SHELL OIL CO, 10-K, 1999-03-12

SHELL OIL CO
10-K, 1999-03-12
PETROLEUM REFINING

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<PAGE> 1
1998
================================================================================
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
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT 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)

<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:

NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
7 1/4% DEBENTURES DUE 2002 NEW YORK STOCK EXCHANGE
------------------------
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, 1999 -- 1,000 shares of Common Stock, of a par value of $10.00 a share.
------------------------
OMISSION OF CERTAIN INFORMATION

In accordance with General Instruction I 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," "forecasts," "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 or its equity companies 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 or its equity companies
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, including its equity companies, 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.

Shell Oil manages its business activities through four major operating
segments -- Oil and Gas Exploration and Production, Downstream Gas, Oil Products
and Chemical Products. Downstream Gas was established as a new operating segment
effective January 1, 1998. The Oil Products operating segment consists
predominantly of Shell Oil's investment in companies which are engaged in the
refining, transportation and marketing of oil products; Shell Oil accounts for
its investment in these companies using the equity method of accounting.

At December 31, 1998, Shell Oil had approximately 19,800 employees,
including approximately 6,100 employees who are currently assigned to the Oil
Products equity companies and who are expected to become employees of those
companies during 1999.

2
<PAGE> 3

COMPARABILITY OF DATA

The comparability of certain current and prior period financial and
operating data presented in this Annual Report has been materially affected as a
result of certain 1998 and 1997 events which have occurred other than in the
course of ordinary operations. Specifically, the comparability of such data and
related disclosures has been affected by the:

- Restructuring of assets, particularly in the Oil Products and the Oil and
Gas Exploration and Production operating segments, into joint venture
companies where Shell Oil has a non-controlling interest accounted for by
the equity method of accounting, as further discussed in Note 2 of the
Notes to Consolidated Financial statements included in Item 14a;

- Formation of a new operating segment -- Downstream Gas -- which combined
significant newly purchased assets with assets drawn from the Oil and Gas
segment of Shell Oil;

- Mandatory writedowns of the values of both certain assets held for sale
and certain retained assets primarily as the result of adverse market
conditions across all businesses, as further discussed in Note 3 of the
Notes to Consolidated Financial Statements included in Item 14a.

FINANCIAL INFORMATION BY MAJOR BUSINESS SEGMENT

Information on revenue, net income, segment assets and capital expenditures
of each business segment is reported in this item. The discussion of segment
results, including certain 1998 asset writedowns, 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.

The following is a summarized disaggregation of Shell Oil's consolidated
net income for each of the past three years. The 1997 and 1996 net income for
each segment has been restated to reflect the allocation to the segments of
interest income and interest expense previously reported as "Nonallocated
Items."

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(millions of dollars)
<S> <C> <C> <C>
SEGMENT NET INCOME (LOSS)
Oil and Gas Exploration and Production........... $(1,166) $1,327 $1,315
Downstream Gas................................... (703) -- --
Oil Products..................................... 169 410 336
Chemical Products................................ 57 441 231
All Other........................................ 23 (11) (22)
Nonallocated Items............................... (107) (63) 161
------- ------ ------
NET INCOME (LOSS)...................... $(1,727) $2,104 $2,021
======= ====== ======
</TABLE>

3
<PAGE> 4

OIL AND GAS EXPLORATION AND PRODUCTION

Exploration and Production Equity Companies

During 1997, Shell Oil completed 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 BP Amoco (formerly Amoco) in a limited partnership, Altura Energy, Ltd.
("Altura"), owned 36 percent by Shell Oil and 64 percent by BP 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 owned 58.6 percent of Aera until November 1,
1998 when its interest was reduced to 51.8 percent due to the additional
contribution of oil and gas properties by Mobil.

In January 1998, Shell Oil contributed certain overriding royalty interests
to Midstream Capital Corporation, a company in which Shell Oil controls 40
percent of the voting rights and third-party investors control 60 percent of the
voting rights. In July 1998, in two separate transactions, Shell Oil sold
substantially all of its south Louisiana onshore properties to The Meridian
Resource Corporation for cash, $135 million stated value of convertible
preferred stock and 12,082,030 shares of common stock. Also in 1998, Shell Oil
contributed certain carbon dioxide producing properties and related assets into
a limited partnership with Kinder Morgan Energy Partners, L.P.

The above described ventures and an international venture collectively
comprise the "E&P Equity Companies." Shell Oil Exploration and Production data
and disclosures do not include data or disclosures regarding Shell Oil's
ownership interest in such equity companies or the results of operations of such
companies except as and when specifically indicated. In the segment narrative,
the term "Total Shell Oil E&P" is used, in any context, to refer to results or
disclosures which include and refer to Shell Oil and its E&P Equity Companies.
In the segment financial statements and tabular disclosures, the results of
operations of E&P Equity Companies shall be included and reflected only in
clearly indicated separate equity company disclosures.

General

Revenues, net income, segment assets and other financial measures for the
Oil and Gas Exploration and Production segment for each of the past three years
were as set out in the table below. This information is presented in accordance
with Statement of Financial Accounting Standards (SFAS) No. 131 "Disclosure
About Segments of an Enterprise and Related Information," which was adopted by
Shell Oil in 1998. Certain 1997 and 1996 amounts have been restated to reflect
the adoption of SFAS No. 131. For additional information see Note 18 of the
Notes to Consolidated Financial Statements included in Item 14a and the
"Comparability of Data" discussion on page 3.

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(millions of dollars)
<S> <C> <C> <C>
Sales and other operating revenue (including
intersegment)......................................... $ 3,504 $ 6,252 $ 6,864
Less: Intersegment sales and revenues................... (1,333) (2,865) (3,344)
-------- ------- -------
Total sales and other operating revenue from external
customers............................................. $ 2,171 $ 3,387 $ 3,520
International revenues (included in total)............ $ 332 $ 479 $ 545
Equity in income (loss) of affiliates accounted for by
the equity method..................................... $ (2,126) $ 391 $ 123
Interest income......................................... 31 32 47
Interest expense........................................ 119 105 101
Depreciation, amortization, etc. ....................... 999 1,147 1,375
Income tax expense (benefit)............................ (671) 566 541
Segment net income (loss)............................... (1,166) 1,327 1,315
Investment in equity method investees................... 2,353 4,774 454
Segment assets.......................................... 10,106 13,123 12,557
Segment capital expenditures............................ 1,565 2,182 2,053
</TABLE>

4
<PAGE> 5

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 1998, domestic onshore production accounted
for 46 percent of Total Shell Oil E&P's domestic crude oil production and 28
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 91 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 1998, Shell Oil acquired interests in 149
tracts at a bonus cost of $70 million. Shell Oil now holds interests in 1,035
tracts in the Gulf, 730 of which are in water depths exceeding 1,500 feet,
comprising approximately one-fifth of the industry's deepwater leaseholds.

Exploration and development of offshore acreage continued in 1998 with
Shell Oil participating in the drilling of 86 gross wells, of which 63 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).

Development activity in Shell Oil's Deepwater operations in 1998 continued
at a brisk pace. Included in the fields listed below are three developments
announced in 1998 -- Macaroni, Angus and Europa. The three fields have a
combined anticipated peak daily production rate of 135,000 barrels of oil and
170 million cubic feet of gas. Also in 1998, the Mars field set a series of
daily oil production records, and Ram/Powell achieved its highest daily gas
rate. Mensa, which came on stream in 1997 from a water depth of 5,300 feet,
establishing a new world record water depth for hydrocarbon production, reached
a production rate of 280 million cubic feet of gas per day by late 1998.

Facility construction was completed in late 1998 for the Ursa tension leg
platform (TLP), Shell Oil's fourth TLP in the Gulf, and permanent installation
commenced. Production is scheduled to begin in mid-1999. In addition, the
Marlin, Macaroni and Angus fields are scheduled to begin production in 1999.

5
<PAGE> 6

The following Shell Oil fields are producing or under development at water
depths greater than 1,500 feet in the deepwater Gulf of Mexico, and represent
more than half of the total industry's similar fields in the deepwater Gulf:

<TABLE>
<CAPTION>
SHELL OIL
INITIAL/ WATER WORKING
ANTICIPATED PRODUCTION DEPTH ANTICIPATED PEAK INTEREST
PRODUCTION TECHNOLOGY (FEET) DAILY PRODUCTION OWNERSHIP
----------- ----------- ------ ---------------- ---------
<S> <C> <C> <C> <C> <C>
Auger/Cardamom*.................. 1994 Tension leg 2,860 100,000 barrels of oil 300 100%
platform million cubic feet of gas
Tahoe............................ 1994 Subsea 1,500 300 million cubic feet of gas 70%**
Southeast Tahoe.................. 1996 Subsea 1,770 Included in Tahoe 100%
Popeye........................... 1996 Subsea 2,100 160 million cubic feet of gas 37.5%**
Green Canyon Block 110........... 1996 Subsea 1,785 6,900 barrels of oil 100%
Mars............................. 1996 Tension leg 2,940 140,000 barrels of oil 140 71.5%
platform million cubic feet of gas
Ram/Powell....................... 1997 Tension leg 3,214 60,000 barrels of oil 270 38%
platform million cubic feet of gas
Mensa............................ 1997 Subsea 5,300 300 million cubic feet of gas 100%
Troika........................... 1997 Subsea 2,800 80,000 barrels of oil 140 33.3%
million cubic feet of gas
Ursa............................. 1999 Tension leg 3,800 150,000 barrels of oil 400 45.4%
platform million cubic feet of gas
Marlin........................... 1999 Tension leg 3,200 40,000 barrels of oil 250 25%
platform million cubic feet of gas
Macaroni......................... 1999 Subsea 3,700 35,000 barrels of oil 65 100%
million cubic feet of gas
Angus............................ 1999 Subsea 2,000 40,000 barrels of oil 60 80%
million cubic feet of gas
Europa........................... 2000 Subsea 3,900 60,000 barrels of oil 45 66%
million cubic feet of gas
</TABLE>

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

* Two separate fields developed through a common facility
** After payment of capital costs

Domestic Onshore Oil and Gas

During 1998, Shell Oil participated in drilling 51 gross wells onshore, of
which 44 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
40 percent of Total Shell Oil E&P domestic crude oil production in 1998.
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 22 percent of domestic crude oil production in 1998, up 4 percent
from 1997. Also, in 1998, CO(2) injection projects in West Texas accounted for
18,576 barrels per day or approximately 4 percent of domestic crude oil
production.

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, while retaining its international producing properties located
in Brazil, Cameroon, China, New Zealand and Yemen, and its equity interest in
Shell Exploration and Production Holdings, B.V. In late 1998, Shell Oil sold its
interest in producing properties in Yemen.

6
<PAGE> 7
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.

<TABLE>
<CAPTION>
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
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>
Sales.......................... $ 1,571 $ 44 $ 1,615 $1,933 $ 58 $1,991 $2,114 $ 66 $2,180
Transfers...................... 908 249 1,157 1,602 378 1,980 2,143 418 2,561
------- ----- ------- ------ ---- ------ ------ ---- ------
Total Revenues............. 2,479 293 2,772 3,535 436 3,971 4,257 484 4,741
Production costs............... 835 93 928 868 94 962 1,104 94 1,198
Exploration expenses........... 353 7 360 334 3 337 293 34 327
Depreciation, depletion and
amortization................. 1,114 (127) 987 1,019 109 1,128 1,212 127 1,339
Income tax expense............. 65 81 146 423 14 437 503 29 532
------- ----- ------- ------ ---- ------ ------ ---- ------
Results of Operations...... $ 112 $ 239 $ 351 $ 891 $216 $1,107 $1,145 $200 $1,345
------- ----- ------- ------ ---- ------ ------ ---- ------
Shell Oil's interest in results
of operations of equity
companies.................... (1,388) 53 (1,335) 169 82 251 -- 48 48
------- ----- ------- ------ ---- ------ ------ ---- ------
Total...................... $(1,276) $ 292 $ (984) $1,060 $298 $1,358 $1,145 $248 $1,393
======= ===== ======= ====== ==== ====== ====== ==== ======
</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:

7
<PAGE> 8

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 14 and 18 of the Notes to Consolidated Financial
Statements included in Item 14a.

<TABLE>
<CAPTION>
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
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.......... $12,635 $1,302 $13,937 $12,645 $1,542 $14,187 $21,085 $1,474 $22,559
Unproved properties........ 1,021 3 1,024 1,126 7 1,133 1,195 15 1,210
Support equipment and
facilities.............. 161 8 169 635 12 647 530 10 540
------- ------ ------- ------- ------ ------- ------- ------ -------
Total Capitalized
Costs.............. 13,817 1,313 15,130 14,406 1,561 15,967 22,810 1,499 24,309
Accumulated depreciation,
depletion and
amortization............ 7,807 895 8,702 8,006 983 8,989 13,125 890 14,015
------- ------ ------- ------- ------ ------- ------- ------ -------
NET CAPITALIZED
COSTS.............. $ 6,010 $ 418 $ 6,428 $ 6,400 $ 578 $ 6,978 $ 9,685 $ 609 $10,294
------- ------ ------- ------- ------ ------- ------- ------ -------
Shell Oil's interest in net
capitalized costs of
equity companies........ 1,683 106 1,789 2,901 107 3,008 -- 115 115
------- ------ ------- ------- ------ ------- ------- ------ -------
Total................. $ 7,693 $ 524 $ 8,217 $ 9,301 $ 685 $ 9,986 $ 9,685 $ 724 $10,409
======= ====== ======= ======= ====== ======= ======= ====== =======

COSTS INCURRED IN PROPERTY
ACQUISITION, EXPLORATION
AND DEVELOPMENT ACTIVITIES*
Acquisition of
properties
Proved................ $ 2 $ -- $ 2 $ 7 $ -- $ 7 $ 205 $ -- $ 205
Other................. 91 -- 91 172 -- 172 140 -- 140

Exploration costs....... 544 7 551 638 9 647 583 42 625
Development costs....... 1,211 26 1,237 1,262 63 1,325 1,157 39 1,196
------- ------ ------- ------- ------ ------- ------- ------ -------
Costs Incurred........ $ 1,848 $ 33 $ 1,881 $ 2,079 $ 72 $ 2,151 $ 2,085 $ 81 $ 2,166
Shell Oil's share of
costs incurred by
equity companies...... 154 6 160 150 6 156 -- 6 6
------- ------ ------- ------- ------ ------- ------- ------ -------
Total................. $ 2,002 $ 39 $ 2,041 $ 2,229 $ 78 $ 2,307 $ 2,085 $ 87 $ 2,172
======= ====== ======= ======= ====== ======= ======= ====== =======
</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.

8
<PAGE> 9

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

<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
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.......... 18 -- 18 32 -- 32 22 -- 22
Dry Holes.................. 16 -- 16 14 -- 14 27 1 28
Development
Oil and Gas Wells.......... 61 7 68 99 11 110 447 7 454
Dry Holes.................. 5 -- 5 6 -- 6 13 -- 13
Equity Companies:
Exploratory
Oil and Gas Wells.......... -- -- -- 1 -- 1 -- -- --
Dry Holes.................. -- -- -- 1 -- 1 -- -- --
Development
Oil and Gas Wells.......... 494 2 496 432 2 434 -- 3 3
Dry Holes.................. 3 -- 3 2 -- 2 -- -- --
OIL AND GAS WELLS PRODUCING OR
CAPABLE OF PRODUCING
Gross Wells
Oil........................ 1,957 380 2,337 2,645 446 3,091 20,946 399 21,345
Gas........................ 1,411 30 1,441 1,458 30 1,488 1,572 30 1,602
Net Wells
Oil........................ 1,443 108 1,551 1,803 119 1,922 13,071 107 13,178
Gas........................ 853 7 860 942 9 951 1,042 9 1,051
Number of net oil and gas
wells above completed in
more than one producing
formation.................. 146 9 155 223 10 233 419 10 429
Equity Companies:
Gross Wells
Oil........................ 25,861 127 25,988 29,531 123 29,654 -- 117 117
Gas........................ 498 23 521 513 25 538 -- 30 30
Net Wells
Oil........................ 9,236 22 9,258 8,148 22 8,170 -- 20 20
Gas........................ 85 4 89 88 4 92 -- 5 5
</TABLE>

As of December 31, 1998, 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.......................... 10 4.6 19 14.1 29 18.7
International.......................... 1 .1 1 .3 2 .4
---- ---- ---- ---- ---- ----
Total............................. 11 4.7 20 14.4 31 19.1
==== ==== ==== ==== ==== ====
Equity Companies:
United States............................. -- -- 29 6.3 29 6.3
International............................. -- -- 2 .3 2 .3
</TABLE>

9
<PAGE> 10

Acreage in which Shell Oil had an interest at the end of each of the
periods indicated was as shown in the below table. Certain prior year acreage
data has been corrected and has been restated from that previously reported.

<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(thousands of acres)
<S> <C> <C> <C> <C> <C>
UNDEVELOPED ACREAGE
Gross
United States
Onshore............................. 1,013 1,260 1,365 839 777
Offshore............................ 4,872 4,766 3,542 3,024 3,210
International.......................... 1,111 3,409 3,409 48,241 37,685
------ ------ ------ ------ ------
TOTAL.......................... 6,996 9,435 8,316 52,104 41,672
====== ====== ====== ====== ======
Net
United States
Onshore............................. 466 609 688 475 494
Offshore............................ 3,912 3,925 2,876 2,352 2,449
International.......................... 431 1,484 1,484 14,116 23,125
------ ------ ------ ------ ------
TOTAL.......................... 4,809 6,018 5,048 16,943 26,068
====== ====== ====== ====== ======
PRODUCING OIL AND GAS ACREAGE
Gross
United States.......................... 1,789 1,863 2,337 2,545 2,582
International.......................... 81 100 100 100 90
------ ------ ------ ------ ------
TOTAL.......................... 1,870 1,963 2,437 2,645 2,672
====== ====== ====== ====== ======
Net
United States.......................... 1,071 1,136 1,379 1,482 1,500
International.......................... 21 25 25 25 23
------ ------ ------ ------ ------
TOTAL.......................... 1,092 1,161 1,404 1,507 1,523
====== ====== ====== ====== ======
Domestic Equity Companies:
UNDEVELOPED ACREAGE
Gross.................................... 2,169 1,719 -- -- --
Net...................................... 107 259 -- -- --
PRODUCING OIL AND GAS ACREAGE
Gross.................................... 2,501 864 -- -- --
Net...................................... 260 179 -- -- --
</TABLE>

10
<PAGE> 11

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) 1998 1997 1996 1995 1994
------------------------------------------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
NET CRUDE OIL AND CONDENSATE PRODUCED
Consolidated companies
United States
Gulf of Mexico.................................. 227 197 161 154 133
California...................................... -- 56 132 128 133
Louisiana....................................... 3 7 9 10 9
Michigan........................................ 2 7 7 7 7
Texas........................................... 2 10 44 47 48
Other........................................... 12 17 23 25 25
----- ----- ----- ----- -----
Total United States............................. 246 294 376 371 355
International........................................ 58 57 58 51 43
----- ----- ----- ----- -----
Total consolidated companies.................... 304 351 434 422 398
Shell Oil's interest in production of equity companies
United States
California...................................... 138 80 -- -- --
Texas........................................... 42 34 -- -- --
Other........................................... 13 2 -- -- --
----- ----- ----- ----- -----
Total United States............................. 193 116 -- -- --
International........................................ 41 40 38 34 31
----- ----- ----- ----- -----
Total equity companies.......................... 234 156 38 34 31
----- ----- ----- ----- -----
TOTAL CRUDE OIL AND CONDENSATE PRODUCED.................. 538 507 472 456 429
NATURAL GAS LIQUIDS PRODUCED (predominantly domestic)
Consolidated companies................................. 74 73 75 70 61
Shell Oil's interest in production of equity
companies............................................ 8 8 -- -- --
----- ----- ----- ----- -----
TOTAL NATURAL GAS LIQUIDS PRODUCED....................... 82 81 75 70 61
----- ----- ----- ----- -----
TOTAL LIQUIDS PRODUCED................................... 620 588 547 526 490
===== ===== ===== ===== =====
NET NATURAL GAS PRODUCED*
Consolidated companies
United States
Gulf of Mexico.................................. 1,330 1,216 1,135 1,012 785
Louisiana....................................... 28 52 49 87 120
Michigan........................................ 34 82 99 103 107
Texas........................................... 298 267 360 382 345
Other........................................... 2 28 155 180 205
----- ----- ----- ----- -----
Total United States............................. 1,692 1,645 1,798 1,764 1,562
International........................................ 73 86 82 61 67
----- ----- ----- ----- -----
TOTAL CONSOLIDATED COMPANIES.................... 1,765 1,731 1,880 1,825 1,629
Shell Oil's interest in production of equity companies
United States
California...................................... 46 29 -- -- --
Texas........................................... 47 41 -- -- --
Other........................................... 61 13 -- -- --
----- ----- ----- ----- -----
Total United States............................. 154 83 -- -- --
International........................................ 118 124 98 55 53
----- ----- ----- ----- -----
Total equity companies.......................... 272 207 98 55 53
----- ----- ----- ----- -----
TOTAL NATURAL GAS PRODUCED............................... 2,037 1,938 1,978 1,880 1,682
===== ===== ===== ===== =====
NET NATURAL GAS AVAILABLE FOR MARKET, EXCLUDING CONSUMED
IN OPERATIONS (DOES NOT INCLUDE SHELL OIL'S SHARE OF
PRODUCTION FROM EQUITY COMPANIES)...................... 1,688 1,618 1,720 1,699 1,473
</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.

11
<PAGE> 12

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, 1996........... 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
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
</TABLE>

12
<PAGE> 13

<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... 30 -- 30 (128) 23 (105) (75)
Improved recovery................. -- -- -- -- -- -- --
Purchases of reserves............. 1 1 76 76 77
Extensions and discoveries........ 32 14 46 -- -- -- 46
Sales of reserves................. (30) (40) (70) -- -- -- (70)
Transfers between
consolidated/equity companies... (27) -- (27) 27 -- 27 --
Production........................ (90) (21) (111) (70) (15) (85) (196)
------ ---- ----- ------ ---- ----- -----
Reserves at December 31, 1998......... 762 91 853 795 85 880 1,733
Proved Developed Crude Oil and
Condensate Reserves at:
December 31, 1996..................... 1,157 92 1,249 -- 9 9 1,258
December 31, 1997..................... 395 106 501 653 51 704 1,205
December 31, 1998..................... 379 82 461 646 67 713 1,174
NATURAL GAS LIQUIDS (MILLIONS OF
BARRELS)
Proved Developed and Undeveloped:
Reserves at January 1, 1996........... 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
Changes resulting from:
Revisions of previous estimates... 10 (1) 9 (9) -- (9) --
Extensions and discoveries........ 8 -- 8 -- -- -- 8
Sales of reserves................. (1) -- (1) -- -- -- (1)
Transfers between
consolidated/equity companies... -- -- -- -- -- -- --
Production........................ (27) -- (27) (3) -- (3) (30)
------ ---- ----- ------ ---- ----- -----
Reserves at December 31, 1998......... 178 -- 178 29 -- 29 207
Proved Developed Natural Gas Liquids
Reserves at:
December 31, 1996..................... 161 1 162 -- -- -- 162
December 31, 1997..................... 118 1 119 35 -- 35 154
December 31, 1998..................... 123 -- 123 27 -- 27 150
NATURAL GAS (BILLIONS OF CUBIC FEET)**
Proved Developed and Undeveloped:
Reserves at January 1, 1996........... 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
</TABLE>

13
<PAGE> 14

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

* 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.

14
<PAGE> 15

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
--------------------------
U.S. INT'L TOTAL
------- ------ -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
AT DECEMBER 31, 1998
Future cash inflows....................................... $17,664 $1,293 $18,957
Future production and development costs................... 8,564 522 9,086
Future income tax expense................................. 2,614 249 2,863
------- ------ -------
Future net cash flows*.................................... 6,486 522 7,008
10% annual discount for estimated timing of cash flows.... 2,030 172 2,202
------- ------ -------
Standardized measure of discounted future net cash
flows................................................... 4,456 350 4,806
Shell Oil's share of standardized measure of discounted
future net cash flows of equity companies............... 740 238 978
------- ------ -------
Total..................................................... $ 5,196 $ 588 $ 5,784
======= ====== =======
AT DECEMBER 31, 1997
Future cash inflows....................................... $27,085 $2,619 $29,704
Future production and development costs................... 9,535 887 10,422
Future income tax expense................................. 5,380 498 5,878
------- ------ -------
Future net cash flows*.................................... 12,170 1,234 13,404
10% annual discount for estimated timing of cash flows.... 3,859 375 4,234
------- ------ -------
Standardized measure of discounted future net cash
flows................................................... 8,311 859 9,170
Shell Oil's share of standardized measure of discounted
future net cash flows of equity companies............... 2,598 452 3,050
------- ------ -------
Total..................................................... $10,909 $1,311 $12,220
======= ====== =======
AT DECEMBER 31, 1996
Future cash inflows....................................... $63,131 $3,414 $66,545
Future production and development costs................... 17,468 917 18,385
Future income tax expense................................. 14,952 805 15,757
------- ------ -------
Future net cash flows*.................................... 30,711 1,692 32,403
10% annual discount for estimated timing of cash flows.... 12,202 483 12,685
------- ------ -------
Standardized measure of discounted future net cash
flows................................................... 18,509 1,209 19,718
Shell Oil's share of standardized measure of discounted
future net cash flows of equity companies............... -- 668 668
------- ------ -------
Total..................................................... $18,509 $1,877 $20,386
======= ====== =======
</TABLE>

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

* Future net cash flows were estimated using year-end prices and costs, and
currently enacted tax rates. Shell Oil E&P domestic and international weighted
average crude oil prices at year-end 1998 were $9.20 and $10.13 per barrel,
respectively, compared to year-end 1997 prices of $14.64 and $14.79 per
barrel, respectively, and year-end 1996 prices of $21.35 and $23.51 per
barrel, respectively.

15
<PAGE> 16

Changes in the standardized measure of discounted net cash flow for the
consolidated companies were as follows:

<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
(millions of dollars)
<S> <C> <C> <C>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED
FUTURE NET CASH FLOWS
Beginning of year...................................... $ 9,170 $ 19,718 $11,358
Sales and transfers of oil and gas produced, net of
production costs..................................... (1,844) (3,009) (3,543)
Net change in prices and costs......................... (7,695) (10,037) 11,089
Development costs related to future production......... 422 (344) (210)
Extensions, discoveries, additions and improved
recovery, less related costs......................... 592 2,628 3,006
Net purchases and sales of reserves.................... (535) (1,084) (237)
Transfers to equity companies.......................... (146) (5,207) --
Development costs incurred during the period........... 1,237 1,325 1,196
Revisions of previous reserve estimates................ 204 (54) 400
Accretion of discount.................................. 1,320 2,161 1,582
Net change in income taxes............................. 2,081 3,073 (4,923)
------- -------- -------
End of year............................................ $ 4,806 $ 9,170 $19,718
======= ======== =======
</TABLE>

DOWNSTREAM GAS

General

Downstream Gas was established as a new operating segment for Shell Oil in
1998. This segment is engaged in the business of purchasing, gathering,
processing, treating, storing, transporting and marketing natural gas, primarily
in the major gas producing areas of Oklahoma, South Texas, East Texas and the
Texas and Louisiana Gulf Coast regions. 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. Shell Oil continues to
market substantially all of its natural gas production through Coral. In 1997,
in two separate transactions, Shell Oil acquired 100 percent ownership of Corpus
Christi Natural Gas Company, L.P. and affiliated companies. Their activities
include natural gas transportation, processing, hub services and marketing,
primarily in South Texas. In January 1998, Shell Oil acquired all of the
outstanding common stock of Tejas as further discussed in Note 2 of the Notes to
Consolidated Financial Statements included in Item 14a. Following this
transaction, Shell Oil combined its natural gas and natural gas liquids
business, Coral, Corpus Christi Natural Gas, and Tejas and its interest in Coral
into a single natural gas and natural gas liquids business segment.

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 was completed.

Revenues, net income, segment assets and other financial measures for the
Downstream Gas segment for 1998 were as set out in the table below. This
information is presented in accordance with SFAS No. 131 which was adopted by
Shell Oil in 1998. Downstream Gas was a new operating segment in 1998, and as a
result, no comparative data are available for 1997 and 1996. For additional
information see Note 18 of the

16
<PAGE> 17

Notes to Consolidated Financial Statements included in Item 14a and the
"Comparability of Data" discussion on page 3.

<TABLE>
<CAPTION>
1998
---------------------
(millions of dollars)
<S> <C>
Sales and other operating revenue (including
intersegment)............................................. $6,808
Less: Intersegment sales and revenues....................... (78)
------
Total sales and other operating revenue from external
customers................................................. $6,730
International revenues (included in total)................ $ 897
Equity in income of affiliates accounted for by the equity
method.................................................... $ 52
Interest income............................................. 5
Interest expense............................................ 152
Depreciation, amortization, etc. ........................... 857
Income tax expense (benefit)................................ (217)
Segment net income (loss)................................... (703)
Investment in equity method investees....................... 390
Segment assets.............................................. 4,307
Segment capital expenditures................................ 1,807
</TABLE>

Natural Gas Processing

Natural gas processing operations consist of the extraction of natural gas
liquids ("NGL") from unprocessed natural gas. The unprocessed natural gas is
supplied to Downstream Gas' natural gas processing plants from Shell Oil or its
equity companies' own natural gas production, or from other producers or natural
gas pipeline companies. The natural gas is delivered to the processing plants
through either Shell Oil's or its equity companies' owned pipelines, or from
other companies' pipelines. After processing, the NGL are either sold to other
Shell Oil subsidiaries or equity companies, or transported to fractionation
facilities owned by Shell Oil or its equity companies, or by other third
parties, where the NGL products are further separated and then sold. The
remaining processed gas is returned to the pipelines.

Selected statistics for the gas processing operations for 1998 were as
summarized below:

GAS PROCESSING STATISTICS

<TABLE>
<CAPTION>
1998
----
<S> <C>
Number of natural gas processing, treating and fractionation
plants.................................................... 30
Average daily gross natural gas capacity (bcf per day)...... 11.4
Average daily net natural gas capacity (bcf per day)........ 4.1
Average daily net inlet volumes (bcf per day)............... 2.8
Average daily net natural gas liquids production (thousands
of barrels)............................................... 92
</TABLE>

Natural Gas Pipelines

Shell Oil's natural gas pipelines are located primarily in Texas, Oklahoma,
Louisiana and the Gulf of Mexico. These pipelines consist of wholly owned lines
as well as varying equity ownership interests in jointly owned lines. The
pipeline operations involve gathering and purchasing natural gas from producers
and suppliers and transporting and reselling, primarily through Coral, such
natural gas to electric utility companies, local distribution companies,
industrial customers, affiliates of other pipeline companies, and gas marketing
companies, as well as gathering and transporting natural gas for others on a fee
basis.

During 1998, Shell Oil was active in a number of expansion projects and new
business initiatives. Destin Pipeline Company, L.L.C., completed a natural gas
pipeline and gas processing plant to serve the eastern Gulf and announced plans
for two extensions to that pipeline. Destin is owned by affiliates of Shell Oil,
BP Amoco and Sonat Inc. As further discussed in Note 3 of the Notes to the
Consolidated Financial Statements included in Item 14a, in late 1998, Shell Oil
announced the intent to sell certain Downstream Gas pipeline assets.

17
<PAGE> 18

The following table summarizes the natural gas pipeline systems in which
Shell Oil had an ownership interest during 1998:

GAS PIPELINE SYSTEMS

<TABLE>
<CAPTION>
1998
------
<S> <C>
Miles of pipeline........................................... 13,800
Pipeline capacity in Bcf per day............................ 14.1
Average throughput in Bcf per day........................... 6.6
</TABLE>

Natural Gas Sales and Marketing

Shell Oil markets energy and related services to utilities, and industrial
and commercial accounts. Natural gas sales are made pursuant to both long-term
contracts, which generally range from one to 20 years and short-term contracts,
which generally range from one month to one year in duration. Natural gas system
sales during 1998 averaged approximately 7.8 bcf per day.

Shell Oil uses long-term natural gas reserve positions, storage resources,
and multi-commodity expertise in the marketplace to provide customers with
flexible, tailored solutions to meet their energy supply, asset management and
financial risk management needs. In the course of conducting such business,
Shell Oil utilizes certain types of fixed-price forward purchase and sales
contracts, futures and options contracts traded on the New York Mercantile
Exchange ("NYMEX"), and swaps and options traded in the over-the-counter
financial markets to manage and hedge fixed-price purchase and sales
commitments, to provide fixed-price commitments as a service to customers and
suppliers, to reduce exposure to cash market prices and to protect its
investment in storage inventories. Shell Oil, from time to time, may have a bias
in the market resulting from the managing of its portfolio.

Natural Gas Storage Facilities

Shell Oil owns natural gas storage facilities in Texas, Oklahoma and
Louisiana. Shell Oil may hedge all or a portion of its natural gas volumes held
in storage utilizing the futures, swaps and options markets. Natural gas volumes
held in storage enable Shell Oil to respond quickly to changing market
conditions and to take advantage of seasonal price variations and peak demand
periods.

Natural Gas Supplies

Shell Oil purchases natural gas from a variety of suppliers, ranging from
small independent producers to other major oil and gas companies, equity
companies in which Shell Oil has an interest and other natural gas pipeline
companies, under both long-term and short-term natural gas purchase contracts.

Other Services

A subsidiary, Shell Energy Services Company, L.L.C., has been established
to sell natural gas and electricity directly to homes and businesses in
deregulated markets.

OIL PRODUCTS

Shell Oil's Oil Products operating segment consists predominantly of its
investment in companies engaged, principally in the United States, in the
refining, marketing and transportation of crude oil and petroleum products,
including: Equilon Enterprises LLC (Shell Oil interest -- 56 percent), Motiva
Enterprises LLC (Shell Oil interest -- 35 percent), and the Deer Park Refining
Limited Partnership (Shell Oil interest -- 50 percent). Shell Oil accounts for
its noncontrolling investment in each of these companies using the equity method
of accounting.

Revenues, net income, segment assets and other financial measures for the
Oil Products segment for each of the past three years were as set out in the
table below. This information is presented in accordance with SFAS No. 131 which
was adopted by Shell Oil in 1998. Certain 1997 and 1996 amounts have been
restated to

18
<PAGE> 19

reflect the adoption of SFAS No. 131. For additional information see Note 18 of
the Notes to Consolidated Financial Statements included in Item 14a and the
"Comparability of Data" discussion on page 3.

<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
(millions of dollars)
<S> <C> <C> <C>
Sales and other operating revenue (including
intersegment).......................................... $4,193 $22,236 $22,944
Less: Intersegment sales and revenues.................... (441) (2,171) (1,989)
------ ------- -------
Total sales and other operating revenue from external
customers.............................................. $3,752 $20,065 $20,955
International revenues (included in total)............. $ -- $ 73 $ 213
Equity in income of affiliates accounted for by the
equity method.......................................... $ 292 $ 85 $ 13
Interest income.......................................... 51 34 25
Interest expense......................................... 77 76 83
Depreciation, amortization, etc. ........................ 73 438 391
Income tax expense....................................... 124 118 171
Segment net income....................................... 169 410 336
Investment in equity method investees.................... 5,207 312 221
Segment assets........................................... 5,970 9,277 9,326
Segment capital expenditures............................. 48 554 726
</TABLE>

In 1998, Shell Oil restructured its previously wholly owned assets in the
oil products business into two new joint ventures, Equilon Enterprises LLC
("Equilon") and Motiva Enterprises LLC ("Motiva"). Also, in 1993 Shell Oil
formed a 50/50 joint venture involving its Deer Park, Texas refinery with a
subsidiary of Mexico's national oil company Petroleos Mexicanos ("Pemex"). Shell
Oil accounts for its investment in these joint ventures using the equity method
of accounting. Shell Oil's Oil Products operating segment now consists
predominantly of its equity investment in and equity share of operating results
of these companies.

Equilon was formed and began operations in January 1998 by combining major
elements of Shell Oil's and Texaco Inc.'s ("Texaco") western and midwestern
United States refining and marketing businesses and both companies' nationwide
trading, transportation and lubricants businesses. Shell Oil owns 56 percent and
Texaco owns 44 percent of Equilon. Equilon uses these assets in the refining,
marketing, trading, transportation and lubricants 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 have been or 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.

Motiva was formed and began operations in July 1998 by combining major
elements of Shell Oil's, Texaco's and Saudi Arabian Oil Company's ("Saudi
Aramco") eastern United States and Gulf Coast 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).

Both Equilon and Motiva market petroleum and other products directly and
through independent wholesalers and retailers and have the exclusive rights to
use the Shell and Texaco brands on refined oil product sales in those areas of
the United States where each company is authorized to conduct its respective
businesses.

Together, Equilon and Motiva hold a significant position in the domestic
refined products industry having an approximate 15 percent share of the domestic
gasoline market. The two companies have 10 refineries with a combined capacity
of approximately 1.7 million barrels per day; interests in approximately 31,000
miles of pipelines; and distribute gasoline through approximately 23,600 retail
outlets.

Deer Park Refinery. The Deer Park Refining Limited Partnership, formed in
1993, is a 50/50 joint venture of Shell Oil and a subsidiary of Petroleos
Mexicanos ("Pemex"). It operates the Deer Park, Texas refinery and is not part
of Equilon or Motiva. The partnership is considering a potential growth
opportunity,

19
<PAGE> 20

with engineering work in progress for an expansion at the refinery. If approved,
the project would involve the expansion of the delayed coker and associated
units. Scheduled for completion in 2001, the expansion would enable the refinery
to process 340,000 barrels per day of crude oil, including 220,000 barrels per
day of Maya crude oil.

Manufacturing

Prior to the formation of the Equilon and Motiva alliances in 1998, Shell
Oil owned and operated refining facilities located at Martinez, California; Wood
River, Illinois; Norco, Louisiana; Odessa, Texas; and Anacortes, Washington.
Additionally, the Company operated its 50 percent owned refinery at Deer Park,
Texas. Also, in 1996, Shell Oil's Chemical Products operating segment acquired a
refinery in Mobile, Alabama. This refinery acquisition was made to assure the
Chemical Products operating 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
operating segment.

With the formation of Equilon in January 1998, Shell Oil contributed its
refineries at Martinez, Odessa and Wood River, and Texaco contributed its
refineries at Bakersfield, California; El Dorado, Kansas; Los Angeles,
California; and the Puget Sound refinery in Anacortes, Washington. In late 1998,
Equilon converted the Odessa refinery into a products storage and distribution
terminal. With the formation of Motiva, Shell Oil contributed its Norco
refinery, and Star Enterprise contributed its refineries in Convent, Louisiana;
Delaware City, Delaware; and Port Arthur, Texas.

As noted earlier, Shell Oil's Anacortes refinery was sold under the terms
of a consent agreement accepted by the Federal Trade Commission.

20
<PAGE> 21

The following table of refinery processing intakes of crude oil, natural
gas liquids and other raw materials for the manufacture of petroleum, and
certain other refinery statistics reflects the data on a 100 percent basis,
(i.e., is not limited to Shell Oil's equity ownership share) for the full year
of operation shown in which Shell Oil had an ownership interest in the refinery
(i.e., not pro rated for ownership for a portion of a year):

<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----- ----- ----- ---- --------
(thousands of barrels daily)
<S> <C> <C> <C> <C> <C>
REFINERY PROCESSING INTAKES
Anacortes, Washington.............................. -- 113 114 105 107
Deer Park, Texas................................... 262 262 252 202 224
Mobile, Alabama.................................... 72 67 68 -- --
Equilon
Martinez, California............................. 159 161 150 165 161
Odessa, Texas.................................... 20 25 24 24 24
Wood River, Illinois............................. 289 292 278 256 262
Bakersfield, California.......................... 64 -- -- -- --
El Dorado, Kansas................................ 109 -- -- -- --
Los Angeles, California.......................... 99 -- -- -- --
Puget Sound, Washington.......................... 140 -- -- -- --
Motiva
Convent, Louisiana............................... 227 -- -- -- --
Delaware City, Delaware.......................... 171 -- -- -- --
Norco, Louisiana................................. 230 256 250 236 239
Port Arthur, Texas............................... 261 -- -- -- --
----- ----- ----- ---- --------
TOTAL......................................... 2,103 1,176 1,136 988 1,017
===== ===== ===== ==== ========
OTHER REFINERY STATISTICS
Operable capacity of crude oil distillation units
at beginning of year............................. 2,031 988 969 856 847
Refinery intakes to crude oil distillation units... 1,953 984 940 821 850
Refinery crude oil distillation unit intakes as a
percent of operable capacity at beginning of
year............................................. 96.2% 99.6% 97.1% 95.9% 100.4%
</TABLE>

Transportation

In 1998, Shell Oil contributed its crude oil trunk and a majority of its
gathering lines, and its product lines to Equilon. These pipelines consisted of
Shell Oil's wholly owned pipelines as well as its varying stock, partnership and
undivided interests in other pipelines. Texaco also contributed its interest in
its nationwide pipeline systems to Equilon.

At December 31, 1998, Equilon had interests in approximately 10,700 miles
of crude oil trunk lines, 3,300 miles of crude oil gathering lines and
approximately 16,700 miles of product lines.

Equilon and Motiva also engage 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.

Marketing

Beginning with the formation of Equilon in January, 1998 and the subsequent
formation of Motiva in July, 1998, Shell Oil's marketing operations, including
transportation systems, terminals, bulk distributing plants and retail sales
through service station or other similar retail outlets, were conducted through
Equilon and Motiva. Both of these ventures market petroleum and other products
directly and through independent wholesalers and retailers and have the
exclusive rights to use the Shell and Texaco brands on refined oil product sales
in those areas of the United States where each company is authorized to conduct
its respective

21
<PAGE> 22

businesses. At the end of 1998, Equilon and Motiva distributed products under
the "Shell" or "Texaco" brand and related trademarks through approximately
23,600 service stations located throughout the United States.

CHEMICAL PRODUCTS

In late 1998, Shell Oil announced a significant restructuring of its
chemicals portfolio, which includes the planned divestiture of businesses not
integral to its revised portfolio strategy. The businesses that were announced
to constitute the future portfolio were lower olefins, aromatics, solvents,
ethylene oxide/glycol and derivatives, phenol, higher olefins and derivatives,
propanediol (PDO), styrene monomer, propylene oxide and urethane chemicals, as
well as ventures in polyethylene, polypropylene, additives and catalysts. The
businesses to be divested include PET, Carilon(R), Bisphenol A, elastomers,
resins and versatics. The future Shell Oil portfolio of businesses makes basic
chemical products which are used in many consumer and industrial products and
processes. They are sold primarily to industrial markets in the United States.
Approximately 15 percent of chemical sales are outside the United States.
Chemical products are delivered to customers principally by rail, 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. In late 1998, Shell Oil formed a worldwide additives venture with
Exxon, which includes operations in the United States. To further improve
long-term profitability, Shell Oil intends to invest selectively in new capacity
and in the development of businesses with superior profit and growth potential.

Revenues, net income, segment assets and other financial measures for the
Chemical Products segment for each of the past three years were as set out in
the table below. This information is presented in accordance with SFAS No. 131
which was adopted by Shell Oil in 1998. Certain 1997 and 1996 amounts have been
restated to reflect the adoption of SFAS No. 131. For additional information see
Note 18 of the Notes to Consolidated Financial Statements included in Item 14a
and the "Comparability of Data" discussion on page 3.

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
(millions of dollars)
<S> <C> <C> <C>
Sales and other operating revenue (including
intersegment)............................................. $ 5,351 $ 5,789 $5,083
Less: Intersegment sales and revenues....................... (1,110) (1,064) (778)
------- ------- ------
Total sales and other operating revenue from external
customers................................................. $ 4,241 $ 4,725 $4,305
International revenues (included in total)................ $ 383 $ 414 $ 363
Equity in income of affiliates accounted for by the equity
method.................................................... $ (43) $ 55 $ 57
Interest income............................................. 2 3 4
Interest expense............................................ 32 24 19
Depreciation, amortization, etc. ........................... 641 270 271
Income tax expense (benefit)................................ (82) 238 71
Segment net income.......................................... 57 441 231
Investment in equity method investees....................... 853 766 728
Segment assets.............................................. 4,608 5,342 5,089
Segment capital expenditures................................ 570 348 582
</TABLE>

Chemical sales revenues were as follows for the periods indicated:

<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(millions of dollars)
<S> <C> <C> <C> <C> <C>
Primaries (olefins, aromatics)......... $1,767 $1,543 $1,411 $1,184 $1,024
Intermediates and solvents............. 1,272 1,665 1,505 1,644 1,314
Polymers............................... 1,091 1,268 1,309 1,861 1,550
Other.................................. 61 131 27 82 78
------ ------ ------ ------ ------
$4,191 $4,607 $4,252 $4,771 $3,966
====== ====== ====== ====== ======
</TABLE>

22
<PAGE> 23

Shell Oil has manufacturing facilities located at Mobile, Alabama;
Martinez, California; Lakeland, Florida; Argo and Wood River, Illinois; St.
Rose, Geismar, Norco, Taft and Reserve, Louisiana; Belpre, Ohio; Deer Park,
Texas; Pt. Pleasant, West Virginia; and Altamira, Mexico. As a result of the
chemicals portfolio restructuring discussed above, the following manufacturing
facilities are planned to be sold during 1999 and are included in the business
divestment: Lakeland, Florida; Belpre, Ohio; Pt. Pleasant, West Virginia; and
Altamira, Mexico. In 1998, Shell Oil began construction of a phenol plant at the
Deer Park Chemical plant, which is scheduled to begin operation in late 1999.
This expansion will add 500 million pounds per year of phenol capacity and 300
million pounds per year of acetone capacity.

OTHER BUSINESSES

A subsidiary of the Company, 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 36-38), and Item 3. Legal
Proceedings (pages 24-25).

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.

The Downstream Gas segment is a rapidly evolving commodity based trading
and marketing business which has undergone significant consolidation during
recent years. Factors affecting competition in this

23
<PAGE> 24

segment include the ability to deliver natural gas supplies to customers at
competitive prices and in such quantities as the customer may need from time to
time as well as having a record of reliability in performing the required
services. Other competitive factors include the capability to provide innovation
in financial products and services, and expertise in energy management services.

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.

Research

Total research and development expenses charged to income (including
applicable operating taxes and depreciation) in 1998 amounted to $176 million,
compared with $199 million in 1997 and $173 million in 1996. In 1998, about 64
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 63 percent in 1997 and 66 percent in 1996. 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
alleged 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.

24
<PAGE> 25

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 and in one case,
carbon dioxide 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. Department of Justice
has intervened 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.

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 36-38). 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, 1998 was
$180 million, which the Company believes will be adequate to meet its
obligations in connection with the site.

In November of 1998, Shell Chemical Company received a penalty assessment
of $330,000 from the Louisiana Department of Environmental Quality ("LDEQ")
relating to releases of ethylene oxide in excess of permit limitations which
occurred at the Geismar, Louisiana plant between May 21, 1996 through April 7,
1998. Shell Chemical Company and the LDEQ are in negotiations regarding the
resolution of these violations.

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
believes that the District Court decision was incorrect and appealed the
decision to the Third Circuit in September, 1998. Shell Oil also 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.

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.

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>
1998 1997
------------------------------- -------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
----- ------ ----- ------ ----- ------ ----- ------
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cash dividends.............. $413 $412 $413 $412 $400 $400 $400 $400
</TABLE>

25
<PAGE> 26

ITEM 6. SELECTED FINANCIAL DATA.

Selected financial data is presented below for the periods indicated.

<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(millions of dollars)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues.............................. $15,451 $28,959 $29,151 $24,650 $21,581
Costs and expenses.................... 17,178 26,855 27,130 23,130 21,073
------- ------- ------- ------- -------
Net income............................ $(1,727) $ 2,104 $ 2,021 $ 1,520 $ 508
======= ======= ======= ======= =======
BALANCE SHEET DATA
Total assets.......................... $26,543 $29,601 $28,709 $27,021 $26,379
Gross investment*..................... 30,862 38,540 42,779 41,150 40,045
Total debt............................ 5,791 4,124 3,212 3,251 2,995
Deferred income tax liability......... 2,000 3,339 3,229 2,841 3,137
Shareholder's equity.................. 11,386 14,792 14,310 13,779 13,686
STATEMENT OF CASH FLOWS
Cash provided by operating
activities.......................... $ 2,029 $ 3,321 $ 4,124 $ 3,473 $ 3,014
Capital expenditures.................. 4,038 3,131 3,414 2,957 2,451
Cash dividends........................ 1,650 1,600 1,500 1,400 1,400
</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, and
the "Comparability of Data" discussion in Item 1, page 3.

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

KEY FINANCIAL RESULTS

-- The Company incurred a net loss of $1,727 million in 1998, compared with
net income of $2,104 million in 1997 and $2,021 million in 1996.

-- Adjusted net income, which excludes special items, was $730 million in
1998, compared with $1,890 million in 1997 and $1,860 million in 1996.

-- Cash flows from operating activities in 1998 were $2,029 million
compared with $3,321 million in 1997 and $4,124 million in 1996.

-- Revenues in 1998 were $15.5 billion, down from $29.0 billion in 1997,
and from $29.2 billion in 1996. The decline in 1998 revenues was due
significantly to the newly formed Oil Products ventures, which resulted
in such assets being held in equity companies.

-- Shareholder's equity was $11.4 billion at the end of 1998, down from
$14.8 billion in 1997 and $14.3 billion in 1996.

-- Return on Average Capital Employed was a negative 7.2 percent in 1998,
compared to 12.0 percent in 1997 and 12.2 percent in 1996. (Return on
Average Capital Employed: Net Income plus Minority Interest in Income
plus after tax Interest Expense expressed as a percent of Average
Capital Employed. Capital Employed is Shareholder's Equity plus Total
Debt plus Minority Interest. Average Capital Employed is the average of
current year and prior year Capital Employed.)

-- Total debt at the end of 1998 was $5,791 million compared with $4,124
million in 1997 and $3,212 million at year-end 1996. At that level, it
represented 33.7 percent of total capital, compared with 21.8 percent at
year-end 1997 and 18.3 percent at the end of 1996.

26
<PAGE> 27

Segment net income has been restated for 1997 and 1996 to facilitate
comparable results to 1998 in the discussions that follow. In 1998, Shell Oil
adopted Financial Accounting Standard No. 131, "Disclosure about Segments of an
Enterprise and Related Information", which establishes standards for reporting
information about operating segments in annual and interim financial reports.
The adoption by Shell Oil of SFAS No. 131 did not result in a change in the
reportable segments; however, the previously reported net income for each
segment has been restated primarily to reflect the allocation to the segments of
interest income and interest expense previously reported as "Nonallocated
Items."

OIL AND GAS EXPLORATION AND PRODUCTION

<TABLE>
<CAPTION>
INCOME HIGHLIGHTS 1998 1997 1996
- ----------------- ------- ------ ------
<S> <C> <C> <C>
Segment Net Income (Loss)................................. $(1,166) $1,327 $1,315
Special Items............................................. (1,517) 96 37
------- ------ ------
Adjusted Net Income....................................... $ 351 $1,231 $1,278
======= ====== ======
</TABLE>

Oil and Gas Exploration and Production incurred a net loss of $1,166
million in 1998, compared with net income of $1,327 million in 1997 and $1,315
million in 1996.

Adjusted net income, which excludes special items, was $351 million in
1998, a decrease of $880 million from 1997, and $927 million from 1996. The $880
million decline in 1998 compared to 1997 was due to significantly lower crude
oil and natural gas prices that more than offset the benefits from increased
domestic crude oil and natural gas production.

Shell Oil's average domestic crude oil price fell $6.03 per barrel in 1998,
a decrease of 34 percent compared to 1997 and 37 percent compared to 1996. In
addition, average natural gas prices fell 19 percent versus 1997 and 16 percent
versus 1996. Shell Oil's average crude oil and natural gas prices declined
throughout 1998, and during December 1998 were $9.08 per barrel and $1.83 per
mcf, respectively. These lower prices were the primary contributors to the
significant decline in 1998 earnings from operations compared to the prior two
years.

Overall in 1998 average prices for crude oil have been at their lowest
levels during the past two decades, and the prospects for 1999 and the
foreseeable future look to be about the same. For forecasting and planning
purposes, Shell Oil lowered its expectation of long-term prices to a pricing
structure based on $14 per barrel Brent crude price. This pricing structure was
developed internally giving consideration to the short-term outlook of
oversupply and price declines and to the longer-term outlook of global demand
and supply. In determining the longer-term view of sustained lower oil prices,
Shell Oil believes that world economic growth rates will continue to be modest
as economies in Asia and South America recover and oversupply will continue.
Moreover, improvements in efficiency and recoverability will characterize the
industry as a result of corporate viability and environmental pressures. In
light of Shell Oil's decrease in long-term price outlook, it was deemed
necessary to test the recoverability of its investments. Given the underlying
investment in oil and gas properties in the equity companies, Shell Oil followed
the methodology of Statement of Financial Accounting Standards No. 121. Shell
Oil also tested all its oil and gas assets under these rules. As a result,
writedowns were recorded in 1998.

These writedowns were primarily related to equity investments in two
alliances, Altura Energy, Ltd (Altura) and Aera Energy, LLC, (Aera), as well as
certain oil and gas producing assets being held for sale. Altura and Aera
production requires extensive use of tertiary recovery methods, that is, CO(2)
injection and steam injection, respectively. These methods, while recovering
reserves that would otherwise go unproduced, are expensive compared to
conventional production methods. Shell Oil deemed that the carrying value of its
equity investments was impaired because the underlying assets were no longer
expected to recover the equity investment value through future cash flows. The
lower estimated future cash flows result primarily from continued weakness in
oil and gas prices judged to be permanent by management. In addition, downward
reserve revisions were deemed necessary for certain oil and gas fields as a
result of the lack of future economic recoverability. The prices used in
performing the impairment analysis of future cash flows were Shell Oil's

27
<PAGE> 28

pricing structure described in the previous paragraph. As a result of the
impairment test, Shell Oil recorded an after tax noncash writedown of these
assets of $624 million for Altura and $794 million for Aera.

Additionally, certain oil and gas producing assets that were being held for
sale were also subjected to the appropriate expected sales price test. Based on
internally estimated or comparable properties' sales prices, the carrying value
of these assets less costs to sell exceeded their estimated sales value by $177
million after tax and accordingly, were written down to the lower level. The
anticipated sale of these assets is unlikely to result in significant employee
terminations, and as such, the writedown amount is not impacted by such costs.
These assets are expected to be sold in 1999.

Including the writedowns discussed in the previous paragraphs, total
special items decreased segment net income by $1,517 million in 1998, but
increased net income $96 million in 1997 and $37 million in 1996. Special items
in 1998 consisted of the noncash writedowns totaling $1,595 million, $26 million
for an employee severance program, $30 million for litigation reserves and $17
million for special transition costs related to employee benefits. Partially
offsetting these charges were gains from property sales totaling $163 million.

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.

Cash provided by operating activities was $1,407 million in 1998, compared
with $2,680 million in 1997, and $2,493 million in 1996.

Production -- Total net crude oil production, on a barrels per day basis,
averaged 538,000 in 1998, 507,000 in 1997 and 472,000 in 1996. Total crude oil
production has now increased for the fifth consecutive year.

Domestic crude oil production increased 7 percent over 1997, averaging
439,000 barrels per day in 1998, and increased 17 percent over 1996. At this
level, domestic production was at its highest level in 10 years.

International net production, on a barrels per day basis, averaged 99,000
in 1998, up 2,000 over 1997 and 3,000 over 1996. International production was
primarily from operations in Brazil, Cameroon, China, Denmark, New Zealand and
Yemen, the latter of which was sold in 1998.

Average total natural gas production was 2,037 million cubic feet per day
in 1998, up 5 percent over 1997 and 3 percent over 1996. Average domestic
natural gas production was 1,846 million cubic feet per day in 1998, an increase
of 7 percent over 1997 and 3 percent over 1996.

Total net natural gas liquids production, on a barrels per day basis, was
82,000 in 1998, up 1,000 over 1997 and 7,000 over 1996.

As indicated above, in the 1998 to 1997 comparisons, Shell Oil's production
of domestic crude oil and natural gas increased 7 percent. These results
occurred despite temporary curtailment of production from the Auger platform,
the Mensa subsea installation and numerous storms in the Gulf of Mexico during
1998. 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 5 to 7 percent for oil and 4 to 5 percent
for gas. While volumes are still anticipated to increase, the rate of increase
is less than previously forecast primarily due to reductions in capital spending
as a result of the lower oil price environment. In the event of potential
further declines in capital spending, the pace of growth during this period may
be constrained further.

28
<PAGE> 29

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

Costs and Expenses -- Comparative data between 1998 and the previous two
years has been greatly affected by the new alliances which began operations in
1997. These two alliances, Altura and 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 1998 totaled $928 million, down $34 million from 1997
and $270 million from 1996. However, after restating 1997 and 1996 costs as
though such ventures had been in existence in both years, production costs
increased in 1998 over 1997 and 1996 due to costs related to storms in the Gulf
of Mexico and higher repair and maintenance expenses.

Shell Oil's exploration expenses of $360 million in 1998, including dry
hole costs of $188 million, increased $23 million over 1997 and $33 million over
1996. Exclusive of dry holes, 1998 exploration costs decreased $19 million from
1997 and $13 million from 1996. The level of exploration costs in all three
years remained about the same, reflecting continuation of the spending program
in the Gulf of Mexico.

Depreciation, depletion and amortization costs were $987 million in 1998,
down $141 million from 1997, and $352 million from 1996. After adjusting for the
effects of the ventures formations in 1997, depreciation, depletion and
amortization costs increased in 1998 due in part to higher production.

Capital Expenditures -- Capital spending for Oil and Gas Exploration and
Production was $1,565 million in 1998, compared with $2,182 million in 1997 and
$2,053 million in 1996. Approximately one-half of the decrease in 1998 was due
to significant expenditures in 1997 on Shell Oil's growing investment in the
Downstream Gas business. Excluding the downstream gas expenditures, capital
expenditures in 1998 declined further due to an overall reduction in activities
in all areas, except deepwater Gulf of Mexico, where spending increased in 1998
over 1997. The reductions were in response to oil and gas prices. Capital
spending is planned to decline further in 1999 to approximately $1,000 million
or less due to the current economic environment resulting from low prices.

Hydrocarbon Reserves -- In 1998, reserve additions, mainly from
discoveries, extensions, purchases, improved recovery techniques and revisions
to previous reserve estimates, were 129 million barrels on a crude oil
equivalent basis. These additions were more than offset by producing property
sales of 95 million equivalent barrels, and by production during the year. In
1997 and 1996, reserves also declined. Reserve numbers include a prorata share
based on Shell Oil's ownership interest of equity company reserves.

Net wells drilled in 1998 totaled 107, down 55 from 1997 and 410 from 1996.
The significant activity in 1996 related primarily to drilling programs in
California, which has subsequently become part of Aera.

DOWNSTREAM GAS

<TABLE>
<CAPTION>
INCOME HIGHLIGHTS 1998
----------------- -----
<S> <C>
Segment Net Income (Loss)................................... $(703)
Special Items............................................... (638)
-----
Adjusted Net Income (Loss).................................. $ (65)
=====
</TABLE>

Downstream Gas was established as a new operating segment for Shell Oil in
1998 and as a result, comparable data for prior years is not available. In 1998,
Shell Oil acquired Tejas Gas Corporation including its interest in Coral Energy,
LP. The Downstream Gas segment includes Shell Oil's natural gas pipelines,
natural gas processing, natural gas sales and marketing, and related activities.

29
<PAGE> 30

The Downstream Gas segment incurred a loss of $703 million in 1998, which
included special items totaling $638 million. Adjusted to exclude these special
items, Downstream Gas incurred a loss in 1998 of $65 million.

The business environment in the initial year of operations was most
unfavorable. While much progress was made in identifying key goals and business
growth strategies, operating results were adversely affected by lower average
natural gas sales margins, lower gas plant processing margins, and a high level
of interest costs associated with debt related to the acquisition of Tejas.

As a result of the decision to hold for sale certain assets and the
application of Statement of Financial Accounting Standards No. 121 to this
anticipated sale, Shell Oil recorded an after tax noncash writedown of assets of
$626 million in the Downstream Gas segment. Shell Oil decided to sell certain of
its onshore United States natural gas pipeline and processing assets as a result
of a significant downturn in business conditions during 1998 and the concurrent
determination that these assets were no longer strategic to Shell Oil. The sale
of these assets is expected to occur in 1999. The estimated fair value of these
assets was determined primarily based on a discounted cash flow analysis of
expected future cash values based on Shell Oil's view of current and future
business conditions. The strategic factors which Shell Oil evaluated in
performing the estimated fair value analysis included continued weakness in
natural gas liquids prices due to downward pressure on oil and gas prices
coupled with apparent changes in natural gas demand, in part due to mild
winters, increased natural gas supply in the Northeast primarily from Canada,
increased natural gas demand in the West and intrastate regulatory issues. The
forecasting pricing structure as previously described in the Oil and Gas
Exploration and Production discussion was also utilized. The anticipated sale of
these assets is not expected to result in significant employee terminations, and
as such, the writedown amount is not impacted by such costs.

Special items in 1998 totaled $638 million including the writedown
described in the previous paragraph and $23 million for employee severance
provision, partially offset by an $11 million gain from a property sale.

OIL PRODUCTS

<TABLE>
<CAPTION>
INCOME HIGHLIGHTS 1998 1997 1996
----------------- ---- ---- ----
<S> <C> <C> <C>
Segment Net Income.......................................... $169 $410 $336
Special Items............................................... (99) 84 (9)
---- ---- ----
Adjusted Net Income......................................... $268 $326 $345
==== ==== ====
</TABLE>

The Oil Products segment was structurally changed in 1998 with the
formation of new alliances. In January 1998, the Shell Oil and Texaco Inc.
(Texaco) western United States downstream alliance began operations. This new
equity company, Equilon Enterprises LLC, combines major elements of the two
companies' western and midwestern U.S. refining and marketing businesses and
their nationwide trading, transportation and lubricants businesses. Shell Oil
owns 56 percent of the venture and Texaco 44 percent. In July 1998, Shell Oil
and Star Enterprise's eastern and Gulf Coast U.S. refining and marketing
businesses, excluding the Company's investment in the Deer Park Refining Limited
Partnership, began operations as Motiva Enterprises LLC. Shell Oil owns 35
percent, Texaco 32.5 percent and 32.5 percent is owned by Saudi Refining, Inc.

The discussion that follows includes Shell Oil's share of the results of
these ventures, and the Shell Oil eastern and Gulf Coast U.S. refining and
marketing business for the first half of 1998. As a result of the start-up of
operations of these equity ventures, comparisons to 1997 and 1996 do not reflect
comparable results of operations for all periods.

In 1998, U.S. refining margins remained under pressure and were lower than
in 1997 and have continued to trend downward during early 1999, reflecting a
continuing difficult industry environment. For the year, U.S. gasoline prices
were down significantly from 1997 as a result of an oversupply of crude oil and
intense competition in the industry. Shell Oil's Oil Products segment net income
reflected these industry conditions.

30
<PAGE> 31

Oil Products segment net income in 1998 was $169 million, compared with
$410 million in 1997 and $336 million in 1996.

Adjusted net income, which excludes special items, was $268 million in
1998, a decrease of $58 million from 1997, and $77 million from 1996. Results
were lower in 1998 compared to 1997 due to lower refined product margins. In
particular, average 1998 refining margins were lower than in 1997, with
resulting reduced income only partially offset by higher marketing margins.

Special items in 1998 reduced segment net income $99 million, including
charges of $55 million for employee severance programs, $44 million for
environmental cleanup provisions, and $27 million for litigation reserves. In
addition, a net gain from property sales totaling $57 million more than offset
charges of $32 million for refinery and lubricant plant closures. 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.

Cash flow provided by operating activities was $240 million in 1998, down
$503 million from 1997 and $522 million from 1996. Capital expenditures in 1998
of $48 million declined $506 million from 1997 and were $678 million lower than
1996. Capital expenditures in 1998 were related to projects in the eastern
geographic region during the first half of the year, prior to the start-up of
operations in Motiva.

Equilon and Motiva Synergies -- A key objective of the Equilon and Motiva
ventures is to achieve combined permanent synergy benefits of $800 million
pretax annually by the end of 2000. Shell Oil's equity share of these
anticipated benefits is expected to be approximately $400 million annually.
Areas for synergies are logistical optimization, improved crude oil and refined
product supply and trading, business systems consolidation and sharing of best
practices across companies. Cost reduction synergies in 1998 have included the
consolidation of lubricant blending and packaging operations, research
facilities, and marketing and other office locations.

In 1998, divestitures mandated under the terms of a consent agreement
accepted by the Federal Trade Commission and similar agreements with the
attorneys general of various states as a condition for approving the new
alliances were almost all completed. These included the sale of Shell Oil's
Anacortes Refining Company in the State of Washington and Shell Oil's 24 percent
interest in Plantation Pipe Line Company. As also required, Equilon sold a
mixture of Shell and Texaco branded stations in San Diego county, California.
The sale of Texaco's Barbers Point products supply terminal on the island of
Oahu, Hawaii and of 27 Texaco branded gasoline stations in Hawaii is pending.
Other Equilon portfolio changes included the expansion of a crude oil pipeline
system to transport refined products from Gulf Coast refineries to West Texas
and other markets. The pipeline originates in East Houston and extends to
Corsicana, Texas, with sections continuing to the Ft. Worth and Abilene areas,
Midland-Odessa and El Paso in Texas and to Oklahoma. Construction is under way
to expand the system's current capacity of 60,000 barrels per day of gasoline,
diesel and jet fuel, providing growth opportunities in both pipeline revenue and
refined products marketing. Concurrent with the expansion, Equilon converted the
Odessa, Texas, refinery into a products storage and distribution terminal tied
into the pipeline system. Despite cost reductions in recent years, the 28,000
barrel-per-day Odessa refinery was no longer able to compete with larger, more
efficient refining facilities, especially in light of lower pipeline
transportation costs for products sourced from the Gulf Coast.

CHEMICAL PRODUCTS

<TABLE>
<CAPTION>
INCOME HIGHLIGHTS 1998 1997 1996
----------------- ----- ---- -----
<S> <C> <C> <C>
Segment Net Income.......................................... $ 57 $441 $ 231
Special Items............................................... (205) (9) (108)
----- ---- -----
Adjusted Net Income......................................... $ 262 $450 $ 339
===== ==== =====
</TABLE>

31
<PAGE> 32

Chemical Products segment net income in 1998 was $57 million, compared with
$441 million in 1997 and $231 million in 1996.

Adjusted net income, which excludes special items, was $262 million in
1998, a decrease of $188 million from 1997, and $77 million from 1996.

The decline in adjusted net income in 1998 from 1997 was due to lower
margins. Partially offsetting these margin declines were improved sales volumes
of primary chemicals and downstream products, with higher sales of olefins and
solvents in 1998 over 1997.

Special items reduced segment net income $205 million in 1998, $9 million
in 1997, and $108 million in 1996. The 1998 special items of $205 million
included a partial writedown totaling $227 million for assets held for sale and
the related sale of certain businesses as further discussed below, $32 million
for product warranty litigation, $31 million charges for employee severance
provisions, and $15 million write-off of obsolete software. Partially offsetting
these charges were tax benefits of $100 million. 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.

Cash provided by operating activities in 1998 was $780 million, compared
with $554 million in 1997 and $729 million in 1996.

In late 1998, Shell Oil announced a significant restructuring of its
chemicals portfolio, which includes the planned divestiture of businesses not
integral to its revised portfolio strategy. The businesses to be divested
include PET, Carilon(R), Bisphenol A, elastomers, resins and versatics. As a
result of the decision to withdraw from these businesses, the assets at certain
of Shell Oil's plants were classified as held for sale. The sale of these assets
is expected to occur during 1999. Due to a lack of comparable sales data, Shell
Oil used a combination of methods to arrive at an estimated fair market value
for these assets. Two separate calculations were made: a multiple of Earnings
Before Interest, Taxes, Depreciation and Amortization (EBITDA) analysis, and a
discounted net cash flow analysis. These are common valuation techniques in the
chemical industry. An average of the two calculations was used, resulting in a
net after tax writedown affecting these assets of $227 million. The sale of
these assets is not expected to result in significant employee terminations, and
as such, the writedown is not impacted by such costs.

Total chemical sales volumes in 1998 improved 9 percent over 1997 and 2
percent over 1996, reflecting higher sales of olefins and solvents.

Capital spending for Chemical Products was $570 million in 1998, compared
with $348 million in 1997 and $582 million in 1996. Increases in capital
spending in 1998 included spending on the new PDO/PTT plant at Geismar,
Louisiana, to develop Corterra(R) Polymers and the Phenol 3 unit at the Deer
Park, Texas plant.

In late 1998, a transaction involving the sale and leaseback of certain
chemicals manufacturing assets was completed. Under the terms of this lease,
Shell Oil received approximately $550 million in proceeds that were used
primarily to reduce outstanding indebtedness. The depreciation charges for the
assets, as well as the interest charges on existing loans related to the assets,
will be replaced by the lease rentals.

OTHER SEGMENT

<TABLE>
<CAPTION>
INCOME HIGHLIGHTS 1998 1997 1996
----------------- ---- ---- ----
<S> <C> <C> <C>
Segment Net Income (Loss)................................... $23 $(11) $(22)
Special Items............................................... -- -- (4)
--- ---- ----
Adjusted Net Income (Loss).................................. $23 $(11) $(18)
=== ==== ====
</TABLE>

The Other operating segment recorded net income of $23 million in 1998,
compared with net losses of $11 million in 1997 and $22 million in 1996. The
improvement in 1998 was due mainly to higher earnings from Shell Services
Company. In 1997, the loss was attributable to new business venture costs and
losses

32
<PAGE> 33

incurred on real estate properties held for sale. In 1996, the loss was mainly
due to settlement costs associated with an exited business.

NONALLOCATED CORPORATE COSTS

<TABLE>
<CAPTION>
INCOME HIGHLIGHTS 1998 1997 1996
----------------- ----- ----- ----
<S> <C> <C> <C>
Nonallocated Costs.......................................... $(107) $ (63) $161
Special Items............................................... 2 43 245
----- ----- ----
Adjusted Nonallocated Costs................................. $(109) $(106) $(84)
===== ===== ====
</TABLE>

Corporate items not allocated to the operating segments reduced net income
$107 million in 1998, $63 million in 1997, while benefiting net income $161
million in 1996.

In 1998, special items benefited nonallocated costs $2 million. 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.
Excluding these effects, corporate costs increased in 1998 compared to 1997 due
primarily to corporate brand initiative costs.

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 1998, cash provided by operating activities totaled $2,029 million, down
$1,292 million from 1997, but exceeded cash used for investing activities in
1998 by $597 million. Similarly, cash provided by operating activities in 1997
totaled $3,321 million and exceeded cash used for investing activities by $482
million. In 1996, cash provided by operating activities totaled $4,124 million
and exceeded investing activities by $1,354 million. Total debt in 1998
increased $1,667 million from 1997 to $5,791 million, with the
total-debt-to-total-capital ratio increasing to 33.7 percent. Cash dividends
increased to $1,650 million in 1998, compared with $1,600 million in 1997 and
$1,500 million in 1996.

Cash Provided by Operating Activities -- In 1998, cash provided by
operating activities amounted to $2,029 million, compared with $3,321 million in
1997 and $4,124 million in 1996. The decline in cash provided by operating
activities in 1998 from both 1997 and 1996 was due largely to lower earnings.

Cash Used for Investing Activities -- The major use of cash flows from
operating activities was for capital expenditures, which amounted to $4,038
million in 1998, $3,131 million in 1997, and $3,414 million in 1996. Proceeds
from property sales in 1998 totaled $1,167 million and in 1997 totaled $169
million. The decrease in net cash used for investing activities in 1998 over
1997 was primarily due to increased proceeds from property sales and a
settlement resulting from the formation of equity ventures.

Debt Obligations -- At year-end 1998, Shell Oil had increased its total
debt by $1,667 million, compared with an increase of $912 million in 1997 and a
decrease of $39 million in 1996. Shell Oil's ratio of total-debt-
to-total-capital was 33.7 percent at the end of 1998, compared with 21.8 percent
at the end of 1997 and 18.3 percent at the end of 1996. Of the total Shell Oil
debt outstanding at year-end 1998, $3,314 million or 57 percent was borrowed on
commercial terms from affiliated companies.

Capital Spending -- Shell Oil's capital spending of $4,038 million in 1998
was about $900 million lower than planned at the beginning of the year, due
primarily to changes in the structure of the Oil Products business which
affected reporting of these expenditures. In 1998, oil and gas exploration and
production activities accounted for 38 percent of total capital expenditures,
compared with 70 percent in 1997 and 61 percent in 1996. Downstream gas in 1998
accounted for 45 percent of the total expenditures. These outlays were primarily
in the United States. The remaining Oil Products business and Chemical Products
accounted for 15 percent of total spending in 1998, compared with 29 percent in
1997 and 38 percent in 1996.

Dividends -- Cash dividends were $1,650 million in 1998, increasing $50
million over 1997 and $150 million over 1996.

33
<PAGE> 34

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 $322 million at year-end 1998, a decrease of $20 million
from 1997 and $71 million from 1996.

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, 1998, unused revolving credit
agreements of $1,259 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 1998, $500 million of a $1.0 billion shelf registration remained,
allowing future flexibility in the public debt markets.

Operating working capital decreased in 1998 compared to 1997 and 1996 due
primarily to the formation of the oil product alliances, offset in part by
increases resulting from the acquisition of Tejas. Total working capital at the
end of 1998, including financing related items, decreased $2,452 million due
primarily to an increase in short term debt of $1,762 million over 1997. Shell
Oil's liquidity position is 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 $59 million at the end of
1998, $519 million in 1997 and $976 million in 1996.

Disclosures Concerning Market Risk -- As further discussed in Note 11 of
the Notes to Consolidated Financial Statements included in Item 14a, from time
to time Shell Oil utilizes financial derivatives with the intention of
minimizing its borrowing costs and reducing price volatility risks on certain
commodities -- primarily the products Shell Oil sells (natural gas, natural gas
liquids, and certain chemical products) and, to a lesser extent, the raw
materials which Shell Oil purchases. Shell Oil also utilizes currency
derivatives to hedge transactions in which natural gas is purchased in Canada
and resold in the United States, as well as to reduce the volatility of
executive compensation plans. Shell Oil also enters into derivatives
transactions for trading for the purpose of earning profits. All derivative
products are straightforward futures, options and swaps, with no leverage or
multiplier features.

Prior to the formation of the Equilon and Motiva joint venture alliances in
the Oil Products operating segment in January, 1998 and July, 1998,
respectively, Shell Oil also utilized derivative commodity instruments related
to refined products. However, Shell Oil's refined product business is now a part
of these equity company ventures which carry out their own risk management
strategies.

The Oil and Gas Exploration and Production operating segment is a producer
of crude oil and natural gas and thus benefits when market prices rise but is
harmed when such prices decline. The Downstream Gas segment purchases, processes
and sells natural gas and natural gas liquids products, which are subject to
similar variations in price and which produce similar impacts. 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 natural gas and natural gas liquids
or the ultimate sales prices of certain future sales of natural gas and natural
gas liquids. These derivative instruments are generally for a term of less than
one year and cover volumes below anticipated purchases or sales.

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.

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
34
<PAGE> 35

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.

As part of its acquisition of Tejas in January, 1998, Shell Oil acquired
certain long-term debt of Tejas which carried floating rates of interest which
Tejas had effectively converted to fixed rates of interest through interest rate
swaps. These swaps require Shell Oil to pay fixed rates of interest on notional
amounts of principal to counterparties. The counterparties, in turn, pay to
Shell Oil floating 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 decrease. Increases
in short-term market rates would result in an improvement in earnings and cash
flow to the extent the floating rates received exceeded the fixed rates paid and
reduced the cost of underlying debt. In addition, decreases in long-term market
interest rates would have the effect of decreasing the fair value of Shell Oil's
long-term debt and other long-term, fixed rate obligations.

During 1998 the combined effect of these transactions was a pre-tax
decrease in interest expense of $9 million. The following interest rate table
shows the Shell Oil swaps that were in effect and their fair value as of
December 31, 1998:

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

<TABLE>
<CAPTION>
NOTIONAL
PRINCIPAL FAIR VALUE
(MILLIONS OF INTEREST UNDERLYING INTEREST (MILLIONS OF
DOLLARS) MATURITY PAID OBLIGATIONS RECEIVED DOLLARS)
------------ -------- -------- --------------------------------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
235 1999 CP* Preferred stock (6.1%)** 6.08% $ 0.7
250 1999 CP* 6.625% bonds 6.1% 2.2
55 2000 CP* Production payment (6.45%)** 5.9% 0.4
100 2001 CP* Fixed coupon preferred stock 6.6% 3.6
250 2002 CP* 6.7% bonds 6.3% 10.0
594 2004 Various Commercial Paper Libor (35.0)
173 2008 CP* Obligation of investee (6.47%)** 6.4% 9.8
139 2013 CP* Obligation of investee (6.64%)** 6.6% 9.3
153 2015 CP* Building lease (9.8%)** 7.1% 22.2
85 2017 CP* Building lease (8.4%)** 7.1% 13.5
------ ------
Total $2,034 $ 36.7
====== ======
</TABLE>

Shell Oil uses a "Value-at-Risk" (VaR) model to determine the maximum
potential five-day loss in the fair value of its 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 five-day holding
period. Shell Oil's computations are based on the interrelationship between
movements in underlying products' prices and exposure to particular price
indices.

35
<PAGE> 36

At December 31, 1998 and, on a pro forma basis assuming the acquisition of
Tejas had occurred at January 1, 1997, at December 31, 1997, the estimated
maximum potential five-day loss in fair value, calculated using the Shell Oil
VaR model was as set forth in the following table:

VALUE-AT-RISK
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE-AT-RISK
(MILLIONS OF DOLLARS)
----------------------
1997
CATEGORY 1998 (PRO FORMA)
- -------- ------ ------------
<S> <C> <C>
Commodity Derivatives....................................... $39.8 $34.2
Interest Rate Swaps......................................... 19.5 12.1
Foreign Currency Derivatives................................ 0.4 6.7
Equity Swaps................................................ 11.5 --
----- -----
Total............................................. $71.2 $53.0
===== =====
</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. The 1997 market
risk disclosure has been converted from a one-day holding period to a five-day
holding period using market accepted conversion methods (i.e., square root of
time).

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. Due to extensive business restructuring,
particularly in Shell Oil's Oil Products and Exploration and Production
segments, many previously Shell Oil owned assets are now part of joint venture
companies where Shell Oil does not have a controlling interest and which are
accounted for by the equity method of accounting (the "Equity Companies"). Where
Equity Companies' statistics are included with Shell Oil statistics in this
"Environmental Matters" section, the term "Total Shell Oil Interests" is used.
Disclosures concerning the newly created Downstream Gas segment are presented
separately for 1998.

Discussions are ongoing with governmental agencies as to the scope and
magnitude of present closure and post-closure Resource Conservation and Recovery
Act ("RCRA") and similar state or local remediation obligations at operating
locations. A number of those discussions have resulted in corrective action
being required and other discussions are still continuing. Based on those
discussions, 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 1998, pursuant to the requirements of
certain federal and state laws which determine how such calculations are made,
Shell Oil confirmed its ability to pay $199 million either directly or as the
guarantor of specifically described obligations of certain Equity Companies
(including $172 million Oil Products and $19 million Chemical Products and $8
million for accidental occurrences) for RCRA-related closure, post-closure and
liability costs. A portion of Oil Products RCRA obligations relating to
operating sites have been assumed by the relevant Equity Company. 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

36
<PAGE> 37

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 238 sites. Approximately 138 of these
sites are alleged to involve Oil Products operations, 69 Chemical Products
operations and 31 E&P operations. In a number of instances, more than one
business is alleged to be involved. As of December 1998, discussions or
activities concerning 88 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. Eighty-eight
sites were considered inactive, meaning that no discussions or activity were
pending or had occurred for more than one year and 62 sites were considered
settled. In 1997 Shell Oil reported 235 such sites, 81 of which were active, 93
inactive and 61 settled.

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 several 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 and include
Shell Oil's pro rata share based on ownership percentage of costs incurred by
Equity Companies. Consistent with the preceding, Shell Oil estimates that
environmental capital expenditures in 1998 were about $170 million ($91 million
Oil Products, $58 million Chemical Products, $19 million Exploration &
Production and $3 million Downstream Gas). 1997 total expenditures were $140
million (Oil Products $95 million; Chemical Products $20 million and Exploration
& Production $25 million). Environmental capital expenditures are expected to be
about $135 million in 1999 and $120 million in the year 2000. Future year
expenditures will relate primarily to Clean Air Act regulations relating to
control of conventional and toxic emissions and additional requirements related
to clean fuels. Total Shell Oil Interests' operating, maintenance and
administrative costs related to environmental protection and remediation of
waste disposal sites were approximately $737 million in 1998 (Oil Product's
costs were $572 million, Chemical Products' $98 million, Exploration &
Production's $55 million, Downstream Gas' $8 million and Corporate $4 million).
Total 1997 costs were $789 million (Oil Products' costs were $588 million,
Chemical Product's $133 million and Exploration & Production's $68 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 but also the ongoing effort to
improve efficiency and cost effectiveness.

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

37
<PAGE> 38

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

REPORT ON YEAR 2000 ISSUES

Shell Oil has been engaged in the identification, analysis and remediation
of the Year 2000 computer date ("Y2K") problem since 1997. This problem is
associated with the incorrect interpretation of computer stored dates which are
numerically related to the change of the millennium. Large and small computing
devices and associated software used in running large business applications as
well as some kinds of industrial automation systems are potentially subject to
this problem.

Each business organization takes independent responsibility for
identification, analysis and remediation of Y2K problems within such business.
Year 2000 Teams have been formed in each business organization to deal with the
Y2K problem. The Teams communicate through a central focal point committee which
tracks and updates Year 2000 progress reports from each business at the overall
Shell Oil level. This Shell Oil Year 2000 Team also provides a vehicle for
exchange of ideas and experiences to achieve improved efficiencies and results.
The Chief Information Officer of each business represents the organization on
the Shell Oil Year 2000 Team. Confirmation is sought from those equity companies
where Shell Oil has a significant voting interest of an active and appropriate
Y2K program.

Shell Oil Year 2000 Teams have identified and analyzed the use of computer
technology in the respective businesses to determine where there may be business
operation issues associated with the Y2K problem. Priority in such reviews has
been placed first on health, safety and environmental issues, then on areas
which may materially affect third parties or revenues. These reviews necessarily
included both internal uses of technology as well as key trading interfaces
which might be adversely affected by third party customers', suppliers' or
service providers' use of computing technology with Y2K problems.

The Shell Oil businesses have divided their analysis of the Y2K problem
into three areas: 1) business information, computing and telecommunication
systems ("IT Systems"); 2) industrial automation systems ("Imbedded Technology
Systems"); and 3) potential problems involving the Y2K problems of third party
suppliers, customers and service providers (each a "Third Party" and together
"Third Parties"). The internal portion of this analysis and inventory of
potential problems has been completed in all areas believed to be associated
with critical IT Systems. The inventory of IT Systems, Imbedded Technology
Systems and Third Party interfaces is substantially completed and has been
analyzed to determine remediation requirements. Remediation of Y2K problems in
all areas in which issues have been identified is scheduled to be accomplished
by the end of June 1999. Remediation is primarily handled by internal company
staff, although some outside companies are involved in the remediation
associated with particular systems. It is expected that analysis of interfaces
with key Third Parties will continue into August of 1999 to insure appropriate
coordination and, where necessary or appropriate, development of contingency
plans in the event a Third Party cannot meet its commitments to Shell Oil.

Due to a business-driven demand for improved computing systems throughout
Shell Oil, the primary business computing systems in each Shell Oil business
organization are being replaced in this decade. These new systems are
represented to be fully Y2K compliant by their manufacturers and Shell Oil
believes that it will have no Y2K issues in its important business computing
systems. While acquisition of these new IT Systems for business computing
avoided the necessity of dealing with Y2K issues in the predecessor systems, the
cost of these systems was incurred primarily for other business reasons. The
majority of the costs of each such system are being capitalized and charged
against income over the estimated useful life of the systems. Funds for the
acquisition of these systems are included in the capital budget of the
respective businesses.

38
<PAGE> 39

Costs associated with the identification, analysis and remediation of Y2K
problems, including the repair or replacement of imbedded technology systems,
are currently projected by the businesses at approximately $150 million. These
costs are being charged to expense as incurred and do not include Y2K costs of
equity companies. At December 31, 1998, approximately 60 percent of such
expenditure had been committed or incurred. Funding for these efforts has been a
part of the normal budgeting of current operations within each business.

As to the Imbedded Technology Systems used in industrial automation within
Shell Oil, the businesses are in the process of analyzing and testing these
systems. The various Shell Oil businesses have used several approaches to the
identification and analysis of the potential Y2K problem in such systems.
Identification of imbedded technology issues is handled by field installation
inspection in some cases and in other cases by inspection of design blueprints,
with field-testing to confirm the adequacy of design information. Remediation of
all problems with this technology is expected to be completed by July 1, 1999.

Beyond the internal programs in the Shell Oil businesses, significant
efforts are underway to understand the position of key Third Parties with
respect to possible business interruptions due to Y2K problems in their systems.
Current indications are that all of Shell Oil's major Third Party customers,
suppliers and service providers are well aware of this problem and have programs
underway to address it. Discussions will continue with these Third Parties
during 1999 to best position Shell Oil to continue its business operations
without interruption. Specific attention is being given to Third Parties that
have critical relationships with Shell Oil to attempt to insure that there is
not a disruption in the flow of those products or services which are essential
to the ability of Shell Oil to carry on its business operations. Since Shell Oil
will remain dependent on Third Party confirmations in certain areas, appropriate
contingency plans will be considered where viable.

The key objective of Shell Oil's extensive program to address the Y2K
computer technology problem is the significant reduction or complete elimination
of the risk to business operations. Internal audits during the first quarter of
1999 in all of Shell Oil's major business units will further validate the
coverage of the Y2K remediation programs. As a contingency plan, steps will be
taken to manage this issue around key dates where unanticipated Y2K problems may
arise. Such plans include the positioning of skilled computer staff in the
various areas of business operations to insure quick response to any unexpected
Y2K problems arising due to failure to previously detect the problem or due to
inadequate remediation. Shell Oil will review its current business operation
contingency plans in the first half of 1999 to understand what additions may be
appropriate to those plans to deal with residual risk associated with Y2K
problems. This will include decisions on operating schedules and staff
deployment during time periods in which Y2K-related problems are most likely to
occur.

Shell Oil realizes that its failure or the failure of critical Third
Parties to identify and correct a material Y2K problem could result in an
interruption in or failure of certain normal business activities or operations.
While such failures could materially and adversely affect Shell Oil's operations
and relationships with Third Parties, the objective of Shell Oil's Year 2000
Team is the significant reduction or complete elimination of these risks. Shell
Oil expects to achieve this goal. As stated above, steps will be taken to manage
this issue around key dates where the problem may arise.

The discussion of Shell Oil's Y2K efforts and expectations regarding the
same includes forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933. Shell Oil's ability to achieve Year 2000 readiness
and the level of costs associated therewith could be adversely impacted by,
among other things: the availability and cost of programming and testing
resources; vendors' ability to install or modify hardware, software or other
computer technology in Shell Oil systems; and unanticipated problems identified
as the Year 2000 Teams conclude their analysis and verification of IT and
Imbedded Technology Systems. Additionally, no precedent exists as to the manner
in which to fully detect and eliminate Y2K risks. Thus, it is possible that
despite all efforts to identify, analyze and remediate Y2K related problems, not
all potential problems may be detected or all remediation efforts operate as
intended; it is impossible to accurately predict the impact on Shell Oil in any
such case. Finally, the failure of Third Parties to achieve acceptable Y2K
compliance and the absence of available contingent suppliers and resources could
also materially adversely affect Shell Oil.

39
<PAGE> 40

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 24-25),
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." 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 34-36), and Note 11 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 19 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.

40
<PAGE> 41

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.

41
<PAGE> 42
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........................... 44
Consolidated Statement of Income and Earnings Reinvested for
the years 1998, 1997 and 1996............................. 45
Consolidated Balance Sheet at December 31, 1998 and 1997.... 46
Consolidated Statement of Cash Flows for the years 1998,
1997 and 1996............................................. 47
Notes to Consolidated Financial Statements.................. 48
</TABLE>

b. REPORTS ON FORM 8-K

None.

c. 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 is incorporated by
reference to Item 6 of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.

2.2 Asset Transfer and Liability Assumption Agreement dated as of
January 15, 1998 between Shell Oil and Texaco Inc. is incorporated
by reference to Item 7 of the Company's Current Report on Form 8-K
filed January 30, 1998.

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 10 of the Notes to
Consolidated Financial Statements.

10. Material Contracts:

(i) Copy of letter agreement dated January 11, 1999 between the
Company and Shell Internationale Research Maatschappij, B.V.
continuing for the calendar year 1999 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.

42
<PAGE> 43

d. FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Equilon Enterprises, LLC Financial Statements, the
investment in which are accounted for on the equity method
and are filed as part of this report...................... 70
Motiva Enterprises LLC Financial Statements, the investment
in which are accounted for on the equity method and are
filed as part of this report.............................. 88
</TABLE>

The Company's financial statements and schedules are listed in Item 14a
above. Certain schedules have been omitted because the required information is
shown in the financial statements or notes thereto.

43
<PAGE> 44

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 42 present fairly, in all material respects,
the financial position of Shell Oil Company and its subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, 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.

PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 5, 1999

44
<PAGE> 45

SHELL OIL COMPANY AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
REVENUES
Sales and other operating revenue...................... $17,858 $32,173 $32,450
Less: Consumer excise and sales taxes.................. 824 3,905 3,627
------- ------- -------
17,034 28,268 28,823
Equity in income (loss) of affiliates.................. (1,823) 533 193
Interest income........................................ 89 74 88
Other income........................................... 151 84 47
------- ------- -------
Total............................................. 15,451 28,959 29,151
------- ------- -------

COSTS AND EXPENSES
Purchased raw materials and products................... 10,723 18,440 18,355
Operating expenses..................................... 2,667 3,560 3,773
Selling, general and administrative expenses........... 850 974 1,012
Exploration, including exploratory dry holes........... 353 332 319
Research expenses...................................... 153 164 136
Depreciation, depletion, amortization and
retirements.......................................... 2,596 1,895 2,066
Interest and discount amortization..................... 392 205 203
Operating taxes........................................ 231 362 452
------- ------- -------
Total............................................. 17,965 25,932 26,316
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST..... $(2,514) $ 3,027 $ 2,835
Federal and other income taxes......................... (865) 860 763
Minority Interest in income of subsidiaries............ 78 63 51
------- ------- -------
NET INCOME (LOSS)........................................... (1,727) 2,104 2,021

OTHER COMPREHENSIVE INCOME
Minimum pension liability adjustment (net of taxes).... (29) (22) 10
------- ------- -------
COMPREHENSIVE INCOME (LOSS)................................. $(1,756) $ 2,082 $ 2,031
======= ======= =======

EARNINGS REINVESTED
Balance at beginning of year........................... $12,586 $12,104 $11,573
Net Income (Loss)...................................... (1,727) 2,104 2,021
Other Comprehensive Income (Loss)...................... (29) (22) 10
Dividends -- Cash...................................... (1,650) (1,600) (1,500)
------- ------- -------
Balance at end of year............................... $ 9,180 $12,586 $12,104
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

45
<PAGE> 46

SHELL OIL COMPANY AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31
-------------------
1998 1997
------- -------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................... $ 322 $ 342
Receivables and prepayments, less allowance for
doubtful accounts................................ 2,235 3,414
Owing by related parties.......................... 618 280
Inventories of products........................... 723 974
Inventories of materials and supplies............. 150 218
------- -------
Total Current Assets......................... 4,048 5,228
Investments............................................ 9,345 6,456
Long-Term Receivables.................................. 158 125
Deferred charges and other............................. 1,548 1,025
Property, Plant and Equipment at cost, less accumulated
depreciation, depletion and amortization.............. 11,444 16,767
------- -------
Total........................................ $26,543 $29,601
======= =======

LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Accounts payable -- trade......................... $ 1,490 $ 2,257
Other payables and accruals....................... 1,406 1,281
Income, operating and consumer taxes.............. 88 186
Owing to related parties.......................... 553 303
Short-term debt................................... 5,301 3,539
------- -------
Total Current Liabilities.................... 8,838 7,566
Long-Term Debt......................................... 490 585
Deferred Income Taxes.................................. 2,000 3,339
Long-Term Liabilities.................................. 2,287 2,240
Minority Interest and Preferred Stock of
Subsidiaries.......................................... 1,542 1,079
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............................... 9,180 12,586
------- -------
Total Shareholder's Equity................... 11,386 14,792
------- -------
Total........................................ $26,543 $29,601
======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

46
<PAGE> 47

SHELL OIL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................... $(1,727) $ 2,104 $ 2,021
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion, amortization and
retirements..................................... 2,596 1,895 2,066
Dividends from equity companies................... 578 341 78
(Income) loss from equity companies............... 1,823 (486) (193)
(Increases) decreases in working capital:
Receivables and prepayments.................. 125 558 (845)
Inventories.................................. (93) (342) (49)
Payables and accruals........................ 224 (548) 461
Deferred income taxes............................. (1,584) 110 388
Minority interest in income of subsidiaries....... 78 63 51
Other non-current items........................... 9 (374) 146
------- ------- -------
Net Cash Provided by Operating Activities.... 2,029 3,321 4,124
------- ------- -------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES
Capital expenditures................................... (4,038) (3,131) (3,414)
Proceeds from property sales and salvage............... 1,167 169 743
Other investments and advances......................... 1,439 123 (99)
------- ------- -------
Net Cash Used for Investing Activities....... (1,432) (2,839) (2,770)
------- ------- -------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Proceeds from issuance of long-term debt............... 339 297 387
Principal payments on long-term debt................... (597) (505) (293)
Proceeds from sales of redeemable securities of
subsidiaries......................................... 461 215 111
Dividends to shareholder............................... (1,650) (1,600) (1,500)
Dividends to minority interests........................ (76) (60) (50)
Increase (decrease) in short-term obligations.......... 906 1,120 (37)
------- ------- -------
Net Cash Used for Financing Activities....... (617) (533) (1,382)
------- ------- -------
NET CASH FLOWS
Decrease in Cash and Cash Equivalents.................. $ (20) $ (51) $ (28)
======= ======= =======

CASH AND CASH EQUIVALENTS
Balance at beginning of year........................... $ 342 $ 393 $ 421
Decrease in cash and cash equivalents.................. (20) (51) (28)
------- ------- -------
Balance at end of year....................... $ 322 $ 342 $ 393
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

47
<PAGE> 48

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 1997 and 1996 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. Storage gas inventory
is valued at the lower of cost or market at the end of each period. Natural gas
is removed from inventory at weighted average cost. Materials and supplies are
carried at average cost or less.

Income Taxes -- Shell Oil utilizes an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of other assets and liabilities.

Derivatives

Interest rate swaps (not for trading). Shell Oil uses interest rate swaps
to minimize its borrowing costs. 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.

Equity swaps (not for trading). Shell Oil uses equity swap derivative
transactions to hedge a portion of its exposure under executive compensation
plans. Shell Oil accounts for equity swaps on a current basis as net decreases
or increases in compensation expense.

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

48
<PAGE> 49

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.

Commodity swaps, options and futures (trading). Shell Oil enters into
refined product, natural gas, natural gas liquids, crude oil and selected
chemical products swaps, options and futures for the purpose of earning profits.
This includes offering risk management services to these industries. 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.

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, Amortization and Retirements -- 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.

Goodwill -- The amortization period for goodwill is generally dependent on
the nature and estimated useful life of the underlying acquired assets to which
the goodwill relates, not to exceed 40 years.

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 gain of $1 million in 1998, a loss of $3 million in
1997, and a gain of $3 million in 1996.

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.

Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" -- In June 1998 the Financial
Accounting Standards Board issued SFAS 133. This new standard is effective for
fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company).

49
<PAGE> 50

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.

2. SIGNIFICANT ALLIANCES AND ACQUISITIONS

1998 Alliances and Acquisitions

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.

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.

Motiva Enterprises LLC. On June 22, 1998 Shell Oil, Texaco and Saudi
Arabian Oil Company ("Saudi Aramco") reached agreement on the formation and
operational start-up effective July 1, 1998, of Motiva Enterprises LLC
("Motiva"), a joint venture combining major elements of the three companies'
eastern and Gulf Coast United States 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 accounts for its investment in Motiva using the equity method of
accounting. Shell Oil recorded its investment in Motiva by removing from its
consolidated balance sheet the values of the assets and liabilities it
contributed to the joint venture, or approximately $2.2 billion and $0.5
billion, respectively, and, in turn, recording the net of these amounts, or
approximately $1.7 billion as its equity investment in Motiva.

The following summary, prepared on a pro forma basis, presents the Shell
Oil results of operations for the twelve month periods ending December 31, 1997
and December 31, 1998 as if Equilon and Motiva had been formed and Tejas had
been acquired on January 1, 1997:

SHELL OIL COMPANY AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- -------------------
(millions of dollars)
<S> <C> <C>
Gross Revenues.......................... $11,922 $17,682
Net income.............................. (1,733) 2,011
</TABLE>

50
<PAGE> 51

Other 1998 Alliances. Shell Oil contributed certain overriding royalty
interests to Midstream Capital Corporation, a company in which Shell Oil
controls 40 percent of the voting rights and third-party investors control 60
percent of the voting rights. Additionally in 1998, in two separate
transactions, Shell Oil sold substantially all of its south Louisiana onshore
properties to The Meridian Resource Corporation for cash, $135 million stated
value of convertible preferred stock and 12,082,030 shares of common stock. Also
in 1998, Shell Oil contributed certain carbon dioxide producing properties and
related assets into a limited partnership with Kinder Morgan Energy Partners, L.
P. The impact of these additional 1998 alliances on the Shell Oil consolidated
results of operations was not material and are not included in the above pro
forma results of operations.

1997 Alliances

Altura. Altura Energy, Ltd. ("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 BP Amoco
(formerly Amoco). Altura is owned approximately 36 percent by Shell Oil and 64
percent by BP 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 Energy LLC ("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 owned 58.6
percent of Aera until November 1, 1998 when its interest was reduced to 51.8
percent due to the additional contribution of oil and gas properties by Mobil.
Shell Oil 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.

3. ASSET IMPAIRMENTS

In 1998, Shell Oil recorded noncash writedowns totaling $3,517 million on a
pretax basis. These writedowns consisted of certain equity investments in oil
and gas producing ventures, certain oil and gas producing properties, certain
chemical assets that are part of a planned divestiture and certain Downstream
Gas assets, as further discussed below.

Equity Investments

Equity investments writedowns consisted of Shell Oil's investments in the
Altura venture with BP Amoco, and Shell Oil's Aera venture with Mobil. These
interests are accounted for under the equity method of accounting. In light of
the low price environment and Shell Oil's lower long-term price outlook, it was
deemed necessary to test the recoverability of its investment in these ventures.
Given that these ventures' principal assets and operations relate to oil and gas
properties, Shell Oil followed the methodology of Statement of Financial
Accounting Standards No. 121. Altura and Aera production requires extensive use
of tertiary recovery methods, that is, CO(2) injection and steam injection,
respectively. These methods, while recovering reserves that would otherwise go
unproduced, are expensive compared to conventional production methods. Shell Oil
deemed that the carrying value of its equity investments was impaired because
the underlying assets were no longer expected to recover the equity investment
value through future cash flows. The lower estimated future cash flows result
primarily from continued weakness in oil and gas prices judged to be permanent
by management. In addition, downward reserve revisions were deemed necessary for
certain oil and gas fields as a result of the lack of future economic
recoverability. The prices used in performing the impairment analysis of future
cash flows are Shell Oil's investment guideline prices, developed internally
giving consideration to the short-term outlook of over supply and price declines
and to the longer-term outlook

51
<PAGE> 52

of global demand and supply. In determining the longer-term view of sustained
lower oil prices, Shell Oil believes that world economic growth rates will
continue to be modest as economies in Asia and South America recover and
oversupply will continue. Moreover, improvements in efficiency and
recoverability will characterize the industry as a result of corporate viability
and environmental pressures. Shell Oil based its long-term pricing structure on
a Brent crude oil price of $14 per barrel. Shell Oil used proved and probable
reserves when justified by actual drilling results and planned additional
drilling. As a result of the impairment test, Shell Oil recorded a pretax
noncash writedown of these assets of $2,181 million, primarily reflected as
lower Equity in Income of Affiliates, impacting Shell Oil's Oil and Gas
Exploration and Production segment.

Assets Held for Sale

Assets to be sold consisted of miscellaneous oil and gas producing
properties, a natural gas pipeline system and certain chemical businesses. All
of these assets held for sale were written down to estimated sales prices less
costs to sell. The writedowns on a pretax basis impacted the Oil and Gas
Exploration and Production segment by $272 million, Downstream Gas Segment by
$755 million and the Chemical Segment by $309 million, all impacting
Depreciation, Depletion and Amortization expense. All assets classified as
Assets to Be Disposed of are expected to be sold before the end of 1999. Giving
effect to the writedown, the aggregate carrying value of the assets held for
sale was $979 million at December 31, 1998. Operating losses relating to these
assets held for sale were $266 million and $74 million in 1998 and 1997,
respectively, and an operating profit of $11 million in 1996.

Oil and Gas. Assets to be disposed of consist of certain onshore and
offshore oil and gas properties located in the United States. These assets were
written down by $272 million pretax to either internally estimated or comparable
properties' sales prices less costs to sell.

Downstream Gas. As a result of the decision to hold for sale certain
assets, Shell Oil recorded a pretax noncash writedown of assets of $755 million
in the Downstream Gas segment. In the fourth quarter of 1998, Shell Oil decided
to sell certain of its onshore United States natural gas pipeline and processing
assets as a result of a significant downturn in business conditions during 1998
and the concurrent determination that these assets were no longer strategic to
the Company. The estimated fair value of these assets was determined primarily
based on a discounted cash flow analysis of expected future cash values based on
Shell Oil's view of current and future business conditions. The strategic
factors which Shell Oil evaluated in performing the estimated fair value
analysis included continued weakness in natural gas liquids prices due to
downward pressure on oil and gas prices coupled with apparent changes in natural
gas demand, in part due to mild winters, increased natural gas supply in the
Northeast primarily from Canada, increased natural gas demand in the West and
intrastate regulatory issues. Shell Oil based its pricing structure from a Brent
crude oil price of $14 per barrel. The impairment loss of $755 million is
included in Depreciation, Depletion and Amortization in the Consolidated
Statement of Income.

Chemical. After a decision in the fourth quarter of 1998 regarding a
significant restructuring of its chemicals portfolio, which includes the
divestiture of businesses not integral to its revised portfolio strategy, the
assets at certain of Shell Oil's plants were classified as held for sale. The
businesses to be divested include PET, Carilon(R), Bisphenol A, elastomers,
resins and versatics. Due to a lack of comparable sales data, the Company used a
combination of methods to arrive at an estimated fair market value for these
assets. Two separate calculations were made: a multiple of Earnings Before
Interest, Taxes, Depreciation and Amortization (EBITDA) analysis and a
discounted net cash flow analysis. These are common valuation techniques in the
chemical industry. An average of the two calculations was used, resulting in a
pretax writedown of $309 million.

4. EMPLOYEE SEVERANCE COSTS

During 1998, Shell Oil recorded provisions for employee severance of
approximately $115 million, affecting approximately 1,200 employees. The costs
related to the severance programs are reflected on the Consolidated Statement of
Income primarily as an increase in Operating Expenses. At December 31, 1998
approximately one-half of the affected employees had terminated, with most of
such terminations occurring

52
<PAGE> 53

during the fourth quarter of 1998. Under the terms of the severance plans, in
most instances payments to the terminated employees were deferred and will occur
during 1999 and 2000; as a result, payments to terminated employees during 1998
were minimal.

Equilon and Motiva -- In accordance with the terms of joint venture
agreements related to human resource matters of the Oil Products alliances with
Equilon and Motiva, employees performing duties supporting Equilon and Motiva
remain employees of the respective employer companies, i.e., Shell Oil, Texaco
and Star Enterprise. During 1999, such employees are expected to become
employees of Equilon and Motiva. The employer companies currently bill Equilon
and Motiva for the payroll related costs of these employees, including employee
severance costs. Additionally, the joint venture agreements provide for Equilon
and Motiva to determine the appropriate staffing levels for their businesses. To
the extent those staffing needs result in the elimination of positions, affected
employees are entitled to termination benefits provided for under the benefit
plans of their applicable employer company. Shell Oil, Texaco and Star
Enterprise, as the employer companies, are responsible for administering the
payment of benefits under their respective benefit plans. Equilon and Motiva are
obligated to reimburse the employer companies for all costs resulting from the
elimination of positions in accordance with a formula included in the joint
venture agreements.

The formation of Equilon and Motiva is expected to result in the
termination of 1,535 employees. Of this total, 869 employees had been terminated
through December 31, 1998. The remaining separations will be substantially
completed by mid-year 1999. In 1998 Equilon and Motiva recorded charges totaling
$91 million for reimbursable severance and other benefit costs. Shell Oil's
share of these charges at December 31, 1998 was $46 million and is reflected as
a reduction to Equity in Income of Affiliates on the Consolidated Statement of
Income. Equilon and Motiva have reimbursed the owner companies $10 million in
termination benefits through December 31, 1998, and will make reimbursement for
the remaining benefits in future periods in accordance with the joint venture
agreements.

5. INTEREST

Interest costs were as follows:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(millions of dollars)
<S> <C> <C> <C>
Interest incurred......................................... $392 $205 $203
Interest paid............................................. 379 225 207
</TABLE>

6. 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>
1998 1997 1996
------ ------ ------
(millions of dollars)
<S> <C> <C> <C>
Sales and other operating revenue.................... $3,588 $2,402 $2,216
Purchases and transportation......................... 1,918 1,843 1,260
</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.

As further discussed in Note 2 of the Notes to the Consolidated Financial
Statements regarding significant alliances and acquisitions, Equilon Enterprises
and Motiva Enterprises began operations on January 1 and July 1, 1998,
respectively. During 1998, and included in the table above, Shell Oil's sales to
Equilon and Motiva were $3,027 million, and purchases from Equilon and Motiva
were $977 million. Sales to Equilon and Motiva consisted predominantly of crude
oil while purchases from Equilon and Motiva were predominantly refined products
and chemical feedstocks.

53
<PAGE> 54

Also as further discussed in Note 2 of the Notes to the Consolidated
Financial Statements, in January 1998 Shell Oil acquired Tejas Gas Corporation
including Tejas's interest in Coral Energy, L.P., a gas marketing enterprise.
Prior to this transaction, Coral was jointly owned by Shell Oil, Shell Canada
and Tejas and accounted for by Shell Oil using the equity method. During 1996
and 1997, Shell Oil marketed substantially all of its natural gas production
through Coral. 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.

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 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, 1998 and 1997 the amounts borrowed from such affiliate were
approximately $3,314 million and $2,000 million, respectively. These amounts are
included in the Commercial notes amounts shown in Note 9 of the Notes to
Consolidated Financial Statements. Additionally, Shell Oil holds in Investments
$150 million of debt instruments having varying interest rates and maturities
issued by the Deer Park Refining Limited Partnership, an equity investee of the
Company.

7. INVENTORIES OF PRODUCTS

Inventories of Products as shown on the Consolidated Balance Sheet consist
primarily of natural gas, oils and chemicals. As discussed in Note
1 -- Accounting Policies, inventories of natural gas are valued at the lower of
cost or market while inventories of oils and chemicals are carried predominantly
on a LIFO basis. LIFO basis inventories, which represented approximately 72
percent of the total value of the inventories of products, were lower than
current cost by $59 million at December 31, 1998, $519 million at December 31,
1997, and $978 million at December 31, 1996. Partial liquidations of inventories
valued on a LIFO basis impaired net income by $3 million in 1998 while improving
1997 and 1996 net income by $2 million and $11 million, respectively.

8. RECEIVABLES AND PREPAYMENTS

Receivables, prepayments and allowances for doubtful accounts as of
December 31, 1998 and 1997 consisted of the following:

<TABLE>
<CAPTION>
1998 1997
------ ------
(millions of
dollars)
<S> <C> <C>
Trade receivables........................................... $1,134 $2,169
Other receivables........................................... 743 789
Prepayments................................................. 360 476
------ ------
2,237 3,434
Less: Allowance for Doubtful Accounts
Balance beginning of year.............................. 20 18
Provision......................................... 1 21
Transfer to equity investments in Equilon and
Motiva.......................................... (19) --
Net write-offs.................................... -- (19)
------ ------
Balance end of year.................................... 2 20
------ ------
Total........................................ $2,235 $3,414
====== ======
</TABLE>

54
<PAGE> 55

9. SHORT-TERM DEBT

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

<TABLE>
<CAPTION>
1998 1997
------- -------
(millions of dollars)
<S> <C> <C>
Commercial notes............................................ $4,139 $2,322
Bank loans.................................................. 30 30
Industrial Revenue Bonds.................................... 808 881
------ ------
4,977 3,233
Current maturities of long-term debt........................ 324 306
------ ------
Total........................................ $5,301 $3,539
====== ======
</TABLE>

The weighted average interest rate on short-term debt outstanding was 5.05
percent at December 31, 1998 and 5.47 percent at December 31, 1997.

10. LONG-TERM DEBT

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

<TABLE>
<CAPTION>
1998 1997
------- -------
(millions of dollars)
<S> <C> <C>
6.95% Notes Due 1998........................................ $ -- $ 250
6 5/8% Notes Due 1999....................................... 250 250
6.70% Notes Due 2002........................................ 250 250
Tejas Master Notes with interest rates ranging from 6.60% to
8.34% and maturities beginning in 1999.................... 196 --
Other....................................................... 118 141
------ ------
814 891
Less: Amounts due within one year.......................... 324 306
------ ------
Total........................................ $ 490 $ 585
====== ======
</TABLE>

Shell Oil had $1,259 million of unused revolving credit agreements in place
as of December 31, 1998, 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 $324 million, $38 million, $30 million, $297 million and $21 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, 1998, $52 million of such defeased debt remained outstanding.

11. 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
as further discussed below. At December 31, 1998, the notional principal amounts
of interest rate swaps outstanding were $2,034 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, 1998, Shell
Oil held commodity derivatives positions having notional values of $1,174
million. Of that amount, $694 million was classified as for "purposes other than
trading."

55
<PAGE> 56

Shell Oil also enters into currency derivative instrument transactions to
hedge its exposure to contractual situations where natural gas is purchased in
Canadian dollars and sold in U.S. dollars. At December 31, 1998, the notional
value of such hedges was $163 million, and the fair value was $(29) million. The
Company also provides commodity price risk management services through its
subsidiary, Coral Energy, L. P. In addition, in 1998 Shell Oil hedged certain
aspects of executive compensation plans, which are tied to the price of Royal
Dutch/Shell stock.

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.

As part of its acquisition of Tejas Gas Corporation ("Tejas") in January,
1998, Shell Oil acquired certain long-term debt of Tejas which carried floating
rates of interest which Tejas had effectively converted to fixed rates of
interest through interest rate swaps. These swaps require Shell Oil to pay fixed
rates of interest on notional amounts of principal to counterparties. The
counterparties, in turn, pay to Shell Oil floating rates of interest on the same
notional amounts of principal.

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

The terms of the swaps related to the bonds and notes issued by Shell Oil,
including the mechanism by which the variable or fixed interest rate paid by
Shell Oil to the counterparty is determined, are indicated in the accompanying
Interest Rate Swaps table. During 1998, the net effect of these transactions was
that Shell Oil paid 5.96% and received 5.98% 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 5.43% and received 6.52%
effective rates of interest. The combined effect of these transactions,
accounted for as described above, was a net pretax decrease in interest expense
of $9.0 million, $12.4 million and $11.4 million in 1998, 1997 and 1996,
respectively. The fair value of these interest rate swaps was $36.7 million and
$40.8 million at year-end 1998 and 1997, 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 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 rate specified under the terms of the swap and the fixed or 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

56
<PAGE> 57

nonperformance. Shell Oil also bears the market risk that changes in interest
rates may result in greater total costs than would have arisen on the
obligations alone.

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>
235 1999 CP* Preferred stock (6.1%)** 6.08% 0.7
250 1999 CP* 6.625% bonds 6.1% 2.2
55 2000 CP* Production payment (6.45%)** 5.9% 0.4
100 2001 CP* Fixed coupon preferred stock 6.6% 3.6
250 2002 CP* 6.7% bonds 6.3% 10.0
594 2004 Various Commercial Paper Libor (35.0)
173 2008 CP* Obligation of investee (6.47%)** 6.4% 9.8
139 2013 CP* Obligation of investee (6.64%)** 6.6% 9.3
153 2015 CP* Building lease (9.8%)** 7.1% 22.2
85 2017 CP* Building lease (8.4%)** 7.1% 13.5
------ ------
Total $2,034 $ 36.7
====== ======
</TABLE>

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

* Pay rates are negotiated based on commercial paper rates; the weighted
average rate paid was 5.4%.
** Imputed interest rates.

Derivative Commodity Instruments. Shell Oil uses derivative instruments in
certain instances to reduce price volatility risk on commodities -- primarily
natural gas, natural gas liquids and refined products. Generally, Shell Oil's
strategy is to hedge its exposure to price variance by locking in prices for
future purchases and sales. Shell Oil accounts for such commodity derivatives as
hedges. Shell Oil also offers risk management services to others by the use of
derivative instruments, primarily in Natural Gas, through its subsidiary, Coral
Energy, L.P. Shell Oil accounts for such trading activity which is limited to
straightforward futures, options and swaps instruments with no leverage or
multiplier features, on a mark-to-market basis, recognizing gains or losses each
business period.

Usually, such derivatives are for terms less than one year. The exposure on
commodity derivatives used as hedge instruments includes the risk that the
counterparty will not pay if the market declines below the established fixed
price. In such case, Shell Oil would lose the benefit of the derivative
differential on the volume of the commodities covered. In any case, Shell Oil
would continue to receive the market price on the actual volume hedged. 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).

During 1998, Shell Oil had a loss of $32 million in connection with
commodity derivatives marked-to-market. At December 31, 1998, there were open
positions covering 251 billion cubic feet of natural gas, 1 million barrels of
refined products, 90 thousand barrels of natural gas liquids, 222 thousand
megawatt hours of electricity and 409 million pounds of chemical products,
primarily ethylene and benzene.

At December 31, 1998 Shell Oil had open positions covering 525 billion
cubic feet of natural gas for purposes other than trading primarily related to
futures, swaps and options. These contracts hedge a portion of Shell Oil's
natural gas pipeline transportation operations. At December 31, 1998, the
unrealized gain associated with these contracts was approximately $10 million.

Equity Swaps. In 1998 Shell Oil entered into equity swap derivative
transactions to hedge a portion of its exposure under executive Compensation
Plans containing phantom stock appreciation rights ("Plans") based primarily on
Royal Dutch Petroleum Company stock. Under the terms of the equity swap
derivative transactions, the counterparty is obligated to pay the Company the
amount by which a notional number of Royal Dutch Petroleum Company shares' price
increases and any dividends, which, for the Company, is off-set by a
corresponding increase in the Plans' obligations. Similarly, the Company is
obligated to pay the counterparty a fee and the amount by which a notional
number of Royal Dutch Petroleum Company shares'

57
<PAGE> 58

price decreases, which, for the Company, is off-set against a corresponding
decrease in the Plans' obligations. However, Shell Oil is exposed to the risk
that a significant Royal Dutch Petroleum Company stock price decline would cause
the number of phantom stock appreciation rights with grant prices below market
value (in-the-money stock appreciation rights) to be materially less than the
notional number of shares swapped. Should this occur, the reduction in Plan
obligations would no longer match the increase in the swap obligations at an
increasing rate if the stock price continued to decline. Shell Oil has the
ability to reduce or close out the swaps. The notional number of shares,
notional value and the fair value of these hedges at December 31, 1998 were 6
million, $287 million and $(46) million, respectively.

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, 1998 and 1997, the estimated fair values, determined
primarily by market quotes, of Shell Oil's financial instruments were as
follows:

<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- -----
(millions of dollars)
<S> <C> <C> <C> <C>
Investments............................... $307 $304 $356 $356
Long-term debt............................ 490 528 585 595
Interest rate swaps....................... -- 37 -- 41
Derivative commodity instruments.......... -- (22) -- 1
Derivative currency instruments........... -- (29) -- --
Equity swaps.............................. -- (46) -- --
</TABLE>

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.

12. TAXES

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

<TABLE>
<CAPTION>
1998 1997 1996
------- ----- -----
(millions of dollars)
<S> <C> <C> <C>
OPERATING TAXES
Real and personal property......................... $ 94 $ 139 $ 166
Sales and use...................................... 42 77 105
Oil and gas production............................. 24 41 65
Payroll............................................ 47 69 75
Franchise.......................................... 18 32 33
Import and export duties........................... 4 2 2
Other.............................................. 2 2 6
------- ----- -----
TOTAL.................................... $ 231 $ 362 $ 452
======= ===== =====
FEDERAL AND OTHER INCOME TAXES
Current
U.S. federal.................................. $ 192 $ 648 $ 295
Foreign....................................... 59 98 88
State and local............................... 39 40 51
------- ----- -----
290 786 434
Deferred
U.S. federal.................................. (1,150) 58 316
State and other............................... (5) 16 13
------- ----- -----
(1,155) 74 329
------- ----- -----
TOTAL.................................... $ (865) $ 860 $ 763
======= ===== =====
</TABLE>

58
<PAGE> 59

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, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
1998 1997
------ ------
(millions of
dollars)
<S> <C> <C>
Deferred tax liabilities:
Items associated with capitalized costs and
write-offs........................................... $2,865 $3,930
Other.................................................. 115 46
------ ------
Total deferred tax liabilities.................... $2,980 $3,976
====== ======
Deferred tax assets:
Other postretirement obligations....................... $ 381 $ 326
Environmental and other reserves....................... 452 312
Loss carryforwards..................................... 384 345
------ ------
Total deferred tax assets......................... $1,217 $ 983
Valuation allowance......................................... 100 102
------ ------
Net deferred tax assets..................................... $1,117 $ 881
------ ------
Net deferred tax liabilities................................ $1,863 $3,095
------ ------
</TABLE>

Receivables and prepayments included $137 million and $244 million of net
current deferred tax assets as of December 31, 1998 and 1997, respectively.

Total income taxes paid in the years 1998, 1997 and 1996 were $49 million,
$958 million and $579 million, respectively. Total income tax expense for the
years 1998, 1997 and 1996 was equivalent to effective tax rates of 34.4, 28.4
and 26.9, percent, respectively, on earnings before income taxes and minority
interest of $(2,514) million, $3,027 million and $2,835 million, respectively.
Reconciliation to the expected tax at the U.S. statutory rate (35 percent) is as
follows:

<TABLE>
<CAPTION>
1998 1997 1996
----- ------ -----
(millions of dollars)
<S> <C> <C> <C>
Expected tax at U.S. statutory rate...................... $(880) $1,059 $ 992
State and foreign tax.................................... 21 12 47
Prior year adjustment.................................... -- (50) (151)
Tax credits.............................................. (50) (82) (96)
Benefit of tax losses.................................... -- (74) --
Indefinitely invested earnings of equity investees....... (100) -- --
Goodwill amortization.................................... 143 -- --
Other.................................................... 1 (5) (3)
----- ------ -----
TOTAL..................................... $(865) $ 860 $ 468
===== ====== =====
</TABLE>

Shell Oil has tax loss carryforwards of $1,099 million expiring as follows:
1999 ($320 million); 2002 ($204 million); 2004 through 2008 ($31 million); 2011
($120 million); 2012 ($398 million); and 2013 ($26 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. At December 31, 1998, $1 million of Federal income tax was owing
from SPI; at December 31, 1997 no income tax balances were owing to or from SPI.
Additionally, included in the Shell Oil tax provision are the tax attributes of
certain subsidiaries which are consolidated for financial reporting purposes but
are deconsolidated for tax purposes.

59
<PAGE> 60

13. INVESTMENTS

Shell Oil's investments consist primarily of its ownership in companies
accounted for using the equity method of accounting. 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, 1998, such
investments included primarily: Equilon Enterprises, LLC and Motiva Enterprises,
LLC, domestic refining and refined products marketing and transportation
companies; 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; and Deer Park Refining Limited Partnership, a domestic
refining operation.

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

<TABLE>
<CAPTION>
1998 1997
------ ------
(millions of
dollars)
<S> <C> <C>
Equilon Enterprises......................................... $3,758 $ --
Motiva Enterprises.......................................... 1,442 --
All other equity affiliates................................. 3,606 5,852
------ ------
Total equity affiliates........................... $8,806 $5,852
Other affiliates, at cost................................... 26 28
Other investments........................................... 513 576
------ ------
Total............................................. $9,345 $6,456
====== ======
</TABLE>

Dividends received on these investments in 1998, 1997 and 1996 were $578
million, $388 million and $78 million, respectively. Undistributed earnings of
these equity affiliates included in Shell Oil's retained earnings at December
31, 1998 were $94 million.

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

<TABLE>
<CAPTION>
EQUILON MOTIVA OTHER AFFILIATES SHELL OIL'S SHARE
------- ------ -------------------------- -------------------------
1998 1998 1998 1997 1996 1998 1997 1996
------- ------ ------- ------- ------ ------- ------ ------
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets.......... $ 2,648 $1,435 $ 1,464 $ 2,609 $1,272 $ 2,688 $1,236 $ 647
Noncurrent assets....... 7,758 5,306 13,290 12,365 6,256 12,371 5,944 2,948
Current liabilities..... 4,058 1,248 1,015 1,691 1,259 3,101 805 641
Noncurrent
liabilities........... 382 1,665 3,015 3,366 3,439 2,135 1,544 1,593
Deferred income taxes... -- -- 1,225 425 438 633 156 160
Revenues................ 22,246 5,371 3,795 8,963 5,304 16,165 4,303 2,885
Net income.............. 502 78 450 1,388 452 486 599 212
</TABLE>

At December 31, 1998, the unamortized excess of Shell Oil's investments in
Shell Exploration and Production, B.V. was $176 million, Equilon was $417
million, and Motiva was $102 million.

60
<PAGE> 61

14. PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------- ----------------------------
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.................. $15,197 $ 8,696 $ 6,501 $16,251 $ 9,146 $ 7,105
Other energy................. 120 20 100 113 13 100
Downstream gas processing
facilities................... 2,485 500 1,985 -- -- --
Oil and Chemical manufacturing
facilities................... 5,036 2,881 2,155 11,384 5,371 6,013
Marketing facilities........... 30 14 16 3,403 905 2,498
Transportation facilities...... 552 237 315 1,288 599 689
Other.......................... 759 387 372 833 471 362
------- ------- ------- ------- ------- -------
TOTAL................ $24,179 $12,735 $11,444 $33,272 $16,505 $16,767
======= ======= ======= ======= ======= =======
</TABLE>

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

* Accumulated depreciation, depletion and amortization.

15. PENSION PLANS, OTHER POSTRETIREMENT BENEFITS, AND PROVIDENT FUND

The Company and certain of its subsidiaries currently provide defined
benefit pension plans and other postretirement benefit plans for employees.
Following is a reconciliation of the changes in the plans' benefit obligations
and fair values of assets during 1998 and 1997 and a statement of the funded
status of these plans as of December 31 of each year. In addition, several
subsidiary companies have separate defined benefit pension plans; these plans
are not material and were excluded from the disclosures below.

<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------- ---------------
1998 1997 1998 1997
------- ------- ------ ------
(millions of dollars)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1................ $5,409 $4,932 $ 858 $ 776
Service cost................................... 118 107 17 18
Interest cost.................................. 376 359 54 56
Participant contributions...................... -- -- 11 11
Amendments..................................... 151 -- -- --
Actuarial loss/(gain).......................... 342 334 (16) 48
Divestitures................................... -- -- (4) --
Benefits paid.................................. (337) (323) (55) (51)
------ ------ ----- -----
Benefit obligation at December 31.............. $6,059 $5,409 $ 865 $ 858
====== ====== ===== =====
</TABLE>

61
<PAGE> 62

<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------- ---------------
1998 1997 1998 1997
------- ------- ------ ------
(millions of dollars)
<S> <C> <C> <C> <C>
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1......... $5,980 $5,278 -- --
Actual return on plan assets................... 732 997 -- --
Employer contribution.......................... 30 28 44 40
Participant contributions...................... -- -- 11 11
Benefits paid.................................. (337) (323) (55) (51)
------ ------ ----- -----
Fair value of plan assets at December 31....... $6,405 $5,980 -- --
====== ====== ===== =====
Funded status at December 31................... $ 346 $ 571 $(865) $(858)
Unrecognized (gain)/loss....................... (165) (258) (78) (90)
Unrecognized prior service cost................ 298 180 (13) (15)
Unrecognized transition (asset)/obligation..... (4) (14) -- --
------ ------ ----- -----
Net amount recognized at December 31........... $ 475 $ 479 $(956) $(963)
====== ====== ===== =====
</TABLE>

Following are amounts recognized in the statement of financial position as
of December 31 of each year:

<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------- ---------------
1998 1997 1998 1997
------- ------- ------ ------
(millions of dollars)
<S> <C> <C> <C> <C>
Prepaid benefit cost................................. $ 631 $ 614 $ -- $ --
Accrued benefit liability............................ (377) (297) (956) (963)
Intangible asset..................................... 46 32 -- --
Accumulated other comprehensive income............... 175 130 -- --
----- ----- ----- -----
Net amount recognized................................ $ 475 $ 479 $(956) $(963)
===== ===== ===== =====
</TABLE>

The projected benefit obligation and the accumulated benefit obligation for
the unfunded pension benefit plans were $403 million and $377 million,
respectively, as of December 31, 1998, and $329 million and $297 million,
respectively, as of December 31, 1997.

Following are the components of net periodic benefit cost for 1998, 1997
and 1996:

<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------- --------------------
1998 1997 1996 1998 1997 1996
----- ----- ----- ---- ---- ----
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C>
Service cost....................... $ 118 $ 107 $ 114 $ 17 $ 18 $ 18
Interest cost...................... 376 359 345 54 56 54
Expected return on plan assets..... (496) (446) (427) -- -- --
Amortization of prior service
cost............................. 34 22 22 (3) (3) (3)
Amortization of transition
(asset)/obligation............... (10) (10) (10) -- -- --
Recognized actuarial loss/(gain)... 12 9 21 (27) (36) (26)
----- ----- ----- ---- ---- ----
Net periodic benefit cost.......... $ 34 $ 41 $ 65 $ 41 $ 35 $ 43
===== ===== ===== ==== ==== ====
</TABLE>

The amount included within other comprehensive income arising from a change
in the additional minimum pension liability was $45 million and $33 million at
December 31, 1998 and 1997, respectively.

Unrecognized net gains or losses in the postretirement benefit plan in
excess of 10% of the benefit obligation are amortized over three years.

62
<PAGE> 63

Following are the assumptions used in the measurement of the Company's
benefit obligation and net periodic benefit cost, as of December 31, of each
year:

<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rate......................... 6.5% 7.0% 7.5% 6.5% 7.0% 7.5%
Expected return on plan assets........ 9.5% 9.5% 9.5% N/A N/A N/A
Rate of compensation increase......... 5.0% 5.0% 5.0% N/A N/A N/A
</TABLE>

For measurement purposes, 6.5% is the assumed health care cost trend rate
for 1999. This rate gradually declines to 5% by 2002 and remains at that level.

Assumed health care cost trend rates have a significant effect on the
amounts reported for the retiree health care plan. A one-percentage-point change
in assumed health care cost trend rates would have the following effects:

<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
(millions of dollars)
<S> <C> <C>
Effect on total of service and interest cost............. $ 11 $ 9
Effect on postretirement benefit obligation.............. 113 100
</TABLE>

PROVIDENT FUND

The Shell Provident Fund is a defined contribution plan. Costs recognized
for this plan were $103 million, $102 million, and $100 million in 1998, 1997,
and 1996, respectively.

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 alleged
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.

63
<PAGE> 64

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 believes that the District Court decision was
incorrect and appealed the decision to the Third Circuit in September, 1998.
Shell Oil also 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.

17. LEASES AND OTHER COMMITMENTS

Shell Oil conducts a portion of its operations using leased facilities,
including a new five year lease transaction completed in late 1998. This new
transaction, accounted for as an operating lease, involved the sale and
leaseback of certain chemicals manufacturing assets located at the Geismar,
Belpre and Deer Park chemical plants. Under the terms of this lease, Shell Oil
received approximately $550 million in proceeds that were used primarily to
reduce outstanding indebtedness. There was a loss of $2 million associated with
this transaction. The lease requires Shell Oil to pay customary operating and
repair expenses. The lease contains purchase options and renewal options for up
to two additional years. The lease provisions also permit the return of the
leased equipment at lease termination whereupon Shell Oil is obligated to
attempt to sell the equipment on a best efforts basis and has guaranteed the
residual value up to $462 million. The depreciation charges for the assets, as
well as the interest charges on outstanding indebtedness repaid with the
proceeds of the sale, will be replaced by the lease rentals. As a result of the
decision to exit certain chemical businesses, Shell Oil may need to substitute
other assets for assets currently under this lease to allow for their sale.
Alternatively, Shell Oil could repurchase certain assets and thereby elect to
have fewer assets covered by this lease.

Including the above transaction, future minimum payments under operating
leases with initial or remaining terms of one year or more consisted of the
following at December 31, 1998:

<TABLE>
<CAPTION>
OPERATING
LEASES
---------
(millions
of
dollars)
<S> <C>
1999........................................................ $ 447
2000........................................................ 481
2001........................................................ 394
2002........................................................ 238
2003........................................................ 191
Thereafter.................................................. 650
------
Total minimum lease payments...................... $2,401
======
</TABLE>

64
<PAGE> 65

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>
1998 1997 1996
-------- -------- --------
(millions of dollars)
<S> <C> <C> <C>
Minimum rentals........................................... $178 $286 $345
Contingent rentals
(Generally based on sales volumes)...................... 1 3 2
Less: sublease rentals.................................... (14) (36) (36)
---- ---- ----
Total........................................... $165 $253 $311
==== ==== ====
</TABLE>

Under long-term agreements with an offshore port Shell Oil may be required
to advance funds in the event such companies are unable to meet their financial
obligations. Also, at December 31, 1998, 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. 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

Segment information has been prepared in accordance with Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 defines "operating segments"
to be those components of a business about which separate financial information
is available that is regularly evaluated by management in deciding how to
allocate resources and in assessing performance. SFAS No. 131 further requires
that the segment information presented be consistent with the basis and manner
in which management internally disaggregates financial information for the
purposes of assisting in making internal operating decisions. The adoption by
Shell Oil of SFAS No. 131 did not result in a change in the reportable segments;
however, the previously reported net income for each segment has been restated
primarily to reflect the allocation to the segments of interest income and
interest expense previously reported as "Nonallocated Items."

Shell Oil's business activities are conducted predominantly through four
major business segments -- Oil and Gas Exploration and Production, Downstream
Gas, Oil Products and Chemical Products. These segments were determined based
primarily upon the differing production processes and the differing nature of
the products produced and sold by the segments. Segment performance is evaluated
based primarily on stand alone segment net income. The accounting policies of
the operating segments are the same as those described in Note 1 -- "Accounting
Policies" in the Notes to Consolidated Financial Statements. Intersegment sales
were made at prices approximating current market value.

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.

Downstream Gas, a new Shell Oil business segment established in 1998,
is primarily engaged in the transportation and processing of natural gas,
and in the marketing of natural gas and other energy products including
related financial risk products to industrial and commercial customers.
Natural gas processing and transportation activities are conducted
primarily in the major natural gas producing areas of Oklahoma, Texas and
Louisiana and in the Gulf of Mexico. Natural gas and other energy marketing
activities are conducted throughout the United States and in Canada.

Oil Products consists predominantly of Shell Oil's ownership share of
companies engaged in the transportation, refining and marketing of crude
oil and petroleum products, including: Equilon Enterprises LLC (Shell Oil
interest -- 56 percent), Motiva Enterprises LLC (Shell Oil interest -- 35
percent), and the Deer Park Refining Limited Partnership (Shell Oil
interest -- 50 percent). Shell Oil

65
<PAGE> 66

accounts for its investment in each of these companies using the equity
method of accounting. Activities of these companies are conducted
principally in the United States.

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. In late 1998,
Shell Oil announced a significant restructuring of its chemicals portfolio,
which includes the planned divestiture of businesses not integral to its
revised portfolio strategy. The businesses that were announced to
constitute the future portfolio were lower olefins, aromatics, solvents,
ethylene oxide/glycol and derivatives, phenol, higher olefins and
derivatives, propanediol (PDO), styrene monomer, propylene oxide and
urethane chemicals, as well as ventures in polyethylene, polypropylene,
additives and catalysts. 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 15 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 worldwide markets. Catalysts are
manufactured and sold through joint ventures with affiliates and other
parties.

In addition to these four major business segments, the All Other segment
consists primarily of a subsidiary of Shell Oil which provides business services
and infrastructure support to the operating business segments of Shell Oil. The
revenues of this segment are predominantly intersegment; however this subsidiary
has begun marketing its services to external customers and a small but growing
portion of its revenues are being generated from third party customers.

Operating segments information for the years 1998, 1997 and 1996 is
presented below.

1998

<TABLE>
<CAPTION>
DOWNSTREAM OIL CHEMICAL NONALLOCATED
OIL AND GAS GAS PRODUCTS PRODUCTS ALL OTHER ITEMS TOTAL
----------- ---------- -------- -------- --------- ------------ -------
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales and other operating revenue
(including intersegment)......... $ 3,504 $6,808 $ 4,193 $ 5,351 $ 584 $ 107 $20,547
Less: Intersegment sales and
revenues......................... (1,333) (78) (441) (1,110) (509) (42) (3,513)
------- ------ ------- ------- ----- ------ -------
Total sales and other operating
revenue from external
customers........................ $ 2,171 $6,730 $ 3,752 $ 4,241 $ 75 $ 65 $17,034
International revenues (included
in total)...................... $ 332 $ 897 $ -- $ 383 $ -- $ -- $ 1,612
Equity in income (loss) of
affiliates accounted for by the
equity method.................... $(2,126) $ 52 $ 292 $ (43) $ 4 $ (2) $(1,823)
Interest income.................... 31 5 51 2 -- -- 89
Interest expense................... 119 152 77 32 -- 12 392
Depreciation, amortization, etc.... 999 857 73 641 23 3 2,596
Income tax expense (benefit)....... (671) (217) 124 (82) 17 (36) (865)
Segment net income (loss).......... (1,166) (703) 169 57 23 (107) (1,727)
Investment in equity method
investees........................ 2,353 390 5,207 853 -- 3 8,806
Segment assets..................... 10,106 4,307 5,970 4,608 342 1,210 26,543
Segment capital expenditures....... 1,565 1,807 48 570 35 13 4,038
</TABLE>

66
<PAGE> 67

1997

<TABLE>
<CAPTION>
DOWNSTREAM OIL CHEMICAL NONALLOCATED
OIL AND GAS GAS PRODUCTS PRODUCTS ALL OTHER ITEMS TOTAL
----------- ---------- -------- -------- --------- ------------ -------
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales and other operating revenue
(including intersegment)......... $ 6,252 $ -- $22,236 $ 5,789 $ 544 $ 7 $34,828
Less: Intersegment sales and
revenues......................... (2,865) -- (2,171) (1,064) (460) -- (6,560)
------- ------ ------- ------- ----- ------ -------
Total sales and other operating
revenue from external
customers........................ $ 3,387 $ -- $20,065 $ 4,725 $ 84 $ 7 $28,268
International revenues (included
in total)...................... $ 479 $ 73 $ 414 $ 966
Equity in income of affiliates
accounted for by the equity
method........................... $ 391 $ -- $ 85 $ 55 $ 2 $ -- $ 533
Interest income.................... 32 -- 34 3 5 -- 74
Interest expense................... 105 -- 76 24 -- -- 205
Depreciation, amortization, etc.... 1,147 -- 438 270 36 4 1,895
Income tax expense (benefit)....... 566 -- 118 238 10 (72) 860
Segment net income (loss).......... 1,327 -- 410 441 (11) (63) 2,104
Investment in equity method
investees........................ 4,774 -- 312 766 -- -- 5,852
Segment assets..................... 13,123 -- 9,277 5,342 211 1,648 29,601
Segment capital expenditures....... 2,182 -- 554 348 43 4 3,131
</TABLE>

1996

<TABLE>
<CAPTION>
DOWNSTREAM OIL CHEMICAL NONALLOCATED
OIL AND GAS GAS PRODUCTS PRODUCTS ALL OTHER ITEMS TOTAL
----------- ---------- -------- -------- --------- ------------ -------
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales and other operating revenue
(including intersegment)......... $ 6,864 $ -- $22,944 $ 5,083 $ 379 $ (1) $35,269
Less: Intersegment sales and
revenues......................... (3,344) -- (1,989) (778) (335) -- (6,446)
------- ------ ------- ------- ----- ------ -------
Total sales and other operating
revenue from external
customers........................ $ 3,520 $ -- $20,955 $ 4,305 $ 44 $ (1) $28,823
International revenues (included
in total)...................... $ 545 $ -- $ 213 $ 363 $ 1,121
Equity in income of affiliates
accounted for by the equity
method........................... $ 123 $ -- $ 13 $ 57 $ -- $ -- $ 193
Interest income.................... 47 -- 25 4 12 -- 88
Interest expense................... 101 -- 83 19 -- -- 203
Depreciation, amortization, etc.... 1,375 -- 391 271 23 6 2,066
Income tax expense (benefit)....... 541 -- 171 71 (4) (16) 763
Segment net income (loss).......... 1,315 -- 336 231 (22) 161 2,021
Investment in equity method
investees........................ 454 -- 221 728 -- -- 1,403
Segment assets..................... 12,557 -- 9,326 5,089 226 1,511 28,709
Segment capital expenditures....... 2,053 -- 726 582 49 4 3,414
</TABLE>

19. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
1998 1997
----------------------------------------- -----------------------------------------
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................. $4,648 $4,816 $3,665 $ 3,905 $7,477 $6,920 $6,945 $6,927
Revenues, less purchased
raw materials and
products, and operating
expenses................ 1,183 1,361 1,036 (1,520) 1,770 1,739 1,705 1,748
Income before income taxes
and minority interest... 309 499 481 (3,803) 785 718 769 756
Net income (loss)......... $ 172 $ 316 $ 258 $(2,473) $ 517 $ 531 $ 479 $ 577
</TABLE>

67
<PAGE> 68

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 11, 1999.

SHELL OIL COMPANY
(Registrant)

By /s/ JACK E. LITTLE
------------------------------------
(Jack E. Little, President)

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 11, 1999 by the following persons on
behalf of the Registrant in the capacities indicated.

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

/s/ JACK E. LITTLE President and Director
- ----------------------------------------------------- (Principal Executive Officer)
(Jack E. Little)

/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)

/s/ ROBERT F. DANIELL* Director
- -----------------------------------------------------
(Robert F. Daniell)

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

/s/ STEVE L. MILLER* Director
- -----------------------------------------------------
(Steve L. Miller)

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

/s/ HAROLD A. POLING* Emeritus Director
- -----------------------------------------------------
(Harold A. Poling)
</TABLE>

(Signatures continued on next page)
68
<PAGE> 69

(Signatures continued from preceding page)

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

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

/s/ JOHN F. WOODHOUSE* Director
- -----------------------------------------------------
(John F. Woodhouse)

* By: /s/ JACK B. EDRINGTON
-----------------------------------------------
Jack B. Edrington
Attorney-in-Fact
</TABLE>

69
<PAGE> 70

EQUILON ENTERPRISES LLC

CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998

INDEX

Report of Management........................................ 71
Report of Independent Accountants........................... 72
Statement of Consolidated Income............................ 73
Consolidated Balance Sheets................................. 74
Statement of Consolidated Cash Flows........................ 75
Statement of Owners' Equity................................. 76
Notes to the Consolidated Financial Statements.............. 77
</TABLE>

70
<PAGE> 71

EQUILON ENTERPRISES LLC

REPORT OF MANAGEMENT

The management of Equilon Enterprises LLC ("Equilon") is responsible for
preparing the consolidated financial statements of Equilon in accordance with
generally accepted accounting principles. In doing so, management must make
estimates and judgements when the outcome of events and transactions is not
certain.

In preparing these financial statements from the accounting records,
management relies on an effective internal control system in meeting its
responsibility. This system of internal controls provides reasonable assurance
that assets are safeguarded and that the financial records are accurately and
objectively maintained. Equilon's internal auditors conduct regular and
extensive internal audits throughout the company. During these audits they
review and report on the effectiveness of the internal controls and make
recommendations for improvement.

The independent accounting firms of PricewaterhouseCoopers LLP and Arthur
Andersen LLP are engaged to provide an objective, independent audit of Equilon's
financial statements. Their accompanying report is based on an audit conducted
in accordance with generally accepted auditing standards, which includes a
review and evaluation of the effectiveness of the company's internal controls.
This review establishes a basis for their reliance thereon in determining the
nature, timing and scope of their audit.

The Audit Committee of the Board of Directors is comprised of four,
non-employee directors who review and evaluate Equilon's accounting policies and
reporting, internal controls, internal audit program and other matters as deemed
appropriate. The Audit Committee also reviews the performance of
PricewaterhouseCoopers LLP and Arthur Andersen LLP and evaluates their
independence and professional competence, as well as the results and scope of
their audit.

<TABLE>
<S> <C> <C>
James M. Morgan David C. Crikelair David C. Cable
President and Chief Executive Officer Chief Financial Officer Controller
</TABLE>

71
<PAGE> 72

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS OF EQUILON ENTERPRISES LLC:

We have audited the accompanying consolidated balance sheets of Equilon
Enterprises LLC ("Equilon") and its subsidiaries as of December 31, 1998 and
January 1, 1998, and the related statements of consolidated income, owners'
equity, and cash flows for the year ended December 31, 1998. These financial
statements are the responsibility of Equilon's management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Equilon
Enterprises LLC and its subsidiaries as of December 31, 1998, and January 1,
1998 and the results of their operations and their cash flows for the year ended
December 31, 1998, in conformity with generally accepted accounting principles.

<TABLE>
<S> <C>
PRICEWATERHOUSECOOPERS LLP ARTHUR ANDERSEN LLP
Houston, Texas Houston, Texas
March 5, 1999 March 5, 1999
</TABLE>

72
<PAGE> 73

EQUILON ENTERPRISES LLC

STATEMENT OF CONSOLIDATED INCOME
For the year ended December 31, 1998
(Millions of dollars)

<TABLE>
<S> <C>
REVENUES
Sales and services........................................ $21,835
Equity in income of affiliates, interest, asset sales and
other.................................................. 411
-------
Total revenues.................................... 22,246
-------
COSTS AND EXPENSES
Purchases and other costs................................. 17,540
Operating expenses........................................ 2,274
Selling, general and administrative expenses.............. 1,251
Depreciation and amortization............................. 543
Interest expense.......................................... 134
Minority interest......................................... 2
-------
Total costs and expenses.......................... 21,744
-------
NET INCOME.................................................. $ 502
=======
</TABLE>

The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.

73
<PAGE> 74

EQUILON ENTERPRISES LLC

CONSOLIDATED BALANCE SHEETS
(Millions of dollars)

<TABLE>
<CAPTION>
DECEMBER 31, JANUARY 1,
1998 1998
------------ ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.............................. $ 11 $ 1
Accounts and notes receivable (less allowance for
doubtful accounts of $14 million at December 31 and
January 1)............................................ 1,672 1,652
Accounts receivable from affiliates.................... 157 --
Inventories............................................ 699 737
Other current assets................................... 109 78
------- -------
Total current assets.............................. 2,648 2,468
Investments and Advances.................................. 467 572
Property, Plant and Equipment, net........................ 7,052 6,977
Deferred Charges and other noncurrent assets.............. 239 220
------- -------
Total Assets...................................... $10,406 $10,237
======= =======

LIABILITIES AND OWNERS' EQUITY
Current Liabilities
Notes payable, commercial paper, and current portion of
long term debt........................................ $ 2,155 $ 317
Accounts payable -- trade.............................. 696 1,229
Accounts payable to owners............................. 563 256
Accrued liabilities and other payables................. 644 398
Formation payable to owners............................ -- 1,613
------- -------
Total current liabilities......................... 4,058 3,813
Long-term Debt and Capital Lease Obligations.............. 160 162
Long-term Liabilities, Deferred Credits, and Minority
Interest............................................... 222 140
------- -------
Total Liabilities................................. 4,440 4,115
OWNERS' EQUITY............................................ 5,966 6,122
------- -------
Total Liabilities and Owners' Equity.............. $10,406 $10,237
======= =======
</TABLE>

The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.

74
<PAGE> 75

EQUILON ENTERPRISES LLC

STATEMENT OF CONSOLIDATED CASH FLOWS
For the year ended December 31, 1998
(Millions of dollars)

<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net Income................................................ $ 502
Reconciliation to net cash provided by operating
activities
Depreciation and amortization.......................... 543
Dividends from affiliates less than equity in income... (41)
Gains on asset sales................................... (118)
Changes in working capital
Accounts and notes receivable........................ (20)
Accounts receivable from affiliates.................. (157)
Inventories.......................................... 26
Accounts payable -- trade............................ (533)
Accounts payable to owners........................... 307
Accrued liabilities and other payables............... 246
Other -- net........................................... (29)
-------
Net cash provided by operating activities.............. 726
INVESTING ACTIVITIES:
Capital expenditures...................................... (651)
Proceeds from asset sales................................. 409
-------
Net cash used in investing activities.................. (242)
FINANCING ACTIVITIES:
Repayments of borrowings having original terms in excess
of three months........................................ (9)
Repayment of formation costs.............................. (1,613)
Net increase in other short-term borrowings............... 1,846
Distributions paid to owners.............................. (698)
-------
Net cash used in financing activities.................. (474)
CASH AND CASH EQUIVALENTS:
Increase in cash during year.............................. 10
Balance at beginning of year.............................. 1
-------
Balance at end of year.................................... $ 11
=======
</TABLE>

The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.

75
<PAGE> 76

EQUILON ENTERPRISES LLC
STATEMENT OF OWNERS' EQUITY
(Millions of dollars)

<TABLE>
<S> <C>
Owners' Equity balance at January 1, 1998................... $6,122
Net Income.................................................. 502
Distributions paid.......................................... (698)
Contribution adjustment..................................... 40
------
Owners' Equity balance at December 31, 1998................. $5,966
======
</TABLE>

The accompanying Notes to the Consolidated Financial Statements are an integral
part of this statement.

76
<PAGE> 77

EQUILON ENTERPRISES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION

Equilon Enterprises LLC ("Equilon") is a joint venture combining the major
elements of Shell Oil Company ("Shell") and Texaco Inc.'s ("Texaco") Western and
Midwestern U.S. refining and marketing businesses and their nationwide trading,
transportation and lubricants businesses. Equilon is a limited liability company
organized by Shell and Texaco effective January 1, 1998 under the Delaware
Limited Liability Act, with equity interests of 56 percent and 44 percent,
respectively. Despite the foregoing ownership interests, Shell and Texaco
jointly control Equilon to the extent that many significant governance decisions
require unanimous approval.

A second joint venture company, Motiva Enterprises LLC ("Motiva"), was
formed on July 1, 1998, combining the major elements of the Eastern and Gulf
Coast U.S. refining and marketing businesses of Shell, Texaco and Saudi
Refining, Inc. ("SRI"). Equiva Trading Company and Equiva Services LLC were also
formed on July 1, 1998. Equiva Trading Company, a general partnership owned by
Equilon and Motiva, functions as the trading unit for both Equilon and Motiva.
Equiva Services LLC provides common financial, administrative, technical and
other operational support to both companies.

Equilon manufactures, distributes and markets petroleum products under both
the Shell and Texaco brands through wholesalers and its network of company owned
and contract operated service stations. Products are manufactured at six
refineries located in Puget Sound, Washington; Bakersfield, Los Angeles, and
Martinez, California; Wood River, Illinois, and El Dorado, Kansas.

Under the terms of consent agreements with the Federal Trade Commission and
certain state governments, Equilon was to divest itself of Shell's Anacortes,
Washington refinery, certain marketing assets in southern California and Hawaii,
and certain terminal and pipeline interests. With the exception of certain
assets in Hawaii, these actions were substantially complete by year-end 1998.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF FINANCIAL STATEMENTS

The accompanying financial statements are presented using Shell and
Texaco's historical basis of the assets and liabilities contributed to Equilon
on January 1, 1998. The consolidated financial statements generally include the
accounts of Equilon and subsidiaries in which Equilon directly or indirectly
owns more than a 50 percent voting interest. Entities where Equilon 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. Equiva Services LLC and Equiva Trading
Company are consolidated based on Equilon's specifically identified interest in
their cost of services and trading activities. Intercompany accounts and
transactions are eliminated.

USE OF ESTIMATES

These financial statements were prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions. These assumptions affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates include the recoverability of
assets, environmental remediation, litigation, claims and assessments. Amounts
are recognized when it is probable that an asset has been impaired or a
liability has been incurred and the cost can be reasonably estimated. Actual
results could differ from those estimates.

77
<PAGE> 78
EQUILON ENTERPRISES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NEW ACCOUNTING STANDARD

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". For Equilon, SFAS No. 133 will be adopted
January 1, 2000. Equilon has not yet determined the impact that the adoption of
SFAS No. 133 in year 2000 will have on its earnings or statement of financial
position.

REVENUES

Revenues for refined products and crude oil sales are recognized at the
point of passage of title specified in the contract. Revenues on forward sales
where cash has been received are recorded to deferred income until the passage
of title during delivery.

CASH EQUIVALENTS

Highly liquid investments with maturity when purchased of three months or
less are considered to be cash equivalents.

INVENTORIES

Inventories are valued at the lower of cost or market. Hydrocarbon
inventory cost is determined on the last-in, first-out (LIFO) method. The cost
of other merchandise inventories is determined on the first-in, first-out (FIFO)
method. Average cost is utilized for inventories of materials and supplies.

INVESTMENTS AND ADVANCES

The equity method of accounting is generally used for investments in
certain affiliates owned 50 percent or less, including corporate joint ventures,
limited liability companies and partnerships. Under this method, equity in
pre-tax income or losses of limited liability companies and partnerships, and
the net income or losses of corporate joint-venture companies is reflected in
revenue, rather than when realized through dividends or distributions.

The cost method is used to account for Equilon's interest in the net income
of affiliates with an ownership interest of less than twenty percent. Income
from these investments is realized through dividends.

PROPERTY, PLANT AND EQUIPMENT

Depreciation of property, plant and equipment is generally provided on
composite groups, using the straight-line method, with depreciation rates based
upon the estimated useful lives of the groups.

Under the composite depreciation method, the cost of partial retirements of
a group is charged to accumulated depreciation. However, when there is a
disposition of a complete group, or when the retirement is due to an
extraordinary loss, the cost and related depreciation are retired, and any gain
or loss is reflected in income.

Capitalized leases are amortized over the estimated useful life of the
asset or the lease term, as appropriate, using the straight-line method.

All maintenance and repairs, including major refinery maintenance, are
charged to expense as incurred. Renewals, betterments and major repairs that
materially extend the life of the properties are capitalized. Interest incurred
during the construction period of major additions is capitalized.

The evaluation of impairment for property, plant and equipment is based on
comparisons of carrying values against undiscounted future net pre-tax cash
flows. If an impairment is identified, the asset's carrying

78
<PAGE> 79
EQUILON ENTERPRISES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amount is adjusted to fair value. Assets to be disposed of are generally valued
at the lower of net book value or fair value less cost to sell.

DERIVATIVES

Equilon, through its affiliate, Equiva Trading Company, utilizes futures,
options and swaps to hedge the effects of fluctuations in the prices of crude
oil and refined products. Equiva Trading Company also conducts petroleum-related
commodity trading activities, the results of which are marked to market, with
gains and losses recorded in operating revenue.

FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of long-term debt is disclosed in Note 8 to the
financial statements. The carrying amount of long-term debt with variable rates
of interest approximates fair value at both January 1, and December 31, 1998,
because borrowing terms equivalent to the stated rates were available in the
marketplace. Fair value for long-term debt with a fixed rate of interest is
determined based on discounted cash flows using estimated prevailing interest
rates.

Other financial instruments are included in current assets and liabilities
on the balance sheets and approximate fair value because of the short maturity
of such instruments. These include cash, short-term investments, notes and
accounts receivable, accounts payable and short-term debt.

CONTINGENCIES

Certain conditions may exist as of the date financial statements are
issued, which may result in a loss to the company, but which will be resolved
only when one or more future events occur or fail to occur. Equilon's management
and legal counsel assess such contingent liabilities. The assessment of loss
contingencies necessarily involves an exercise of judgement and is a matter of
opinion. In assessing loss contingencies related to legal proceedings that are
pending against the company or unasserted claims that may result in such
proceedings, Equilon's legal counsel evaluates the perceived merits of any legal
proceedings or unasserted claims as well as the perceived merits of the amount
of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a
material liability had been incurred and the amount of the loss can be
estimated, then the estimated liability would be accrued in the company's
financial statements. If the assessment indicates that a potentially material
liability is not probable, but is reasonably possible, or is probable but cannot
be estimated, then the nature of the contingent liability, together with an
estimate of the range of possible loss if determinable and material would be
disclosed. Loss contingencies considered remote are generally not disclosed
unless they involve guarantees, in which case the nature of the guarantee would
be disclosed.

ENVIRONMENTAL EXPENDITURES

Equilon accrues for environmental remediation liabilities when it is
probable that such liabilities exist, based on past events or known conditions,
and the amount of such liability can be reasonably estimated. If Equilon can
only estimate a range of probable liabilities, the minimum future undiscounted
expenditure necessary to satisfy Equilon's future obligation is accrued.

For each potential liability, Equilon determines the appropriate liability
amount considering all of the available data, including technical evaluations of
the currently available facts, interpretation of existing laws and regulations,
prior experience with similar sites and the estimated reliability of financial
projections.

79
<PAGE> 80
EQUILON ENTERPRISES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Equilon adjusts the environmental liabilities, as required, based on the
latest experience with similar sites, changes in environmental laws and
regulations or their interpretation, development of new technology or new
information related to the extent of Equilon's obligation.

Other environmental expenditures, principally maintenance or preventive in
nature, are expensed or capitalized as appropriate.

NOTE 3 -- INTEREST COSTS

Interest costs were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1998
------------------
(millions of
dollars)
<S> <C>
Interest incurred........................................... $134
Interest paid............................................... 95
</TABLE>

NOTE 4 -- INVENTORIES

<TABLE>
<CAPTION>
AS OF
-------------------------
DECEMBER 31, JANUARY 1,
1998 1998
------------ ----------
(millions of dollars)
<S> <C> <C>
Crude oil................................................... $292 $304
Petroleum products.......................................... 304 325
Other merchandise........................................... 17 13
Materials and supplies...................................... 86 95
---- ----
Total............................................. $699 $737
==== ====
</TABLE>

The excess of estimated market value over the book value of inventories
carried at cost on the LIFO basis of accounting was approximately $353 million
at January 1, 1998 and $135 million at December 31, 1998.

NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<CAPTION>
AS OF
-----------------------------------
DECEMBER 31, JANUARY 1,
1998 1998
---------------- ----------------
GROSS NET GROSS NET
------- ------ ------- ------
(millions of dollars)
<S> <C> <C> <C> <C>
Manufacturing............................................ $ 7,106 $3,847 $ 6,962 $3,995
Marketing................................................ 2,757 2,032 2,599 2,052
Transportation........................................... 2,098 1,051 1,970 881
Other.................................................... 181 122 115 49
------- ------ ------- ------
Total.......................................... $12,142 $7,052 $11,646 $6,977
======= ====== ======= ======
Capital lease amounts included above..................... $ 65 $ 20 $ 66 $ 23
======= ====== ======= ======
</TABLE>

80
<PAGE> 81
EQUILON ENTERPRISES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accumulated depreciation and amortization totaled $4,669 million at January
1, 1998 and $ 5,090 million at December 31, 1998. Interest capitalized as part
of property, plant and equipment during 1998 was $1 million.

LONG-LIVED ASSETS

During its first year of operation, Equilon recognized the impairment of
surplus assets resulting from the consolidation and optimization of assets
contributed by Shell and Texaco under the provisions of SFAS No. 121 "Accounting
For the Impairment of Long Lived Assets and For Long Lived Assets to be Disposed
of." Impairments from this activity totaled over $77 million, including the
write-off of abandoned assets at the Odessa refinery, shut down in October 1998,
and the write-down to estimated realizable value of three lubricant blending
plants either closed in 1998 or expected to be sold in 1999. The impairments
were primarily reflected in increased depreciation expense on the income
statement.

NOTE 6 -- INVESTMENTS AND ADVANCES

Investments in affiliates, including corporate joint venture and
partnerships, owned 50% or less are generally accounted for on the equity
method. Equilon's total investments and advances are summarized as follows:

<TABLE>
<CAPTION>
AS OF
-------------------------
DECEMBER 31, JANUARY 1,
1998 1998
------------ ----------
(millions of dollars)
<S> <C> <C>
Investments in affiliates accounted for on the equity method
Pipeline affiliates....................................... $378 $329
Other affiliates.......................................... 52 37
---- ----
Total equity method affiliates.................... 430 366
Other investments and advances.............................. 37 206
---- ----
Total investments and advances.................... $467 $572
==== ====
</TABLE>

Undistributed earnings of equity companies included in Equilon's
accumulated earnings as of December 31, 1998 were $41 million. Summarized
financial information for these investments and Equilon's equity share thereof
is as follows:

<TABLE>
<CAPTION>
AS OF
-----------------------------------
DECEMBER 31, JANUARY 1,
1998 1998
----------------- ---------------
(millions of dollars)
<S> <C> <C>
EQUITY COMPANIES AT 100%
Current assets......................................... $ 373 $ 342
Noncurrent assets...................................... 2,750 2,603
Current liabilities.................................... (530) (515)
Noncurrent liabilities and deferred credits............ (1,684) (1,767)
------- -------
Net assets............................................. $ 909 $ 663
======= =======
</TABLE>

81
<PAGE> 82
EQUILON ENTERPRISES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1998
------------------
(millions of
dollars)
<S> <C>
Revenues.................................................... $1,500
Income before income taxes.................................. 519
Net income.................................................. 362
======
</TABLE>

<TABLE>
<CAPTION>
AS OF
-------------------------
DECEMBER 31, JANUARY 1,
1998 1998
------------ ----------
(millions of dollars)
<S> <C> <C>
EQUITY COMPANIES AT EQUILON'S PERCENTAGE OWNERSHIP
Current assets.............................................. $ 115 $ 91
Noncurrent assets........................................... 842 763
Current liabilities......................................... (136) (126)
Noncurrent liabilities and deferred credits................. (384) (412)
----- -----
Net assets.................................................. $ 437 $ 316
===== =====
</TABLE>

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1998
------------------
(millions of
dollars)
<S> <C>
Revenues.................................................... $ 430
Income before income taxes.................................. 123
Net income.................................................. 109
------
Dividends received.......................................... $ 68
======
</TABLE>

NOTE 7 -- LEASE COMMITMENTS AND RENTAL EXPENSE

Equilon has leasing arrangements involving service stations and other
facilities. Renewal and purchase options are available on certain of these
leases in which Equilon is lessee. Equilon has a one year lease agreement for a
cogeneration plant at its El Dorado, Kansas refinery. This lease may be renewed
each year until 2016 at Equilon's option. The lease has been renewed with a
minimum lease rental of $11 million for 1999. Equilon has guaranteed a minimum
recoverable residual value to the lessor of $73 million, if the lease is not
renewed for the year 2000. Rental expense relative to operating leases,
including contingent rentals, is provided in the table below:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1998
------------------
(millions of
dollars)
<S> <C>
Rental Expense:
Minimum lease rentals....................................... $178
Contingent rentals.......................................... 7
----
Total............................................. 185
Less rental income on properties subleased to others........ 54
----
Net rental expense.......................................... $131
====
</TABLE>

82
<PAGE> 83
EQUILON ENTERPRISES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 1998, Equilon had estimated minimum commitments for
payment of rentals under leases that, at inception, had a non-cancelable term of
more than one year, as follows:

<TABLE>
<CAPTION>
OPERATING LEASES CAPITAL LEASES
---------------- --------------
(millions of dollars)
<S> <C> <C>
1999....................................................... $ 75 $11
2000....................................................... 47 12
2001....................................................... 43 12
2002....................................................... 36 12
2003....................................................... 37 11
After 2003................................................. 274 9
---- ---
Total............................................ 512 67
Less sublease rental income................................ 85
----
Total lease commitments.......................... $427
====
Less amounts representing interest......................... 23
Add noncancelable sublease rentals netted in capital lease
commitments above........................................ 10
---
Present value of total capital lease obligations........... 54
Less current portion of capital lease obligations.......... 7
---
Present value of long-term portion of capital lease
obligations.............................................. $47
===
</TABLE>

NOTE 8 -- DEBT

Equilon has revolving credit facilities with commitments of $1,875 million,
as support for the company's commercial paper, as well as for working capital
and other general purposes. The maximum amount outstanding during 1998 under
these facilities was $1,013 million. Equilon pays a nominal quarterly facility
fee for the $1,875 million availability with no amounts outstanding at year-end.

NOTES PAYABLE, COMMERCIAL PAPER, AND CURRENT PORTION OF LONG TERM DEBT

<TABLE>
<CAPTION>
AS OF
-------------------------
DECEMBER 31, JANUARY 1,
1998 1998
------------ ----------
(millions of dollars)
<S> <C> <C>
Notes Payable............................................... $ -- $ 6
Commercial Paper............................................ 1,846 --
Anacortes Pollution Control Bonds........................... 34 34
Butler County Industrial Revenue Bonds...................... 25 25
California Pollution Control Bonds due 2000 through 2024.... 185 185
Southwestern Illinois Industrial Revenue Bonds due 2021
through 2025.............................................. 58 58
Current portion of long term debt and capital lease
obligations
Indebtedness.............................................. -- 3
Capital Lease Obligations................................. 7 6
------ ----
Total............................................. $2,155 $317
====== ====
Average interest rate of short term debt.......... 5.01% 3.36%
</TABLE>

83
<PAGE> 84
EQUILON ENTERPRISES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS

<TABLE>
<CAPTION>
AS OF
-------------------------
DECEMBER 31, JANUARY 1,
1998 1998
------------ ----------
(millions of dollars)
<S> <C> <C>
Bakersfield-CA Pollution 1978 Series A (Revenue) 7.0% due
2009...................................................... $ 6 $ 6
Bakersfield-CA Pollution 1978 Series A (Industrial) 7.0% due
2008...................................................... 1 1
Butler County Tax Abatement Bonds 7.38 to 9.75% due 2020.... 101 101
First Farmers Bank & Trust 7.625% due 2006 through 2008..... 4 --
Other 8.000% due 2007....................................... 1 --
---- ----
Total long-term debt.............................. 113 108
Capital lease obligations (see Note 7)...................... 47 54
---- ----
Total long-term debt and capital lease
obligations..................................... $160 $162
==== ====
Fair market value of the company's long-term debt........... $114 $108
==== ====
</TABLE>

Certain debt and capital lease obligations as of January 1, 1998 were
assumed from Shell and Texaco. The Pollution Control Bonds outstanding at
December 31, 1998 shown above consisted of two issues assumed from Shell and
three from Texaco. The Industrial Revenue Bonds outstanding at December 31, 1998
consisted of three issues from Shell and one from Texaco. Interest rates are
currently reset on a periodic basis for these issues and the bonds may be
converted from time to time to other modes. Bondholders have the right to tender
their bonds under certain conditions, including on interest rate resets. The Tax
Abatement Bonds outstanding at December 31, 1998 were assumed from Texaco.
Pursuant to the terms of the underlying indentures, Shell and Texaco retain
liability for debt service on the issues assumed by Equilon in the event that
Equilon fails to perform on its obligations. All other Equilon borrowings are
unsecured general obligations of Equilon and not guaranteed by any other entity.

NOTE 9 -- FORMATION PAYABLES

In accordance with the joint venture agreements, Equilon owed Shell $1,001
million and Texaco $612 million at formation. These amounts were separate from
normal trade payables and reflect amounts to reimburse Shell and Texaco for
certain capital expenditures incurred prior to the formation of the venture and
certain other items specified in the formation documents. Equilon paid these
amounts to Shell and Texaco prior to December 31, 1998. Interest was accrued on
these amounts until paid.

In addition to the foregoing payable amounts, Texaco retained $240 million
of receivables related to the contributed business as part of these
arrangements.

84
<PAGE> 85
EQUILON ENTERPRISES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- TRANSACTIONS WITH RELATED PARTIES

Equilon has entered into transactions with Shell, Texaco and Motiva,
including the affiliates of these companies. Such transactions are in the
ordinary course of business and include the purchase, sale and transportation of
crude oil and petroleum products, and numerous service agreements.

The aggregate amount of such transactions was as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1998
------------------
(millions of
dollars)
<S> <C>
Sales and other operating revenue........................... $1,368
Purchases and transportation costs.......................... 4,900
Service and technology expense.............................. 794
</TABLE>

NOTE 11 -- TAXES

Equilon, as a limited liability company, is not liable for income taxes.
Income taxes are the responsibility of the owners, with earnings of Equilon
included in the owners' earnings for the determination of income tax liability.

Direct taxes other than income taxes, which are included in operating
expenses, were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1998
------------------
(millions of
dollars)
<S> <C>
Direct taxes
Property.................................................. $41
Licenses and permits...................................... 5
Other..................................................... 26
---
Total direct taxes................................ $72
===
</TABLE>

Other taxes collected from consumers for governmental agencies that are not
included in revenues or expenses were $3,646 million for 1998.

NOTE 12 -- EMPLOYEE BENEFITS

In accordance with certain joint venture agreements related to human
resources matters, employees performing duties supporting Equilon remain
employees of the owner companies and affiliates who currently charge their
services to Equilon. It is expected that Equilon or one of its affiliates will
directly employ most personnel necessary for ongoing operations beginning April
1, 1999. Since Equilon and most of its consolidated affiliates had no directly
employed personnel at December 31, 1998, there are no liabilities related to
such on the balance sheet. Equilon does have a majority interest in a pipeline
company that employs its own personnel. The following information is applicable
to the benefit plans of that consolidated affiliate:

PENSION PLANS

Sponsorship for the Texas-New Mexico Pipeline Company retirement and group
pension plans was transferred from Texaco Inc. to Equilon in 1998. The remaining
benefits such as health and life insurance

85
<PAGE> 86
EQUILON ENTERPRISES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

remained with Texaco Inc. and will be transferred in fiscal year 1999. At
December 31, 1998, there were 74 participants in the retirement plan, and 80
participants in the pension plan.

The plan is accounted for as a defined benefit plan; therefore employees
will receive a defined amount upon retirement based on their number of years of
service and final average compensation. Actuarial studies provide the amounts
for inclusion in the audited financial statements.

At year-end 1998, the plans' assets of $20 million exceeded the accumulated
benefit obligation of $9 million. The weighted-average discount rate used in
determining the present value of the projected benefit obligation was 6.75% for
fiscal 1998. For compensation based plans, the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation and service cost was based upon an
experience-related table and approximated 4% on current salaries through 1998,
in accordance with plan terms. The expected long-term rate of return on plan
assets was 10% for 1998. The majority of plan assets are invested in a
diversified portfolio of insurance company deposits, fixed income securities and
equities.

EMPLOYEE TERMINATION BENEFITS

The joint venture agreements provide for Equilon and Motiva to determine
the appropriate staffing levels for their businesses. To the extent those
staffing needs result in the elimination of positions from the ranks of Shell,
Texaco and Star Enterprise, a joint venture between Texaco and SRI, affected
employees are entitled to termination benefits provided for under the benefit
plans of the applicable companies. Shell, Texaco and Star Enterprise, as the
employer companies, are responsible for administering the payment of benefits
under their respective benefit plans. Equilon and Motiva are obligated to
reimburse the employer companies for all costs resulting from the elimination of
positions in accordance with a formula included in the joint venture agreements.

The formation of Equilon and Motiva is expected to result in the
termination of 1,535 employees. Of this total, 869 employees have been
terminated through December 31, 1998. The remaining separations will be
substantially completed by mid-year 1999. In 1998 Equilon recorded a charge of
$61 million for its share of reimbursable severance and other benefit costs.
Equilon has reimbursed the employer companies $7 million in termination benefits
through December 31, 1998, and will make reimbursement for the remaining
benefits in future periods in accordance with the joint venture agreements.

NOTE 13 -- DERIVATIVES

Equilon utilizes futures, options and swaps to hedge the effects of
fluctuations in the prices of crude oil and refined products. These transactions
meet the requirements for hedge accounting, including designation and
correlation. The resulting gains or losses, measured by quoted market prices,
are accounted for as part of the transactions being hedged. On the balance
sheet, deferred gains and losses are included in current assets and liabilities.

At December 31, 1998, open derivative instruments held for hedging purposes
consisted mostly of futures. Notional contract amounts, excluding unrealized
gains and losses, were $59 million at year-end 1998. These amounts principally
represent future values of contract volumes over the remaining duration of the
outstanding futures contracts at the respective dates. These contracts hedge a
small fraction of the company's business activities, generally for the next
twelve months.

Equilon also entered into a relatively small number of petroleum-related
derivative transactions for trading purposes. The results of derivative trading
activities are marked to market, with gains and losses recorded in operating
revenue. All derivative instruments are straightforward futures, swaps and
options, with no leverage or multiplier features. At December 31, 1998, the open
derivative instruments held for trading

86
<PAGE> 87
EQUILON ENTERPRISES LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purposes consisted primarily of futures and swaps. The notional contract amounts
of these derivative instruments, excluding unrealized gains and losses, were $3
million at year-end 1998.

The earnings impact of positions closed in 1998 and the unrealized gains
and losses on open positions at December 31, 1998 were not material.

NOTE 14 -- CONTINGENT LIABILITIES

Equilon is subject to possible loss contingencies including actions or
claims based on environmental laws, federal regulations, and other matters.
While it is impossible to ascertain the ultimate legal and financial liability
with respect to many such contingent liabilities and commitments, Equilon has
accrued amounts related to certain such liabilities where the outcome is deemed
both probable and reasonably measurable.

Equilon, along with other oil companies, is working in cooperation with
regulatory and governmental agencies to investigate the presence and potential
sources of methyl tertiary butyl ether ("MTBE") and other gasoline constituents
in groundwater production wells that formerly provided water to the City of
Santa Monica, California. Equilon has also been named as a defendant or a
potentially responsible party in several other contamination matters and has
certain obligations for remediation of adverse environmental conditions related
to certain of its operating assets under existing laws and regulations.

On November 25, 1998, a fire occurred at the Equilon Puget Sound Refinery
in Anacortes, Washington, which resulted in six worker fatalities -- four
employees of a contractor and two Texaco employees working on behalf of Equilon.
Regulatory and governmental investigations are ongoing and wrongful death
lawsuits have been filed.

In management's opinion, the aggregate amount of liability for contingent
liabilities, in excess of financial liabilities already accrued, is not
anticipated to be material in relation to the consolidated financial position or
results of operations of Equilon.

NOTE 15 -- SUBSEQUENT EVENTS

On February 1, 1999, Equilon and Motiva sold the Shell proprietary Credit
Card Program to Associates First Capital Corporation. The proceeds from the sale
were assigned to Equilon and Motiva based on the outstanding receivable balances
at the time of the sale. The credit card receivables sold that were applicable
to Equilon amounted to $142 million.

87
<PAGE> 88

MOTIVA ENTERPRISES LLC

FINANCIAL STATEMENTS
DECEMBER 31, 1998

INDEX

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Management........................................ 89
Report of Independent Accountants........................... 90
Statement of Income......................................... 91
Balance Sheets.............................................. 92
Statement of Cash Flows..................................... 93
Statement of Owners' Equity................................. 94
Notes to Financial Statements............................... 95
</TABLE>

88
<PAGE> 89
MOTIVA ENTERPRISES LLC

REPORT OF MANAGEMENT

The management of Motiva Enterprises LLC (the "Company") is responsible for
preparing the financial statements of the Company in accordance with generally
accepted accounting principles. In doing so, management must make estimates and
judgements when the outcome of events and transactions is not certain.

In preparing these financial statements from the accounting records,
management relies on an effective internal control system in meeting its
responsibility. This system of internal controls provides reasonable assurance
that assets are safeguarded and that the financial records are accurately and
objectively maintained. The Company's internal auditors conduct regular and
extensive internal audits throughout the Company. During these audits they
review and report on the effectiveness of the internal controls and make
recommendations for improvement.

The independent accounting firms of PricewaterhouseCoopers LLP, Deloitte &
Touche LLP and Arthur Andersen LLP are engaged to provide an objective,
independent audit of the Company's financial statements. Their accompanying
report is based on an audit conducted in accordance with generally accepted
auditing standards, which includes a review and evaluation of the effectiveness
of the Company's internal controls. This review establishes a basis for their
reliance thereon in determining the nature, timing and scope of their audit.

The Audit Committee of the Board of Directors is comprised of three,
non-employee directors who review and evaluate the Company's accounting policies
and reporting, internal controls, internal audit program and other matters as
deemed appropriate. The Audit Committee also reviews the performance of
PricewaterhouseCoopers LLP, Deloitte & Touche LLP and Arthur Andersen LLP and
evaluates their independence and professional competence, as well as the results
and scope of their audit.

<TABLE>
<CAPTION>
<S> <C> <C>
L. Wilson Berry Jr. W. M. Kaparich Randy J. Braud
President and Chief Executive Officer Chief Financial Officer Controller
</TABLE>

89
<PAGE> 90

REPORT OF INDEPENDENT ACCOUNTANTS

THE BOARD OF DIRECTORS OF MOTIVA ENTERPRISES LLC:

We have audited the accompanying balance sheets of Motiva Enterprises LLC
(the "Company") as of December 31, 1998 and July 1, 1998 and the related
statements of income, owners' equity and cash flows for the period from
inception (July 1, 1998) to December 31, 1998. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Motiva Enterprises LLC as of
December 31, 1998 and July 1, 1998 and the results of its operations and its
cash flows for the period from inception (July 1, 1998) to December 31, 1998 in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

DELOITTE & TOUCHE LLP

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
March 5, 1999

90
<PAGE> 91

MOTIVA ENTERPRISES LLC

STATEMENT OF INCOME
For the period from inception (July 1, 1998) to December 31
(Millions of dollars)

<TABLE>
<CAPTION>
1998
------
<S> <C>
REVENUES
Sales and other revenue................................ $5,371
------
COSTS AND EXPENSES
Purchases and other costs.............................. 4,079
Operating expenses..................................... 783
Selling, general and administrative expenses........... 193
Depreciation and amortization.......................... 174
Interest expense....................................... 43
Taxes other than income taxes.......................... 21
------
Total costs and expenses............................... 5,293
------
Net Income............................................. $ 78
======
</TABLE>

The accompanying Notes to Financial Statements are an integral part of this
statement.

91
<PAGE> 92

MOTIVA ENTERPRISES LLC

BALANCE SHEETS
(Millions of dollars)

<TABLE>
<CAPTION>
DECEMBER 31, JULY 1,
1998 1998
------------ -------
<S> <C> <C>

ASSETS
Current Assets
Cash and cash equivalents.............................. $ 25 $ --
Accounts and notes receivable, less allowance for
doubtful accounts of $9 million at December 31 and
July 1................................................ 661 639
Inventories............................................ 692 653
Other current assets................................... 57 48
------ ------
Total current assets.............................. 1,435 1,340
Investments and Advances.................................. 54 52
Property, Plant and Equipment
At cost................................................ 7,187 7,095
Less accumulated depreciation.......................... 2,112 2,056
------ ------
Net Property, Plant and Equipment...................... 5,075 5,039
------ ------
Deferred Charges and Other Noncurrent Assets.............. 177 163
------ ------
Total Assets...................................... $6,741 $6,594
====== ======

LIABILITIES AND OWNERS' EQUITY
Current Liabilities
Commercial paper and current portion of long-term
debt.................................................. $ 441 $ 909
Accounts payable and accrued liabilities............... 611 561
Accrued taxes.......................................... 196 312
------ ------
Total current liabilities......................... 1,248 1,782
Long-Term Debt and Capital Lease Obligation............... 1,425 590
Accrued Environmental Remediation Liability............... 232 229
Deferred Credits and Other Noncurrent Liabilities......... 8 --
------ ------
Total Liabilities................................. 2,913 2,601
Owners' Equity............................................ 3,828 3,993
------ ------
Total Liabilities and Owners' Equity.............. $6,741 $6,594
====== ======
</TABLE>

The accompanying Notes to Financial Statements are an integral part of these
statements.

92
<PAGE> 93

MOTIVA ENTERPRISES LLC

STATEMENT OF CASH FLOWS
For the period from inception (July 1, 1998) to December 31
(Millions of dollars)

<TABLE>
<CAPTION>
1998
-----
<S> <C>
OPERATING ACTIVITIES
Net Income............................................. $ 78
Reconciliation to net cash provided by operating
activities:
Depreciation and amortization........................ 174
Loss on sale of assets............................... 1
Changes in operating working capital
Accounts and notes receivable..................... (22)
Inventories....................................... (39)
Other current assets.............................. (9)
Accounts payable and accrued liabilities.......... (66)
Other -- net...................................... (47)
-----
Net cash provided by operating activities......... 70
INVESTING ACTIVITIES
Capital expenditures................................... (182)
Proceeds from sale of assets........................... 13
-----
Net cash used in investing activities............. (169)
FINANCING ACTIVITIES
Proceeds from borrowings............................... 1,278
Repayment of debt...................................... (911)
Distributions to owners................................ (243)
-----
Net cash provided by financing activities......... 124
CASH AND CASH EQUIVALENTS
Increase during the period............................. 25
Beginning of period.................................... --
-----
End of period.......................................... $ 25
=====
Supplemental cash flow information:
Interest paid during the period........................ $ 43
=====
</TABLE>

The accompanying Notes to Financial Statements are an integral part of this
statement.

93
<PAGE> 94

MOTIVA ENTERPRISES LLC

STATEMENT OF OWNERS' EQUITY
(Millions of dollars)

<TABLE>
<S> <C>
Initial Owners' Capital Contribution, July 1, 1998.......... $3,993
Net Income.................................................. 78
Distributions............................................... (243)
------
Balance at December 31, 1998................................ $3,828
======
</TABLE>

The accompanying Notes to Financial Statements are an integral part of this
statement.

94
<PAGE> 95

MOTIVA ENTERPRISES LLC

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION

Motiva Enterprises LLC (the "Company") is a joint venture combining the
major elements of Shell Oil Company (Shell), Texaco Inc. (Texaco) and Saudi
Aramco's Gulf and East Coast U.S. refining and marketing businesses. The Company
is a limited liability company established by Shell Norco Refining Company
(Shell Norco), Shell, Texaco Refining and Marketing (East) Inc. (TRMI East) and
Saudi Refining Inc. (SRI) effective July 1, 1998 under the Delaware Limited
Liability Company Act. In accordance with the Limited Liability Company
Agreement (the "Agreement"), initial provisional ownership percentages are 35%
for Shell Norco and Shell together and 32.5% for each of TRMI East and SRI,
effective through the first full fiscal year. Also in accordance with the
Agreement, subsequent provisional ownership percentages will be determined for
the Company's second through seventh full fiscal years and final ownership
percentages will be determined for the Company's eighth full fiscal year. On
December 7, 1998, the ownership in the Company attributable to Shell Norco and
Shell was transferred to SOPC Holdings East LLC.

A second joint venture company, Equilon Enterprises LLC (Equilon), was
formed on January 1, 1998, combining the major elements of Shell and Texaco's
Western and Midwestern U.S. refining and marketing businesses and their
nationwide trading, transportation and lubricants businesses. Equiva Trading
Company (Trading) and Equiva Services LLC (Services) were also formed on July 1,
1998 and are owned equally by the Company and Equilon. Trading functions as the
trading unit for both companies. Services provides common financial,
administrative, technical and other operational support to both companies.
Trading and Services bill their services at cost.

The Company manufactures, distributes and markets petroleum products under
both the Shell and Texaco brands through its network of wholesalers, retailers
and Company owned and contract operated service stations in all or part of 26
states and the District of Columbia. Products are manufactured at four
refineries located in Delaware City, Delaware; Convent, Louisiana; Norco,
Louisiana; and Port Arthur, Texas.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Effective July 1, 1998, Shell Norco, Shell, TRMI East and SRI contributed
assets and liabilities to the Company pursuant to the terms of the Asset
Transfer and Liability Assumption Agreement, one of the joint venture agreements
establishing the Company. TRMI East and SRI contributed the assets and
liabilities of Star Enterprise (Star). The accompanying financial statements are
presented using the historical basis on July 1, 1998 of the assets and
liabilities contributed to the Company.

USE OF ESTIMATES

These financial statements are prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions. These assumptions affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates include the recoverability of
assets, environmental remediation, litigation and claims and assessments.
Amounts are recognized when it is probable that an asset has been impaired or a
liability has been incurred and the cost can be reasonably estimated. Actual
results could differ from those estimates.

NEW ACCOUNTING STANDARD

In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133). SFAS 133 is effective for fiscal years beginning
after January 1, 2000. The Company has not determined the impact that the
adoption of SFAS 133 will have on its financial position or results of
operations.

95
<PAGE> 96
MOTIVA ENTERPRISES LLC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

REVENUES

Revenues for refined products and crude oil sales are recognized at the
point of passage of title specified in the contract.

CASH EQUIVALENTS

Cash equivalents consist of highly liquid investments with a maturity of
three months or less when purchased.

INVENTORIES

All inventories are valued at the lower of cost or market. The cost of
inventories of crude oil and petroleum products is determined on the last-in,
first-out (LIFO) method, while the cost of other merchandise inventories is
determined on the first-in, first-out (FIFO) method, and materials and supplies
are stated at average cost.

PROPERTY, PLANT AND EQUIPMENT

Depreciation of property, plant and equipment is provided generally on
composite groups, using the straight-line method, with depreciation rates based
upon the estimated useful lives of the groups.

Under the composite depreciation method, the cost of partial retirements of
a group is charged to accumulated depreciation. However, when there is a
disposition of a complete group, the cost and related depreciation are retired,
and any gain or loss is reflected in earnings.

Capitalized leases are amortized over the estimated useful life of the
asset or the lease term, as appropriate, using the straight-line method.

Maintenance and repairs, including major refinery maintenance, are charged
to expense as incurred. Renewals, betterments and major repairs that materially
extend the life of the properties are capitalized.

Interest incurred during the construction period of major additions is
capitalized.

The evaluation of impairment for property, plant and equipment is based on
a comparison of carrying value against undiscounted future net pre-tax cash
flows. If an impairment is identified, the asset's carrying amount is adjusted
to fair value. Assets to be disposed of are generally valued at the lower of net
book value or fair value less cost to sell.

INVESTMENTS AND ADVANCES

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. The equity method of accounting is
generally used for investments in certain affiliates owned 50 percent or less,
including corporate joint ventures, limited liability companies and
partnerships. Under this method, equity in pre-tax income or losses of limited
liability companies and partnerships, and the net income or losses of corporate
joint venture companies is reflected in revenue, rather than when realized
through dividends or distributions.

ENVIRONMENTAL EXPENDITURES

The Company accrues for environmental remediation liabilities when it is
probable that such liability exists, based on past events or known conditions,
and the amount of such loss can be reasonably estimated. If the Company can only
estimate a range of probable liabilities, the minimum, undiscounted expenditure
necessary to satisfy the Company's future obligation is accrued.

96
<PAGE> 97
MOTIVA ENTERPRISES LLC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

For each potential liability, the Company determines the appropriate
liability amount considering all of the available data, including technical
evaluations of the currently available facts, interpretation of existing laws
and regulations, prior experience with similar sites and the estimated
reliability of financial projections.

The Company adjusts financial liabilities, as required, based on the latest
experience with similar sites, changes in environmental laws and regulations or
their interpretation, development of new technology or new information related
to the extent of the Company's obligation.

DERIVATIVES

The Company uses interest rate swap derivative financial transactions to
minimize its borrowing cost. Amounts receivable or payable based on the interest
rate differentials of interest rate swaps are accrued monthly and are reflected
in interest expense.

The Company uses futures, options and swaps to hedge the effects of
fluctuations in the prices of crude oil and refined products. Unrealized gains
and losses on such transactions are deferred and recognized in income when the
transactions and cash are settled.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of long-term debt is disclosed in Note 7 to the
financial statements. The carrying amount of long-term debt with variable rates
of interest approximates fair value at December 31, 1998 because borrowing terms
equivalent to the stated rates were available in the marketplace. Fair value for
long-term debt with a fixed rate of interest and interest rate swaps is
determined based on discounted cash flows using estimated prevailing interest
rates.

Other financial instruments are included in current assets and liabilities
on the balance sheet and approximate fair value because of the short maturity of
such instruments. These include cash, short-term investments, notes and accounts
receivable, accounts payable and short-term debt.

CONTINGENCIES

Certain conditions may exist as of the date financial statements are
issued, which may result in a loss to the Company, but which will only be
resolved when one or more future events occur or fail to occur. The Company's
management and legal counsel assess such contingent liabilities. The assessment
of loss contingencies necessarily involves an exercise of judgment and is a
matter of opinion. In assessing loss contingencies related to legal proceedings
that are pending against the Company or unasserted claims that may result in
such proceedings, the Company's legal counsel evaluates the perceived merits of
any legal proceeding or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a
material liability had been incurred and the amount of the loss can be
estimated, then the estimated liability would be accrued in the Company's
financial statements. If the assessment indicates that a potentially material
liability is not probable, but is reasonably possible, or is probable but cannot
be estimated, then the nature of the contingent liability, together with an
estimate of the range of possible loss if determinable and material would be
disclosed.

Loss contingencies considered remote are generally not disclosed unless
they involve guarantees, in which case the nature of the guarantee would be
disclosed. However, in some instances in which disclosure is not otherwise
required, the Company may disclose contingent liabilities of an unusual nature
which, in the judgment of management and its legal counsel, may be of interest
to the owners or others.

97
<PAGE> 98
MOTIVA ENTERPRISES LLC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3 -- TRANSACTIONS WITH RELATED PARTIES

The Company has entered into transactions with Shell, Texaco, SRI and
Equilon including the affiliates of these companies. Such transactions are in
the ordinary course of business and include the purchase, sale and
transportation of crude oil and petroleum products and numerous service
agreements.

The aggregate amounts of such transactions were as follows:

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JULY 1, 1998)
TO DECEMBER 31, 1998
---------------------
(millions of dollars)
<S> <C>
Sales and other operating revenue........................... $ 857
Purchases and transportation costs.......................... 2,642
Service and technology expense.............................. 297
</TABLE>

Accounts receivable from related parties and accounts payable to related
parties were $73 million and $175 million, respectively, at December 31, 1998.

NOTE 4 -- SALE OF RECEIVABLES

At December 31, 1998 the Company had a third-party accounts receivable
agreement under which it has the right to sell up to $200 million of trade
accounts receivable on a continuing basis subject to limited recourse.
Receivables sold under this facility totaled $569 million for the six months
ended December 31, 1998. At December 31, 1998, $90 million of trade receivables
sold remained uncollected. The discount recorded on sales of trade receivables
amounted to $1 million for the six months ended December 31, 1998.

NOTE 5 -- INVENTORIES

<TABLE>
<CAPTION>
DECEMBER 31, JULY 1,
1998 1998
------------ -------
(millions of dollars)
<S> <C> <C>
Crude oil and petroleum products............................ $597 $569
Other merchandise........................................... 13 12
Materials and supplies...................................... 82 72
---- ----
Total............................................. $692 $653
==== ====
</TABLE>

Due to declines in prices, December 31, 1998 crude oil and petroleum
products inventories have been reduced to estimated market value, reflecting a
$23 million valuation adjustment to the LIFO carrying value of such inventories
at December 31, 1998. At July 1, 1998, the excess of current cost over the LIFO
carrying value of crude oil and petroleum products inventories was approximately
$71 million.

98
<PAGE> 99
MOTIVA ENTERPRISES LLC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
DECEMBER 31, 1998 JULY 1, 1998
----------------- ---------------
GROSS NET GROSS NET
------- ------- ------ ------
(millions of dollars)
<S> <C> <C> <C> <C>
Refining................................................... $4,383 $2,972 $4,326 $2,941
Marketing.................................................. 2,794 2,098 2,760 2,094
Other...................................................... 10 5 9 4
------ ------ ------ ------
Total............................................ $7,187 $5,075 $7,095 $5,039
====== ====== ====== ======
Capital lease amounts included above....................... $ 24 $ 12 $ 24 $ 13
====== ====== ====== ======
</TABLE>

Interest expense capitalized as part of property, plant and equipment was
$4 million for the six months ended December 31, 1998.

NOTE 7 -- DEBT

Debt and capital lease obligation as of July 1, 1998 were assumed from Star
and Shell pursuant to the terms of the Asset Transfer and Liability Assumption
Agreement, one of the joint venture agreements forming the Company.

SHORT-TERM

Debt due within one year from the dates indicated below consisted of the
following:

<TABLE>
<CAPTION>
DECEMBER 31, JULY 1,
1998 1998
------------ -------
(millions of dollars)
<S> <C> <C>
Commercial paper............................................ $1,211 $ --
Pollution control revenue bonds............................. 277 210
Bank loans.................................................. -- 254
Parent company note......................................... -- 316
------ ----
1,488 780
Current maturities of long-term debt and capital lease
obligation................................................ 1 129
------ ----
1,489 909
Less: Short-term obligations intended to be refinanced:
Commercial paper.......................................... 900 --
Pollution control revenue bonds........................... 148 --
------ ----
Total short-term debt............................. $ 441 $909
====== ====
</TABLE>

The weighted average interest rate for the commercial paper outstanding at
December 31, 1998 was 5.42%.

The pollution control revenue bonds outstanding at December 31, 1998 shown
above consisted of five individual issues totaling $129 million assumed from
Shell, three issues totaling $81 million assumed from Star, and $67 million
issued by the Company. For the issues assumed from Shell, interest rates are
currently reset on a daily basis for four of the issues and on a weekly basis
for the remaining issue; the bonds may be converted from time to time to other
modes. The weighted average interest rates for these issues at December 31, 1998
and July 1, 1998 were 5.02% and 3.61%, respectively. The bonds mature between
2005 and 2023, although bondholders have the right to tender their bonds under
certain conditions, including on

99
<PAGE> 100
MOTIVA ENTERPRISES LLC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

interest rate resets. Pursuant to the terms of the underlying indentures, Shell
retains liability for debt service on the issues the Company assumed from Shell
in the event that the Company fails to perform its obligations.

Interest rates are currently reset on a weekly basis for the issues assumed
from Star and the bonds issued by the Company, although these bonds may also be
converted from time to time to other modes. Weighted average interest rates at
December 31, 1998 and July 1, 1998 were 4.0% and 3.65%, respectively, for the
issues assumed from Star; the weighted average interest rate at December 31,
1998 was 5.35% for the bonds issued by the Company. The bonds assumed from Star
are currently supported by an irrevocable bank letter of credit, for which the
Company pays a fee based on the face amount of the letter of credit. The bonds
mature between 2014 and 2018, although bondholders have the right to tender
their bonds under certain conditions, including on interest rate resets. These
bonds, as well as $900 million of the Company's other short-term obligations
scheduled to mature in 1999, are reclassified to long-term debt at December 31,
1998 recognizing the Company's intent and ability to refinance those issues on a
long-term basis, if necessary through the use of its $1.5 billion revolving
credit facility.

The weighted average interest rate for the bank loans outstanding at July
1, 1998 which were assumed from Star, was 6.07%. The parent company note
outstanding at July 1, 1998 represented an amount due Shell in connection with
its asset contribution to the Company; its interest rate at that date was 6.02%.
Both the bank loans and the parent company note were repaid during the period
with proceeds from the Company's commercial paper program.

LONG-TERM

Long-term debt as of the dates indicated below consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JULY 1,
1998 1998
------------ -------
(millions of dollars)
<S> <C> <C>
Private placements.......................................... $ 360 $400
Bank loans.................................................. -- 300
Capital lease obligation.................................... 18 19
------ ----
378 719
Less: Amounts due within one year........................... 1 129
------ ----
377 590
Add: Short-term obligations intended to be refinanced:
Commercial paper.......................................... 900 --
Pollution control revenue bonds........................... 148 --
------ ----
Total long-term debt.............................. $1,425 $590
====== ====
</TABLE>

At December 31, 1998 the Company was party to a $1.5 billion extendible
364-day revolving credit facility with a syndicate of major U.S. and
international banks. This facility is available as support for the issuance of
the Company's commercial paper and certain of its pollution control revenue
bonds, as well as for working capital and for other general corporate purposes.
The Company had no amounts outstanding under this facility during 1998. The
Company pays a facility fee on this facility, based on its total amount. Under
this agreement, interest on any amounts borrowed would be based on short-term
rates at the time of borrowing.

Private placements of $360 million at December 31, 1998 (originally $400
million at July 1, 1998) were assumed from Star, and consist of $110 million and
$250 million issued to various insurance companies in 1991 and 1992,
respectively. All of the notes carry fixed interest rates; the weighted average
interest rates were 8.6% for the 1991 issue and 7.6% for the 1992 issue. These
notes have varying maturities lasting until the year 2009.

100
<PAGE> 101
MOTIVA ENTERPRISES LLC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

A term bank loan facility was also assumed from Star on July 1, 1998 at
which time its weighted average interest rate was 6.05%. This facility was
repaid in full and terminated during the period with proceeds from the Company's
commercial paper program.

All Company borrowings are unsecured and with the exception of the
pollution control revenue bonds assumed from Shell, are non-recourse to the
owners. Long-term debt borrowing agreements include financial covenants
regarding net worth, leverage and liens. As of December 31, 1998 the Company was
in compliance with all covenants.

The amounts of long-term debt maturities during each of the next five years
are $0 million, $0 million, $45 million, $63 million and $65 million,
respectively. The preceding maturities are before consideration of short-term
obligations intended to be refinanced and also exclude capital lease
obligations.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values, at the dates indicated below, of the Company's
long-term debt and related derivative financial instruments were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JULY 1,
1998 1998
----------------- ----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------ -------- -----
(millions of dollars)
<S> <C> <C> <C> <C>
Long-term debt...................................... $1,425 $1,472 $590 $626
Interest rate swaps................................. -- 1.6 -- 0.4
</TABLE>

NOTE 8 -- DERIVATIVES

DEBT-RELATED DERIVATIVES

Many of the Company's interest bearing liabilities reflected on its balance
sheet are floating rate instruments. To reduce the impact of changes in interest
rates on this floating rate debt, the Company assumed certain interest rate swap
agreements in the notional amount of $100 million previously entered into by
Star. All such interest rate swaps require the counterparty of the swap to pay
to the Company a floating rate of interest on notional amounts of principal, and
for the Company to pay to the counterparty a fixed rate of interest on the same
amounts of notional principal. In all cases, the Company remains obligated to
pay the variable rate owing to the holder of the underlying obligations. These
interest rate swaps effectively convert $100 million of floating rate debt to a
fixed rate of 6% through the year 2000.

Each party to any interest rate swap agreement is exposed to credit risk
for nonperformance of the other party. The Company has such exposure, but since
the counterparties are major financial institutions, does not anticipate
nonperformance by counterparties.

COMMODITY DERIVATIVES

The Company utilizes futures, options and swaps to hedge the effects of
fluctuations in the prices of crude oil and refined products. These transactions
meet the requirements for hedge accounting, including designation and
correlation. The resulting gains or losses, measured by quoted market prices,
are accounted for as part of the transactions being hedged. On the balance
sheet, deferred gains and losses are included in current assets and liabilities.

At December 31, 1998, the Company had open derivative commodity contracts
required to be settled in cash, consisting mostly of futures. Notional contract
amounts, excluding unrealized gains and losses, were $101 million at December
31, 1998. These amounts principally represent future values of contract volumes

101
<PAGE> 102
MOTIVA ENTERPRISES LLC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

over the remaining duration of outstanding futures contracts at the respective
dates. These contracts hedge a small fraction of the company's business
activities, generally for the next two months.

Unrealized losses on open positions at December 31, 1998 were $5 million.
The earnings impact of closed positions for the six months ended December 31,
1998 was not material.

NOTE 9 -- LEASE COMMITMENTS AND RENTAL EXPENSE

The Company has leasing arrangements involving service stations and other
facilities. Renewal and purchase options are available on certain of these
leases in which the Company is lessee.

The Company has a one-year lease agreement for a cogeneration plant being
constructed in proximity to the Company's Delaware City refinery. The lease
commences upon completion of the facility's construction, which is estimated to
be in the first quarter of 2000. The lease may be renewed at the Company's
option for seventeen consecutive one-year terms. The minimum lease commitment
for the first year (year 2000) is expected to be approximately $20 million (not
included in the table below). The Company, as construction agent for the
project, is obligated to reimburse the lessor for approximately 89 percent of
the project's construction cost if certain agreed-upon requirements are not met.
The accumulated expenditures to date at December 31, 1998 were $168 million. At
the end of the first one-year lease, if not renewed, the Company has guaranteed
a minimum recoverable residual value to the lessor of approximately 89 percent
of the total project construction cost.

As of December 31, 1998, the Company had estimated minimum commitments for
payment of rentals under leases which, at inception, had a noncancelable term of
more than one year, as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASE
---------- --------
(millions of dollars)
<S> <C> <C>
1999........................................................ $ 47 $ 4
2000........................................................ 38 4
2001........................................................ 30 4
2002........................................................ 21 4
2003........................................................ 18 4
After 2003.................................................. 51 13
---- ---
Total lease commitments........................... $205 33
====
Less amounts representing interest.......................... 15
---
Present value of total capital lease obligation............. 18
Less current portion of capital lease obligation............ 1
---
Present value of long-term portion of capital lease
obligation................................................ $17
===
</TABLE>

102
<PAGE> 103
MOTIVA ENTERPRISES LLC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Rental expense relative to operating leases, including contingent rentals,
is provided in the table below:

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JULY 1, 1998) TO
DECEMBER 31,
1998
-----------------
(millions of
dollars)
<S> <C>
Rental expense:
Minimum lease rentals..................................... $52
Contingent rentals........................................ 5
---
Total............................................. 57
Less rental income on properties subleased to others........ 25
---
Net rental expense.......................................... $32
===
</TABLE>

NOTE 10 -- EMPLOYEE BENEFIT PLANS

In accordance with certain joint venture agreements related to human
resources matters, employees performing duties supporting the Company remain
employees of Shell, Texaco and Star, who currently charge their services to the
Company. It is expected that the Company or one of its affiliates will directly
employ the personnel necessary for continued support on April 1, 1999. Since the
Company has no directly employed personnel at December 31, 1998, there are no
liabilities related to such on the balance sheet. Pensions and other post
employment benefits costs are not separately identified in billings for employee
services from Shell, Texaco and Star, and therefore are not disclosed.

The joint venture agreements provide for the Company and Equilon to
determine the appropriate staffing levels for their businesses. To the extent
those staffing needs result in the elimination of positions from the ranks of
Shell, Texaco and Star, affected employees are entitled to termination benefits
provided for under the benefit plans of the applicable companies. Shell, Texaco
and Star, as the employer companies, are responsible for administering the
payment of benefits under their respective benefit plans. The Company and
Equilon are obligated to reimburse the employer companies for all costs
resulting from the elimination of positions in accordance with a formula
included in the joint venture agreements.

The formation of the Company and Equilon is expected to result in the
termination of 1,535 employees. Of this total, 869 employees have been
terminated through December 31, 1998. The remaining separations will be
substantially completed by mid-year 1999. In 1998 the Company recorded a charge
of $30 million for its share of reimbursable severance and other benefit costs.
The Company has reimbursed the employer companies $3 million in termination
benefits through December 31, 1998, and will make reimbursement for the
remaining benefits in future periods in accordance with the joint venture
agreements.

NOTE 11 -- CONTINGENT LIABILITIES

Except for environmental obligations, the Company generally did not assume
any contingent liabilities with respect to events occurring before July 1, 1998.

While it is impossible to ascertain the ultimate legal and financial
liability with respect to many contingent liabilities and commitments (including
lawsuits, claims, guarantees, federal regulations, environmental issues, etc.),
the Company has accrued amounts related to certain such liabilities. The Company
does not expect that the aggregate amount of commitments and contingent
liabilities in excess of amounts accrued at December 31, 1998, if any, will have
a material effect on the financial position or results of operations of the
Company.

103
<PAGE> 104
MOTIVA ENTERPRISES LLC

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12 -- TAXES

The Company, as a limited liability company, is not liable for income
taxes. Income taxes are the responsibility of the owners, with earnings of the
Company included in the owners' earnings for the determination of income tax
liability.

Excise taxes collected from consumers for governmental agencies that are
not included in revenues or expenses were $2,062 million for the six month
period ended December 31, 1998.

NOTE 13 -- SUBSEQUENT EVENT

On February 1, 1999 the Company and Equilon sold the Shell Proprietary
Credit Card Program to Associates First Capital Corporation. The proceeds from
the sale were assigned to the Company and Equilon based on the outstanding
receivable balances at the time of the sale. The credit card receivables sold
that were applicable to the Company amounted to $108 million.

104
<PAGE> 105

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NO.
- ------- ----------- --------
<C> <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. ....................................................... *
2.2 Asset Transfer and Liability Assumption Agreement dated as
of January 15, 1998 between Shell Oil and Texaco Inc. ...... *
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................... 106
(ii) Agreement for Research Services....................... *
21 Subsidiaries of the Registrant.............................. 107
23 Consent of Independent Accountants.......................... 108
24 Powers of Attorney.......................................... 109
27 Financial Data Schedule.....................................
</TABLE>

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

* Incorporated by reference; see Item 14c, page 42.

105

<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, EQUILON ENTERPRISES LLC
WESTHOLLOW TECHNOLOGY CENTER A DIVISION OF SHELL WESTHOLLOW TECHNOLOGY CENTER
EXPLORATION & PRODUCTION COMPANY
BELLAIRE TECHNOLOGY CENTER
</TABLE>

January 11, 1999
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 1999 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
1999, 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

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

Accepted and Agreed to:

Shell Internationale Research Maatschappij, B. V.

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

106

<PAGE> 1

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

<TABLE>
<CAPTION>
NAME FORMED 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
SOPC Holdings West LLC.................................... Delaware
Equilon Enterprises LLC................................ Delaware
SOPC Holdings East LLC.................................... Delaware
Motiva Enterprises LLC................................. Delaware
Shell Energy Investments 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 Investment Limited Partnership.... Delaware
Shell Onshore Ventures Inc. .................... Delaware
Shell Deepwater Royalties Inc. ................... Delaware
Shell Frontier Oil & 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, L.L.C............................. Delaware
Shell Consolidated Energy Resources Inc..................... Delaware
Shell Land & Energy Company............................... Delaware
Mimas, Inc............................................. Delaware
Tejas Energy LLC..................................... Delaware
Coral Energy, L.P.................................... 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, 1998, such subsidiaries considered in the aggregate as a single subsidiary
would not constitute a "significant subsidiary."

107

<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 March 5, 1999 appearing on page 44 of this
Form 10-K.

PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 5, 1999

108

<PAGE> 1

EXHIBIT 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:

Each person whose signature appears below constitutes and appoints Jack E.
Little, S.A. Lackey, and Jack B. Edrington, and each of them, his or her true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for such person and in his or her name, place and stead, in any
and all capacities, to sign the Shell Oil Company Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, and any and all amendments thereto, 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 or she 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.

IN WITNESS WHEREOF, the undersigned hereto set his or her hand this 4th day
of March, 1999.

/s/ JOSEPH E. ANTONINI /s/ RAND V. ARASKOG
- ----------------------------------------------------- -----------------------------------------------------
Joseph E. Antonini, Director Rand V. Araskog, Director

/s/ ROBERT F. DANIELL /s/ VILMA S. MARTINEZ
- ----------------------------------------------------- -----------------------------------------------------
Robert F. Daniell, Director Vilma S. Martinez, Director

/s/ STEVE L. MILLER /s/ MARK MOODY-STUART
- ----------------------------------------------------- -----------------------------------------------------
Steve L. Miller, Director Mark Moody-Stuart, Director

/s/ HAROLD A. POLING /s/ GORDON R. SULLIVAN
- ----------------------------------------------------- -----------------------------------------------------
Harold A. Poling, Emeritus Director Gordon R. Sullivan, Director

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

109

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

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 322
<SECURITIES> 0
<RECEIVABLES> 1,134
<ALLOWANCES> 2
<INVENTORY> 873
<CURRENT-ASSETS> 4,048
<PP&E> 24,179
<DEPRECIATION> 12,735
<TOTAL-ASSETS> 26,543
<CURRENT-LIABILITIES> 8,838
<BONDS> 490
0
0
<COMMON> 0
<OTHER-SE> 11,386
<TOTAL-LIABILITY-AND-EQUITY> 26,543
<SALES> 16,227
<TOTAL-REVENUES> 15,451
<CGS> 13,390
<TOTAL-COSTS> 13,621
<OTHER-EXPENSES> 2,949
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 392
<INCOME-PRETAX> (2,514)
<INCOME-TAX> (865)
<INCOME-CONTINUING> (1,727)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,727)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>