<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION PERIOD PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from________________ to ____________________________
Commission File Number 1-2475
SHELL OIL COMPANY
(Exact Name of Registrant as Specified in its Charter)
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
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 [ ]
The number of shares of Common Stock, $10.00 par value, outstanding as of June
30, 1998 - 1,000 shares.
-------------------------------------
OMISSION OF CERTAIN INFORMATION
In accordance with General Instruction H of Form 10-Q, the registrant is
omitting Part II, Items 2, 3, and 4 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, own directly or indirectly 60 percent and 40 percent, respectively, of
the shares of the companies of the 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.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
SHELL OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Millions of Dollars
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
------------------- --------------------
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
REVENUES
Sales and other operating revenue .................... $ 5,235 $ 7,908 $10,261 $16,301
Less: Consumer excise and sales taxes ............... 419 988 796 1,904
------- ------- ------- -------
4,816 6,920 9,465 14,397
Equity in income of affiliates ....................... 151 135 271 231
Interest and other income ............................ 63 38 99 97
------- ------- ------- -------
TOTAL .......................................... 5,030 7,093 9,835 14,725
------- ------- ------- -------
COSTS AND EXPENSES
Purchased raw materials and products ................. 3,056 4,305 6,000 9,440
Operating expenses ................................... 613 1,049 1,292 1,777
Selling, general and administrative expenses.......... 214 287 433 500
Exploration, including exploratory dry holes ......... 107 84 176 162
Research expenses .................................... 38 40 75 76
Depreciation, depletion, amortization and
retirements ....................................... 342 478 738 977
Interest and discount amortization ................... 101 52 186 97
Operating taxes ...................................... 60 80 128 193
------- ------- ------- -------
TOTAL .......................................... 4,531 6,375 9,028 13,222
------- ------- ------- -------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST ........................................ $ 499 $ 718 $ 807 $ 1,503
Federal and other income taxes ....................... 162 167 274 420
Minority interest in income
of subsidiaries ................................... 21 20 45 35
------- ------- ------- -------
NET INCOME ............................................... $ 316 $ 531 $ 488 $ 1,048
======= ======= ======= =======
</TABLE>
Note: Certain 1997 amounts have been reclassified to conform with current year
presentation.
----------------------------
OPERATING SEGMENTS INFORMATION
Millions of Dollars
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
------------------- ------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
SEGMENT NET INCOME (LOSS)
Oil and Gas Exploration and Production $ 184 $ 262 $ 332 $ 715
Downstream Gas ....................... 14 -- 23 --
Oil Products ......................... 117 128 128 139
Chemical Products .................... 75 151 180 257
Other ................................ 5 (2) 9 (1)
Corporate Items ...................... (79) (8) (184) (62)
------ ------ ------ ------
NET INCOME ............................... $ 316 $ 531 $ 488 $1,048
====== ====== ====== ======
</TABLE>
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<PAGE> 3
SHELL OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Millions of Dollars
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..................... $ 286 $ 342
Receivables and prepayments, less allowance for
doubtful accounts .......................... 3,056 3,414
Owing by related parties ...................... 562 280
Inventories of oils and chemicals ............. 902 974
Inventories of materials and supplies ......... 176 218
------- -------
TOTAL CURRENT ASSETS ................ 4,982 5,228
INVESTMENTS ...................................... 10,289 6,456
LONG-TERM RECEIVABLES AND DEFERRED CHARGES ....... 1,885 1,150
PROPERTY, PLANT AND EQUIPMENT AT COST, LESS
ACCUMULATED DEPRECIATION, DEPLETION AND
AMORTIZATION OF $13,413 AT JUNE 30, 1998
AND $16,505 AT DECEMBER 31, 1997 .............. 14,184 16,767
GOODWILL, NET .................................... 1,022 --
------- -------
TOTAL ............................... $32,362 $29,601
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable - trade ...................... $ 1,541 $ 2,257
Other payables and accruals ................... 1,366 1,281
Income, operating and consumer taxes .......... 81 186
Owing to related parties ...................... 394 303
Short-term debt ............................... 6,756 3,539
------- -------
TOTAL CURRENT LIABILITIES ............. 10,138 7,566
LONG-TERM DEBT ................................... 769 585
DEFERRED INCOME TAXES ............................ 3,338 3,339
LONG-TERM LIABILITIES ............................ 2,252 2,154
MINORITY INTEREST ................................ 1,324 1,079
SHAREHOLDER'S EQUITY
Common stock - 1,000 shares of $10 per share
par value ................................. -- --
Capital in excess of par value ................ 2,206 2,206
Earnings reinvested ........................... 12,335 12,672
------- -------
TOTAL SHAREHOLDER'S EQUITY ............ 14,541 14,878
------- -------
TOTAL ................................. $32,362 $29,601
======= =======
</TABLE>
3
<PAGE> 4
SHELL OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions of Dollars
<TABLE>
<CAPTION>
SIX MONTHS
----------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ................................................................ $ 488 $ 1,048
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion, amortization and retirements .................. 738 977
Dividends less than equity income ................................. (76) (152)
(Increases) decreases in working capital:
Receivables and prepayments .................................... (202) 907
Inventories .................................................... (161) (200)
Current payables and accruals .................................. (295) (1,098)
Deferred income taxes ............................................. (250) 142
Minority interest in income of subsidiaries ....................... 45 35
Other noncurrent items ............................................ 225 (142)
------- --------
Net Cash Provided by Operating Activities ......................... 512 1,517
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES
Capital expenditures:
Acquisition of Tejas ................................................... (1,376) --
Other .................................................................. (1,188) (1,485)
Proceeds from property sales and salvage .................................. 196 127
Other investments ......................................................... 241 (202)
------- --------
Net Cash Used for Investing Activities ......................... (2,127) (1,560)
------- --------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Proceeds from issuance of long-term debt .................................. 324 161
Principal payments on long-term debt ...................................... (370) (467)
Proceeds from sales of securities of subsidiaries ......................... 246 32
Dividends to shareholder .................................................. (825) (800)
Dividends to minority interest ............................................ (46) (31)
Increase (decrease) in short-term obligations ............................. 2,230 1,405
------- --------
Net Cash Provided by Financing Activities ...................... 1,559 300
------- --------
NET CASH FLOWS
Increase (Decrease) in cash and cash equivalents ......................... $ (56) $ 257
======= ========
CASH AND CASH EQUIVALENTS
Balance at beginning of period ............................................ $ 342 $ 393
Increase (decrease) in cash and cash equivalents .......................... (56) 257
------- --------
Balance at end of period ....................................... $ 286 $ 650
======= ========
</TABLE>
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SHELL OIL COMPANY AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
A. INTERIM FINANCIAL STATEMENT MATTERS
The unaudited financial statements and summarized notes of Shell Oil
Company ("the Company") and its consolidated subsidiaries ("Shell Oil") included
in this report do not include complete financial information and should be read
in conjunction with the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements filed with the Securities and Exchange
Commission ("the Commission") in the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997. The financial information presented in the
financial statements included in this report reflects all adjustments which are,
in the opinion of management, necessary for a fair statement of results for the
interim periods presented. Any such adjustments are of a normal recurring
nature, except as may otherwise be described in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The results for the second quarter and first six months of 1998 should
not be construed as necessarily indicative of future financial results.
B. SIGNIFICANT 1998 ALLIANCES AND ACQUISITIONS
EQUILON ENTERPRISES LLC. On January 15, 1998, Shell Oil and Texaco Inc.
(Texaco) reached agreement on the formation and operational start up, effective
January 1, 1998, of Equilon Enterprises LLC ("Equilon"). Equilon is a joint
venture which combines major elements of both companies' western and midwestern
United States refining and marketing businesses and both companies' nationwide
trading, transportation and lubricants businesses. Shell Oil owns 56 percent of
Equilon but does not exercise control and therefore accounts for its investment
in Equilon using the equity method of accounting. Shell Oil recorded its
investment in Equilon by removing from its consolidated balance sheet the values
of the assets and liabilities it contributed to the joint venture, or
approximately $6.2 billion and $2.3 billion, respectively, and, in turn,
recording the net of these amounts, or approximately $3.9 billion as its equity
investment in Equilon. Further detail concerning this new venture was included
in the Company's Current Report on Form 8-K filed with the Commission on January
30, 1998.
TEJAS GAS CORPORATION. In January 1998 Shell Oil acquired all of the
outstanding common stock of Tejas Gas Corporation ("Tejas"), a natural gas
pipeline company engaged in the business of purchasing, gathering, processing,
treating, storing, transporting and marketing natural gas, for $61.50 per share
which, on a fully diluted common stock basis, represented an aggregate common
stock purchase price of approximately $1.4 billion. In addition, Shell Oil
assumed Tejas' balance sheet debt and preferred stock of approximately $1.4
billion. Shell Oil accounted for this transaction using the purchase method of
accounting. 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 44 percent interest in Coral using the equity method of
accounting; however, with the completion of the Tejas acquisition, Shell Oil
fully consolidates its now 88 percent ownership interest in Coral.
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<PAGE> 6
The following summary, prepared on a pro forma basis, presents the
Shell Oil results of operations for the three month and six month periods ending
June 30, 1997 as if Equilon had been formed and Tejas had been acquired on
January 1, 1997:
SHELL OIL COMPANY AND SUBSIDIARIES
PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30, 1997 Ended June 30, 1997
------------------- -------------------
(Millions of dollars)
<S> <C> <C>
Gross Revenues.......... $ 5,377 $ 11,840
Net income.............. 523 1,033
</TABLE>
C. EQUILON ENTERPRISES LLC
The following unaudited financial information for Equilon is reflected
on a 100 percent Equilon basis:
<TABLE>
<CAPTION>
Three Month Period Six Month Period
Ended June 30, 1998 Ended June 30, 1998
------------------- -------------------
(Millions of dollars)
<S> <C> <C>
Gross Revenues.......... $6,070 $ 12,095
Income Before Tax....... 198 310
</TABLE>
As a limited liability company, Equilon's results of operations do not
include income tax liability, but rather the income tax liability is reflected
in the results of operations of the parent companies. Shell Oil's 56 percent
equity share of Equilon's Income Before Tax and the corresponding income tax
expense is reflected currently in Shell Oil's Consolidated Statement of Income.
D. 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
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<PAGE> 7
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.
------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Shell Oil reported second quarter net income of $316 million, a
decrease of $215 million, or 40 percent, from the second quarter of 1997.
Excluding special items in both quarters, adjusted net income in the second
quarter of 1998 totaled $312 million, a decrease of $164 million or 34 percent.
The key operational elements contributing to lower earnings in the
second quarter of 1998 as compared to 1997 were lower average crude oil prices
and lower earnings from the chemical business. Domestic crude oil production
increased 13 percent over the same period last year, while natural gas
production rose 20 percent.
For the first six months of 1998, net income was $488 million, a
decrease of $560 million, or 53 percent, from the same period last year.
Excluding special items, adjusted net income for 1998 totaled $483 million, a
decrease of $492 million, or 50 percent, from 1997.
Contributing to the lower earnings in the first six months of 1998 were
lower average prices for crude oil and natural gas and lower earnings from the
chemical business. Results in oil products were
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<PAGE> 8
virtually unchanged during 1998 compared to 1997 due in part to a continuing
very competitive business environment.
Special items in the 1998 periods benefited net income $4 million for
the quarter and $5 million for the first half. Special items in the second
quarter of 1998 were comprised primarily of gains from oil and gas property
sales offset in part by redundancy provisions. Special items increased 1997 net
income by $55 million for the quarter and $73 million in the first six months.
OIL AND GAS EXPLORATION AND PRODUCTION
<TABLE>
<CAPTION>
Income Highlights Second Quarter Six Months
- ----------------- -------------------- ---------------------
(millions of dollars) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Segment Net Income ..... 184 262 332 715
Special Items .......... 39 10 42 36
--- --- --- ---
Adjusted Net Income .... 145 252 290 679
</TABLE>
Oil and gas exploration and production net income in the second quarter
of 1998 totaled $184 million, a decrease of $78 million from 1997. For the first
half of 1998, earnings were $332 million, down $383 million. Excluding special
items in the comparable periods, adjusted net income declined $107 million in
the 1998 quarter versus 1997 and $389 million in the first-half comparison.
Production of crude oil and natural gas in both 1998 periods increased
significantly; however, sharply lower crude oil prices more than offset these
gains. For the second quarter of 1998, domestic crude oil prices averaged $11.17
per barrel, decreasing $5.26 per barrel, or 32 percent, from the 1997 quarter.
For the first six months of 1998, average domestic crude oil prices decreased
$6.33 per barrel, or 35 percent. Operating expenses were higher in both 1998
periods, although on a per barrel equivalent basis, costs were lower.
Average domestic crude oil production during the 1998 periods was
460,000 barrels per day for the quarter and 455,000 barrels per day for the
first six months, increasing 52,000 and 56,000 barrels per day, respectively,
compared to 1997. These increases resulted primarily from the deepwater Gulf of
Mexico development, and more than offset natural crude oil production declines
elsewhere. Natural gas production averaged 2,076 million cubic feet daily during
the second quarter of 1998, increasing 343 million cubic feet daily, or 20
percent. For the first six months of 1998, natural gas production averaged 1,987
million cubic feet daily, an increase of 241 million, or 14 percent. This year's
second quarter natural gas production represents an all-time high for Shell Oil.
These record levels are largely attributable to new and increased production
from deepwater Gulf of Mexico.
Domestic crude oil and natural gas production numbers include Shell
Oil's net production plus a pro rata share, based on ownership interest, of
domestic equity companies' production; price and expenditure information
excludes equity company data. Equity companies are those companies in which
Shell Oil has significant influence but not control.
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DOWNSTREAM GAS
<TABLE>
<CAPTION>
Income Highlights Second Quarter Six Months
- ----------------- ---------------------- ------------------
(millions of dollars) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Segment Net Income ....... 14 -- 23 --
Special Items ............ -- -- -- --
---- ---- ---- ----
Adjusted Net Income .... 14 -- 23 --
</TABLE>
Downstream gas, a new operating segment of Shell Oil, had earnings for
the second quarter of 1998 of $14 million, essentially unchanged from the first
quarter of this year. This is the initial year of reporting, and as a result no
comparative earnings data are available for 1997.
In January 1998, Shell Oil acquired Tejas, including Tejas' interest in
Coral, as further discussed in Note B of the Notes to Interim Financial
Statements. In addition to Shell Oil's previously existing natural gas marketing
business and its infrastructure of natural gas pipelines in the Gulf of Mexico,
the new downstream gas segment also includes the operations of Tejas, Coral and
Corpus Christi Natural Gas, which was acquired in 1997.
During the second quarter of 1998, downstream gas transported natural
gas volumes were about 6.8 BCF/D, up slightly over the first quarter of 1998.
Gas transport margins were essentially unchanged from quarter to quarter;
however, gas processing margins declined.
OIL PRODUCTS
<TABLE>
<CAPTION>
Income Highlights Second Quarter Six Months
- ----------------- -------------------- ------------------
(millions of dollars) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Segment Net Income ....... 117 128 128 139
Special Items ............ (29) (1) (30) (6)
---- ---- ---- ----
Adjusted Net Income .... 146 129 158 145
</TABLE>
Oil products earnings, including Shell Oil's equity share of the
earnings of Equilon, totaled $117 million in the second quarter of 1998, a
decrease of $11 million from 1997. In the first six months of 1998, earnings
totaled $128 million, down $11 million from 1997. However, after excluding
special items in comparable periods, adjusted net income increased $17 million
versus the 1997 quarter, and $13 million in the six-month comparison. Special
items in 1998 included a severance provision associated with the new downstream
refining and marketing alliances.
Overall, the key factor in the higher operating earnings in the 1998
periods compared to 1997 was an improvement in refined product margins. Earnings
in the second quarter of 1998 also improved over the prior quarter, mainly due
to higher margins and lower manufacturing costs associated with turnarounds.
As further discussed in Note B of the Notes to Interim Financial
Statements and as reported in the Company's Current Report on Form 8-K filed
with the Commission on January 30, 1998, operations began, effective January 1,
1998, in Equilon, the new refining and marketing venture jointly owned by Shell
Oil and Texaco. Equilon combines major elements of both companies' western and
midwestern
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United States refining and marketing businesses and their nationwide trading,
transportation and lubricants businesses.
CHEMICAL PRODUCTS
<TABLE>
<CAPTION>
Income Highlights Second Quarter Six Months
- ----------------- -------------------- ----------------
(millions of dollars) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Segment Net Income ....... 75 151 180 257
Special Items ............ (11) (4) (9) (7)
---- ---- ---- ----
Adjusted Net Income .... 86 155 189 264
</TABLE>
Chemical products earnings were $75 million in the second quarter of
1998, a decrease of $76 million from 1997. For the first six months of 1998,
chemical products earnings totaled $180 million, a decrease of $77 million.
Excluding special items in the comparable periods, adjusted net income for the
1998 quarter decreased $69 million and for the first six months decreased $75
million.
Earnings declined in the second quarter of 1998 due to lower prices for
primary chemicals, which more than offset the benefits derived from lower
feedstock costs, and to a $9 million charge associated with the restructuring of
a business. For the six months of 1998, lower primary chemical margins and
higher operating expenses, primarily turnaround costs, contributed to the
earnings decline.
OTHER
The other segment net income in the second quarter and first half of
1998 was $5 million and $9 million, respectively, compared to net losses of $2
million and $1 million in the in the same 1997 periods.
CORPORATE ITEMS
Corporate items reduced earnings $79 million and $184 million in the
second quarter and first half of 1998, respectively, compared to a reduction to
earnings of $8 million and $62 million in the comparable 1997 periods. Excluding
special items, corporate charges totaled $84 million in the 1998 quarter and
$186 million in the first six months of 1998 compared to costs of $58 million
and $112 million in the same 1997 periods. Higher financing costs in both 1998
periods were the primary factor in the increases.
FINANCIAL CONDITION
CAPITAL RESOURCES AND LIQUIDITY
Cash flow provided by operating activities totaled $512 million for the
first six months of 1998, compared with $1,517 million in the comparable period
last year, a decrease of $1,005 million. The period to period decrease was
attributable to lower earnings and, in part, to lower dividends from equity
investments. Cash generated from operating activities, coupled with an increase
in debt and sale of securities totaling $2,430 million, and proceeds from
property sales and other investments of $437 million in the first six months of
1998, was used primarily for capital expenditures of $2,564 million and dividend
payments of $871 million.
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OTHER MATTERS
RECENT DEVELOPMENTS
As reported in the Company's Current Report on Form 8-K filed with the
Commission on July 1, 1998, on July 1, 1998, Shell Oil, Texaco and Saudi Arabian
Oil Company (Saudi Aramco) jointly announced the formation and operational
start-up of Motiva Enterprises LLC (Motiva), a joint venture combining major
elements of the three companies' eastern and Gulf Coast U.S. refining and
marketing businesses, including assets previously held by Star Enterprise, a
partnership of corporate affiliates of Texaco and Saudi Aramco. Shell Oil has 35
percent ownership of Motiva, and Texaco and Saudi Refining, Inc., a corporate
affiliate of Saudi Aramco, each have 32.5 percent ownership of the company (such
ownership to be subject to adjustment in the future based on the performance of
the assets). Shell Oil will account for its investment in Motiva using the
equity method of accounting.
On June 30, 1998 Shell Oil conveyed substantially all of its onshore
oil and gas property interests in south Louisiana (excluding offshore interests
and certain interests in Louisiana state waters and the onshore areas adjacent
to such waters) to The Meridian Resource Corporation (Meridian) in exchange for
cash, and common and preferred stock interests in Meridian as reported in the
Company's Schedule 13D filed with the Commission on July 10, 1998.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This new standard is effective
for fiscal years beginning after June 15, 1999 (January 1, 2000 for the
Company). SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The Company has not yet completed
its evaluation of the impact of the adoption of this new standard.
In addition to the economic conditions and other matters discussed
above affecting Shell Oil, the operations, earnings and financial condition of
Shell Oil may be affected by political developments; litigation; and
legislation, regulation and other actions taken by federal, state, local and
foreign governmental entities, including those matters discussed in Note D of
the Notes to Interim Financial Statements.
-------------------------
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In July 1998, an exploration and production subsidiary of the Company
agreed to a civil penalty in the amount of $128 thousand, to be paid in cash or
by funding of a fugitive emission and odor study. The penalty was assessed by
the San Luis Obispo Air Pollution Control District.
In 1998, the Shell Deer Park Chemical Plant was informed by the
Environmental Protection Agency ("EPA") that the agency is considering an
enforcement action under Section 112(r)(1) of the Clean Air Act Amendments of
1990. The EPA and Shell are engaging in discussions regarding such potential
alleged past violations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
2.1 Asset Transfer and Liability Assumption Agreement
dated as of July 1, 1998 among Shell Oil, Texaco Inc.
and Saudi Arabian Oil Company for the creation of
Motiva Enterprises LLC.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed in the second quarter of 1998.
However, on July 1, 1998, the Company filed a Current Report on
Form 8-K regarding the formation and operational startup of
Motiva Enterprises LLC on July 1, 1998.
SIGNATURES
Pursuant to the requirements 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.
SHELL OIL COMPANY
By N. J. CARUSO
------------------------
N. J. Caruso, Controller
(Principal Accounting and
Duly Authorized Officer)
Date: July 29, 1998
12
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1 Asset Transfer and Liability Assumption Agreement
dated as of July 1, 1998 among Shell Oil, Texaco Inc.
and Saudi Arabian Oil Company for the creation of
Motiva Enterprises LLC.
27. Financial Data Schedule.
</TABLE>
<PAGE> 1
Exhibit 2.1
================================================================================
ASSET TRANSFER
AND
LIABILITY ASSUMPTION AGREEMENT
AMONG
STAR ENTERPRISE,
SAUDI REFINING, INC.,
TEXACO REFINING AND MARKETING (EAST) INC.,
SHELL OIL COMPANY,
SHELL NORCO REFINING COMPANY,
AND
MOTIVA ENTERPRISES LLC
dated as of
July 1, 1998
================================================================================
ASSET TRANSFER AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS AND USAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.1. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II CONTRIBUTIONS TO THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 2
SECTION 2.1. Contribution of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.2. Transfer Subject to Permitted Exceptions and Agreement Terms . . . . . . . . . . . . . . . . . 2
SECTION 2.3. Excluded Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.4. Assignment of Contracts and Rights; Equitable Ownership . . . . . . . . . . . . . . . . . . . 2
ARTICLE III ASSUMPTION OF LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 4
SECTION 3.1. Assumed Liabilities and Obligations; Exclusions . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE IV INSTRUMENTS OF TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 4
SECTION 4.1. Shell Instruments of Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 4.2. Star Instruments of Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE V CERTAIN POST-CLOSING MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 6
SECTION 5.1. Post-Closing Recordings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 5.2. Access to and Retention of Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 5.3. Availability of Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 5.4. Mail; Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 5.5. Existing Insurance Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE VI REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 6.1. Representations and Warranties of Shell and Shell
Norco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
(i)
ASSET TRANSFER AGREEMENT
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
(a) Good, Indefeasible or Marketable Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(b) Pro Forma Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(c) Shell Contributed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 6.2. Representations and Warranties Regarding Star . . . . . . . . . . . . . . . . . . . . . . . . . 11
(a) Good, Indefeasible or Marketable Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(b) Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(c) Star Contributed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE VII MISCELLANEOUS . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 7.1. Further Assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 7.2. Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 7.3. Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
SCHEDULES
Schedule A Usage and Definitions
Schedule B Procedural Conventions and Dispute Resolution
Schedule C Shell Shared Assets
Schedule D Shell Common Contracts
Schedule 2.1A Shell Asset List
Schedule 2.1B Star Asset List
Schedule 2.3A Shell Excluded Assets
Schedule 2.3B Star Excluded Assets
Schedule 3.1A Shell Assumed Liabilities
Schedule 3.1B Star Assumed Liabilities
(ii)
ASSET TRANSFER AGREEMENT
<PAGE> 4
EXHIBITS
Exhibit A-1 Shell Contributed Asset Master Bill of Sale
Exhibit A-2 Star Contributed Asset Master Bill of Sale
Exhibit B-1 Shell Contributed Asset Master Assignment
and Assumption of Contracts
Exhibit B-2 Star Contributed Asset Master Assignment
and Assumption of Contracts
Exhibit C-1 Shell Contributed Asset Master Assignment
and Assumption of Leases
Exhibit C-2 Star Contributed Asset Master Assignment
and Assumption of Leases
Exhibit D-1 Shell Contributed Asset Master Deed
Exhibit D-2 Star Contributed Asset Master Deed
Exhibit E-1 Shell Contributed Asset Master Assignment of Permits
Exhibit E-2 Star Contributed Asset Master Assignment of Permits
Exhibit F-1 Shell Contributed Asset Master Subleases
and Assignment and Assumption of Sublessor's
Interest in User Subleases (Financing Leases)
Exhibit F-2 Shell Contributed Asset Master Subleases
and Assumption of Sublessor's Interest
in User Subleases (Operating Leases)
Exhibit F-3 Star Contributed Asset Master Subleases
and Assumption of Sublessor's Interest
in User Subleases (Financing Leases)
Exhibit F-4 Star Contributed Asset Master Subleases
and Assumption of Sublessor's Interest
in User Subleases (Operating Leases)
Exhibit G-1 Shell Deed
Exhibit G-2 Star Deed
Exhibit H-1 Shell Assignment and Assumption of Leases
Exhibit H-2 Star Assignment and Assumption of Leases
Exhibit Y-1 Description of Norco Refinery
Exhibit Y-2 Description of Delaware City Refinery
Exhibit Y-3 Description of Convent Refinery
Exhibit Y-4 Description of Port Arthur Refinery
(iii)
ASSET TRANSFER AGREEMENT
<PAGE> 5
ASSET TRANSFER AND LIABILITY ASSUMPTION AGREEMENT (the "ASSET TRANSFER
AGREEMENT"), dated as of July 1, 1998, among Star Enterprise, a New York
general partnership ("STAR"), Saudi Refining, Inc., a Delaware corporation
("SRI"), Texaco Refining and Marketing (East) Inc., a Delaware corporation
("TRMI (EAST)"), Shell Oil Company, a Delaware corporation ("SHELL"), Shell
Norco Refining Company, a Delaware corporation ("SHELL NORCO") and Motiva
Enterprises LLC, a Delaware limited liability company (the "COMPANY").
R E C I T A L S :
WHEREAS, Texaco, Shell and SRI have entered into a Master Agreement,
dated as of June 22, 1998, whereby they have agreed, inter alia, to enter into,
and to cause the Company, Star and Shell Norco to enter into this Asset
Transfer Agreement and certain other Motiva Joint Venture Documents for the
purpose of organizing and operating the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, and for other good and valuable
consideration, the receipt and adequacy of which are acknowledged by each of
the parties hereto, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS AND USAGE
SECTION 1.1. Defined Terms. Unless the context shall otherwise
require, terms used and not defined herein shall have the meanings assigned
thereto in Schedule A hereto and all rules as to usage set forth therein shall
apply hereto. Schedule B hereto contains provisions regarding the Procedural
Conventions and Dispute Resolution which shall govern this Asset Transfer
Agreement. Such Schedules A and B are hereby incorporated herein by reference.
ASSET TRANSFER AGREEMENT
<PAGE> 6
ARTICLE II
CONTRIBUTIONS TO THE COMPANY
SECTION 2.1. Contribution of Assets. At the Effective Time:
(a) First, SRI and TRMI (East), severally, shall (i) cause Star to
transfer directly to the Company all of Star's right, title and interest in the
Star Contributed Assets and (ii) transfer directly to the Company all of their
respective right, title and interest in StarStaff Inc.; and
(b) Second, Shell and Shell Norco shall each transfer or cause to be
transferred directly to the Company all of its and its Affiliates' right, title
and interest in the Shell Contributed Assets.
SECTION 2.2. Transfer Subject to Permitted Exceptions and Agreement
Terms. The Contributed Assets shall be transferred to the Company subject to
Permitted Exceptions and in accordance with, and subject to, all provisions of
the Master Agreement and this Asset Transfer Agreement whether or not any of
the Transfer Instruments contains a specific exception for or reference to
Permitted Exceptions, the Master Agreement or this Asset Transfer Agreement.
SECTION 2.3. Excluded Assets. No party to this Asset Transfer
Agreement nor any of its Affiliates shall transfer any right, title or interest
with respect to the Excluded Assets.
SECTION 2.4. Assignment of Contracts and Rights; Equitable Ownership.
(a) Without limitation to any representation, warranty or indemnification
obligation set forth in the Master Agreement, this Asset Transfer Agreement
shall not constitute an agreement to assign or assume any Contributed Contract
or any claim, right, benefit, or liability thereunder, if such assignment,
without the approval or consent of a Third Party thereto, would be ineffective
or would constitute a breach or other contravention thereof or give rise to any
right of termination thereof and such approval or consent is not obtained. The
party required to contribute such Contributed Contract shall use its reasonable
efforts (which shall not require any payment of money to any Third Party by
such party or any of its Affiliates) to obtain the approval or consent of such
Third Party for the assignment to or assumption by the Company of any such
Contributed Contract, claim, right, benefit or liability arising thereunder.
If as of the Effective Time such assignment or assumption will be ineffective
or will give rise to any right of termination
-2-
ASSET TRANSFER AGREEMENT
<PAGE> 7
thereof, the parties will cooperate in arranging a mutually agreeable
alternative to enable the Company to obtain the benefits and assume the
obligations under such Contributed Contract as of the Effective Time or as soon
as practicable thereafter (including through a sub-contracting, sub-licensing,
sub-participation or sub-leasing arrangement, or an arrangement under which the
Person contributing such Contributed Contract would enforce such Contract for
the benefit of the Company, with the Company, to the extent permissible,
assuming such Person's executory obligations and any and all rights of such
Person against the other party thereto). If the approval of the other party to
such Contributed Contract is obtained, such approval will, as between the
Person contributing such Contributed Contract and the Company, constitute a
confirmation (automatically and without further action of the parties) that
such Contributed Contract is assigned to the Company as of the Effective Time,
and (automatically and without further action of the parties) that the
liabilities with respect to such Contributed Contract are assumed as of the
Effective Time.
(b) The parties hereto agree that if any Contributed Assets or any
claim, right, benefit or liability thereunder are not transferred to the
Company at the Effective Time as a result of any restriction under any
Applicable Law or Contract that prohibits such transfer or makes such transfer
unduly burdensome, the party required to contribute such Contributed Assets
will use its reasonable efforts (which shall not require any payment of money
to any Third Party by such party or any of its Affiliates) to obtain such
Contractual Consents or Governmental Consents as might be required to
consummate the contributions in respect of such assets as soon as practicable
after the Effective Time. During the period between the Effective Time and the
consummation of such contribution, such party shall operate all such assets
pursuant to instructions from the Company and all benefits of, and risks
arising out of or related to, the ownership and operation of such assets shall
be for the account of the Company. The parties hereto agree that, at or as
promptly as practicable after the Effective Time, they will enter (and will
cause the Company and each applicable Affiliate and Specified Subsidiary to
enter) into such agreements as might be reasonably required to carry out the
intent of the immediately preceding sentence, including agreements (i)
specifying, to the extent feasible, such assets, (ii) setting up separate
accounting systems for such assets, (iii) providing for undertaking by the
Company of any indemnity obligations of the contributing party in respect of
such assets (other than such obligations set forth in the Motiva Joint Venture
Documents), (iv) providing that until the legal ownership is transferred to the
Company, each party will treat such assets in every respect as being equitably
owned by the Company as of the Effective Time and (v) providing such further
specific assurances as the Company or another party may reasonably request.
-3-
ASSET TRANSFER AGREEMENT
<PAGE> 8
ARTICLE III
ASSUMPTION OF LIABILITIES
SECTION 3.1. Assumed Liabilities and Obligations; Exclusions. (a) At
the Effective Time, the Company shall assume and thereafter pay, perform or
discharge the Assumed Liabilities. Such assumption may be effectuated by the
Company making full payments in respect of any Assumed Liability at the time of
the discharge of such Assumed Liability to any Person which, after the
Effective Time, remained liable in respect of such Assumed Liability and
thereafter discharged such Assumed Liability in accordance with the terms of
the agreement or instrument under which such Assumed Liability arose (but only
to the extent that such discharge was in accordance with the terms of the
relevant agreement or instrument as in effect at the Effective Time).
(b) Upon the terms and subject to the conditions hereof and in
consideration of the transfer of the Contributed Assets, the Company shall,
effective as of the Effective Time, perform and discharge all obligations of
Shell, Shell Norco and Star under the Contributed Contracts.
(c) Except as otherwise provided in Section 3.1(a) above, after
the Effective Time, neither Shell nor its Affiliates nor Star nor its
Affiliates shall pay, perform or discharge, in whole or in part, any Assumed
Liability or any obligation under the Contributed Contracts without the prior
written consent of the Company.
ARTICLE IV
INSTRUMENTS OF TRANSFER
SECTION 4.1. Shell Instruments of Transfer. At the Closing, Shell
and Shell Norco shall deliver such Shell Transfer Instruments (other than those
referred to in Section 5.1(a)), in form and substance reasonably satisfactory
to TRMI (East) and SRI, as shall be necessary or desirable to convey the Shell
Contributed Assets to the Company, including:
(a)(i) the Shell Contributed Asset Master Bill of Sale, (ii)
the Shell Contributed Asset Master Assignment and Assumption of
Contracts, (iii) the Shell Contributed Asset Master Assignment and
Assumption of Leases, (iv) the
-4-
ASSET TRANSFER AGREEMENT
<PAGE> 9
Shell Contributed Asset Master Deed, (v) the Shell Contributed Asset
Master Subleases and Assignment and Assumption of Sublessor's Interest
in User Subleases;
(b) a deed or deeds, in respect of the Norco Refinery and
the Shell Terminals, substantially in the form of Exhibit G-1 annexed
hereto; provided, however, that such modifications shall be made as
are necessary to conform Exhibit G-1 to the requirements of Applicable
Law in the jurisdictions where the real property conveyed by the deed
or deeds in question is located; and
(c) any other bills of sale, endorsements, assignments
and instruments necessary to transfer the Shell Contributed Assets,
other than those provided for in Section 5.1(a).
SECTION 4.2. Star Instruments of Transfer. At the Closing, Star
shall deliver such Star Transfer Instruments (other than those referred to in
Section 5.1(b)), in form and substance reasonably satisfactory to Shell, as
shall be necessary or desirable to convey the Star Contributed Assets to the
Company, including:
(a)(i) the Star Contributed Asset Master Bill of Sale, (ii)
the Star Contributed Asset Master Assignment and Assumption of
Contracts, (iii) the Star Contributed Asset Master Assignment and
Assumption of Leases, (iv) the Star Contributed Asset Master Deed, (v)
the Star Contributed Asset Master Subleases and Assignment and
Assumption of Sublessor's Interest in User Subleases;
(b) a deed or deeds, in respect of the Star Refineries
and the Star Terminals, substantially in the form of Exhibit G-2
annexed hereto; provided, however, that such modifications shall be
made as are necessary to conform Exhibit G-2 to the requirements of
Applicable Law in the jurisdictions where the real property conveyed
by the deed or deeds in question is located; and
(c) any other bills of sale, endorsements, assignments
and instruments necessary to transfer the Star Contributed Assets,
other than those provided for in Section 5.1(b).
-5-
ASSET TRANSFER AGREEMENT
<PAGE> 10
ARTICLE V
CERTAIN POST-CLOSING MATTERS
SECTION 5.1. Post-Closing Recordings. (a) Shell agrees that it will
use its best efforts to submit those deeds described in Section 4.1(b) to be
recorded on behalf of the Company within ninety (90) Business Days after the
later of the Closing Date or the Effective Time. Shell will use its best
efforts to (i) deliver or cause to be delivered to the Company (x) deeds to be
recorded substantially in the form of Exhibit G-1 (with such modifications as
are necessary to conform Exhibit G-1 to the requirements of Applicable Law in
the jurisdictions where the real property conveyed by the deed or deeds in
question is located) for all real property owned by Shell or Shell Norco that
is included in the Shell Contributed Assets, deeds for which were not delivered
to the Company in accordance with Section 4.1(b), (y) all transfer and gains
tax returns required by any Governmental Entity in respect of the properties
transferred by such deeds, and (z) subject to Section 2.4 hereof, assignments
of lease to be recorded substantially in the form of Exhibit H-1 with respect
to all real property leased by Shell or Shell Norco that is included in the
Shell Contributed Assets and (ii) cause such deeds and such assignments of
leases (with respect to recorded leases) to be recorded, in each case, within
one hundred eighty (180) days after the later of the Closing Date or the
Effective Time. Promptly upon receipt of any evidence of recordation in
connection with the recording of deeds provided for in this Section 5.1(a),
Shell shall provide the Company with evidence of such recording. Costs of
title and survey documentation, recordation, transfer taxes, deed stamps, sales
taxes and similar charges relating to Shell Transfer Instruments delivered
under Section 4.1 or under this Section 5.1(a) or otherwise arising out of the
transfers contemplated pursuant to this Asset Transfer Agreement shall be borne
by Shell or Shell Norco.
(b) Star agrees that it will use its best efforts to submit those
deeds described in Section 4.2(b) to be recorded on behalf of the Company
within ninety (90) Business Days after the later of the Closing Date or the
Effective Time. Star will use its best efforts to (i) deliver or cause to be
delivered to the Company (x) deeds to be recorded substantially in the form of
Exhibit G-2 (with such modifications as are necessary to conform Exhibit G-2 to
the requirements of Applicable Law in the jurisdictions where the real property
conveyed by the deed or deeds in question is located) for all real property
owned by Star that is included in the Star Contributed Assets, deeds for which
were not delivered to the Company in accordance with Section 4.2(b), (y) all
transfer and gains tax returns required by any Governmental Entity in respect
of the properties
-6-
ASSET TRANSFER AGREEMENT
<PAGE> 11
transferred by such deeds, and (z) subject to Section 2.4 hereof, assignments
of lease to be recorded substantially in the form of Exhibit H-2 with respect
to all real property leased by Star that is included in the Star Contributed
Assets and (ii) cause such deeds and such assignments of leases (with respect
to recorded leases) to be recorded, in each case, within one hundred eighty
(180) days after the later of the Closing Date or the Effective Time. Promptly
upon receipt of any evidence of recordation in connection with the recording of
deeds provided for in this Section 5.1(b), Star shall provide the Company with
evidence of such recording. Costs of title and survey documentation,
recordation, transfer taxes, deed stamps, sales taxes and similar charges
relating to Star Transfer Instruments delivered under Section 4.2 or under this
Section 5.1(b) or otherwise arising out of the transfers contemplated pursuant
to this Asset Transfer Agreement shall be borne by Star.
(c) Except with respect to Contributed Assets covered under
Section 2.4, all deeds and assignments of lease shall be dated the Effective
Time, and notwithstanding the date of recordation thereof, as between the
parties hereto the date of transfer with respect to the Contributed Assets
shall be the Effective Time. Notwithstanding the foregoing, in the event that
any penalties or interest will be payable to any Governmental Entity with
respect to any recording or transfer tax or fee due to any difference in the
date of the deeds and the recorded assignments of lease and the date of actual
recordation, the party submitting such deed or assignment of lease may date
such document as of such later date as may be necessary to prevent the
incurrence of such penalties or interest, it being agreed that notwithstanding
the date of such deed or assignment of lease, as between the parties, the date
of transfer shall be the Effective Time. During the period between the
Effective Time and the date of recordation of the deeds and any recorded
assignments of lease, the transferor of the relevant Contributed Assets shall
take no action adversely affecting the Company's title thereto.
SECTION 5.2. Access to and Retention of Records. As of the Effective
Time, the Company shall acquire and take possession of the Books and Records,
provided, that if any part of such Books and Records cannot without
unreasonable effort be separated from books, records, files and other data that
do not constitute Books and Records or relate to services to be provided to the
Company, then Shell, Star, TRMI (East), SRI or their relevant Affiliates, as
the case may be, shall retain such part of the Books and Records and make such
part available to the Company as provided herein. Each of the parties hereto
agrees that it shall, and shall cause its relevant Affiliates to, (i) preserve
and keep the Books and Records or the parts thereof in its possession, as the
case may be, (A) in accordance with their respective records retention
programs, or (B) for any longer period as may be required by any Governmental
Entity or ongoing litigation or as
-7-
ASSET TRANSFER AGREEMENT
<PAGE> 12
required by any of the Motiva Joint Venture Documents and (ii) during such
period, subject to the Confidentiality Agreement, shall allow each other
party's counsel, accountants, officers, employees and other representatives
access to such Books and Records upon such other party's reasonable request and
during normal business hours for the purpose of examining and, at the examining
party's expense, copying them, to the extent reasonably required by such party
in connection with (A) any insurance claims by, legal proceedings against or
governmental investigations of such party, (B) the preparation of any tax
return required to be filed by such party, the defense of any audit,
examination, administrative appeal or litigation of any tax return, or (C) any
other reasonable business purpose reasonably related to such party's or its
Affiliates' Ownership Interest; provided that Star may transfer any Books or
Records in its possession to the Company, SRI or TRMI (East) upon or in
anticipation of its dissolution.
SECTION 5.3. Availability of Personnel. Each of the parties hereto
shall afford, and shall cause their respective Affiliates to afford, to each
other on a reasonable basis their respective personnel as necessary to permit
the Company, as the case may be, to provide background information necessary to
(i) prepare tax returns, (ii) prosecute Claims or (iii) investigate, defend
against, or otherwise oppose any pending or threatened Claim against any party
or any of such party's Affiliates, as the case may be, in each case, in
connection with the Contributed Assets. The party affording its, or its
Affiliates', personnel shall be reimbursed by the other party for its
reasonable incremental out- of-pocket expenses of such personnel, but shall not
charge any other fee to any other party hereto.
SECTION 5.4. Mail; Payments. (a) Each of Shell, Star, TRMI (East),
Shell Norco and SRI authorizes and empowers the Company from and after the
Effective Time to receive and open all mail and other communications directed
to any of Shell, Star, TRMI (East), Shell Norco, SRI or their Affiliates and
received by the Company, and, except for matters as to which Shell, TRMI
(East), SRI or any of their respective Affiliates is providing indemnification
under any Motiva Joint Venture Document, to act with respect to such
communications in such manner as the Company may elect if such communications
relate to the Contributed Assets. If such communications do not relate to the
Contributed Assets or relate to matters as to which Shell, TRMI (East) or SRI
is providing indemnification under any Motiva Joint Venture Document, the
Company shall forward the same promptly to the party (or parties) providing
such indemnification or to whom such communications relate. Each of Shell,
Star, TRMI (East), Shell Norco and SRI shall, and shall cause their respective
Affiliates to, promptly deliver to the Company any cash, checks, other
instruments of payment and funds to which the
-8-
ASSET TRANSFER AGREEMENT
<PAGE> 13
Company is entitled and shall hold such cash, checks, other instruments of
payment and funds in trust for the Company until such delivery. The Company
shall promptly deliver to Shell, Star, TRMI (East), SRI, Shell Norco or their
Affiliates, as applicable, any cash, checks or other instruments of payment to
which such entity is entitled and shall hold such cash, checks or other
instruments of payment in trust for such entity until such delivery.
(b) The Company authorizes and empowers Shell, Star, TRMI (East),
Shell Norco, SRI and their Affiliates from and after the Effective Time to
receive and open all mail and other communications directed to the Company and
received by any such entity, and to act with respect to such communications in
such manner as such entity may elect if such communications do not relate to
the Contributed Assets or do relate to matters as to which such entity or any
of its Affiliates is providing indemnification under any Motiva Joint Venture
Document or, if such communications do relate to the Contributed Assets and not
to such indemnified matters, to forward the same promptly to the Company.
SECTION 5.5. Existing Insurance Coverage. If, after December 1, 1997,
any of Shell, Star, TRMI (East), Shell Norco, SRI or their Affiliates receives,
directly or indirectly, from any insurer cash proceeds attributable to (i)
casualty and property (but not liability or business interruption for periods
prior to the Effective Time) insurance coverage applicable to any of the
Contributed Assets with respect to any occurrence or any series of related
occurrences on or after December 1, 1997 or (ii) real property title insurance
in respect of any of the Contributed Assets, which proceeds, in either the case
of clause (i) or (ii), aggregate in excess of $1,000,000 for such occurrence or
series of related occurrences, then such recipient shall pay over such cash
proceeds to the Company (net of any deductible, co-payment, retro fees,
premiums, costs or other charges payable to the insurance carrier or obligations
to reimburse the insurance carrier for which it is liable and net of the cost of
collection) except to the extent that (x) the damage or loss incurred as a
result of such occurrence or series of occurrences was repaired, restored or
reimbursed by or on behalf of such recipient prior to the Effective Time or will
be obligated to be reimbursed by such recipient pursuant to the Motiva Joint
Venture Documents or (y) Shell, SRI and Texaco have otherwise expressly agreed
in writing that such proceeds shall not be paid over to the Company. Any such
payment paid over to the Company shall reduce any amounts payable by such
recipient or its Affiliates with respect to such occurrence under Article 8 of
the Master Agreement. Any other insurance proceeds received by any of Shell,
Star, TRMI (East), Shell Norco, SRI or their Affiliates with respect to any
occurrence or series of occurrences prior to the Effective Time shall be
retained by such recipient.
-9-
ASSET TRANSFER AGREEMENT
<PAGE> 14
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
SECTION 6.1. Representations and Warranties of Shell and Shell Norco.
Each of Shell and Shell Norco represents and warrants to each of the other
parties hereto as follows; provided that Shell and Shell Norco shall have no
liability to any other party hereto or any other Person (including any Person
indemnified under Article 8 of the Master Agreement) for the breach of any
representation or warranty hereunder to the extent that the facts or
circumstances that gave rise to such breach:
(i) were actually disclosed in writing in the Due Diligence
Process to any of the Due Diligence Representatives of such
other party;
(ii) would reasonably be expected to be discovered by such other
party based on facts or circumstances so disclosed in writing
during the Due Diligence Process; or
(iii) were actually known to such other party or such other party's
Due Diligence Representatives on or prior to the Closing Date.
(a) Good, Indefeasible or Marketable Title. With such
exceptions as would not, individually and in the aggregate, have a
Company Material Adverse Effect, each entity contributing Shell
Contributed Assets pursuant to Section 2.1 has good (and in the case
of interests in real property, indefeasible or marketable) title to
all Shell Contributed Assets so contributed thereby, free of all Liens
other than (x) Permitted Exceptions and (y) provisions in contracts,
licenses and agreements which prohibit or otherwise restrict
assignment and upon the granting of the deeds and other instruments of
transfer provided for herein, the Company shall receive good (and in
the case of interests in real property, indefeasible or marketable)
title to the Shell Contributed Assets as described above.
For the avoidance of doubt, in the event that any
representation or warranty with respect to title to the Shell
Contributed Assets set forth in any of the Shell Transfer Instruments
or implied by Applicable Law may be interpreted to create
representations or warranties other than those set forth in this
Section 6.1(a), the representation and warranty set forth in this
Section 6.1(a) shall
-10-
ASSET TRANSFER AGREEMENT
<PAGE> 15
govern and such other representations and warranties shall be without
force or effect.
(b) Pro Forma Financial Information. With such
exceptions as would not, individually and in the aggregate, have a
Company Material Adverse Effect:
(i) the Shell Pro Forma Financial Information
represents Shell's good faith allocation of the results of
operations and cash flows of Shell's oil products business
segment, for the periods indicated therein, among (A) the
Shell Valuated Units, (B) the businesses being contributed to
Equilon (including the assets to be held separately pursuant
to the Consent Order), (C) Shell's interest in the business
conducted by DPRLP and (D) the Shell Excluded Assets;
(ii) the Shell oil products business segment
information referred to in clause (i) was included in Shell's
audited financial statements for the periods indicated
therein; and
(iii) the Shell Pro Forma Financial Information was
not necessarily prepared in accordance with GAAP, but was
prepared with due care after reasonable inquiry and is a fair
presentation of the financial performance of the Shell
Valuated Units for the periods indicated therein.
(c) Shell Contributed Assets. With such
exceptions as would not, individually and in the aggregate, have a
Company Material Adverse Effect, except for the Shell Excluded Assets
and the Shell Intellectual Property Rights, the Shell Contributed
Assets constitute all of the assets used for or necessary to the
operation of the Shell Valuated Units in the ordinary course of
business and in substantially the same manner as such Shell Valuated
Units were operated as of December 1, 1997.
SECTION 6.2. Representations and Warranties Regarding Star. Each of
Star, TRMI (East) and SRI represents and warrants to each of the other parties
hereto as follows; provided that Star, TRMI (East) and SRI shall have no
liability to any other party hereto or any other Person (including any Person
indemnified under Article 8 of the Master Agreement) for the breach of any
representation or warranty hereunder to the extent that the facts or
circumstances that gave rise to such breach:
-11-
ASSET TRANSFER AGREEMENT
<PAGE> 16
(i) were actually disclosed in writing in the Due Diligence
Process to any of the Due Diligence Representatives of such
other party;
(ii) would reasonably be expected to be discovered by such other
party based on facts or circumstances so disclosed in writing
during the Due Diligence Process; or
(iii) were actually known to such other party or such other party's
Due Diligence Representatives on or prior to the Closing Date.
(a) Good, Indefeasible or Marketable Title. With such
exceptions as would not, individually and in the aggregate, have a
Company Material Adverse Effect, Star has good (and in the case of
interests in real property, indefeasible or marketable) title to all
Star Contributed Assets so contributed thereby, free of all Liens
other than (x) Permitted Exceptions and (y) provisions in contracts,
licenses and agreements which prohibit or otherwise restrict
assignment and upon the granting of the deeds and other instruments of
transfer provided for herein, the Company shall receive good (and in
the case of interests in real property, indefeasible or marketable)
title to the Star Contributed Assets as described above.
For the avoidance of doubt, in the event that any
representation or warranty with respect to title to the Star
Contributed Assets set forth in any of the Star Transfer Instruments
or implied by Applicable Law may be interpreted to create
representations or warranties other than those set forth in this
Section 6.2(a), the representation and warranty set forth in this
Section 6.2(a) shall govern and such other representations and
warranties shall be without force or effect.
(b) Financial Information. With such exceptions as would
not, individually and in the aggregate, have a Company Material
Adverse Effect, the Star Financial Statement (i) has been prepared
with due care after reasonable inquiry and (ii) is a fair presentation
of the financial performance and cash flow of Star.
(c) Star Contributed Assets. With such exceptions as
would not, individually and in the aggregate, have a Company Material
Adverse Effect, except for the Star Excluded Assets and the Texaco
Intellectual Property Rights, the Star Contributed Assets constitute
all of the assets used for or necessary to
-12-
ASSET TRANSFER AGREEMENT
<PAGE> 17
the operation of Star in the ordinary course of business and in
substantially the same manner as Star was operated as of December 1,
1997.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. Further Assurance. (a) From and after the
Effective Time, each of the parties hereto shall, at any time and from time to
time, at the request of any other party hereto, make, execute and deliver, or
use its best efforts to cause to be made, executed and delivered, such
assignments, conveyances, deeds, bills of sale, filings and other instruments,
agreements (including any agreements which may be necessary or desirable in
connection with the making of any filing or the obtaining of any approval in
any jurisdiction), consents and assurances and take or cause to be taken all
such action as the parties hereto may reasonably request for the effectual
consummation of this Asset Transfer Agreement and the Motiva Joint Venture
Transactions. It is understood that this Section 7.1(a) may be applied to
require the assignment or conveyance (i) to the Company of assets owned or
leased by any party or its Affiliates that constitute Shell Contributed Assets
or Star Contributed Assets but by mistake were not assigned or conveyed to the
Company at the Effective Time, or (ii) to any party or Affiliate of a party of
assets transferred to the Company that were not listed on the Asset List (or
was listed on the Asset List but was an Excluded Asset or the non-contributed
portion of a Shell Common Contract or Shell Shared Asset) and are not Shell
Contributed Assets or Star Contributed Assets, but were assigned or conveyed by
mistake to the Company.
(b) From time to time after the Effective Time, as and when
requested by the Company, TRMI (East) shall, or shall cause its Worldwide
Affiliates to execute and deliver, or cause to be executed and delivered, all
such documents and instruments and shall take, or cause to be taken, all such
further or other actions as any other party may reasonably deem necessary or
desirable to transfer legal or beneficial title to any Star Contributed Asset
which should have been transferred by TRMI (East) or its Worldwide Affiliates
to Star effective as of December 31, 1988 in accordance with the transaction
documents by which Star was formed which for any reason was not transferred.
SECTION 7.2. Effectiveness. This Asset Transfer Agreement shall be
effective as of the Effective Time.
-13-
ASSET TRANSFER AGREEMENT
<PAGE> 18
SECTION 7.3. Exclusivity. For avoidance of doubt, Section 8.01 of
the Master Agreement shall constitute the exclusive remedy for any
misrepresentation or breach of warranty or covenant contained in or arising
under this Asset Transfer Agreement.
-14-
ASSET TRANSFER AGREEMENT
<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have caused this Asset Transfer
Agreement to be duly executed as of the day and year first above written.
STAR ENTERPRISE
By: SAUDI REFINING, INC.
PARTNER
By /s/ F. R. Woelfel
----------------------------------
Title: President and Chief Executive
Officer
By: TEXACO REFINING AND
MARKETING (EAST) INC.
PARTNER
By /s/ L. Wilson Berry Jr.
----------------------------------
Title: Vice President
-15-
ASSET TRANSFER AGREEMENT
<PAGE> 20
SAUDI REFINING, INC.
By /s/ F. R. Woelfel
-----------------------------------
Title: President and Chief Executive
Officer
-16-
ASSET TRANSFER AGREEMENT
<PAGE> 21
TEXACO REFINING AND
MARKETING (EAST) INC.
By /s/ G. F. Tilton
-----------------------------------
Title: Chairman
-17-
ASSET TRANSFER AGREEMENT
<PAGE> 22
SHELL OIL COMPANY
By /s/ J. M. Morgan
------------------------------------
Title: Senior Vice President
-18
ASSET TRANSFER AGREEMENT
<PAGE> 23
SHELL NORCO REFINING COMPANY
By /s/ W. G. Hougland
------------------------------------
Title: Attorney-in-Fact
-19-
ASSET TRANSFER AGREEMENT
<PAGE> 24
MOTIVA ENTERPRISES LLC
By /s/ L. Wilson Berry Jr.
------------------------------------
Title: CEO
-20-
ASSET TRANSFER AGREEMENT
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<NAME> SHELL OIL COMPANY
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