold primarily to industrial markets in the United
States; approximately 17 percent of chemical volumes are sold outside the
United States. In addition, petrochemicals are manufactured by a joint
venture with Saudi Basic Industries Corporation and sold in world wide
markets. Catalysts are manufactured and sold through joint ventures with
affiliates and other parties.

Operating segments information for the years 1997, 1996 and 1995 is
presented below. Income taxes are allocated to segments on the basis of
contributions to taxable income reduced by applicable tax credits. Shell Oil's
activity outside the United States has not reached a level warranting separate
reporting.

<TABLE>
<CAPTION>
OIL AND GAS
EXPLORATION AND OIL CHEMICAL
PRODUCTION PRODUCTS PRODUCTS OTHER TOTAL
--------------- -------- -------- ------ --------
(millions of dollars)
<S> <C> <C> <C> <C> <C>

1997 SUMMARY STATEMENT OF INCOME
Sales and other operating revenue...... $ 2,961 $20,491 $ 4,725 $ 84 $28,261
Other revenue.......................... 344 15 (2) 1 358
Intersegment transfers................. 2,578 1,541 489 -- --
------- ------- ------- ------ -------
TOTAL REVENUE................ 5,883 22,047 5,212 85 28,619(1)
Costs and operating expenses........... 2,812 21,075 4,246 59 23,584(1)
Depreciation, amortization, etc........ 1,147 438 270 34 1,889
------- ------- ------- ------ -------
OPERATING PROFIT (LOSS)...... 1,924 534 696 (8) 3,146
Corporate expense--allocated........... 43 39 22 -- 104
Income tax expense--allocated.......... 593 136 246 8 983
Minority interest...................... 45 8 9 -- 62
Equity in net (income) loss of
others............................... (137) (82) (55) (2) (276)
------- ------- ------- ------ -------
INCOME (LOSS) FROM ONGOING
OPERATIONS................. 1,380 433 474 (14) 2,273
Other charges (credits)(4)............. 2 (9) 17 -- 10
------- ------- ------- ------ -------
SEGMENT NET INCOME (LOSS).... $ 1,378 $ 442 $ 457 $ (14) $ 2,263
Nonallocated amounts................... $ 159
-------
NET INCOME................... $ 2,104
=======
1997 CAPITAL EXPENDITURES................... $ 2,182 $ 554 $ 348 $ 43 $ 3,131(2)
IDENTIFIABLE ASSETS DECEMBER 31, 1997....... $13,123 $ 9,277 $ 5,342 $ 211 $29,601(3)
</TABLE>

(Table continued on following page)

57
<PAGE> 58

<TABLE>
<CAPTION>
OIL AND GAS
EXPLORATION AND OIL CHEMICAL
PRODUCTION PRODUCTS PRODUCTS OTHER TOTAL
--------------- -------- -------- ------ --------
(millions of dollars)
<S> <C> <C> <C> <C> <C>
1996 SUMMARY STATEMENT OF INCOME
Sales and other operating revenue...... $ 3,010 $21,465 $ 4,305 $ 44 $28,824
Other revenue.......................... 55 17 8 2 82
Intersegment transfers................. 3,123 1,265 213 -- --
------- ------- ------- ------ -------
TOTAL REVENUE................ 6,188 22,747 4,526 46 28,906(1)
Costs and operating expenses........... 2,943 21,746 3,958 61 24,107(1)
Depreciation, amortization, etc........ 1,375 391 271 23 2,060
------- ------- ------- ------ -------
OPERATING PROFIT (LOSS)...... 1,870 610 297 (38) 2,739
Corporate expense--allocated........... 39 36 23 (2) 96
Income tax expense
(benefit)--allocated................. 559 196 78 (9) 824
Minority interest...................... 44 5 -- 2 51
Equity in net (income) loss of
others............................... (123) (13) (57) -- (193)
------- ------- ------- ------ -------
INCOME (LOSS) FROM ONGOING
OPERATIONS................. 1,351 386 253 (29) 1,961
Other charges(4)....................... 2 3 10 -- 15
------- ------- ------- ------ -------
SEGMENT NET INCOME (LOSS).... $ 1,349 $ 383 $ 243 $ (29) $ 1,946
Nonallocated amounts................... $ (75)
-------
NET INCOME................... $ 2,021
=======
1996 CAPITAL EXPENDITURES................... $ 2,053 $ 726 $ 582 $ 49 $ 3,414(2)
IDENTIFIABLE ASSETS DECEMBER 31, 1996....... $12,557 $ 9,326 $ 5,089 $ 226 $28,709(3)

1995 SUMMARY STATEMENT OF INCOME
Sales and other operating revenue...... $ 1,764 $17,375 $ 4,841 $ 318 $24,298
Other revenue.......................... 90 11 15 5 121
Intersegment transfers................. 2,659 969 152 -- --
------- ------- ------- ------ -------
TOTAL REVENUE................ 4,513 18,355 5,008 323 24,419(1)
Costs and operating expenses........... 2,293 17,212 3,778 353 19,856(1)
Depreciation, amortization, etc........ 1,533 365 273 132 2,303
------- ------- ------- ------ -------
OPERATING PROFIT (LOSS)...... 687 778 957 (162) 2,260
Corporate expense--allocated........... 40 34 17 -- 91
Income tax expense
(benefit)--allocated................. 66 232 371 (86) 583
Minority interest...................... 42 -- -- 2 44
Equity in net (income) loss of
others............................... (83) 55 (135) -- (163)
------- ------- ------- ------ -------
INCOME (LOSS) FROM ONGOING
OPERATIONS................. 622 457 704 (78) 1,705
Other charges (credits)(4)............. 1 (17) 10 -- (6)
------- ------- ------- ------ -------
SEGMENT NET INCOME (LOSS).... $ 621 $ 474 $ 694 $ (78) $ 1,711
-------
Nonallocated amounts................... $ 191
NET INCOME................... $ 1,520
=======
1995 CAPITAL EXPENDITURES................... $ 1,395 $ 1,065 $ 422 $ 13 $ 2,957(2)
IDENTIFIABLE ASSETS DECEMBER 31, 1995....... $11,976 $ 8,763 $ 4,836 $ 254 $27,021(3)
</TABLE>

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

(1) After elimination of intersegment transfers of $4,608 million in 1997,
$4,601 million in 1996 and $3,780 million in 1995, which are based on
estimated market-related values.

(2) Includes non-segment capital expenditures of $4 million in 1997, $4 million
in 1996, and $62 million in 1995.

(3) Includes non-segment assets of $1,648 million in 1997, $1,511 million in
1996 and $1,192 million in 1995.

(4) Amounts associated with major product classifications for which there has
been no revenue stream or investment in the last 5 years.

58
<PAGE> 59

19. SUMMARIZED FINANCIAL INFORMATION -- SHELL PIPE LINE CORPORATION

The following summarized financial information for Shell Pipe Line
Corporation is presented here for the information of holders of Shell Pipe Line
Corporation's 7 1/2% Guaranteed Sinking Fund Debentures Due 1999, which are
fully guaranteed by Shell Oil Company.

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(millions of dollars)
<S> <C> <C> <C>
SHELL PIPE LINE CORPORATION
Current assets......................................... $101 $122 $154
Noncurrent assets...................................... 777 739 524
Current liabilities.................................... 169 121 89
Noncurrent liabilities................................. 77 79 73
Revenue................................................ 399 370 322
Operating income....................................... 185 184 167
Net income............................................. 150 144 130
</TABLE>

20. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
1997 1996
----------------------------------------- -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
-------- -------- -------- -------- -------- -------- -------- --------
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and other operating
revenue.................. $7,477 $6,920 $6,945 $6,927 $6,306 $7,095 $7,196 $8,226
Revenues, less purchased
raw materials and
products, and operating
expenses................. 1,770 1,739 1,705 1,748 1,576 1,772 1,750 1,923
Income before income taxes
and minority interest.... 785 718 769 756 577 669 797 792
Net income................. $ 517 $ 531 $ 479 $ 577 $ 483 $ 461 $ 504 $ 573
</TABLE>

59
<PAGE> 60

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, on March 5, 1998.

SHELL OIL COMPANY
(Registrant)

By /s/ PHILIP J. CARROLL
------------------------------------
(Philip J. Carroll, President)

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

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Philip
J. Carroll, S. A. Lackey, and Jack B. Edrington, and each of them, his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 5, 1998 by the following persons on behalf
of the Registrant in the capacities indicated.

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

/s/ PHILIP J. CARROLL President and Director
- ----------------------------------------------------- (Principal Executive Officer)
(Philip J. Carroll)

/s/ D. GARDY Vice President Finance
- ----------------------------------------------------- (Principal Financial Officer)
(D. Gardy)

/s/ N. J. CARUSO Controller and General Auditor
- ----------------------------------------------------- (Principal Accounting Officer)
(N. J. Caruso)

/s/ JOSEPH E. ANTONINI Director
- -----------------------------------------------------
(Joseph E. Antonini)

/s/ RAND V. ARASKOG Director
- -----------------------------------------------------
(Rand V. Araskog)
</TABLE>

(Signatures continued on next page)

60
<PAGE> 61

(Signatures continued from preceding page)

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

Director
- -----------------------------------------------------
(Robert F. Daniell)

/s/ C. A. J. HERKSTROTER Director
- -----------------------------------------------------
(C. A. J. Herkstroter)

/s/ JACK E. LITTLE Director
- -----------------------------------------------------
(Jack E. Little)

/s/ VILMA S. MARTINEZ Director
- -----------------------------------------------------
(Vilma S. Martinez)

/s/ MARK MOODY-STUART Director
- -----------------------------------------------------
(Mark Moody-Stuart)

/s/ HAROLD A. POLING Emeritus Director
- -----------------------------------------------------
(Harold A. Poling)

/s/ GORDON R. SULLIVAN Director
- -----------------------------------------------------
(Gordon R. Sullivan)

/s/ JOHN F. WOODHOUSE Director
- -----------------------------------------------------
(John F. Woodhouse)
</TABLE>

61
<PAGE> 62

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NO.
- ------- ----------- --------
<C> <S> <C>

3 Articles of Incorporation and By-Laws
(i) Copy of Restated Articles of Incorporation of the
Registrant............................................. *
(ii) Copy of By-Laws of the Registrant, as Amended......... *
10 Material Contracts:
(i) Letter Agreement between Registrant and Shell
Internationale Research Maatschappij B. V................... 63
(ii) Agreement for Research Services....................... *
21 Subsidiaries of the Registrant.............................. 64
23 Consent of Independent Accountants.......................... 65
24 Powers of Attorney.......................................... 60
27 Financial Data Schedule.....................................
</TABLE>

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

* Incorporated by reference; see Item 14c, page 37.

<PAGE> 1
EXHIBIT 10(i)

SHELL OIL COMPANY

ONE SHELL PLAZA
P. O. BOX 2463
HOUSTON, TEXAS
77252-2463

<TABLE>
<S> <C> <C>
C. J. SHEARER J. E. KREBS P. L. CUNEO
VICE PRESIDENT PRESIDENT DIRECTOR OF TECHNOLOGY
SHELL CHEMICAL COMPANY SHELL E&P TECHNOLOGY COMPANY, SHELL OIL PRODUCTS COMPANY
WESTHOLLOW TECHNOLOGY CENTER A DIVISION OF SHELL WESTHOLLOW TECHNOLOGY CENTER
EXPLORATION & PRODUCTION COMPANY
BELLAIRE TECHNOLOGY CENTER
</TABLE>

February 5, 1998
Our Ref: STVP LGVP
Shell Internationale Research Maatschappij, B. V.
P. O. Box 162
30 Carel van Bylandtlaan
The Hague 2501, The Netherlands

Gentlemen:

SUBJECT: AGREEMENT FOR RESEARCH SERVICES

This refers to the Agreement dated January 1, 1960, between Shell Oil Company
and Shell Internationale Research Maatschappij, B.V. entitled "Agreement for
Research Services," as amended.

Programs and budget for the year 1998 having been exchanged in accordance with
paragraph 9 of said Agreement, and the parties having agreed to the factors
referred to in subparagraph 10 (c) we now wish to confirm the understanding with
you that said Agreement, as amended, shall be continued for the calendar year
1998, with the amount of the monthly payment to be determined and paid according
to the terms of said Agreement.

Please indicate your concurrence to the continuation of the said Agreement on
the basis indicated above by executing both of the executed letters enclosed and
returning one of them to us and retaining the other for your files.

Yours very truly,
For and on behalf of Shell Oil Company:

<TABLE>
<S> <C> <C>
Shell Chemical Company Shell E&P Technology Company a Shell Oil Products Company
division of Shell Exploration &
Production

By: /s/ C. J. SHEARER By: /s/ J. E. KREBS By: /s/ P. L. CUNEO
------------------------------- ----------------------------------- -----------------------------------
C. J. Shearer J. E. Krebs P. L. Cuneo
</TABLE>

Accepted and Agreed to:

Shell Internationale Research Maatschappij, B. V.

<TABLE>
<S> <C> <C>
By: /s/ B. STOUTHAMER By: /s/ T. N. WARREN By: /s/ G. J. VAN LUIJK
------------------------------- ----------------------------------- -----------------------------------
B. Stouthamer T. N. Warren G. J. Van Luijk
</TABLE>

<PAGE> 1

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

<TABLE>
<CAPTION>
NAME INCORPORATED IN
<S> <C>
Shell Chemical Company...................................... Delaware
Shell Exploration & Production Company...................... Delaware
Shell Oil Products Company.................................. Delaware
Shell Services Company...................................... Delaware
Shell Services International Inc.......................... Delaware
Services Integration Group, L.P........................ Delaware
Services Integration Marketing, L.L.C.................. Delaware
SHEMS Corporation...................................... Delaware
Solutions Innovations Company.......................... Delaware
Shell Consolidated Refining Company......................... Delaware
Shell Refining Assets Company............................. Delaware
Shell Martinez Holding Company............................ Delaware
Shell Martinez Refining Company........................ Delaware
Shell Refining Holding Company............................ Delaware
Shell Anacortes Refining Company....................... Delaware
Shell Norco Refining Company........................... Delaware
Shell Odessa Refining Company.......................... Delaware
Shell Wood River Refining Company...................... Delaware
Shell Pipe Line Corporation................................. Maryland
Shell Energy Investment Inc................................. Delaware
Shell Energy Resources Inc. .............................. Delaware
Shell Deepwater Production Holdings Inc................ Delaware
Shell Deepwater Production Inc....................... Delaware
Shell Western E&P Inc. ................................ Delaware
Altura Energy, Ltd. ................................. Delaware
Shell K2 Inc. ......................................... California
Aera Energy LLC...................................... California
SOI Finance Inc. ...................................... Delaware
Shell Offshore Inc. ................................. Delaware
Shell Deepwater Development Holdings, Inc....... Delaware
Shell Deepwater Development Inc.............. Delaware
Shell Oil & Gas Investments, Limited
Partnership....................................... Delaware
Shell Onshore Ventures Inc. .................... Delaware
Shell Deepwater Royalties Inc. ................... Delaware
Shell Frontier Oil and Gas Inc. .................. Delaware
Shell Energy Company................................... Delaware
Pecten International Company......................... Delaware
Pecten Ash Sham Company........................... Delaware
Pecten Cameroon Company........................... Delaware
Pecten Brazil Exploration Company................. Delaware
Mercury Energy LLC................................ Delaware
Shell Consolidated Energy Resources Inc..................... Delaware
Shell Land & Energy Company............................... Delaware
Shell Offshore Properties and Capital II Inc. ......... Delaware
Pecten Arabian Company...................................... Delaware
</TABLE>

The names of other subsidiaries have been omitted because, as of December
31, 1997, such subsidiaries considered in the aggregate as a single subsidiary
would not constitute a "significant subsidiary."

<PAGE> 1

EXHIBIT 23

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-45397) of
Shell Oil Company of our report dated February 6, 1998 appearing on page 38 of
this Form 10-K.

PRICE WATERHOUSE LLP
Houston, Texas
March 5, 1998

<ARTICLE> 5
<CIK> 0000089629
<NAME> SHELL OIL COMPANY
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 342
<SECURITIES> 0
<RECEIVABLES> 2,169
<ALLOWANCES> 20
<INVENTORY> 1,192
<CURRENT-ASSETS> 5,228
<PP&E> 33,272
<DEPRECIATION> 16,605
<TOTAL-ASSETS> 29,601
<CURRENT-LIABILITIES> 7,566
<BONDS> 585
0
0
<COMMON> 0
<OTHER-SE> 14,878
<TOTAL-LIABILITY-AND-EQUITY> 29,601
<SALES> 27,826
<TOTAL-REVENUES> 28,959
<CGS> 22,000
<TOTAL-COSTS> 22,362
<OTHER-EXPENSES> 2,227
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> 205
<INCOME-PRETAX> 3,027
<INCOME-TAX> 860
<INCOME-CONTINUING> 2,104
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,104
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>