Management's Discussion and Analysis

Transactions in 1998

     In  January  1998,  Kerr-McGee  announced  its  intent to focus on two core
businesses, the exploration and production of oil and gas and the production and
marketing of titanium dioxide pigment.  Several major  transactions were part of
this strategic plan.
     The company also announced its intent to exit the coal business in January.
The  sales  were  completed  in July for  approximately  $600  million  cash and
resulted in an after-tax gain of $257 million.  The company also disposed of its
ammonium  perchlorate  operation in the first half of 1998 in a $39 million cash
sale. The gain on the sale was immaterial.
     Titanium dioxide pigment  production  capacity was  significantly  expanded
with the acquisition of an 80% interest in the Bayer AG (Bayer) European pigment
business.  The company has the option to acquire the  remaining  20% after March
31, 2001. The $97 million cash  transaction  was effective  March 31, 1998. This
acquisition increased annual production capacity by approximately 55%.
     Oil and gas production and exploratory prospects expanded with the purchase
of the North Sea assets of Gulf Canada Resources  Limited (Gulf Canada) for $422
million.  This transaction was effective March 31, 1998. The company's North Sea
production  and reserves were increased by 80% and 47%,  respectively,  compared
with year-end 1997.
     The merger with Oryx Energy  Company  (Oryx) was announced in October 1998.
As a  result  of the  merger  Kerr-McGee  is,  based  on  proven  reserves,  the
fourth-largest among the independent, non-integrated oil and gas exploration and
production companies base d in the United States.

Kerr-McGee/Oryx

     On February 26, 1999, the merger between  Kerr-McGee and Oryx was completed
(see Note 23). Oryx's operations have been merged into and will be reported with
the company's exploration and production segment.
     Under the merger agreement, each outstanding share of Oryx common stock was
exchanged   for  0.369  shares  of  newly  issued   Kerr-McGee   common   stock.
Approximately  39 million  shares of  Kerr-McGee  stock were  issued to the Oryx
shareholders,  bringing  total shares  outstanding  at February 26, 1999,  to 86
million.  The existing  Oryx debt ($1.3 billion at December 31, 1998) has become
the company's  obligation.  The Oryx 7-1/2% convertible  debentures due 2014 are
convertible into shares of Kerr-McGee common stock at a conversion rate adjusted
to reflect the exchange ratio.
     The merger is being accounted for using the pooling of interests  method of
accounting.  Therefore,  all  prior  period  results  of  operations,  financial
position  and cash flows will be  restated to reflect  the  combined  company as
though it had always been in  existence.  These  results  will be presented in a
Form 8-K to be filed with the Securities and Exchange Commission in mid-1999.
     The financial  statements  and related notes included in this Annual Report
to Stockholders  and this  Management's  Discussion and Analysis pertain only to
the operations of Kerr-McGee Corporation as it existed at December 31, 1998, and
therefore do not reflect the results of operations,  financial  position or cash
flows of Oryx.

Operating Environment and Outlook
  
     The merger with Oryx  creates a much larger  global oil and gas reserve and
production  base.  The company's  management  expects the benefits of the pretax
synergies of the two organizations to be $100 million annually.
     Oil prices in early 1999 are at their  lowest  level since 1985.  The Asian
and South  American  economic  downturns  have reduced  demand,  and prices have
remained low for approximately 18 months.  These low oil prices have forced most
exploration  and  production  companies  to reduce  capital  budgets.  Crude oil
inventories  declined in early 1999,  which indicates that world oil consumption
is higher than production.  Management  recognizes that supply restraint by OPEC
and a few larger non-OPEC  producers  remains a risk to commodity  pricing,  but
believes  prices will rise because of the high levels of internal  political and
economic  risk in major  producing  nations,  increasing  demand  and the likely
reduction of crude oil stocks.
     In early 1999, gas markets in the United States have seen weakened  pricing
due to a warm winter and high storage  volumes.  Management  believes the severe
downturn in drilling on the shallow Gulf of Mexico shelf has already reduced gas
deliverability.  This lack of  investment,  the long startup  time  required for
deepwater  projects  and  increasing  demand for natural gas in  environmentally
friendly power generation  should  contribute to higher prices later in 1999 and
support them over the longer term.
     The company expanded its titanium dioxide pigment capacity by approximately
55% in 1998. Pigment prices for 1998 increased due to economic growth, mainly in
North America and Europe,  rising about 14% in the domestic  market and slightly
higher in certai n international  markets.  Demand in early 1999 is about 90% of
industry capacity. Management believes that pigment consumption will remain flat
in 1999,  which is likely to equate to a flat  pricing  structure.  To  maximize
profits, the company is focused on optimizing  manufacturing processes to reduce
costs.

Results of Consolidated Operations

     Net income and per-share  amounts for each of the three years in the period
ended December 31, 1998, were as follows:

(Millions of dollars, except per-share amounts)         1998     1997     1996
------------------------------------------------------------------------------
 Net income                                             $ 50     $194     $220
 Income from continuing operations
   excluding special items                                37      151      174
 Net income per share -
   Net income -
        Basic                                           1.06     4.06     4.45
        Diluted                                         1.06     4.04     4.43
   Income from continuing operations
     excluding special items -   
        Basic                                            .77     3.17     3.52
        Diluted                                          .77     3.15     3.50

     Net income was impacted by a number of special  items in each of the years.
In 1998,  special items related primarily to impairment  write-downs  reflecting
the  current  market  value of certain of the  company's  oil and gas  producing
fields  and  certain  chemical   facilities.   Other  1998  special  items  were
principally nonoperating and reduced net income by an additional $14 million. In
1997, special items were also principally  nonoperating and increased net income
by $10 million. The 1996 special items resulted in a charge to net income of $10
million and were both  operating  and  nonoperating.  These special items affect
comparability  between the periods  and are shown on an  after-tax  basis in the
following table,  which reconciles income from continuing  operations  excluding
special items to net income.

(Millions of dollars)                                   1998     1997     1996
------------------------------------------------------------------------------
Income from continuing
  operations excluding special items                    $ 37     $151     $174
                                                        ----     ----     ----
Special items, net of income taxes -
  Asset impairment                                      (250)      --      (16)
  Equity affiliate's full-cost
    ceiling writedown                                    (27)      --       --
  Net provision for environmental
    reclamation and remediation of
    inactive sites                                       (26)     (13)     (28)
  Gains (losses) on the sale of nonstrategic
    oil and gas properties                               (12)       4        8
  Restructuring                                           (4)      (1)     (7)
  Pending/settled litigation                              --       (1)     (21)
  Settlement of prior years' income taxes                 41       --        --
  Settlements with insurance carriers                      8        8       44
  Effect of United Kingdom 
    tax-rate change                                        8       --       --
  Gains on the sale of equity securities                  --       12       15
  Other, net                                              (2)       1       (5)
                                                        ----     ----     ---- 
    Total                                               (264)      10      (10)
                                                        ----     ----     ---- 
Income from discontinued operations,
  net of income taxes                                    277       33       56
                                                        ----     ----     ----
Net income                                              $ 50     $194     $220
                                                        ====     ====     ====

     The company  sold its coal  operations  in 1998,  resulting in an after-tax
gain of $257 million.  All amounts related to coal are shown in the Consolidated
Statement of Income as discontinued operations.
     Income from continuing operations excluding special items for 1998 declined
$114 million from 1997.  This primarily  resulted from a $165 million decline in
exploration and production  operating profit excluding special items,  which was
partially off set by a $31 million increase in chemical results. In 1997, income
from continuing  operations  excluding  special items decreased $23 million from
the prior year,  due  primarily  to declines of 25% and 7% in  operating  profit
excluding   special  items  of   exploration   and   production   and  chemical,
respectively. The merger of the company's North American onshore properties into
Devon Energy  Corporation  (Devon) was effective  December 31, 1996, and affects
the comparability of 1997 and 1996 operating profit. The company's investment in
Devon is accounted for using the equity method,  and the related results are not
included in  operating  profit in 1998 and 1997 (see Note 4).  Operating  profit
excluding  special  items was $128  million,  $262  million and $326 million for
1998, 1997 and 1996, respectively.
     Sales from  continuing  operations were $1.4 billion in both 1998 and 1997,
compared  with $1.6 billion in 1996.  Declines in 1998 average  sales prices for
oil and natural gas of 36% and 15%,  respectively,  were offset by sales  volume
increases in crude oil, natural gas and titanium dioxide pigment and sales price
increases for pigment.  The volume  increases in crude oil and natural gas sales
were  primarily  a result of the  company's  purchase of the North Sea assets of
Gulf Canada.  Volume  increases in titanium dioxide sales relate to the purchase
of an 80% interest in Bayer's European  pigment  operations and the expansion of
the pigment facility in Hamilton, Mississippi. Sales for 1997 were less than the
prior year due to lower crude oil prices and volumes,  lower natural gas volumes
and lower  average  prices for  titanium  dioxide  pigment.  Oil and gas volumes
declined  primarily due to the merger of the North American  onshore  properties
into Devon,  divestitures of  nonstrategic  properties and  significantly  lower
sales of natural gas purchased from third parties.  Partially  offsetting  these
declines were higher prices for natural gas and increased pigment volumes.
     Costs and  operating  expenses  were $818  million,  $739  million and $804
million for 1998, 1997 and 1996,  respectively.  The 1998 amount was higher than
the prior year principally due to costs of the new European  pigment  operations
and  higher  per-unit  costs  at  the  domestic  pigment  and  synthetic  rutile
facilities. This was offset by the absence of costs of natural gas purchased for
resale.  Costs and  operating  expenses for 1997 were lower than the prior year,
primarily due to the absence of North American  onshore and divested oil and gas
properties and significantly  lower volumes of natural gas purchased for resale,
partially offset by higher production costs for pigment.
     Following are general and administrative expenses for 1998, 1997 and 1996:

(Millions of dollars)                                   1998     1997     1996
------------------------------------------------------------------------------
General and administrative expenses
  excluding special items                               $135     $109     $106
                                                        ----     ----     ----
Special items -
  Net provision for environmental
    reclamation and remediation of
    inactive sites                                        41       20       43
  Restructuring                                            3        2       10
  Pending/settled litigation                              --        2       29
  Other, net                                              (3)       3        9
                                                        ----     ----     ----
    Total                                                 41       27       91
                                                        ----     ----     ----
General and administrative expenses                     $176     $136     $197
                                                        ====     ====     ====

     The increase in 1998 vs. 1997 general and administrative expenses primarily
resulted  from  additional  costs  related  to the  company's  European  pigment
operations, which were acquired March 31, 1998. Net provisions for environmental
reclamation  and remediation of inactive sites  primarily  represent  additional
provisions  established for the removal of low-level  radioactive materials from
the company's  inactive  facility and offsite  areas in West Chicago,  Illinois.
Restructuring  charges  are for a 1998 work  process  review and  organizational
restructuring of several groups, the 1996-1997 relocation of the exploration and
production unit to Houston, Texas, and severance associated with the divestiture
program and the Devon merger.
     Asset impairment  totaled $370 million in 1998 and $25 million in 1996 (see
Note 10). Of the 1998 amount,  $313 million was for writedowns  associated  with
certain  oil and gas  fields  located  in the North  Sea,  China and the Gulf of
Mexico. Asset impairment of $57 million was also recognized for certain chemical
facilities in Idaho and Alabama.  The  impairments  were recorded  because these
assets were no longer  expected to recover their net book values  through future
cash flows. The 1996 asset impairment related principally to certain oil and gas
exploration and production properties in the Gulf of Mexico.
     Exploration costs for 1998, 1997 and 1996 were $84 million, $65 million and
$74 million,  respectively.  The 1998 increase was the result of higher dry hole
costs  in  the  Gulf  of  Mexico  and  Thailand,  higher  undeveloped  leasehold
amortization in the Gulf of Mexico and higher district  expense in China and the
North  Sea,  partially  offset  by lower  dry hole  costs  in  China  and  lower
geological  expenses.  Lower dry hole costs in the North Sea,  offset in part by
higher costs in China,  were the primary reason for the reduced 1997 costs. Also
contributing  to  the  reduction  was  lower  undeveloped  lease   amortization,
partially offset by higher geophysical cost.
     Interest and debt expense  totaled $58 million in 1998, $47 million in 1997
and $52 million in 1996. Borrowings increased in 1998 due to the acquisitions of
European  chemical  operations and North Sea oil and gas assets.  Decreased debt
was the  principal  reason for the lower 1997  expense,  compared with the prior
year.
     Other income was as follows for each of the years in the three-year  period
ended December 31, 1998:

(Millions of dollars)                                   1998     1997     1996
------------------------------------------------------------------------------
Other income excluding special items                     $37      $47     $ 29
                                                         ---      ---     ----
Special items -
  Interest income from settlement
    of prior years' income taxes                          19       --       --
  Settlements with insurance carriers                     12       12       67
  Equity affiliate's full-cost ceiling
    writedown                                            (27)      --       --
  Gains (losses) on the sale of nonstrategic
    oil and gas properties                               (19)       6       13
  Gains on sales of equity securities                     --       18       23
  Other, net                                              --        7       --
                                                         ---      ---     ----
    Total                                                (15)      43      103
                                                         ---      ---     ----
Other income                                             $22      $90     $132
                                                         ===      ===     ====

     Lower  equity  earnings  from  unconsolidated  affiliates  were the primary
reason for the decline in 1998 other income  excluding  special items,  compared
with the prior year.  Equity earnings from the Devon investment were impacted by
lower oil and gas prices and decreased $14 million for 1998, compared with 1997.
In 1997,  equity  earnings from Devon were $23 million and contributed to higher
other income, as compared with 1996.

Segment Operations

     Operating  profit (loss) from each of the company's  segments is summarized
in the following table:

(Millions of dollars)                                   1998     1997     1996
------------------------------------------------------------------------------
Operating profit excluding special items -
  Exploration and production                           $  13     $178     $236
  Chemicals                                              115       84       90
                                                       -----     ----     ----
    Total                                                128      262      326
Special items                                           (374)      (6)     (37)
                                                       -----     ----     ---- 
Operating profit (loss)                                $(246)    $256     $289
                                                       =====     ====     ====

Exploration and Production
     Exploration and production  sales,  operating  profit (loss) and production
and sales statistics are shown in the following table:

(Millions of dollars, except per-unit amounts)          1998     1997     1996
------------------------------------------------------------------------------
Sales                                                 $  463   $  628   $  874
                                                      ======   ======   ======

Operating profit excluding special items              $   13   $  178   $  236
Special items                                           (315)      (3)     (32)
                                                      ------   ------   ------ 

Operating profit (loss)                               $ (302)  $ 175    $  204
                                                      ======   =====    ======

Net proprietary crude oil and condensate
  produced (thousands of barrels per day)                 67       57       69
Average price of crude oil sold (per barrel)          $11.88   $18.51   $19.16
Proprietary natural gas sold (MMCF per day)              198      184      281
Average price of natural gas sold (per MCF)           $ 2.18   $ 2.56   $ 2.12

     Asset impairment for certain oil and gas fields in the North Sea, China and
Gulf of Mexico  totaled $313 million in 1998 and is reflected in special  items.
Special items in 1997  consisted  primarily of  additional  costs for the unit's
restructuring and relocation to Houston,  Texas. The 1996 special items were $22
million  for asset  impairment  and $10 million  for  restructuring,  due to the
December 1996 merger of the North American onshore properties into Devon and the
announcement of the relocation of certain  exploration and production  personnel
to Houston, Texas.
     Increases in 1998 production volumes of both oil and gas did not offset the
large price declines. As a result,  operating profit excluding special items was
negatively impacted by approximately $100 million. The volume increase primarily
resulted  from the  acquisition  of  additional  North Sea assets.  In addition,
exploration  expenses increased and contributed to the 1998 decline in operating
profit from 1997. The primary reasons for lower 1997 operating  profit excluding
special  items,  compared  with  1996,  were  equity  accounting  for the merged
properties  and lower  average sales prices for crude oil,  partially  offset by
increased sales prices for natural gas and lower exploration expenses.

Chemicals
     Chemical sales and operating profit are shown in the following table:

(Millions of dollars)                                   1998     1997     1996
------------------------------------------------------------------------------
Sales                                                 $  933   $  760   $  692
                                                      ======   ======   ======
Operating profit excluding special items              $  115   $   84   $   90
Special items                                            (59)      (3)      (5)
                                                      ------   ------   ------ 
Operating profit                                      $   56   $   81   $   85
                                                      ======   ======   ======

     Asset impairment totaled $57 million for noncore chemical assets in Alabama
and Idaho in 1998 and is included in special items.  In addition,  $2 million of
severance charges were recorded as special items in 1998.  Special items in 1997
were  primarily  for  the  write-off  of  obsolete  equipment  and in  1996  for
impairment  and  shutdown  costs  for  a  crosstie-treating   facility  and  the
elimination of a product line at a specialty plant.
     Titanium dioxide pigment prices increased throughout 1998. This improvement
in  pricing,   along  with  the  company's   acquisition   of  the  104,000  net
metric-ton-per-year  European  pigment  operations  from Bayer and a full year's
production  from  the  27,000  metric-ton-per-year  expansion  of the  company's
Hamilton,  Mississippi,  plant,  were the primary  reasons for the $173  million
increase in chemical  sales.  These sales  increases  were  partially  offset by
higher  per-unit costs for pigment,  synthetic  rutile and certain  electrolytic
products,  resulting in a $31 mill ion increase in  operating  profit  excluding
special  items.  The  increase in 1997  sales,  compared  with 1996,  was due to
increased  titanium  dioxide  pigment and ammonium  perchlorate  sales  volumes.
Partially offsetting these increases were lower average pigment prices. Although
prices  strengthened  considerably  in the  last  half of 1997,  average  prices
received  over the year were less than those  received in 1996.  The higher 1997
pigment  volumes  resulted from the completion of the expansion at the Hamilton,
Mississippi,  plant  and  a  full  year's  production from the 1996 expansion in
Western Australia.

Financial Condition

(Millions of dollars)                                   1998     1997     1996
------------------------------------------------------------------------------
Current ratio                                            1.4      1.3      1.7
Working capital                                       $  215   $  166   $  320
Total debt                                               944      579      663
Total debt less cash                                     830      396      542
Stockholders' equity                                  $1,333   $1,440   $1,367
Total debt to total capitalization                        41%      29%      33%
Floating-rate debt to total debt                          46       11       66

Cash Flow
     Net cash provided by operating activities was $99 million in 1998, compared
with $569 million in 1997 and $645 million in 1996.
     The decrease in 1998  resulted  primarily  from  working  capital and other
changes that used cash from operating activities and lower net operating income.
Net cash  provided  by  operating  activities  was reduced by taxes paid of $115
million related to the sale of the discontinued coal operations.
     The decrease in 1997 net cash  provided by operating  activities,  compared
with 1996,  resulted  primarily  from lower net income,  lower noncash  charges,
higher  cash  environmental   expenditures  and  lower  deferred  income  taxes,
partially  offset by working  capital and other changes that  increased net cash
provided by operating activities.  Cash flow provided by operating activities in
1997 was also adversely  affected by the company's  merger of its North American
onshore oil and gas properties  into Devon,  since  undistributed  earnings from
equity  affiliates  represent a noncash item. The net cash provided by operating
activities  in 1996 was  primarily  attributable  to the  company's  record  net
income.
     In 1998, approximately $600 million in cash was provided from proceeds from
the sales of the company's  discontinued  coal operations,  $39 million from the
sale of the ammonium perchlorate operations and $21 million from other investing
activities.  These sources of cash from  investing  activities  and net proceeds
from debt issuances of $362 million were used for capital  expenditures  of $550
million and  acquisitions  of $518  million for the Gulf Canada North Sea assets
and the European titanium dioxide pig ment facilities.
     In  both  1997  and  1996,  cash  provided  by  operating   activities  was
supplemented  by other  sources of cash that were used  primarily to reduce debt
and purchase the company's  common stock (see Note 13). In 1997,  cash available
increased $21 million from the sale of equity  securities,  $18 million from the
sale of nonstrategic  and marginal  exploration and production  properties,  $17
million  from the sale of other  assets and $21  million  related  to  insurance
settlements. During 1996, the company received cash proceeds of $48 million from
the divestiture of nonstrategic,  marginal and other  exploration and production
properties;  $43 million related to insurance settlements;  $29 million from the
sale of equity  securities;  $13 million from the sale of the remaining refining
and marketing assets;  and $11 million from the sale of other assets,  including
the company's West Virginia coal mining operation.
     The company's  Board of Directors  authorized a stock  purchase  program in
1998. A total of $25 million  (580,000  shares) was purchased before the program
was cancelled because of the company's merger with Oryx. The 1995 stock purchase
program was completed in August 1997 with  expenditures  of $60 million in 1997,
$195 million in 1996 and $45 million in 1995.  A total of  4,829,000  shares was
purchased through this program.
     On January 14, 1997, the company's Board of Directors  approved an increase
in the quarterly dividend payable April 1, 1997, to $.45 per share from $.41 per
share.

Liquidity
     The company's  balance sheet reflects a solid working capital  position and
low debt to capitalization.  The company's debt has been rated "A", "A3" or "A-"
by various rating agencies,  resulting in low debt costs. In connection with the
merger with Oryx, the rating  agencies have reviewed the company's debt ratings.
The company has been notified that the new ratings are "BBB+",  "Baa1" and "BBB"
for its senior  unsecured debt.  This reflects the substantial  increase in debt
leverage  because of the  assumption of Oryx debt  obligations.  At December 31,
1998, the company's net working capital  position was $215 million,  an increase
of $49 million from the prior year.  The  strengthening  of the working  capital
position was directly  attributable  to increases in  receivables  and inventory
generated by the company's  European  pigment  operations  since  acquisition in
March 1998. The 1997 net working  capital  position was $166 million,  a decline
from the 1996  year-end  position.  The merger of the company's  North  American
onshore exploration and production  properties  contributed to the lower working
capital  position,  since certain  components of working  capital were converted
into the Devon equity investment.
     At year-end 1998, total debt  outstanding was $944 million.  The percentage
of total debt to total  capitalization  was 41% at  December  31,  1998;  29% at
December 31, 1997; and 33% at year-end  1996. The higher  percentage at year-end
1998  resulted  from the increase in borrowings  due to the  acquisition  of the
North Sea assets and European pigment  operations and capital  expenditures that
totaled more than the cash proceeds from the sales of the coal  operations.  The
improvement  in the 1997  percentage was the direct result of repayment of debt,
which  more  than  offset  the  effect of the stock  purchase  program  on total
capitalization.
     The company last issued publicly held debt in October 1997. The majority of
the then  outstanding  floating-rate  debt was  replaced  with $300  million  of
fixed-rate securities - $150 million of 7.125% debentures (effective rate 7.01%)
due October 15, 2027,  and $150 million of 6.625% notes  (effective  rate 6.54%)
due October 15, 2007.
     Additionally,  the company and/or its subsidiaries  have several  revolving
credit  agreements.  At year-end 1998,  $281 million was  outstanding  under the
agreements  with interest  payable at varying  rates.  At December 31, 1998, the
company  had unused  lines of credit and  revolving  credit  facilities  of $525
million.  Of this amount,  $345 million and $90 million could be used to support
the  commercial  paper  borrowings of Kerr-McGee  Credit LLC and  Kerr-McGee Oil
(U.K.) PLC, respectively, both wholly owned subsidiaries.
     In 1998, one of the company's  wholly owned U.K.  subsidiaries,  Kerr-McGee
Resources  Limited,  entered into a $76 million revolving credit  agreement,  of
which $71 million was outstanding at year-end. This agreement permits borrowings
through May 15, 2003.
     Another   facility  entered  into  during  1998  allows  for  the  European
operations  to  borrow  up to 500  million  Belgian  francs  (approximately  $14
million) and is renewable annually.  At December 31, 1998, an amount equal to $8
million was outstanding under this arrangement. Subsequent to year-end 1998, the
company and  Kerr-McGee  Oil (U.K.) PLC  notified the lead bank of the intent to
eliminate a $75 million  credit  facility.  On February  26,  1999,  the company
signed two new revolving credit agreements, a 3-year $500 million facility and a
364-day $250 million facility. Initially, one-third of the borrowings under each
of these agreements can be made in British pounds sterling, euros or other local
European Union currencies.  Interest for each of the revolving credit agreements
is payable at varying rates.
     At December 31, 1998, the company classified $400 million of its short-term
obligations as long-term debt. Final settlement of these obligations, consisting
of revolving credit borrowings and commercial paper, is not expected to occur in
1999.  The company has the intent and the  ability,  as  evidenced  by committed
credit arrangements,  to refinance this debt on a long-term basis. The company's
practice  has  been  to  continually   refinance  its  commercial  paper,  while
maintaining levels believed to be appropriate.
     The company  finances capital  expenditures  through  internally  generated
funds and various  borrowings.  Cash capital  expenditures  were $550 million in
1998,  $341 million in 1997 and $392  million in 1996, a total of $1.3  billion.
During this same  period,  $1.6  billion of net cash was  provided by  operating
activities (exclusive of working capital and other changes), which exceeded cash
capital  expenditures and dividends paid during the period by approximately  $20
million.
     Management  anticipates  that 1999  cash  capital  requirements,  currently
estimated  at  $545  million  after  the  merger  with  Oryx,  and  the  capital
expenditures  programs  for the next  several  years can continue to be provided
through  internally  generated funds and selective  short-term  and/or long-term
borrowings.

Market Risks

     The company is exposed to a variety of market risks,  including the effects
of movements in foreign  currency  exchange  rates,  interest  rates and certain
commodity prices.  The company addresses its risks through a controlled  program
of risk  management that includes the use of derivative  financial  instruments.
The company does not hold or issue derivative financial  instruments for trading
purposes.  See  Notes  1 and 15 to the  Consolidated  Financial  Statements  for
additional  discussion  of  the  company's  financial  instruments  and  hedging
activities.

Foreign Currency Exchange
     The U.S. dollar is the functional currency for the company's  international
operations,  except for its European  chemical  operations.  It is the company's
intent to hedge a portion of its monetary assets and liabilities  denominated in
foreign currencies. Periodically, the company purchases foreign currency forward
contracts to provide funds for operating  and capital  expenditure  requirements
that will be denominated in foreign currencies, primarily Australian dollars and
British pounds sterling.  These contracts  generally have durations of less than
three years. The company also enters into forward contracts to hedge the sale of
various foreign currencies,  principally  generated from accounts receivable for
titanium  dioxide  pigment  sales  denominated  in  foreign  currencies.   These
contracts are principally  for European  currencies and generally have durations
of less than a year.  Since these  contracts  qualify as hedges and correlate to
currency movements, any gains or losses resulting from exchange rate changes are
deferred and  recognized as  adjustments  of the hedged  transaction  when it is
settled in cash.
     At year-end 1998 and 1997, the company's derivative  financial  instruments
were comprised only of foreign  currency  forward  contracts.  Following are the
notional amounts at the contract  exchange rates,  weighted-average  contractual
exchange rates and estimated fair value by contract  maturity for open contracts
at year-end 1998 and 1997 to purchase (sell) foreign currencies. All amounts are
U.S. dollar equivalents.
<TABLE>
<CAPTION>

                                                           Notional  Weighted-Average   Estimated Fair
(Millions  of  dollars,  except  average  contract  rate)    Amount     Contract Rate            Value
------------------------------------------------------------------------------------------------------
<S>                                                             <C>          <C>                  <C>            
Open contracts at December 31, 1998 -
  Maturing in 1999 -
    Australian dollar                                           $56             .7117             $48
    German mark                                                  (1)           1.6745              (1)
  Maturing in 2000 -
    Australian dollar                                            21             .6145              21

Open contracts at December 31, 1997 - 
  Maturing in 1998 -
    Australian dollar                                            63             .7507              55
    British pound sterling                                       12            1.5897              12
    German mark                                                  (3)           1.7721              (3)
    British pound sterling                                       (1)            .6137              (1)
    Belgian franc                                                (1)          36.0382              (1)
  Maturing in 1999 -
    Australian dollar                                            39             .7377              35
</TABLE>


Interest Rates
     The company's  exposure to changes in interest  rates relates  primarily to
long-term  debt  obligations.  The company  does not  currently  participate  in
interest rate-related derivative financial instruments.
     The table below  presents  principal  amounts and related  weighted-average
interest  rates by maturity date for the company's  long-term  debt  obligations
outstanding at year-end 1998. All borrowings are in U.S. dollars.
<TABLE>
<CAPTION>

                                                                                There-           Fair Value
(Millions of dollars)               1999    2000     2001     2002     2003     after   Total      12/31/98
-----------------------------------------------------------------------------------------------------------
<S>                                 <C>     <C>      <C>      <C>      <C>       <C>     <C>           <C>
Fixed-rate debt -
  Principal amount                    $7     $13     $ 12     $ 10      $ 6      $460    $508          $617
  Weighted-average
    interest rate                   9.57%   8.99%    9.61%    9.61%    9.61%     6.98%   7.21%
Variable-rate debt -
  Principal amount                    --     $65     $129     $135      $71        --     400          $400
  Weighted-average
    interest rate                     --    5.43%    6.32%    5.55%    5.58%       --    5.78%

</TABLE>

     At December 31,  1997,  long-term  debt  included  fixed-rate  debt of $517
million  (fair value - $632 million)  with a  weighted-average  interest rate of
7.25% and $37 million  variable-rate debt, which approximated fair value, with a
weighted-average interest rate of 6.04%.

Commodity Prices
     Although no such  contracts  were  entered  into  during 1998 or 1997,  the
company has periodically  used commodity futures and option contracts to hedge a
portion of its crude oil and natural gas sales and  natural  gas  purchased  for
operations in order to minimize the price risks  associated  with the production
and  marketing of crude oil and natural gas.  Since the  contracts  qualified as
hedges and correlated to price  movements of crude oil and natural gas, any gain
or loss from these  contracts was explicitly  deferred and recognized as part of
the hedged transaction.

Environmental Matters

     The  company's  operations  are subject to various  environmental  laws and
regulations. Under these laws, the company is subject to possible obligations to
remove or mitigate the effects on the  environment of the disposal or release of
certain  chemical,  petroleum or  low-level  radioactive  substances  at various
sites,  including  sites that have been  designated  Superfund sites by the U.S.
Environmental   Protection   Agency   (EPA)   pursuant   to  the   Comprehensive
Environmental  Response,  Compensation  and Liability Act of 1980  (CERCLA),  as
amended. At December 31, 1998, the company had received notices that it has been
named a potentially  responsible  party (PRP) with respect to the remediation of
13 existing  EPA  Superfund  sites and may share  liability  at certain of these
sites. In addition,  the company and/or its  subsidiaries  have executed consent
orders,  operate  under a license or have reached  agreements to perform or have
performed  remediation or remedial  investigations  and  feasibility  studies on
sites not included as EPA Superfund sites.
     The  company  does not  consider  the number of sites for which it has been
named a PRP to be a relevant  measure of liability.  The company is uncertain as
to its  involvement  in  many  of the  sites  because  of  continually  changing
environmental laws and regulations;  the nature of the company's businesses; the
large number of other PRPs;  the present  state of the law,  which imposes joint
and several liability on all PRPs under CERCLA;  and pending legal  proceedings.
Therefore,  the company is unable to reliably  estimate the potential  liability
and the  timing  of  future  expenditures  that  may  arise  from  many of these
environmental  si tes.  Reserves have been  established  for the remediation and
reclamation  of active and inactive sites where it is probable that future costs
will be incurred and the liability is estimable.  In 1998, $88 million was added
to the  reserve  for active and  inactive  sites.  At  December  31,  1998,  the
company's reserve for these sites totaled $226 million. In addition, at year-end
1998,  the  company  had a reserve of $73  million  for the future  costs of the
abandonment and removal of offshore well and production facilities at the end of
their productive  lives. In the Consolidated  Balance Sheet, $216 million of the
total reserve is classified as a deferred credit,  and the remaining $83 million
is included in current liabilities.
     Expenditures for the environmental protection and cleanup of existing sites
for each of the last three years and for the  three-year  period ended  December
31, 1998, are as follows:

(Millions of dollars)                      1998   1997   1996   Total
---------------------------------------------------------------------
 Charges to environmental reserves         $105   $ 94   $ 56    $255
 Capital expenditures                        24     17     15      56
 Recurring expenses                          13     20     19      52
                                           ----   ----   ----    ----
   Total                                   $142   $131   $ 90    $363
                                           ====   ====   ====    ====

     The  company  has  not  recorded  in  the  financial  statements  potential
reimbursements  from  governmental  agencies or other third parties (see Notes 9
and 12).  The  following  table  reflects  the  company's  portion  of the known
estimated  costs  of  investigation  and/or  remediation  that is  probable  and
estimable. The table includes all EPA Superfund sites where the company has been
notified it is a PRP under CERCLA and other sites for which the company believes
it had some ongoing financial involvement in investigation and/or remediation at
year-end 1998.
<TABLE>
<CAPTION>


                                                                                  Total Known            Total
                                                                                    Estimated     Expenditures        Total Number
                                                                                        Costs     Through 1998     of Identifiable
Location of Site                  Stage of Investigation/Remediation                   (Millions of dollars)                  PRPs
----------------------------------------------------------------------------------------------------------------------------------

<S>                               <C>                                                    <C>              <C>                  <C>
EPA Superfund sites
  Milwaukee, Wis.                 Executed consent decree to remediate the site of
                                  a former wood-treating facility.  Awaiting approval
                                  of proposed remedy; installed and operating a free-
                                  product recovery system.                               $ 15             $  7                   3

  West Chicago, Ill., two sites   Began cleanup of a portion of one site in 1995, and
  outside the facility            cleanup of the second site began in 1997 (see Note 9).   58               50                   1

  Chicago, Ill., and nine sites
  individually not material       Various stages of investigation/remediation.             32               28                 138
                                                                                         ----             ----                 ---
                                                                                          105               85                 142
                                                                                         ----             ----                 ===
Non-EPA Superfund sites under
consent order, license or
agreement
   West Chicago, Ill., facility   Reached agreement with the City of West Chicago.
                                  Decommissioning is in progress under State of Illinois
                                  supervision while awaiting state license amendment
                                  (see Note 9).  Began shipments to a permanent
                                  disposal facility in 1994.                              385              225
                  
   Cleveland/Cushing, Okla.       Began cleanup in 1996.                                   63               47
                                                                                         ----             ----
                                                                                          448              272
                                                                                         ----             ----
   Non-EPA Superfund sites
   individually not material                                                              213              183
                                                                                         ----             ----

     Total for all sites                                                                 $766             $540
                                                                                         ====             ====

</TABLE>

     Management  believes adequate reserves have been provided for environmental
and all other  known  contingencies.  However,  it is possible  that  additional
reserves  could  be  required  in  the  future  due  to  the  previously   noted
uncertainties.

Year 2000 Readiness

     In 1996,  the company  established a formal Year 2000 Program  (Program) to
assess  and  correct  Year 2000  problems  in both  information  technology  and
non-information  technology  systems.  The Program is  organized  into two major
areas:  business  systems and facilities  integrity.  Business  systems  include
replacement  and upgrade of computer  hardware  and  software,  including  major
business  applications such as purchasing,  inventory,  engineering,  financial,
human resources, etc. Facilities integrity encompasses telecommunications, plant
process  controls,  instrumentation  and  embedded  chip  systems  as well as an
assessment of third-party Year 2000 readiness.  The Program is generally divided
into the following phases:

  - Identification  and  evaluation  of  systems  that  need  to  be modified or
    replaced.
  - Remediation work to modify existing systems or install new systems.
  - Testing and validation of systems and applications.

     An integral  part of the  Program is  communication  with third  parties to
assess the status of their Year 2000 efforts.  Formal  communications  have been
initiated with critical  suppliers to determine  whether their operations and/or
the products and  services  provided to the company will be Year 2000 ready.  In
addition,  the  company  has  contacted  key  customers  requesting  information
regarding their Year 2000 readiness. The company continues to evaluate responses
and make additional inquiries as needed.
     The  company is also  developing  contingency  plans which  include  manual
systems and other procedures to accommodate  significant  disruptions that could
be caused by system  failures.  When possible,  alternative  providers are being
identified in the event that certain critical suppliers are unable to provide an
acceptable level of service to the company.
     At December 31, 1998, approximately 99% of the planned work on the business
systems had been  completed,  with all phases  completed in the first quarter of
1999.  Most of these  projects  were  system  replacements  to improve  business
functionality  and were not  undertaken  solely  because  of Year  2000  issues.
Approximately  70%  of  the  planned  work  on  facilities  integrity  was  also
completed. These activities are expected to be completed by the third quarter of
1999.   Ongoing  work  in  the  areas  of  contingency   planning,   third-party
communications  and Year 2000 response team training is expected through the end
of 1999.
     Inception-to-date  Program  expenditures  totaled  $42  million at year-end
1998,  which  includes  $16 million  spent during  1998.  The total  capital and
operating  costs to achieve Year 2000  readiness are estimated to be $45 million
over  the  period  of the  Program,  which  is  not  material  to the  company's
consolidated  results of operations,  financial position or cash flows.  Program
expenditures  are provided  through  internally  generated  funds and  selective
short-term and/or long-term borrowings.
     The merger with Oryx was  completed in the first  quarter of 1999,  and the
Year 2000 programs of the companies were combined.  Approximately  75% of Oryx's
business  systems  will be  replaced  with  Kerr-McGee's  Year  200  0-compliant
systems.  The  remaining  business  systems  will be  modified  to be Year  2000
compliant by the third quarter of 1999. The status of the  facilities  integrity
is being assessed and will be included in the company's Program.  Therefore, the
cost  and  progress  of the  Kerr-McGee  Program  will be  impacted  and  future
disclosures adjusted appropriately.
     The  failure  to  correct a  material  Year 2000  problem  could  result in
disruption  to some  aspects of the  company's  normal  business  activities  or
operations.  Such failures could have a material adverse effect on the company's
results of operations  and cash flows in a particular  quarter or annual period.
Management  believes  that the Program is  comprehensive  and reduces  Year 2000
risks  associated  with internal  systems to a manageable  level.  Regardless of
management's  efforts to assess and verify readiness,  there can be no assurance
that all  entities  with  which  the  company  does  business  will be Year 2000
compliant.  Contingency  plans are being  developed to address  these  concerns.
However,  failure by a third  party to  remediate  Year 2000  issues in a timely
manner  could  have a  material  adverse  effect  on the  company's  results  of
operations and cash flows in a particular  quarter or annual period.  This would
most likely  result from failure of critical  operating or safety  components or
the failure of a key third-party supplier or customer.

New Accounting Standards

     In March 1998,  the  American  Institute of  Certified  Public  Accountants
issued  Statement  of  Position  (SOP) No.  98-1,  "Accounting  for the Costs of
Computer Software  Developed or Obtained for Internal Use." Amounts  capitalized
or expensed by the company for internal-use  software  projects are not expected
to differ  materially as a result of the SOP,  since the  prescribed  accounting
treatment is fairly consistent with the company's current accounting policy. The
effect of the SOP is to be  recognized  prospectively  and is effective for 1999
financial statements.
     SOP No. 98-5,  "Reporting on the Costs of Start-Up  Activities," was issued
in April 1998. It requires that costs related to start-up activities,  including
organization  costs,  be expensed as  incurred.  The SOP will be adopted for the
first quarter of 1999, and the company will recognize  approximately  $6 million
($4  million  after  income  taxes) as the  cumulative  effect of the  change in
accounting  principle.  These costs were carried as deferred charges at year-end
1998.
     In June 1998, the Financial Accounting Standards Board issued Statement No.
133,  "Accounting for Derivative and Hedging Activities." The statement requires
recording all derivative instruments as assets or liabilities,  measured at fair
value. The standard is effective for fiscal years beginning after June 15, 1999.
The company is currently  evaluating the impact the standard will have on income
from continuing operations;  however,  management believes it will be immaterial
due to the limited amount of hedging activity in which the company engages.

Cautionary Statement Concerning Forward-Looking Statements

     The company has made  certain  forward-looking  statements  in this report,
which are subject to risks and uncertainties.  These statements are based on the
beliefs and assumptions of the company's management.  Forward-looking statements
are not guarantees of performance.
     Certain  information in the Year 2000 Readiness section is forward looking.
The Year 2000  Program  and the date on which the  company  believes  it will be
completed are based on management's best estimates, which were derived utilizing
numerous assumptions of future events,  including the continued  availability of
certain resources,  third-party  modification plans and other factors.  However,
there can be no assurance that there will not be a delay in, or increased  costs
associated with, the im plementation of the Year 2000 Program.
     Forward-looking  statements  include  information  concerning  possible  or
assumed future results and may be preceded by, followed by, or otherwise include
the words "believes", expects", "anticipates",  "intends", "plans", "estimates",
or similar expressions.  For those statements, the company claims the protection
of the safe  harbor for  forward-looking  statements  contained  in the  Private
Securities Litigation Reform Act of 1995.

Responsibility for Financial Reporting

     The company's  management is responsible  for the integrity and objectivity
of the financial data  contained in the financial  statements.  These  financial
statements have been prepared in conformity with generally  accepted  accounting
principles  appropriate  under the circumstances  and, where necessary,  reflect
informed   judgments  and  estimates  of  the  effects  of  certain  events  and
transactions based on currently available  information at the date the financial
statements were prepared.
     The  company's  management  depends  on the  company's  system of  internal
accounting  controls  to  assure  itself  of the  reliability  of the  financial
statements.  The  internal  control  system is  designed  to provide  reasonable
assurance, at appropriate cost, that assets are safeguarded and transactions are
executed  in  accordance  with  management's  authorizations  and  are  recorded
properly to permit the  preparation of financial  statements in accordance  with
generally accepted accounting principles.  Periodic reviews are made of internal
controls by the company's staff of inte rnal auditors,  and corrective action is
taken if needed.
     The Board of Directors reviews and monitors  financial  statements  through
its audit committee,  which is composed solely of directors who are not officers
or  employees of the  company.  The audit  committee  meets  regularly  with the
independent  public  accountants,  internal  auditors and  management  to review
internal accounting controls, auditing and financial reporting matters.
     The independent  public accountants are engaged to provide an objective and
independent  review of the  company's  financial  statements  and to  express an
opinion  thereon.  Their  audits are  conducted  in  accordance  with  generally
accepted auditing standards, and their report is included below.

Report of Independent Public Accountants

To the Stockholders and Board of Directors of Kerr-McGee Corporation:

     We have audited the accompanying  consolidated  balance sheet of Kerr-McGee
Corporation (a Delaware corporation) and subsidiary companies as of December 31,
1998 and 1997, and the related consolidated statements of income,  comprehensive
income and  stockholders'  equity and cash flows for each of the three  years in
the  period  ended  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.
     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
     In our opinion,  the financial statements referred to above present fairly,
in all material respects,  the financial position of Kerr-McGee  Corporation and
subsidiary  companies as of 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.

Oklahoma City, Oklahoma,
  February 26, 1999

                                          ARTHUR ANDERSEN LLP

<TABLE>

Consolidated Statement of Income
<CAPTION>

(Millions of dollars, except per-share amounts)                                 1998       1997      1996
---------------------------------------------------------------------------------------------------------
<S>                                                                           <C>        <C>       <C>   
Sales                                                                         $1,396     $1,388    $1,566
                                                                              ------     ------    ------
Costs and Expenses
  Costs and operating expenses                                                   818        739       804
  General and administrative expenses                                            176        136       197
  Depreciation and depletion                                                     269        239       267
  Asset impairment                                                               370        --         25
  Exploration, including dry holes and amortization of undeveloped leases         84        65         74
  Taxes, other than income taxes                                                  18         20        30
  Interest and debt expense                                                       58         47        52
                                                                              ------     ------    ------
    Total Costs and Expenses                                                   1,793      1,246     1,449
                                                                              ------     ------    ------
                                                                                (397)       142       117
Other Income                                                                      22         90       132
                                                                              ------     ------    ------
Income (Loss) from Continuing Operations before Income Taxes                    (375)       232       249
Provision (Benefit) for Income Taxes                                            (148)        71        85
                                                                              ------     ------    ------
Income (Loss) from Continuing Operations                                        (227)       161       164
Income from Discontinued Operations, net of taxes of
  $156 in 1998, $12 in 1997 and $18 in 1996                                      277         33        56
                                                                              ------     ------    ------
Net Income                                                                    $   50     $  194    $  220
                                                                              ======     ======    ======
Net Income (Loss) per Common Share
  Basic - 
    Continuing operations                                                     $(4.78)    $ 3.38    $ 3.32
    Net income                                                                  1.06       4.06      4.45
  Diluted -
    Continuing operations                                                      (4.78)      3.36      3.30
    Net income                                                                  1.06       4.04      4.43

The accompanying notes are an integral part of this statement.
</TABLE>

<TABLE>

Consolidated Statement of Comprehensive Income and Stockholders' Equity
<CAPTION>

                                                                                 Accumulated
                                                         Capital in                    Other                Deferred          Total
                                    Comprehensive Common  Excess of  Retained  Comprehensive  Treasury  Compensation  Stockholders'
(Millions of dollars)                      Income  Stock  Par Value  Earnings  Income (Loss)     Stock     and Other         Equity
-----------------------------------------------------------------------------------------------------------------------------------

<S>                                          <C>     <C>       <C>     <C>               <C>    <C>            <C>           <C>   
Balance December 31, 1995                            $54       $318    $1,209            $26    $(111)         $(80)         $1,416
  Net income                                 $220     --         --       220             --       --            --             220
  Unrealized gains on securities,
    net of $5 income tax                        9     --         --        --              9       --            --               9
  Realized gains on securities,
    net of $8 income tax                      (15)    --         --        --            (15)      --            --             (15)
  Appreciation of securities
    donated, net of $5 
    income tax                                 (8)    --         --        --             (8)      --            --              (8)
  Shares issued                                --     --         16        --             --       --            --              16
  Shares acquired                              --     --         --        --             --     (195)           --            (195)
  Dividends declared
    ($1.64 per share)                          --     --         --       (81)            --       --            --             (81)
  Other                                        --     --         --        --             --       --             5               5
                                             ----    ---       ----    ------            ---    -----          ----          ------
    Total                                    $206
                                             ====

Balance December 31, 1996                             54        334     1,348             12     (306)          (75)          1,367
  Net income                                 $194     --         --       194             --       --            --             194
  Unrealized gains on securities,
    net of $1 income tax                        2     --         --        --              2       --            --               2
  Realized gains on securities,
    net of $6 income tax                      (12)    --         --        --            (12)      --            --             (12)
  Appreciation of securities
    donated, net of $1
    income tax                                 (2)    --         --        --             (2)      --            --              (2)
  Shares issued                                --     --         12        --             --       --            --              12
  Shares acquired                              --     --         --        --             --      (57)           --             (57)
  Dividends declared 
    ($1.80 per share)                          --     --         --       (86)            --       --            --             (86)
  Other                                        --     --         --        --             --       --            22              22
                                             ----    ---       ----    ------            ---    -----          ----          ------
    Total                                    $182
                                             ====

Balance December 31, 1997                             54        346     1,456             --     (363)          (53)          1,440
  Net income                                 $ 50     --         --        50             --       --            --              50
  Foreign currency
    translation adjustment                     (5)    --         --        --             (5)      --            --              (5)
  Minimum pension liability
    adjustment                                 (3)    --         --        --             (3)      --            --              (3)
  Shares issued                                --     --          3        --             --       --            --               3
  Shares acquired                              --     --         --        --             --      (25)           --             (25)
  Dividends declared
    ($1.80 per share)                          --     --         --       (86)            --       --            --             (86)
  Effect of equity
    affiliate's merger                         --     --         --       (51)            --       --            --             (51)
  Other                                        --     --         --        --             --       --            10              10
                                             ----    ---       ----    ------            ---    -----          ----          ------
    Total                                    $ 42
                                             ====

Balance December 31, 1998                            $54       $349    $1,369            $(8)   $(388)         $(43)         $1,333
                                                     ===       ====    ======            ===    =====          ====          ======

The  accompanying  notes are an integral part of this statement.
</TABLE>

<TABLE>

Consolidated Balance Sheet
<CAPTION>

 (Millions of dollars)                                                           1998       1997
 -----------------------------------------------------------------------------------------------
 <S>                                                                          <C>        <C>
 ASSETS
 Current Assets
   Cash                                                                       $   114    $   183
   Accounts receivable, net of allowance for doubtful accounts
     of $5 in both 1998 and 1997                                                  305        274
   Inventories                                                                    246        172
   Deposits, prepaid expenses and other                                            86         60
                                                                              -------    -------
     Total Current Assets                                                         751        689
 Investments
   Equity affiates                                                                170        273
   Other assets                                                                    49         60
 Property, Plant and Equipment - Net                                            2,288      1,998
 Deferred Charges                                                                  83         76
                                                                              -------    -------
       Total Assets                                                           $ 3,341    $ 3,096
                                                                              =======    =======

 LIABILITIES AND STOCKHOLDERS' EQUITY
 Current Liabilities
   Accounts payable                                                           $   291    $   247
   Short-term borrowings                                                           36         25
   Long-term debt due within one year                                               7          2
   Taxes on income                                                                 --         36
   Taxes, other than income taxes                                                   7         17
   Accrued liabilities                                                            195        196
                                                                              -------    -------
     Total Current Liabilities                                                    536        523
                                                                              -------    -------

 Long-Term Debt                                                                   901        552
                                                                              -------    -------
 Deferred Credits and Reserves
   Income taxes                                                                   189        159
   Other                                                                          382        422
                                                                              -------    -------
     Total Deferred Credits and Reserves                                          571        581
                                                                              -------    -------
 Stockholders' Equity
   Common stock, par value $1.00 - 150,000,000 shares authorized,
     54,177,938 shares issued in 1998 and 54,120,747 shares issued in 1997         54         54
   Capital in excess of par value                                                 349        346
   Preferred stock purchase rights                                                  1          1
   Retained earnings                                                            1,369      1,456
   Accumulated other comprehensive loss                                            (8)        --
   Common stock in treasury, at cost - 7,010,790 shares in 1998 and
     6,434,465 shares in 1997                                                    (388)      (363)
   Deferred compensation                                                          (44)       (54)
                                                                              -------    ------- 
     Total Stockholders' Equity                                                 1,333      1,440
                                                                              -------    -------
       Total Liabilities and Stockholders' Equity                             $ 3,341    $ 3,096
                                                                              =======    =======


The  "successful  efforts"  method of accounting for oil and gas exploration and
production activities has been followed in preparing this balance sheet.
The accompanying notes are an integral part of this balance sheet.
</TABLE>

<TABLE>

Consolidated Statement of Cash Flows
<CAPTION>

(Millions of dollars)                                                               1998     1997     1996
----------------------------------------------------------------------------------------------------------
<S>                                                                                <C>      <C>      <C>
Cash Flow from Operating Activities
   Net income                                                                      $  50    $ 194    $ 220
   Adjustments to reconcile to net cash provided by operating activities -
     Deferred income taxes                                                           (61)      36       68
     Depreciation, depletion and amortization                                        298      271      307
     Asset impairment                                                                370       --       25
     Provision for environmental reclamation and remediation of inactive sites        41       20       43
     Gain on sale of coal operations, net of income taxes                           (257)      --       --
     Gain on sale of exploration and production properties                            --       (6)     (21)
     Realized gain on available-for-sale securities                                   --      (18)     (23)
     Retirements and (gain) loss on sale of other assets                              13       (4)      (3)
     Noncash items affecting net income                                              (19)       1       18
     Changes in current assets and liabilities and other, net of effects
       of operations acquired and sold -
          Decrease in accounts receivable                                             29      132       48
          (Increase) decrease in inventories                                         (56)      40        1
          (Increase) decrease in deposits and prepaids                               (26)      13       59
          Increase (decrease) in accounts payable and accrued liabilities             28      (16)     (37)
          Increase (decrease) in taxes payable                                      (165)      31      (22)
          Other                                                                     (146)    (125)     (38)
                                                                                    ----    -----    ----- 
            Net cash provided by operating activities                                 99      569      645
                                                                                    ----    -----    -----
Cash Flow from Investing Activities
  Capital expenditures                                                              (550)    (341)    (392)
  Acquisitions                                                                      (518)      --       --
  Proceeds from sale of discontinued operations                                      599       --       13
  Proceeds from sale of chemical and exploration and production properties            39       18       48
  Proceeds from sale of available-for-sale securities                                 --       21       29
  Proceeds from sale of other assets                                                  11       17       11
  Proceeds from sale of long-term investments                                         10       13       17
  Purchase of long-term investments                                                   (3)     (14)      (6)
                                                                                    ----    -----    ----- 
            Net cash used in investing activities                                   (412)    (286)    (280)
                                                                                    ----    -----    ----- 
Cash Flow from Financing Activities
  Issuance of long-term debt                                                         401      299       24
  Issuance of common stock                                                             3       12       16
  Increase (decrease) in short-term borrowings                                        11      (12)     (57)
  Repayment of long-term debt                                                        (50)    (375)     (36)
  Dividends paid                                                                     (86)     (85)     (83)
  Purchase of treasury stock                                                         (25)     (60)    (195)
                                                                                    ----    -----    ----- 
            Net cash provided by (used in) financing activities                      254     (221)    (331)
                                                                                    ----    -----    ----- 

Effects of Exchange Rate Changes on Cash and Cash Equivalents                        (10)      --       --
                                                                                    ----    -----    -----
Net Increase (Decrease) in Cash and Cash Equivalents                                 (69)      62       34
Cash and Cash Equivalents at Beginning of Year                                       183      121       87
                                                                                    ----    -----    -----
Cash and Cash Equivalents at End of Year                                            $114    $ 183    $ 121
                                                                                    ====    =====    =====

The  accompanying  notes are an integral part of this statement.
</TABLE>


Notes to Financial Statements

1. Significant Accounting Policies

Basis of Presentation
     The  consolidated   financial   statements  include  the  accounts  of  all
subsidiary companies that are more than 50% owned and the proportionate share of
joint  ventures in which the company has an undivided  interest.  Investments in
affiliated  companies  that are 20% to 50% owned are  carried as  Investments  -
Equity affiliates in the Consolidated Balance Sheet at cost, adjusted for equity
in  undistributed  earnings.  Except for  dividends  and  changes  in  ownership
interest,  changes in equity for  undistributed  earnings  are  included  in the
Consolidated  Statement of Income. All material  intercompany  transactions have
been eliminated.
     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the  reported  amounts of assets and  liabilities,  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. Actual results could differ from those estimates as additional
information becomes known.

Foreign Currencies
     The U.S.  dollar  is the  functional  currency  for  each of the  company's
international operations,  except for its European chemical operations.  Foreign
currency transaction gains or losses are recognized in the period incurred.  The
net foreign currency  transaction  losses in 1998 and 1997 were immaterial.  The
company recorded net foreign currency transaction losses of $9 million in 1996.
     The  local  currencies  are the  functional  currencies  for  the  European
chemical  operations.  Translation  adjustments  resulting from  translating the
functional  currency  financial  statements  into U.S.  dollar  equivalents  are
reported separately in accumulated other comprehensive income (loss).

Net Income (Loss) per Common Share
     Basic net income per share includes no dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares  outstanding for the period.  Diluted net income per share is computed by
dividing net income by the weighted-average  number of common shares outstanding
for the period and common stock equivalents.
     The weighted-average  number of shares used to compute basic net income per
share was 47,504,409 in 1998;  47,807,916 in 1997 and 49,419,993 in 1996.  After
adding the dilutive effect of the conversion of options to the  weighted-average
number of shares outstanding,  the shares used to compute diluted net income per
share were 48,000,082 in 1997 and 49,657,890 in 1996.  There was no dilution for
1998 since the company incurred a loss from continuing operations.
     Not included in the  calculation of the  denominator for diluted net income
per share were  157,000  and  153,000  employee  stock  options  outstanding  at
year-end 1997 and 1996, respectively.  The inclusion of these options would have
been  anti-dilutive  since  they  were  not  "in  the  money"  at the end of the
respective years.

Cash Equivalents
     The company  considers all  investments  purchased with a maturity of three
months or less to be cash equivalents.  Cash equivalents totaling $57 million in
1998 and $132 million in 1997 were comprised of time deposits,  certificates  of
deposit and U.S. government securities.
Inventories
     The  costs of the  company's  product  inventories  are  determined  by the
first-in,  first-out (FIFO) method.  Inventory  carrying values include material
costs, labor and the associated indirect manufacturing  expenses.  Materials and
supplies are valued at average cost.
Property, Plant and Equipment
     Oil and Gas - Exploration  expenses,  including  geological and geophysical
costs,  rentals  and  exploratory  dry  holes,  are  charged  against  income as
incurred.  Costs of  successful  wells  and  related  production  equipment  and
developmental  dry  holes  are  capitalized  and  amortized  by field  using the
unit-of-production method as the oil and gas are produced.
     Undeveloped  acreage  costs are  capitalized  and  amortized  at rates that
provide full  amortization  on  abandonment  of  unproductive  leases.  Costs of
abandoned leases are charged to the accumulated amortization accounts, and costs
of productive leases are transferred to the developed property accounts.
     Other - Property,  plant and  equipment is stated at cost less reserves for
depreciation,  depletion and amortization.  Maintenance and repairs are expensed
as  incurred,  except that costs of  replacements  or renewals  that  improve or
extend the lives of existing  properties are capitalized.  Costs of nonproducing
mineral acreage  surrendered or otherwise  disposed of are charged to expense at
the time of disposition.
     Depreciation  and Depletion - Property,  plant and equipment is depreciated
or  depleted  over  its  estimated  life  by  the   unit-of-production   or  the
straight-line method. Capitalized exploratory drilling and development costs are
amortized using the  unit-of-production  method based on total estimated  proved
developed oil and gas reserves.  Amortization of producing  leasehold,  platform
costs   and   acquisition   costs  of   proved   properties   is  based  on  the
unit-of-production  method using total estimated proved reserves. In arriving at
rates under the  unit-of-production  method,  the quantities of recoverable oil,
gas and other minerals are based on estimates  made by the company's  geologists
and engineers.
     Retirements and Sales - The costs and related  depreciation,  depletion and
amortization  reserves are removed from the respective  accounts upon retirement
or sale of property, plant and equipment. The resulting gain or loss is included
in other income.
     Interest  Capitalized  - The company  capitalizes  interest  costs on major
projects  that  require  a  considerable  length of time to  complete.  Interest
capitalized in 1998,  1997 and 1996 was $12 million,  $8 million and $9 million,
respectively.

Impairment of Long-Lived Assets
     Proved  oil  and  gas   properties   are  reviewed  for   impairment  on  a
field-by-field  basis when facts and circumstances  indicate that their carrying
amounts may not be recoverable. In performing this review, future cash flows are
estimated by applying  estimated  future oil and gas prices to estimated  future
production,  less  estimated  future  expenditures  to develop  and  produce the
reserves.  If the sum of these  estimated  future cash flows  (undiscounted  and
without interest  charges) is less than the carrying amount of the property,  an
impairment  loss is  recognized  for the excess of the carrying  amount over the
estimated fair value of the property.
     Other  assets are  reviewed  for  impairment  by asset  group for which the
lowest level of  independent  cash flows can be  identified  and impaired in the
same manner as proved oil and gas properties.

Revenue Recognition
     Except for natural gas sales,  revenue is  recognized  when title passes to
the customer.  Natural gas revenues and gas-balancing arrangements with partners
in  natural  gas  wells  are  recognized  when  the gas is  produced  using  the
entitlements  method of  accounting  and are based on the  company's net working
interests. At December 31, 1998 and 1997, both the quantity and dollar amount of
gas balancing arrangements were immaterial.

Lease Commitments
     The  company  utilizes   various  leased   properties  in  its  operations,
principally for office space.  Net lease rental expense was $19 million in 1998,
$14 million in 1997 and $13 million in 1996.
     The aggregate minimum annual rentals under  noncancelable  leases in effect
on December 31, 1998, totaled $72 million,  of which $13 million is due in 1999,
$12 million in 2000, $27 million in the period 2001 through 2003 and $20 million
thereafter.

Income Taxes
     Deferred  income taxes are provided to reflect the future tax  consequences
of  differences  between  the tax  bases of  assets  and  liabilities  and their
reported amounts in the financial statements.

Site Dismantlement, Reclamation and Remediation Costs
     The  company  provides  for the  estimated  cost at  current  prices of the
dismantlement and removal of oil and gas production and related facilities. Such
costs are  accumulated  over the estimated lives of the facilities by the use of
the unit-of-production method. As sites of environmental concern are identified,
the company assesses the existing conditions,  claims and assertions,  generally
related to former operations,  and records an estimated  undiscounted  liability
when  environmental  assessments  and/or  remedial  efforts are probable and the
associated costs can be reasonably estimated.

Employee Stock Option Plans
     The  company  accounts  for its  employee  stock  option  plans  using  the
intrinsic value method in accordance with  Accounting  Principles  Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees."

Futures, Forward and Option Contracts
     The  company  hedges a portion  of its  monetary  assets,  liabilities  and
commitments  denominated  in  foreign  currencies.   Periodically,  the  company
purchases  foreign currency forward contracts to provide funds for operating and
capital expenditure requireme nts that will be denominated in foreign currencies
and sells foreign currency forward contracts to convert receivables that will be
paid in foreign  currencies to U.S.  dollars.  Since these contracts  qualify as
hedges and  correlate to currency  movements,  any gain or loss  resulting  from
market  changes is offset by gains or losses on the hedged  receivable,  capital
item or operating cost.
     In 1996, the company also entered into foreign currency  forward  contracts
to sell various foreign  currencies in anticipation of titanium  dioxide pigment
sales denominated in foreign currencies.  These contracts were  marked-to-market
with the resulting  gain or loss  reflected in income in the period in which the
change occurred. There were no open contracts at year-end 1997, and no contracts
were entered into in 1998.  Open  contracts at year-end 1996 matured  throughout
1997.  Net  gains  and  losses  on these  contracts  in both  1997 and 1996 were
immaterial.

2. Cash Flow Information

     Net cash provided by operating activities reflects cash payments for income
taxes and interest as follows:

(Millions of dollars)                             1998         1997         1996
--------------------------------------------------------------------------------
Income taxes paid                                 $149         $ 49         $ 37
Interest paid                                       64           47           60

     Noncash  transactions not reflected in the  Consolidated  Statement of Cash
Flows  include  capital  expenditures  for  which  payment  will  be made in the
subsequent  year  totaling $43  million,  $19 million and $4 million at year-end
1998, 1997 and 1996, respectively;  transactions during 1997 associated with the
assignments  of  interest  in  certain  North  Sea oil and gas  properties;  the
revaluation  of certain  investments  to fair value and  transactions  affecting
deferred compensation  associated with the Employee Stock Ownership Plan in each
of the three years. See Notes 15 and 19.
     Effective  December 31, 1996, the company merged its North American onshore
exploration and production  properties into Devon Energy Corporation  (Devon) in
exchange  for  9,954,000  shares  of Devon  common  stock  (see  Note  4).  This
transaction was not reflected in the Consolidated Statement of Cash Flows due to
its noncash nature.

3. Inventories

     Major categories of inventories at year-end 1998 and 1997 are:

(Millions of dollars)                               1998        1997
--------------------------------------------------------------------
Chemicals and other products                        $185        $119
Materials and supplies                                53          48
Crude oil                                              8           5
                                                    ----        ----
     Total                                          $246        $172
                                                    ====        ====

4. Investments - Equity Affiliates

     At December  31, 1998 and 1997,  investments  in equity  affiliates  are as
follows:

(Millions of dollars)                                           1998        1997
--------------------------------------------------------------------------------
Devon Energy Corporation                                        $108        $217
Javelina Company                                                  30          32
National Titanium Dioxide Company Limited                         18          12
Other                                                             14          12
                                                                ----        ----
     Total                                                      $170        $273
                                                                ====        ====

     The company holds 9,954,000 shares of Devon common stock, a publicly traded
oil and gas  exploration  and  production  company,  representing  an  ownership
interest in Devon of  approximately  21% and 31% at December  31, 1998 and 1997,
respectively.  The initial 31%  investment in Devon was recorded at the carrying
value of the North American onshore properties merged into Devon at December 31,
1996. The change in ownership interest resulted from Devon's merger with a third
party, which was accounted for as a pooling of interests.  In 1998, the carrying
amount  of the  investment  in Devon  stock was  adjusted  for the  issuance  of
additional  common stock that  resulted from the merger,  and retained  earnings
were charged $51 million for the decrease in the company's  share of Devon's net
assets  resulting from the merger.  Devon also recorded a full cost writedown in
1998. The company's  proportionate  share of the writedown was $27 million.  The
market value of the  company's  investment in Devon was $305 million at year-end
1998, based on the closing price of Devon's common stock as reported in The Wall
Street Journal.
     Javelina Company and National  Titanium  Dioxide Company Limited  represent
the company's  investment of 40% and 25%,  respectively,  in non-exploration and
production joint ventures or partnerships.
     Following are financial  summaries of the company's equity affiliates.  Due
to  immateriality,  investments  shown as Other in the preceding table have been
excluded from the information below.

(Millions of dollars)                                1998        1997       1996
--------------------------------------------------------------------------------
Results of operations -
  Net sales(1)                                    $   593     $   570    $   207
  Net income (loss)                                   (41)        105         22
Financial position -
  Current assets                                      222         198
  Property, plant and equipment - net               1,334         990
  Total assets                                      1,582       1,215
  Current liabilities                                 170         123
  Total liabilities                                   844         470
  Stockholders' equity                                738         745

(1) Includes net sales to the company of $2 million, $26 million and $44 million
for 1998, 1997 and 1996, respectively.

5. Investments - Other Assets

     Investments  in other assets  consist of the following at December 31, 1998
and 1997:

(Millions of dollars)                                               1998  1997
------------------------------------------------------------------------------
Net deferred tax asset                                               $17   $22
U.S. government obligations                                           17    19
Patents                                                                6     6
Long-term notes receivable, net of $9 allowance
  for doubtful notes in both 1998 and 1997                             3     5
Equity securities                                                     --     2
Other                                                                  6     6
                                                                     ---   ---
     Total                                                           $49   $60
                                                                     ===   ===

6. Property, Plant and Equipment

     Fixed assets and related  reserves by business segment at December 31, 1998
and 1997, are as follows:
<TABLE>
<CAPTION>

                                                            Reserves for
                                                          Depreciation and
                                     Gross Property           Depletion         Net Property
(Millions of dollars)                 1998     1997         1998     1997      1998    1997(1)
----------------------------------------------------------------------------------------------

<S>                                 <C>      <C>          <C>      <C>       <C>     <C>   
Exploration and production          $3,710   $2,888       $2,053   $1,677    $1,657  $1,211
Chemicals                            1,162    1,020          588      506       574     514
Other                                  130      147           73       90        57      57
Discontinued operations                 --      547           --      331        --     216
                                    ------   ------       ------   ------    ------  ------
  Total                             $5,002   $4,602       $2,714   $2,604    $2,288  $1,998
                                    ======   ======       ======   ======    ======  ======

(1) Includes chemical assets held for sale of $11 million.
</TABLE>

7. Deferred Charges

Deferred charges are as follows at year-end 1998 and 1997:

(Millions of dollars)                               1998  1997
--------------------------------------------------------------
Pension plan prepayment                              $41   $42
Nonqualified pension plan deposit                     10     7
Amounts pending recovery from third parties            8    --
Preoperating and startup costs                         6     8
Intangible assets                                      3     6
Other                                                 15    13
                                                     ---   ---
  Total                                              $83   $76
                                                     ===   ===

8. Debt

Lines of Credit and Short-Term Borrowings
     At year-end 1998, the company had available unused bank lines of credit and
revolving credit  facilities of $525 million.  Of this amount,  $345 million and
$90 million can be used to support  commercial  paper borrowing  arrangements of
Kerr-McGee Credit LLC and Kerr-McGee Oil (U.K.) PLC, respectively.
     The company has arrangements to maintain compensating balances with certain
banks that  provide  credit.  At year-end  1998,  the  aggregate  amount of such
compensating balances was immaterial, and the company was not legally restricted
from withdrawing all or a portion of such balances at any time during the year.
     Short-term  borrowings  at year-end  1998  consisted  of  commercial  paper
totaling $28 million (6.37% average  effective  interest rate) and notes payable
of $8 million (3.63% average interest rate).  Outstanding at year-end 1997 was a
note payable of $25 million (5.98% interest rate).

Long-Term Debt
     The company's  policy is to classify  certain  borrowings  under  revolving
credit  facilities and commercial  paper as long-term debt since the company has
the ability under certain revolving credit agreements and the intent to maintain
these  obligations  for longer than one year.  At year-end  1998 and 1997,  debt
totaling $400 million and $37 million, respectively, was classified as long-term
consistent with this policy.
     Long-term debt consisted of the following at year-end 1998 and 1997:
<TABLE>
<CAPTION>

(Millions of dollars)                                                                1998     1997
--------------------------------------------------------------------------------------------------
<S>                                                                                  <C>      <C>
Debentures -
  7.125% Debentures due October 15, 2027 (7.01% effective rate)                      $150     $150
  7% Debentures due November 1, 2011, net of unamortized debt discount of
     $105 in 1998 and $108 in 1997 (14.25% effective rate)                            145      142
  8-1/2% Sinking fund debentures due June 1, 2006                                      11       22
Notes payable -
  6.625% Notes due October 15, 2007 (6.54% effective rate)                            150      150
  Variable  interest rate revolving credit agreements with banks
    (5.54%  average  rate at  December  31,  1998):  $65 due March 6, 2000;
    $10 due December 4, 2001; $135 due April 28, 2002; $71 due May 15, 2003           281       37
Commercial paper (6.37% average effective interest rate at December 31, 1998)         119       --
Guaranteed Debt of Employee Stock Ownership Plan 9.61% Notes due in installments
    through January 2, 2005                                                            49       51
Other                                                                                   3        2
                                                                                     ----     ----
                                                                                      908      554
Long-term debt due within one year                                                     (7)      (2)
                                                                                     ----     ---- 
    Total                                                                            $901     $552
                                                                                     ====     ====
</TABLE>

     Maturities of long-term debt due after December 31, 1998, are $7 million in
1999,  $78 million in 2000,  $141  million in 2001,  $145  million in 2002,  $77
million in 2003 and $460 million thereafter.
     Additional  information  regarding  the major  changes  in debt  during the
periods and unused  commitments  for  financing  is  included  in the  Financial
Condition discussion in Management's Discussion and Analysis.

9. Contingencies
        
West Chicago
     In 1973, a wholly owned subsidiary, Kerr-McGee Chemical Corporation, closed
the facility at West Chicago,  Illinois, that processed thorium ores. Kerr-McGee
Chemical  Corporation  now  operates  as  Kerr-McGee  Chemical  LLC  (Chemical).
Operations resulted in some low-level radioactive contamination at the site and,
in 1979,  Chemical filed a plan with the Nuclear Regulatory  Commission (NRC) to
decommission the facility. The NRC transferred  jurisdiction of this site to the
State of  Illinois  (the State) in 1990.  The  following  discusses  the current
status of various matters associated with the West Chicago site.
     Closed  Facility - In 1994,  Chemical,  the City of West Chicago (the City)
and the State reached agreement on the initial phase of the decommissioning plan
for the closed West Chicago facility,  and Chemical began shipping material from
the site to a licensed permanent disposal facility.
     In February  1997,  Chemical  executed an agreement with the City as to the
terms and conditions for completing the final phase of decommissioning work. The
State  indicated  approval of this agreement and has issued  license  amendments
authorizing  much of the work.  Chemical  expects the majority of the work to be
completed within five years.
     In 1992, the State enacted legislation imposing an annual storage fee equal
to $2 per cubic foot of byproduct  material located at the closed facility.  The
storage fee cannot  exceed $26 million  per year,  and any storage fee  payments
must be reimbursed to Chemical as decommissioning  costs are incurred.  Chemical
has  been  fully   reimbursed  for  all  storage  fees  paid  pursuant  to  this
legislation.  In June 1997, the  legislation  was amended to provide that future
storage fee obligations are to be offset against  decommissioning costs incurred
but not yet reimbursed.
     Offsite Areas - The U.S.  Environmental  Protection Agency (EPA) has listed
four areas in the vicinity of the West Chicago facility on the National Priority
List that the EPA promulgates under authority of the Comprehensive Environmental
Response,  Compensation  and Liability  Act of 1980 (CERCLA) and has  designated
Chemical as a potentially  responsible party in these four areas. The EPA issued
unilateral  administrative  orders for two of these  areas  (referred  to as the
residential  areas and  Reed-Keppler  Park),  which require  Chemical to conduct
removal actions to excavate  contaminated soils and ship the soils elsewhere for
disposal. Without waiving any of its rights or defenses,  Chemical has begun the
cleanup of these two sites.
     Judicial  Proceedings  - In December  1996, a lawsuit was filed against the
company and Chemical in Illinois  state court on behalf of a purported  class of
present and former West Chicago residents. The lawsuit seeks damages for alleged
diminution in property values and the establishment of a medical monitoring fund
to benefit those allegedly exposed to thorium wastes originating from the former
facility.  The  case was  removed  to  federal  court  and is  being  vigorously
defended.
     Government  Reimbursement - Pursuant to Title X of the Energy Policy Act of
1992 (Title X), the U.S. Department of Energy is obligated to reimburse Chemical
for certain  decommissioning  and cleanup costs in  recognition of the fact that
much of the  facility's  production  was dedicated to United  States  government
contracts. Title X was amended in 1998 to increase the amount authorized to $140
million plus inflation adjustments.  Through January 31, 1999, Chemical has been
reimbursed approximately $54 million under Title X.

Other Matters
     The company's current and former operations involve management of regulated
materials and are subject to various  environmental laws and regulations.  These
laws and  regulations  will  obligate  the company to clean up various  sites at
which petroleum,  chemicals, low-level radioactive substances or other regulated
materials  have been  disposed  of or  released.  Some of these  sites have been
designated  Superfund sites by the EPA pursuant to CERCLA. The company is also a
party to legal proceedings  involving  environmental  matters pending in various
courts and agencies.  As of December 31, 1998,  the  company's  estimate for the
cost to investigate and/or remediate all presently identified sites of former or
current  operations,  based on currently known facts and circumstances,  totaled
$226 million,  which includes $168 million for the former West Chicago facility,
the residential  areas and  Reed-Keppler  Park.  Reserves have been  established
based on this estimate.  Expenditures are reduced by the amounts recovered under
government  programs.  Expenditures  from inception  through  December 31, 1998,
totaled $540 million for currently known sites.
     In addition to the environmental issues previously  discussed,  the company
or its  subsidiaries  are also a party to a number  of other  legal  proceedings
pending in  various  courts or  agencies  in which the  company or a  subsidiary
appears as plaintiff or defendant.
     It is not  possible  for the  company to reliably  estimate  the amount and
timing of all future expenditures related to environmental matters because of:
     -  the difficulty of estimating cleanup costs;
     -  the uncertainty  in  quantifying liability under environmental laws that
        impose  joint  and  several  liability  on all potentially   responsible
        parties;  and
     -  the  continually changing nature of environmental laws and regulations.

     The company  provides  for costs  related to  contingencies  when a loss is
probable and the amount is reasonably  estimable.  Although management believes,
after  consultation  with general  counsel,  that  adequate  reserves  have been
provided  for all known  contingencies,  the  ultimate  cost will  depend on the
resolution  of the  above-noted  uncertainties.  Therefore,  it is possible that
additional reserves could be required in the future.

10. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

Assets to Be Held and Used
     At year-end  1998,  certain oil and gas fields in the North Sea,  China and
the Gulf of Mexico and two domestic  chemical  plants were deemed to be impaired
because  the assets  were no longer  expected  to recover  their net book values
through  future  cash flows.  Expectations  of future cash flows were lower than
those previously forecasted primarily as a result of continued weakness in crude
oil, natural gas and certain chemical product prices. Downward reserve revisions
were also deemed necessary for certain fields.
     The oil and gas impairment test was based on estimates of future cash flows
for each  field.  Crude  oil  price  estimates  were $13 per  barrel  for  1999,
increasing  $1 per  barrel  each year up to $20 per  barrel.  Natural  gas price
estimates were $2.25 per MMBtu for 1999,  increasing $.10 per MMBtu each year up
to $2.45 per MMBtu.  These  prices,  consistent  with  forecasts  by  investment
bankers and industry consultants,  were applied to production profiles developed
by the company's  engineers using proved reserves at December 31, 1998. Probable
reserves  and  future  development  costs were  taken  into  consideration  when
justified by actual drilling and planned additional drilling.
     The chemical  impairment  test was based on current prices for a variety of
different products, including vanadium compounds and fertilizers manufactured at
the Soda Springs,  Idaho, plant and synthetic rutile manufactured at the Mobile,
Alabama, plant. These prices were escalated based on current market perceptions.
     The  impairment  loss was determined  based on the  difference  between the
carrying  value of the  assets  and the  present  value  of  future  cash  flows
discounted at 10% or market value when  appropriate.  The  resulting  impairment
loss  represents 16% and 9% of the carrying value of exploration  and production
and chemical assets, respectively, before the impairment.
     In addition, certain oil and gas fields in the Gulf of Mexico were impaired
in 1996. There was no impairment loss recognized in 1997.
     Following  is the  impairment  loss for assets held and used by segment for
each of the years ended December 31, 1998 and 1996.

(Millions of dollars)                                   1998   1996
-------------------------------------------------------------------
Exploration and production                              $313   $ 22
Chemicals                                                 57    --
                                                        ----   ----   
     Total                                              $370   $ 22
                                                        ====   ====

Assets to Be Disposed Of
     The company  withdrew from the ammonium  perchlorate  business in 1998. The
carrying  value of these assets was  approximately  $9 million.  The gain on the
sale was immaterial.
     During 1997,  the  company's  exploration  and  production  operating  unit
completed  the program to divest a number of crude oil and natural gas producing
properties considered to be nonstrategic.  Most of these properties were located
onshore in the United States;  however, some were located in the Gulf of Mexico,
Canada  and the North  Sea.  Net  gains  recognized  on the sales of  properties
included in the  divestiture  program totaled $6 million in 1997 and $13 million
in 1996.  The  divestiture  program  properties  did not  constitute  a material
portion of the  company's oil and gas  production or cash flows from  operations
for 1997 or 1996 or year-end 1996 oil and gas reserves.
     Certain  chemical   facilities  were  closed  during  1996.  A  $3  million
impairment loss was recognized in 1996,  which reduced the carrying value of the
assets to nil.
     Following  are the sales and pretax  income  included  in the  Consolidated
Statement  of Income in each of the last three  years for assets sold during the
three-year  period ended December 31, 1998.  Any impairment  loss is included in
the pretax income amounts.  The company had no material assets held for disposal
at year-end 1998.

(Millions of dollars)                                1998   1997   1996
-----------------------------------------------------------------------
Sales -
  Exploration and production                          $--    $--    $42
  Chemicals                                            11     30     29
                                                      ---    ---    ---
     Total                                            $11    $30    $71
                                                      ===    ===    ===
Income (Loss) -
  Exploration and production                          $--    $--    $ 9
  Chemicals                                            --      3     (5)
                                                      ---    ---    --- 
     Total                                            $--    $ 3    $ 4
                                                      ===    ===    ===

11. Income Taxes

     The taxation of a company that has operations in several countries involves
many complex variables, such as differing tax structures from country to country
and the effect on U.S. taxation of international earnings. These complexities do
not  permit  meaningful  comparisons  between  the  domestic  and  international
components of income before income taxes and the provision for income taxes, and
disclosures  of  these  components  do  not  provide   reliable   indicators  of
relationships in future periods. Income (loss) from continuing operations before
income taxes is composed of the following:


(Millions of dollars)                            1998     1997    1996
----------------------------------------------------------------------
Domestic                                        $(161)   $ 132   $ 142
International                                    (214)     100     107
                                                -----    -----   -----
  Total                                         $(375)   $ 232   $ 249
                                                =====    =====   =====

     The corporate tax rate in the United  Kingdom will decrease to 30% from 31%
effective  April 1, 1999, and decreased to 31% from 33% effective April 1, 1997.
The deferred  income tax  liability  balance was adjusted to reflect the revised
rates, which decrea sed the international deferred provision for income taxes by
$8 million in both 1998 and 1997. The 1998,  1997 and 1996  provision  (benefit)
for income taxes is summarized below:

(Millions of dollars)                     1998     1997     1996
----------------------------------------------------------------
U.S. Federal -
  Current                                $(160)    $  5      $19
  Deferred                                  72       34       25
                                         -----     ----      ---
                                           (88)      39       44
                                         -----     ----      ---
International -
  Current                                   11       32        5
  Deferred                                 (71)      (1)      32
                                         -----     ----      ---
                                           (60)      31       37
                                         -----     ----      ---

State                                       --        1        4
                                         -----     ----      ---
  Total                                  $(148)    $ 71      $85
                                         =====     ====      ===

     At December 31, 1998, the company had foreign operating loss  carryforwards
totaling $110 million - $9 million that expire in 2001,  $19 million that expire
in 2003 and $82  million  that have no  expiration  date.  Realization  of these
operating  loss  carryforwards  is dependent on  generating  sufficient  taxable
income.
     The net deferred tax asset, classified as Investments - Other assets in the
Consolidated Balance Sheet, represents the net deferred taxes in certain foreign
jurisdictions.  Although  realization is not assured, the company believes it is
more likely than not that all of the net  deferred  tax asset will be  realized.
Deferred tax  liabilities and assets at December 31, 1998 and 1997, are composed
of the following:

(Millions of dollars)                                        1998     1997
--------------------------------------------------------------------------
Net deferred tax liability -
  Accelerated depreciation                                   $223     $240
  Exploration and development                                  85       72
  Undistributed earnings of foreign subsidiaries               28       28
  Postretirement benefits                                     (48)     (47)
  Foreign operating loss carryforward                         (28)      (4)
  Dismantlement, reclamation, remediation 
     and other reserves                                        (9)     (69)
  Other                                                       (62)     (61)
                                                             ----     ---- 
                                                              189      159
                                                             ----     ----
Net deferred tax asset -
  Accelerated depreciation                                      5       13
  Foreign operating loss carryforward                         (14)     (29)
  Other                                                        (8)      (6)
                                                             ----     ---- 
                                                              (17)     (22)
                                                             ----     ---- 
    Total                                                    $172     $137
                                                             ====     ====

     In the following  table,  the U.S. Federal income tax rate is reconciled to
the  company's  effective  tax rates for income from  continuing  operations  as
reflected in the Consolidated Statement of Income.

                                                    1998     1997     1996
                                                    ----     ----     ----
U.S. statutory rate                                (35.0)%   35.0%    35.0%
Increases (decreases) resulting from -
Taxation of foreign operations                       6.1      2.5      1.1
Adjustment of prior years' accruals                  (.4)    (1.9)      .3
Refund of prior years' income taxes                 (7.7)      --       --
Contribution of appreciated equity securities         --      (.4)    (1.8)
Adjustment of deferred tax balances due to tax
  rate changes                                      (2.1)    (3.4)      --
Other - net                                          (.3)    (1.1)     (.3)
                                                   -----     ----     ---- 
  Total                                            (39.4)%   30.7%    34.3%
                                                   =====     ====     ==== 

     The Internal Revenue Service has examined the company's  Federal income tax
returns for all years through 1994, and the years have been closed through 1992.
The company  believes that it has made adequate  provision for income taxes that
may become payable with respect to open tax years.

12. Deferred Credits and Reserves - Other

     Other  deferred  credits and reserves  consist of the following at year-end
1998 and 1997:

(Millions of dollars)                                   1998        1997
------------------------------------------------------------------------
Reserves for site dismantlement,
  reclamation and remediation                           $216        $251
Postretirement benefit obligations                       113         120
Minority interest in subsidiary companies                 20          --
Other                                                     33          51
                                                        ----        ----
  Total                                                 $382        $422
                                                        ====        ====

     The company  provided for  environmental  reclamation  and  remediation  of
former plant sites,  net of  reimbursements  received,  during each of the years
1998, 1997 and 1996 as follows:

(Millions of dollars)                                   1998  1997  1996
------------------------------------------------------------------------
Provision, net of reimbursements                         $44   $18   $43
Reimbursements received                                   14    12    10

     The  reimbursements,  which pertain to the former facility in West Chicago,
Illinois, were received pursuant to the Energy Policy Act of 1992 (see Note 9).

13. Common Stock Outstanding

     Changes in shares of common stock issued and treasury  stock held for 1998,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>

(Thousands of shares)                                        Common Stock        Treasury Stock
-----------------------------------------------------------------------------------------------
<S>                                                                <C>                    <C>  
Balance December 31, 1995                                          53,514                 2,445
  Exercise of stock options and stock appreciation rights             348                    --
  Issuance of shares for achievement awards                            --                    (3)
  Stock purchase program                                               --                 3,127
                                                                   ------                 -----
Balance December 31, 1996                                          53,862                 5,569
  Exercise of stock options and stock appreciation rights             259                    --
  Issuance of shares for achievement awards                            --                    (2)
  Stock purchase program                                               --                   867
                                                                   ------                 -----
Balance December 31, 1997                                          54,121                 6,434
  Exercise of stock options and stock appreciation rights              57                    --
  Issuance of shares for achievement awards                            --                    (3)
  Stock purchase program                                               --                   580
                                                                   ------                 -----
Balance December 31, 1998                                          54,178                 7,011
                                                                   ======                 =====
</TABLE>

     The  company has 40 million  shares of  preferred  stock  without par value
authorized, and none is issued.
     In mid-1998, the Board of Directors authorized management to purchase up to
$300  million of company  common  stock  over the next three  years.  A total of
580,000  shares was acquired at a cost of $25 million before this stock purchase
program was cancelled  because of the merger with Oryx Energy Company.  The 1995
stock purchase program was completed in 1997 with a total of 4,829,000 shares of
the  company's  stock  acquired in  open-market  transactions  at a cost of $300
million.
     The company  has had a  stockholders-rights  plan since  1986.  The current
rights plan is dated July 6, 1996,  and replaced the previous  plan prior to its
expiration. Rights were distributed under the original plan as a dividend at the
rate of one right for each share of the company's common stock.  Generally,  the
rights  become  exercisable  the earlier of 10 days after a public  announcement
that a person or group has acquired, or a tender offer has been made for, 15% or
more of the company's  then-outstanding stock. If either of these events occurs,
each right would entitle the holder (other than a holder owning more than 15% of
the outstanding stock) to buy the number of shares of the company's common stock
having a market value two times the exercise price.  The exercise price is $215.
Generally,  the rights may be redeemed at $.01 per right until a person or group
has  acquired  15% or more of the  company's  stock.  The rights  expire in July
2006.

14. Other Income

     Other  income is as  follows  during  each of the  years in the  three-year
period ended December 31, 1998:

(Millions of dollars)                                 1998     1997    1996
---------------------------------------------------------------------------
Interest                                              $ 34      $12    $  9
Settlements with insurance carriers                     12       12      67
Gain (loss) on sale of assets                          (13)      10      24
Income (loss) from unconsolidated affiliates           (12)      32      14
Gain on sale of available-for-sale securities           --       18      23
Other                                                    1        6      (5)
                                                      ----      ---    ---- 
      Total                                           $ 22      $90    $132
                                                      ====      ===    ====

15. Financial Instruments and Hedging Activities

Investments in Certain Debt and Equity Securities
     The company has certain investments that are considered to be available for
sale. These financial  instruments are carried in the Consolidated Balance Sheet
at fair value,  which is based on quoted market prices,  as Current Assets or as
Investments - Other assets,  depending upon their maturity. At December 31, 1998
and 1997, the fair value of  available-for-sale  securities  totaled $30 million
and  $27  million,  respectively,  which  approximated  cost  at the  end of the
periods.  The  company  held no  securities  classified  as held to  maturity or
trading at December 31, 1998 and 1997.
     During  1997  and  1996,   the  company  sold   available-for-sale   equity
securities.  Proceeds from the sales totaled $21 million in 1997 and $29 million
in 1996. The average cost of the securities was used in the determination of the
realized gains, which totaled $18 million in 1997 and $23 million in 1996 before
income taxes.  Also during 1997 and 1996,  the company  donated a portion of its
available-for-sale  equity securities to Kerr-McGee  Foundation  Corporation,  a
tax-exempt   entity   whose   purpose  is  to   contribute   to   not-for-profit
organizations. The fair value of these donated shares totaled $3 million in 1997
and $16  million in 1996,  which  included  appreciation  of $3 million  and $13
million before income taxes, respectively.

Financial Instruments for Other than Trading Purposes
     In addition to the investments  previously discussed,  the company holds or
issues financial  instruments for other than trading  purposes.  At December 31,
1998 and 1997,  the carrying  amount and estimated  fair value of such financial
instruments for which fair value can be determined are as follows:

                                                    1998              1997
                                             Carrying   Fair  Carrying    Fair
(Millions of dollars)                          Amount  Value    Amount   Value
------------------------------------------------------------------------------
Cash and cash equivalents                       $114    $114      $183    $183
Long-term notes receivable                         3       3         5       5
Contracts to sell foreign currencies              --       2        --       8
Contracts to purchase foreign currencies          --      70        --     102
Short-term borrowings                             36      36        25      25
Total long-term debt                             908   1,017       554     669

     The carrying amount of cash and cash equivalents approximates fair value of
those  instruments  due to  their  short  maturity.  The  fair  value  of  notes
receivable  is based on  discounted  cash  flows or the fair value of the note's
collateral.  The fair value of the company's  short-term  and long-term  debt is
based on the quoted  market prices for the same or similar debt issues or on the
current rates offered to the company for debt with the same remaining  maturity.
The fair value of foreign  currency forward  contracts  represents the aggregate
replacement cost based on financial institutions' quotes.

Hedging Activities
     Most of the company's foreign currency contracts are hedges principally for
chemicals'  accounts  receivable  generated from titanium  dioxide pigment sales
denominated  in foreign  currencies  ($30 million hedged in 1998 and $65 million
hedged  in  1997)  and  the  operating   costs  and  capital   expenditures   of
international  chemical  operations  ($53 million hedged in 1998 and $50 million
hedged in 1997). The purpose of these foreign currency hedging  activities is to
protect the company  from the risk that the  functional  currency  amounts  from
sales to  foreign  customers  and  purchases  from  foreign  suppliers  could be
adversely  affected by changes in foreign  currency  exchange rates. The company
recognized  net  foreign  currency  hedging  gains of $4  million in 1997 and $3
million in 1996. The net foreign  currency  hedging loss  recognized in 1998 was
immaterial.
     Net unrealized  losses on foreign currency  contracts totaled $7 million at
year-end 1998 and $13 million at year-end 1997. Net unrealized  gains totaled $4
million at year-end 1996. The company's foreign currency  contract  positions at
year-end 1998 and 1997 were as follows:

December 31, 1998 -
  - Contracts  maturing  January  1999  through  December  2000 to purchase $113
    million Australian for $77 million
  - Contracts  maturing  January  through  March  1999  to  sell various foreign
    currencies (principally European)for $2 million
December 31, 1997 -
  - Contracts  maturing  January  1998  through  December  1999 to purchase $137
    million Australian for $102 million and 8 million  British  pounds  sterling
    for $12 million
  - Contracts  maturing  January  through  April  1998  to  sell various foreign
    currencies (principally European) for $8 million

     The  company  has  periodically  used oil or natural  gas futures or option
contracts to reduce the effect of the price  volatility of crude oil and natural
gas. The futures contracts permitted settlement by delivery of commodities.
     During 1996,  the company sold forward 10 million  barrels of crude oil and
37 billion cubic feet of natural gas representing  approximately  40% and 36% of
its worldwide  crude oil and natural gas production,  respectively.  Net hedging
losses  recognized in 1996 totaled $37 million.  The effect of the losses was to
reduce the company's  1996 average gross margin for crude oil and natural gas by
$1.04 per barrel and $.11 per MCF, respectively. There were no open crude oil or
natural gas  contracts  at year-end  1996,  and no  contracts  were entered into
during 1998 or 1997.
     Contract amounts do not quantify risk or represent assets or liabilities of
the  company  but are used in the  calculation  of cash  settlements  under  the
contracts.  These financial  instruments  limit the company's  market risks, are
with major financial institutions, expose the company to credit risks and may at
times be  concentrated  with  certain  institutions  or groups of  institutions.
However,  the credit  worthiness of these  institutions is subject to continuing
review, and full performance is anticipated.  Additional  information  regarding
market risk is included in Management's Discussion and Analysis.
     Year-end hedge  positions and activities  during a particular  year are not
necessarily indicative of future activities and results.

16. Taxes, Other than Income Taxes

     Taxes,  other than income taxes, as shown in the Consolidated  Statement of
Income for the years ended December 31, 1998, 1997 and 1996, are composed of the
following:

(Millions of dollars)                           1998  1997  1996
----------------------------------------------------------------
Payroll                                          $12   $11   $11
Property                                           3     4     8
Production/severance                               1     3     9
Other                                              2     2     2
                                                 ---   ---   ---
  Total                                          $18   $20   $30
                                                 ===   ===   ===

17. Employee Stock Option Plans

     The 1998 Long Term  Incentive  Plan (1998 Plan)  authorizes the issuance of
shares of the company's common stock any time prior to December 31, 2007, in the
form of stock options,  restricted stock or long-term  performance  awards.  The
options may be accompanied by stock  appreciation  rights.  A total of 2,300,000
shares of the  company's  common stock is authorized to be issued under the 1998
Plan.
     In January 1998, the Board of Directors approved a broad-based stock option
plan (BSOP) that  provides for the granting of options to purchase the company's
common stock to all full-time  employees,  except officers. A total of 1,500,000
shares of common stock is authorized to be issued under the BSOP.
     The 1987 Long Term Incentive Program (1987 Program) authorized the issuance
of  shares of the  company's  stock  over a 15-year  period in the form of stock
options,  restricted stock or long-term performance awards. The 1987 Program was
terminated  when the  stockholders  approved the 1998 Plan.  No options could be
granted  under the 1987  Program  after  that  time,  although  options  and any
accompanying  stock  appreciation  rights  outstanding may be exercised prior to
their respective expiration dates.
     The company's employee stock options are fixed-price options granted at the
fair  market  value of the  underlying  common  stock on the date of the  grant.
Generally,  one-third  of  each  grant  vests  and  becomes  exercisable  over a
three-year  period  immediately  following  the grant date and  expires 10 years
after the grant date.
     Transactions  during the past three years under these employee stock option
plans are summarized below:
<TABLE>
<CAPTION>

                                                  1998                          1997                          1996
                                     -----------------------------   ---------------------------   ----------------------------
                                                  Weighted-Average              Weighted-Average               Weighted-Average
                                                    Exercise Price                Exercise Price                 Exercise Price
                                       Options          per Option     Options        per Option     Options         per Option
                                       -------          ----------     -------        ----------     -------         ----------

<S>                                  <C>                    <C>      <C>                  <C>      <C>                   <C>   
Outstanding, beginning of year       1,302,577              $56.48   1,246,466            $50.98   1,334,363             $46.46
  Options granted                      785,275               59.19     325,200             68.90     310,800              63.56
  Options exercised                    (56,167)              47.56    (256,986)            45.93    (333,594)             46.40
  Options surrendered upon exercise
    of stock appreciation rights        (4,000)              38.06      (5,000)            32.38     (58,634)             40.80
  Options forfeited                    (24,928)              60.26      (6,703)            57.46      (6,469)             53.00
  Options expired                     (139,839)              60.16        (400)            54.06          --                 --
                                      --------                       ---------                     ---------                   
Outstanding, end of year             1,862,918               57.61   1,302,577             56.48   1,246,466              50.98
                                     =========                       =========                     =========              
Exercisable, end of year               994,430               54.30     750,894             50.87     623,461              46.44
</TABLE>


     The following table summarizes information about stock options issued under
the plans  described  above that are outstanding and exercisable at December 31,
1998:
<TABLE>
<CAPTION>

                         Options Outstanding                                   Options Exercisable
-----------------------------------------------------------------------      -------------------------
                  Range of        Weighted-Average     Weighted-Average               Weighted-Average
           Exercise Prices   Remaining Contractual       Exercise Price                 Exercise Price
  Options       per Option            Life (years)           per Option      Options        per Option
------------------------------------------------------------------------------------------------------

<S>          <C>    <C>                        <C>               <C>         <C>                <C>   
   29,400    $32.38-$39.56                     1.8               $37.84       29,400            $37.84
  386,914    40.81-  49.25                     4.6                45.54      386,914             45.54
  868,236    50.56-  59.66                     8.4                57.76      244,886             54.38
  428,368    61.00-  64.88                     7.7                64.00      267,234             63.96
  150,000    73.50-  73.50                     8.0                73.50       65,996             73.50
---------                                                                    -------
1,862,918    32.38-  73.50                     7.3                57.61      994,430             54.30
</TABLE>

     Financial  Accounting  Standards Board Statement (FAS) No. 123, "Accounting
for Stock-Based  Compensation," prescribes a fair-value method of accounting for
employee stock options under which compensation expense is measured based on the
estimated fair value of stock options at the grant date and recognized  over the
period that the options vest. The company,  however,  chooses to account for its
stock  option  plans under the  optional  intrinsic  value method of APB No. 25,
"Accounting for Stock Issued to Employees," under which no compensation  expense
is  recognized  for  fixed-price  stock  options.  Compensation  cost for  stock
appreciation  rights,  which is recognized  under both accounting  methods,  was
immaterial for 1998, 1997 and 1996.
     Had  compensation  expense been  determined in accordance with FAS No. 123,
the  estimated  weighted-average  fair  value at the grant  date would have been
$11.20, $14.37 and $13.17 per option for those options granted in 1998, 1997 and
1996,  respectively,  and the resulting compensation expense would have affected
net income and per-share amounts as shown in the following table.  These amounts
may not be  representative of future  compensation  expense using the fair-value
method of accounting for employee stock options as the number of options granted
in a particular  year may not be indicative of the number of options  granted in
future years,  and the  fair-value  method of accounting has not been applied to
options granted prior to January 1, 1995.

(Millions of dollars, except per-share amounts)         1998     1997    1996
-----------------------------------------------------------------------------
Net income -
  As reported                                          $  50     $194    $220
  Pro forma                                               46      191     218
Net income per share -
  Basic -
    As reported                                         1.06     4.06    4.45
    Pro forma                                            .98     4.00    4.42
  Diluted -
    As reported                                         1.06     4.04    4.43
    Pro forma                                            .98     3.99    4.40

     The fair value of each option granted in 1998,  1997 and 1996 was estimated
as of the date of grant using the  Black-Scholes  option  pricing model with the
following weighted-average assumptions.

                                                     1998     1997     1996
                                                     ----------------------
Expected volatility                                  17.3%    17.5%    17.9%
Risk-free interest rate                               5.4      6.3      6.1
Expected dividend yield                               3.0%     3.1%     3.1%
Expected life (years)                                 5.8      5.8      5.8
 

18. Restructuring Charges        

     The company  completed a work process  review  during 1998 that resulted in
the elimination of nonessential work processes, organizational restructuring and
employee  reductions  in both the  operating  and staff units.  As a result,  75
employees  were notified that their  positions  would be  eliminated.  Most were
terminated during 1998.
     The restructuring of the exploration and production operating unit began in
1995  with  the  unit's  reorganization  of  its  administrative  and  operating
functions and continued  throughout  1996 and 1997 with the unit's merger of its
North American  onshore  properties into Devon and the relocation of the unit to
Houston,  Texas.  This program was  essentially  completed at year-end  1997 and
resulted in approximately 300 employees terminating their employment.
     During the three-year period ended December 31, 1998, the company accrued a
total of $19 million for the cost of termination benefits for retiring employees
to be paid from retirement plan assets, future compensation,  relocation,  lease
cancellation  and  outplacement.  The $2 million  reserve at December  31, 1998,
primarily  represents  remaining  severance costs, which are expected to be paid
and charged to the reserve during 1999. The accruals,  expenditures  and reserve
balances are set forth below:

(Millions of dollars)                                  1998         1997
------------------------------------------------------------------------
Beginning balance                                       $ 2         $ 10
  Accruals                                                7            2
  Retirement benefits to be paid from plan assets        (3)          --
  Payments                                               (4)         (10)
                                                        ---         ---- 
Ending balance                                          $ 2         $  2
                                                        ===         ====

19. Employee Stock Ownership Plan

     In 1989,  the company's  Board of Directors  approved a leveraged  Employee
Stock  Ownership  Plan  (ESOP)  into  which  is  paid  the  company's   matching
contribution  for the employees'  contributions  to the  Kerr-McGee  Corporation
Savings  Investment Plan (SIP). Most of the company's  employees are eligible to
participate  in both the ESOP  and the  SIP.  Although  the ESOP and the SIP are
separate  plans,  matching   contributions  to  the  ESOP  are  contingent  upon
participants' contributions to the SIP.
     In 1989,  the ESOP  trust  borrowed  $125  million  from a group of lending
institutions and used the proceeds to purchase approximately 3 million shares of
the company's treasury stock. The company used the $125 million in proceeds from
the sale of the stock to acquire shares of its common stock in  open-market  and
privately  negotiated  transactions.  In  1996,  a  portion  of the  third-party
borrowings was replaced with a note payable to the company (sponsor  financing).
The  third-party  borrowings  are guaranteed by the company and are reflected in
the Consolidated  Balance Sheet as Long-Term Debt,  while the sponsor  financing
does not appear in the company's balance sheet.
     The company  stock  acquired  by the ESOP trust is held in a loan  suspense
account.  Deferred  compensation  representing  these unallocated ESOP shares is
reflected  as a  reduction  of  stockholders'  equity.  The  company's  matching
contribution  and  dividends  on the  shares  held by the ESOP trust are used to
repay the loan,  and stock is  released  from the loan  suspense  account as the
principal  and interest are paid.  The expense is  recognized  and stock is then
allocated  to  participants'  accounts  at  market  value  as the  participants'
contributions  are made to the SIP.  Long-term  debt is reduced as payments  are
made on the  third-party  financing.  Dividends paid on the common stock held in
participants' accounts are also used to repay the loans, and stock with a market
value equal to the amount of dividends is allocated to participants' accounts.
     At  December  31,  1998 and  1997,  the ESOP  trust  held  shares  of stock
allocated to participants' accounts and in the loan suspense account as follows:

(Thousands of shares)                               1998      1997
------------------------------------------------------------------
Participants' accounts                             1,196     1,343
Loan suspense account                                934     1,110

     The shares  allocated  to  participants  at  December  31,  1998,  included
approximately  45,000 shares released in January 1999, and at December 31, 1997,
included approximately 15,000 shares released in January 1998.
     All  ESOP  shares  are  considered  outstanding  for net  income  per-share
calculations. Dividends on ESOP shares are charged to retained earnings.
     Compensation expense is recognized using the cost method and is reduced for
dividends  paid  on  the  unallocated  ESOP  shares.   The  company   recognized
ESOP-related  expense of $11 million,  $10 million and $12 million in 1998, 1997
and 1996,  respectively.  These amounts include interest expense incurred on the
third-party  ESOP debt of $5  million  in both 1998 and 1997 and $6  million  in
1996. The company  contributed $2 million, $1 million and $9 million to the ESOP
in 1998,  1997 and  1996,  respectively.  The cash  contributions  are net of $4
million for the  dividends  paid on the company  stock held by the ESOP trust in
each of the years 1998, 1997 and 1996.

20. Employee Benefit Plans

     The company has both noncontributory  defined-benefit  retirement plans and
company-sponsored  contributory  postretirement  plans for health  care and life
insurance.  Most employees are covered under the company's retirement plans, and
substantially  all U.S.  employees  may become  eligible for the  postretirement
benefits if they reach  retirement age while working for the company.  Following
are the changes in the benefit obligations during the past two years:
<TABLE>
<CAPTION>

                                                                   Postretirement Health 
                                             Retirement Plans          and Life Plans
                                             ----------------      ---------------------

(Millions of dollars)                        1998        1997        1998           1997
----------------------------------------------------------------------------------------

<S>                                          <C>          <C>         <C>            <C> 
Benefit obligation, beginning of year        $438         $400        $131           $121
  Service cost                                 10           10           2              2
  Interest cost                                32           28           8              9
  Plan amendments                              26           --          --             --
  Net actuarial loss                           17           38          10              7
  Acquisitions                                  6           --          --             --
  Dispositions, curtailments, settlements       7          (12)         (9)            --
  Benefits paid                               (30)         (26)         (8)            (8)
                                             ----         ----        ----           ----
Benefit obligation, end of year              $506         $438        $134           $131
                                             ====         ====        ====           ====
</TABLE>

     The benefit amount that can be covered by the retirement plans that qualify
under the Employee  Retirement Income Security Act of 1974 (ERISA) is limited by
both ERISA and the Internal  Revenue code.  Therefore,  the company has unfunded
supplemental  plans designed to maintain  benefits for all employees at the plan
formula  level  and to  provide  senior  executives  with  benefits  equal  to a
specified percentage of their final average compensation. The benefit obligation
for the  unfunded  retirement  plans was $18 million and $14 million at December
31, 1998 and 1997, respectively.  Although not considered plan assets, a grantor
trust was  established  from which  payments  for certain of these  supplemental
plans are made.  The trust had a balance of $10 million at year-end  1998 and $7
million at year-end 1997. The postretirement plans are also unfunded.
     Following  are the changes in the fair value of plan assets during the past
two years and the  reconciliation  of the plans'  funded  status to the  amounts
recognized in the financial statements at December 31, 1998 and 1997:
<TABLE>
<CAPTION>

                                                                                      Postretirement Health
                                                               Retirement Plans           and Life Plans
                                                               ----------------       ---------------------

(Millions of dollars)                                          1998        1997         1998         1997
-----------------------------------------------------------------------------------------------------------

<S>                                                           <C>         <C>          <C>          <C>  
Fair value of plan assets, beginning of year                  $ 639       $ 538        $  --        $  --
  Actual return on plan assets                                  275         126           --           --
  Employer contribution                                           1          13           --           --
  Benefits paid                                                 (30)        (26)          --           --
  Settlements                                                    --         (12)          --           --
                                                              -----       -----        -----        -----
Fair value of plan assets, end of year                          885         639           --           --
Benefit obligation                                             (506)       (438)        (134)        (131)
                                                              -----       -----        -----        ----- 

Funded status of plans - over (under)                           379         201         (134)        (131)
  Amounts not recognized in the Consolidated Balance Sheet-
    Transition asset                                             (9)        (13)          --           --
    Prior service costs                                          30          14           --           --
    Net actuarial loss (gain)                                  (372)       (165)          13            3
                                                              -----       -----        -----        -----
Prepaid expense (accrued liability)                           $  28       $  37        $(121)       $(128)
                                                              =====       =====        =====        ===== 
</TABLE>

     Following  is  the   classification  of  the  amounts   recognized  in  the
Consolidated Balance Sheet at December 31, 1998 and 1997:
<TABLE>
<CAPTION>

                                                                                     Postretirement Health
                                                               Retirement Plans          and Life Plans
                                                               ----------------      ---------------------

(Millions of dollars)                                          1998        1997        1998         1997
----------------------------------------------------------------------------------------------------------

<S>                                                           <C>          <C>        <C>          <C>   
Prepaid benefits expense                                      $  42        $ 42       $  --        $  -- 
Accrued benefit liability                                       (20)        (11)       (121)        (128)
Additional minimum liability -
  Intangible asset                                                3           6          --           --
  Accumulated other comprehensive income                          3          --          --           --
                                                              -----        ----       -----        -----
    Total                                                     $  28        $ 37       $(121)       $(128)
                                                              =====        ====       =====        ===== 
</TABLE>

     Total costs recognized for employee  retirement and postretirement  benefit
plans for each of the  years  ended  December  31,  1998,  1997 and 1996 were as
follows:
<TABLE>
<CAPTION>

                                                Retirement Plans           Postretirement Health and Life Plans
                                             ----------------------        ------------------------------------
(Millions of dollars)                        1998     1997     1996           1998         1997           1996
--------------------------------------------------------------------------------------------------------------

<S>                                           <C>      <C>      <C>            <C>          <C>            <C>
Net periodic cost -
  Service cost                                $10      $10      $10            $ 2          $ 2            $ 2
  Interest cost                                32       29       28              8            9              9
  Expected return on plan assets              (49)     (42)     (39)            --           --             --
  Net amortization -
    Transition asset                           (4)      (4)      (4)            --           --             --
    Prior service cost                          3        2        2             --           --             --
    Net actuarial gain                         (1)      (1)      --             --           --             --
                                              ---      ---      ---            ---          ---            ---
                                               (9)      (6)      (3)            10           11             11
Dispositions, curtailments, settlements        14        6        2             (9)          --             --
                                              ---      ---      ---            ---          ---            ---
      Total                                   $ 5      $--      $(1)           $ 1          $11            $11
                                              ===      ===      ===            ===          ===            ===
</TABLE>

     The following  assumptions  were used in estimating  the actuarial  present
value of the plans' benefit obligations and net periodic expense:
                                            1998     1997     1996
                                            ----     ----     ----
Discount rate                               6.75%     7.0%     7.5%
Expected return on plan assets              9.00      9.0      9.0
Rate of compensation increases              5.00      5.0      5.0

     The  health  care cost  trend  rate used to  determine  the  year-end  1998
postretirement benefit obligation was 7.5% in 1999, gradually declining to 5% in
the year 2009 and  thereafter.  A 1% increase  in the  assumed  health care cost
trend  rate for each  future  year would  increase  the  postretirement  benefit
obligation  at December 31, 1998,  by $13 million and increase the  aggregate of
the service and interest cost components of net periodic  postretirement expense
for 1998 by $1  million.  A 1%  decrease  in the trend rate for each future year
would reduce the benefit obligation at year-end 1998 by $11 million.  It was not
practical  to  calculate  the  effect on net  periodic  expense  of the  percent
decrease in the health care cost trend rate.

21. Reporting by Business Segments

     The company is managed in two industry  segments:  oil and gas  exploration
and production and manufacturing and marketing of titanium dioxide pigment.  The
exploration and production unit explores for,  develops and produces oil and gas
in the Gulf of Mexico, United Kingdom sector of the North Sea, Indonesia, China,
Yemen,  Thailand  and  Gabon.  The  chemicals  group  manufactures  and  markets
primarily titanium dioxide pigment, as well as electrolytic chemicals and forest
products. The chemicals segment has operations in the United States,  Australia,
Germany and Belgium.
     Crude  oil  sales to an  individually  significant  customer  totaled  $156
million  and $202  million  for  1997  and  1996,  respectively.  There  were no
individually  significant  customers in 1998. Sales to subsidiary  companies are
eliminated as described in Note 1.
<TABLE>
<CAPTION>

(Millions of dollars)                                           1998       1997       1996
------------------------------------------------------------------------------------------
<S>                                                           <C>        <C>        <C>
Sales -
  Exploration and production                                  $  463     $  628     $  874
  Chemicals                                                      933        760        692
                                                              ------     ------     ------
    Total                                                     $1,396     $1,388     $1,566
                                                              ======     ======     ======
Operating profit (loss)(1) -
  Exploration and production$                                   (302)    $  175     $  204
  Chemicals                                                       56         81         85
                                                              ------     ------     ------
    Total                                                     $ (246)    $  256     $  289
                                                              ======     ======     ======
Net operating profit (loss)(1) -
  Exploration and production$                                   (205)    $  107     $  136
  Chemicals                                                       35         52         53
                                                              ------     ------     ------
    Total                                                       (170)       159        189
Net interest expense(1)                                          (15)       (24)       (29)
Net nonoperating income (expense)(1)                             (42)        26          4
Income from discontinued operations, net of income taxes         277         33         56
                                                              ------     ------     ------
Net income                                                    $   50     $  194     $  220
                                                              ======     ======     ======
Sales -
  U.S. operations                                             $  805     $  889     $1,026
                                                              ------     ------     ------
  International operations -
    North Sea - exploration and production                       195        215        289
    Southeast Asia - exploration and production                   46         60         25
    Australia - chemicals                                        178        185        151
    Europe - chemicals                                           163         --         --
    Other                                                          9         39         75
                                                              ------     ------     ------
                                                                 591        499        540
                                                              ------     ------     ------
      Total                                                   $1,396     $1,388     $1,566
                                                              ======     ======     ======
Operating profit (loss)(1) -
  U.S. operations                                             $ (24)     $  159     $  174
                                                              -----      ------     ------
  International operations -
    Southeast Asia - exploration and production                (132)          1         --
    North Sea - exploration and production                     (131)         80         93
    Europe - chemicals                                           23          --         --
    Australia - chemicals                                        19          13          9
    Other                                                        (1)          3         13
                                                              -----      ------     ------
                                                               (222)         97        115
                                                              -----      ------     ------
      Total                                                   $(246)     $  256     $  289
                                                              =====      ======     ======

(1) Includes special items. Refer to Management's Discussion and Analysis.
</TABLE>


<TABLE>
<CAPTION>

(Millions of dollars)                                           1998       1997       1996
------------------------------------------------------------------------------------------
<S>                                                           <C>        <C>        <C>
Depreciation, depletion and amortization expense - 
  Exploration and production$                                    210       $186       $218
  Chemicals                                                       68         55         55
  All other                                                        6          5          4
  Discontinued operations                                         14         25         30
                                                              ------     ------     ------
    Total                                                     $  298     $  271     $  307
                                                              ======     ======     ======
Cash capital expenditures -
  Exploration and production$                                    440       $213       $239
  Chemicals                                                       92         91        118
  All other                                                        8         10          6
  Discontinued operations                                         10         27         29
                                                              ------     ------     ------
    Total                                                        550        341        392
                                                              ------     ------     ------
Exploration expenses -
  Exploration and production -
     Dry hole costs                                               37         25         37
     Amortization of undeveloped leases                           15          8         10
     Other                                                        31         30         25
                                                              ------     ------     ------
       Total                                                      83         63         72
  Minerals and other                                               1          2          2
                                                              ------     ------     ------
       Total exploration expenses                                 84         65         74
  Less - Amortization of oil and gas and minerals leases
         and other noncash expenses                              (17)        (8)       (14)
                                                              ------     ------     ------ 
                                                                  67         57         60
                                                              ------     ------     ------
      Total cash capital expenditures and cash
        exploration expenses                                  $  617     $  398     $  452
                                                              ======     ======     ======

Identifiable assets -
  Exploration and production                                  $1,973     $1,681     $1,667
  Chemicals                                                    1,098        875        886
                                                              ------     ------     ------
    Total                                                      3,071      2,556      2,553
Corporate and other assets                                       270        270        295
Discontinued operations                                           --        270        276
                                                              ------     ------     ------
      Total                                                   $3,341     $3,096     $3,124
                                                              ======     ======     ======

Identifiable assets -
  U.S. operations                                             $1,246     $1,362     $1,390
                                                              ------     ------     ------
  International operations -
    North Sea - exploration and production                     1,224        699        651
    Southeast Asia - exploration and production                   97        216        196
    Australia - chemicals                                        245        243        268
    Europe - chemicals                                           223         --         --
    Other                                                         36         36         48
                                                              ------     ------     ------
                                                               1,825      1,194      1,163
                                                              ------     ------     ------
      Total                                                   $3,071     $2,556     $2,553
                                                              ======     ======     ======
</TABLE>

<TABLE>
<CAPTION>

(Millions of dollars)                                           1998       1997       1996
------------------------------------------------------------------------------------------
<S>                                                           <C>        <C>        <C>
Net property, plant and equipment -
  U.S. operations -                                           $  853     $1,096     $1,086
  International operations -
    North Sea - exploration and production                     1,125        581        555
     Southeast Asia - exploration and production                  77        186        171
     Australia - chemicals                                       129        133        135
     Europe - chemicals                                           99         --         --
     Other                                                         5          2          1
                                                              ------     ------     ------
       Total                                                  $2,288     $1,998     $1,948
                                                              ======     ======     ======

Net assets -
  U.S. operations                                             $  270     $   617    $  582
                                                              ------     -------    ------
  International operations -
  North Sea - exploration and production                         654         475       413
  Southeast Asia - exploration and production                     22         167       126
  Australia - chemicals                                          204         152       211
  Europe - chemicals                                             142          --        --
  Other                                                           41          29        35
                                                              ------      ------    ------
                                                               1,063         823       785
                                                              ------      ------    ------
     Total                                                    $1,333      $1,440    $1,367
                                                              ======      ======    ======
</TABLE>

22. Discontinued Operations

     The  company  exited  from the coal  business in 1998 with the sales of its
mining operations at Galatia,  Illinois, and Kerr-McGee Coal Corporation,  which
held  Jacobs  Ranch Mine in  Wyoming.  The cash sales  resulted  in  proceeds of
approximately  $600 million.  Coal assets and  liabilities at December 31, 1997,
are included as part of the appropriate line items in the  Consolidated  Balance
Sheet.  Included at  December  31,  1997,  are  current  assets of $50  million;
property,  plant and  equipment  of $216  million;  other  assets of $4 million;
current  liabilities  of $40 million and long-term  liabilities  of $73 million.
Summarized financial information for discontinued operations for the three years
ended December 31, 1998, is as follows:
<TABLE>
<CAPTION>

(Millions of dollars, except per-share amounts)                     1998       1997       1996
----------------------------------------------------------------------------------------------

<S>                                                                 <C>        <C>       <C>  
Sales                                                               $174       $323      $ 365
                                                                    ====       ====      =====
Income from discontinued operations -
  Gain on disposal, net of income taxes of $149                     $257       $ --      $  --
  Income from operations, net of income taxes of $7 in 1998,
    $12 in 1997 and $18 in 1996                                       20         33         56
                                                                    ----       ----      -----
      Total                                                         $277       $ 33      $  56
                                                                    ====       ====      =====
Net income per share -
  Basic -
    Gain on sale                                                    $5.42      $ --      $  --
    Income from operations                                            .42       .68       1.13
                                                                    -----      ----      -----
      Total                                                         $5.84      $.68      $1.13
                                                                    =====      ====      =====
  Diluted -
    Gain on sale                                                    $5.42      $ --      $  --
    Income from operations                                            .42       .68       1.13
                                                                    -----      ----      -----
      Total                                                         $5.84      $.68      $1.13
                                                                    =====      ====      =====
</TABLE>


23. Merger with Oryx Energy Company (Unaudited)

     On February 26, 1999,  the company  completed the merger with Oryx upon the
approval  of the  shareholders  of each  company.  Under the terms of the merger
agreement,  each outstanding  share of Oryx common stock was exchanged for 0.369
shares of newly issued  company  stock.  Approximately  39 million shares of the
company  stock were issued to the Oryx  shareholders,  bringing the total shares
outstanding  to  approximately  86 million.  The merger  qualifies as a tax-free
exchange  to Oryx  shareholders  and has  been  accounted  for as a  pooling  of
interests.  Presented below are combined condensed financial  statements for the
year ended and at December 31, 1998, as though the merger had been  completed at
year-end.
<TABLE>

Combined Condensed Statement of Income

<CAPTION>
                                                                                                                   Combined
(Millions of dollars, except per-share amounts)         Kerr-McGee       Oryx     Reclassifications Adjustments(1)   Company
----------------------------------------------------------------------------------------------------------------------------

<S>                                                         <C>         <C>                   <C>          <C>        <C>   
Sales                                                       $1,396      $ 820                 $(16)        $ --       $2,200
                                                            ------      -----                 ----         ----       ------
Costs and operating expenses                                 1,735        868                  (13)          16        2,606
Interest and debt expense                                       58         99                   --           --          157
                                                            ------      -----                 ----         ----       ------
  Total costs and expenses                                   1,793        967                  (13)          16        2,763
                                                            ------      -----                 ----         ----       ------
                                                              (397)      (147)                  (3)         (16)        (563)
Other income                                                    22         --                   21           --           43
Provision (benefit) for income taxes                          (148)       (52)                  18            7         (175)
                                                            ------      -----                 ----         ----       ------ 
Loss from continuing operations                               (227)       (95)                  --          (23)        (345)
Income from discontinued operations                            277         --                   --           --          277
                                                            ------      -----                 ----         ----       ------
Net income (loss)                                           $   50      $ (95)                $ --         $(23)      $  (68)
                                                            ======      =====                 ==           ====       ====== 

Net loss per share -
  Continuing operations                                                                                               $(3.98)
  Total                                                                                                                 (.78)
</TABLE>

<TABLE>

Combined Condensed Balance Sheet
<CAPTION>
                                                                                                                    Combined
(Millions of dollars)                                   Kerr-McGee        Oryx    Reclassifications Adjustments(1)   Company
----------------------------------------------------------------------------------------------------------------------------

<S>                                                         <C>         <C>                  <C>          <C>         <C>   
Assets -
  Current assets                                            $  751      $  131               $ (5)        $ --        $  877
  Property, plant and equipment - net                        2,288       1,765                123          (23)        4,153
  Other noncurrent assets                                      302          88                 (1)          --           389
                                                            ------      ------               ----         ----        ------
    Total                                                   $3,341      $1,984               $117         $(23)       $5,419
                                                            ======      ======               ====         ====        ======

Liabilities and stockholders' equity -
  Current liabilities                                       $  536      $  505               $  9         $ --        $1,050
  Long-term debt                                               901       1,077                 --           --         1,978
  Deferred credits and reserves                                571         329                108            9         1,017
  Stockholders' equity                                       1,333          73                 --          (32)        1,374
                                                            ------      ------               ----         ----        ------
    Total                                                   $3,341      $1,984               $117         $(23)       $5,419
                                                            ======      ======               ====         ====        ======

(1) These amounts  reflect  adjustments to conform  accounting  methods  between
Kerr-McGee and Oryx and apply the pooling of interests  method of accounting for
business combinations.
</TABLE>
         

24. Results of Operations from Crude Oil and Natural Gas Activities

     The results of operations from crude oil and natural gas activities for the
three years ended December 31, 1998, consist of the following:
<TABLE>
<CAPTION>

                                                                                                                        Proportional
                                                                                                                            Interest
                                                                                                           Results of      in Equity
                                     Production     Other              Depreciation            Income Tax Operations,    Affiliate's
                              Gross   (Lifting)   Related Exploration and Depletion      Asset    Expense   Producing     Results of
(Millions of dollars)      Revenues       Costs  Costs(1)    Expenses      Expenses Impairment  (Benefit)  Activities  Operations(2)
------------------------------------------------------------------------------------------------------------------------------------

<S>                            <C>         <C>        <C>         <C>          <C>        <C>       <C>        <C>             <C>
1998 -
  Domestic                     $222        $ 48       $31         $44          $ 91       $ 38      $(11)      $ (19)          $(11)
  North Sea                     179          63         3          13            85        160       (43)       (102)            --
  Other international            46          14         9          26            19        115       (44)        (93)             7
                               ----        ----       ---         ---           ---       ----      ----       -----           ----
   Total crude oil and
    natural gas activities      447         125        43          83           195        313       (98)       (214)            (4)
  Other(3)                       16           5         1          --            --         --         1           9             --
       --                      ----        ----       ---         ---          ----       ----      ----       -----           ---- 
     Total                     $463        $130       $44         $83          $195       $313      $(97)      $(205)          $ (4)
                               ====        ====       ===         ===          ====       ====      ====       =====           ==== 

1997 -
   Domestic                    $309        $ 50       $25         $25          $105       $ --      $ 39       $  65           $ 25
   North Sea                    190          49         7          13            53         --        27          41             --
   Other international           59          12        12          25            20         --        (4)         (6)             3
                               ----        ----       ---         ---          ----       ----      ----       -----           ----
    Total crude oil and
     natural gas activities     558         111        44          63           178         --        62         100             28
   Other(3)                      70          55         2          --            --         --         6           7             --
        --                     ----        ----       ---         ---          ----       ----       ---       -----           ----
      Total                    $628        $166       $46         $63          $178       $ --       $68       $ 107           $ 28
                               ====        ====       ===         ===          ====       ====       ===       =====           ====

1996 -
   Domestic                    $397        $ 83       $31         $26          $127       $ 22       $35       $  73           $ --
   North Sea                    240          57         8          36            57         --        30          52             --
   Other international           57          18        11          10            23         --        (1)         (4)            --
                               ----        ----       ---         ---          ----       ----       ----      -----           ----
    Total crude oil and
     natural gas activities     694         158        50          72           207         22        64          121            --
   Other(3)                     180         159         1          --             1         --         4           15            --
        --                     ----        ----       ---         ---          ----       ----       ---       ------          ----
      Total                    $874        $317       $51         $72          $208       $ 22       $68       $  136          $ --
                               ====        ====       ===         ===          ====       ====       ===       ======          ====

(1) Includes  restructuring  charges of $2 million in both 1998 and 1997 and $10
million in 1996 (see Note 18).
(2) The equity  affiliate  follows the "full cost" method of accounting  for oil
and gas exploration and production activities.
(3) Includes gas  marketing,  gas processing  plants,  pipelines and other items
that do not fit the  definition of crude oil and natural gas activities but have
been included above to reconcile to the segment presentations.
</TABLE>

     The table below  presents the  company's  average  per-unit  sales price of
proprietary  crude oil and  natural gas and  production  costs per barrel of oil
equivalent  for each of the past three years.  Natural gas  production  has been
converted to a barrel of o il equivalent  based on approximate  relative heating
value (6 MCF equals 1 barrel).
          

                                                  1998         1997         1996
                                                ------       ------       ------
Average sales price -
  Crude oil (per barrel)
     Domestic                                   $11.70       $18.53       $19.36
     North Sea                                   11.97        18.77        19.08
     Other international                         11.96        17.75        18.63
       Average                                   11.88        18.51        19.16

  Natural gas (per MCF)
     Domestic                                     2.12         2.57         2.16
     North Sea                                    2.49         2.52         2.64
     Other international                            --           --         1.14
       Average                                    2.18         2.56         2.12

Production costs -
  (Per barrel of oil equivalent)
    Domestic                                      2.62         2.75         3.32
    North Sea                                     4.25         4.70         4.33
    Other international                           3.92         3.56         4.23
      Average                                     3.41         3.48         3.72

25. Capitalized Costs of Crude Oil and Natural Gas Activities

     Capitalized  costs of crude oil and natural gas  activities and the related
reserves for  depreciation,  depletion and  amortization  at the end of 1998 and
1997 are set forth in the table below. Not included in the amounts shown is $221
million  that  represents  the  company's  proportional  interest  in an  equity
affiliate's net  capitalized  costs at both December 31, 1998 and 1997 (see Note
4). The equity  affiliate  follows the "full cost" method of accounting  for oil
and gas exploration and production activities.

(Millions of dollars)                                           1998      1997
------------------------------------------------------------------------------
Capitalized costs -
  Proved properties                                           $3,260    $2,709
  Unproved properties                                            399       134
  Other                                                           51        45
                                                              ------    ------
    Total                                                      3,710     2,888
                                                              ------    ------
Reserves for depreciation, depletion and amortization -
  Proved properties                                            1,986     1,623
  Unproved properties                                             41        30
  Other                                                           26        24
                                                              ------    ------
    Total                                                      2,053     1,677
                                                              ------    ------
      Net capitalized costs                                   $1,657    $1,211
                                                              ======    ======

26. Standardized Measure  of and  Reconciliation of Changes in Discounted Future
    Net Cash Flows (Unaudited)

     The  standardized  measure  of  future  net  cash  flows  presented  in the
following  table was computed using year-end prices and costs and a 10% discount
factor.  The future income tax expense was computed by applying the  appropriate
year-end  statutory  rates,  with  consideration  of future  tax  rates  already
legislated,  to the  future  pre-tax  net cash  flows  less the tax basis of the
properties  involved.  However, the company cautions that actual future net cash
flows  may vary  considerably  from  these  estimates.  Although  the  company's
estimates of total reserves,  development  costs and production rates were based
on the best information available, the development and production of the oil and
gas reserves may not occur in the periods  assumed.  Actual prices  realized and
costs incurred may vary significantly from those used. Therefore, such estimated
future net cash flow  computations  should not be  considered  to represent  the
company's  estimate of the  expected  revenues or the current  value of existing
proved reserves.
<TABLE>
<CAPTION>

                                                                                                    Standardized       Proportional
                                                 Future                                               Measure of Interest in Equity
                                            Development                                       10%     Discounted        Affiliate's
                                Future   and Production          Future     Future Net     Annual     Future Net       Standardized
(Millions of dollars)     Cash Inflows            Costs    Income Taxes     Cash Flows   Discount     Cash Flows            Measure
-----------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>              <C>              <C>           <C>          <C>          <C>                  <C> 
1998 -
  Domestic                      $  889           $  352           $ 139         $  398       $ 97         $  301               $102
  North Sea                      1,759            1,069             135            555        175            380                 --
  Other international              546              327              84            135         83             52                 90
                                ------           ------           -----         ------       ----         ------               ----
    Total                       $3,194           $1,748           $ 358         $1,088       $355         $  733               $192
                                ======           ======           =====         ======       ====         ======               ====

1997 -
Domestic                        $1,407           $  403           $  290        $  714       $242         $  472               $205
North Sea                        1,807              813              266           728        266            462                 --
Other international                705              324               97           284         87            197                 19
                                ------           ------           ------        ------       ----         ------               ----
  Total                         $3,919           $1,540           $  653        $1,726       $595         $1,131               $224
                                ======           ======           ======        ======       ====         ======               ====

1996 -
Domestic                        $2,217           $  435           $  552        $1,230       $411         $  819               $336
North Sea                        2,610              841              638         1,131        382            749                 --
Other international                904              395              133           376        117            259                 28
                                ------           ------           ------        ------       ----         ------               ----
  Total                         $5,731           $1,671           $1,323        $2,737       $910         $1,827(1)            $364
                                ======           ======           ======        ======       ====         ======               ====

(1) Includes $(8) million for properties held for sale.
</TABLE>


     The  changes  in the  standardized  measure  of future  net cash  flows are
presented below for each of the past three years:
<TABLE>
<CAPTION>

(Millions of dollars)                                          1998       1997       1996
-----------------------------------------------------------------------------------------
<S>                                                          <C>       <C>         <C>   
Net change in sales, transfer prices and production costs    $ (831)   $(1,121)    $  847
Changes in estimated future development costs                  (168)       (64)        45
Sales and transfers less production costs                      (322)      (446)      (516)
Purchases of reserves in place                                  156       --            1
Changes due to extensions, discoveries, etc                      46        108        474
Changes due to revisions in quantity estimates                   17         37        116
Changes due to sales of reserves in place                       (11)        (8)      (139)
Changes due to reserves merged into equity affiliate             --         --       (511)
Current period development costs                                342        152        155
Accretion of discount                                           153        261        199
Changes in income taxes                                         181        384       (289)
Timing and other                                                 39          1        (52)
                                                             ------    -------     ------ 
  Net change                                                   (398)      (696)       330
Total at beginning of year                                    1,131      1,827      1,497
                                                             ------    -------     ------
Total at end of year                                         $  733    $ 1,131     $1,827
                                                             ======    =======     ======
</TABLE>

27. Crude Oil, Condensate and Natural Gas Net Reserves (Unaudited)

     The  estimates  of proved  reserves  have been  prepared  by the  company's
geologists  and  engineers  in  accordance  with  the  Securities  and  Exchange
Commission  definitions.  Such estimates include reserves on certain  properties
that are partially  undeveloped  and reserves that may be obtained in the future
by improved recovery operations now in operation or for which successful testing
has been  demonstrated.  The  company  has no proved  reserves  attributable  to
long-term  supply  agreements with  governments or consolidated  subsidiaries in
which there are  significant  minority  interests.  At December  31,  1996,  the
company merged its North American  onshore  properties into an equity  affiliate
(see Note 4).
     The following table  summarizes the changes in the estimated  quantities of
the company's  crude oil and  condensate  and natural gas reserves for the three
years ended December 31, 1998.
<TABLE>
<CAPTION>

                                                                   Crude Oil and Condensate                   Natural Gas
                                                                    (Millions of barrels)               (Billions of cubic feet)
                                                              ---------------------------------    --------------------------------
                                                                                   Other                               Other
                                                                       North    Interna-                    North   Interna-
                                                              Domestic   Sea      tional  Total    Domestic   Sea     tional  Total
                                                              -------- -----    --------  -----    -------- -----   --------  -----
<S>                                                                <C>   <C>         <C>    <C>        <C>    <C>        <C>   <C>
Proved developed and undeveloped reserves -
  Balance December 31, 1995(1)                                      66    62          42    170         519   191         69    779
    Revisions of previous estimates                                 12    (1)         (1)    10          (1)  (10)        (1)   (12)
    Purchases of reserves in place                                  --    --          --     --           1    --         --      1
    Sales of reserves in place                                     (10)   --          (1)   (11)        (28)   --        (18)   (46)
    Reserves merged into equity affiliate                          (16)   --          (9)   (25)       (122)   --        (41)  (163)
    Extensions, discoveries and other additions                      3    39           7     49          27     2         39     68
    Production                                                     (11)  (11)         (3)   (25)        (84)  (11)        (9)  (104)
                                                                   ---   ---          --    ---         ---   ---         --   ---- 

  Balance December 31, 1996(1)                                      44    89          35    168         312   172         39    523
    Revisions of previous estimates                                  5     1           1      7          (1)   29          3     31
    Sales of reserves in place                                      --    (1)         --     (1)        (27)   --         --    (27)
    Extensions, discoveries and other additions                      7    --           4     11          37    --          4     41
    Production                                                      (9)   (8)         (4)   (21)        (56)  (12)        --    (68)
                                                                   ---   ---          --    ---         ---   ---         --    --- 
   
  Balance December 31, 1997                                         47     81         36     164        265   189         46    500
    Revisions of previous estimates                                  3      2        (15)    (10)         2     7         13     22
    Purchases of reserves in place                                  --     45         --      45         --    46         --     46
    Sales of reserves in place                                      (1)    --         --      (1)        (8)   --         --     (8)
    Extensions, discoveries and other additions                      1      1          5       7         23     1        103    127
    Production                                                      (8)   (12)        (4)    (24)       (60)  (13)        --    (73)
                                                                   ---    ---         --     ---        ---   ---        ---    --- 
 
  Balance December 31, 1998                                         42    117         22     181        222   230        162    614
                                                                    ==    ===         ==     ===        ===   ===        ===    ===
    
  Proportional interest in equity affiliate's reserves(2) -
    December 31, 1996                                               22     --          3      25        172    --         13    185
    December 31, 1997                                               22     --          3      25        175    --         15    190
    December 31, 1998                                               11     --          9      20        122    --        124    246
Proved developed reserves -
    December 31, 1996(1)                                            26     45         20      91        183   161         --    344
    December 31, 1997                                               28     33         36      97        166   147         --    313
    December 31, 1998                                               26     62         16     104        176   151         --    327

  Proportional interest in equity affiliate's reserves(2) -
    December 31, 1996                                               20     --          3      23        164    --         13    177
    December 31, 1997                                               20     --          2      22        142    --         14    156
    December 31, 1998                                               10     --          8      18         96    --        120    216

(1)  Includes 1 million  barrels of oil and 3 billion  cubic feet of natural gas
held for sale at December 31, 1996, and 12 million barrels of oil and 57 billion
cubic feet of natural gas held for sale at December 31, 1995 (see Note 10).

(2) During 1998, the equity affiliate  merged with a third party,  which reduced
the company's ownership interest in the affiliate.  The company's  proportionate
interest  reflects its ownership  interest at the respective  year-end (see Note
4).
</TABLE>

          
     The  following  presents  the  company's  barrel of oil  equivalent  proved
developed and undeveloped  reserves based on approximate  relative heating value
(6 MCF equals 1 barrel).
<TABLE>
<CAPTION>

                                                                         North          Other
(Millions of equivalent barrels)                            Domestic       Sea  International    Total
------------------------------------------------------------------------------------------------------
<S>                                                               <C>      <C>             <C>     <C>
December 31, 1996(1)                                              96       118             42      256
December 31, 1997                                                 91       112             44      247
December 31, 1998                                                 79       155             49      283

Proportional interest in equity affiliate's reserves(2) -
  December 31, 1996                                               51       --               5       56
  December 31, 1997                                               52       --               5       57
  December 31, 1998                                               31       --              30       61
   
(1) Includes 2 million  barrels of oil equivalent  held for sale at December 31,
1996 (see Note 10).
(2) During 1998, the equity affiliate  merged with a third party,  which reduced
the company's ownership interest in the affiliate.  The company's  proportionate
interest  reflects its ownership  interest at the respective  year-end (see Note
4).
</TABLE>

28. Costs Incurred in Crude Oil and Natural Gas Activities
<TABLE>
<CAPTION>

     Total  expenditures,  both  capitalized  and  expensed,  for  crude oil and
natural gas property acquisition, exploration and development activities for the
three years ended December 31, 1998, are reflected in the following table:

                                                              Property
                                                           Acquisition  Exploration  Development
(Millions of dollars)                                         Costs(1)     Costs(2)     Costs(3)
------------------------------------------------------------------------------------------------
<S>                                                               <C>          <C>          <C>   
1998 -
  Proprietary costs -
    Domestic                                                      $ 52         $ 55         $ 90
    North Sea                                                      423           37          237
    Other international                                              5           34           15
                                                                  ----         ----         ----
      Total                                                       $480         $126         $342
                                                                  ====         ====         ====
  
  Proportional interest in equity affiliate's costs(4) -
    Domestic                                                      $ 11         $ 7          $ 16
    Other international                                             30          10            15
                                                                  ----         ---          ----
      Total                                                       $ 41         $17          $ 31
                                                                  ====         ===          ====

1997 -
  Proprietary costs -
    Domestic                                                      $ 29         $31          $ 45
    North Sea                                                       --          15            86
    Other international                                              2          39            21
                                                                  ----        ----          ----
      Total                                                       $ 31        $ 85          $152
                                                                  ====        ====          ====

  Proportional interest in equity affiliate's costs(4) -
    Domestic                                                      $  6        $  6          $ 25
    Other international                                             --          --             2
                                                                  ----        ----          ----
      Total                                                       $  6        $  6          $ 27
                                                                  ====        ====          ====

1996 -
  Proprietary costs -
    Domestic                                                      $  6        $ 53          $ 99
    North Sea                                                       --          49            21
    Other international                                              1          15            35
                                                                  ----        ----          ----
      Total                                                       $  7        $117          $155
                                                                  ====        ====          ====

(1) Includes $278 million applicable to purchases of reserves in place in 1998.
(2) Exploration costs include delay rentals, exploratory dry holes, dry hole and
bottom hole  contributions,  geological and geophysical costs, costs of carrying
and retain- ing properties,  and capital  expenditures such as costs of drilling
and equipping successful exploratory wells.
(3) Development costs include costs incurred to obtain access to proved reserves
(surveying,  clearing ground,  building roads),  to drill and equip  development
wells and to acquire,  construct and install production  facilities and improved
recovery  systems.  Development  costs also include costs of  developmental  dry
holes.
(4) During 1998, the equity affiliate  merged with a third party,  which reduced
the company's ownership interest in the affiliate.  The company's  proportionate
interest  reflects its ownership  interest at the respective  year-end (see Note
4).
</TABLE>
          

29. Quarterly Financial Information (Unaudited)

     A summary of quarterly  consolidated results for 1998 and 1997 is presented
below.  In periods in which  there was a loss from  continuing  operations,  the
conversion  of stock  options was not assumed  since the loss  per-share  amount
would have been lower. Therefore, the quarterly per-share amounts may not add to
the  annual  amounts.   Refer  to  Management's   Discussion  and  Analysis  for
information about special items.
<TABLE>
<CAPTION>

                                                                                                           Diluted Income (Loss)
                                                                                      Income                  per Common Share
                                                                                 (Loss) from      Net
                                                                  Operating       Continuing   Income      Continuing        Net
(Millions of dollars, except per-share amounts)         Sales    Profit (Loss)    Operations   (Loss)      Operations     Income
--------------------------------------------------------------------------------------------------------------------------------
 
<S>                                                    <C>              <C>           <C>      <C>            <C>        <C>    
1998 Quarter Ended -
  March 31                                             $  291           $  34         $  16    $  24          $  .33     $  .50
  June 30                                                 395              43            26       77             .55       1.62
  September 30                                            360              31           (23)     195            (.48)      4.09
  December 31                                             350            (354)         (246)    (246)          (5.18)     (5.17)
           --                                          ------           -----         -----    -----          ------     ------ 
  Total                                                $1,396           $(246)        $(227)   $  50          $(4.78)    $ 1.06
                                                       ======           =====         =====    =====          ======     ======

1997 Quarter Ended -
  March 31                                             $  384           $  83         $  58    $  70          $ 1.21     $ 1.45
  June 30                                                 335              54            37       42             .76        .87
  September 30                                            324              57            31       37             .65        .77
  December 31                                             345              62            35       45             .74        .95
           --                                          ------           -----         -----    -----          ------     ------
  Total                                                $1,388           $ 256         $ 161    $ 194          $ 3.36     $ 4.04
                                                       ======           =====         =====    =====          ======     ======
</TABLE>

     The  company's  common  stock is listed  for  trading on the New York Stock
Exchange and was held by approximately 10,900 stockholders of record at year-end
1998.  The ranges of market  prices and dividends  declared  during the last two
years are as follows:
<TABLE>
<CAPTION>

                                               Market Prices
                               ------------------------------------------
                                                                               Dividends
                                      1998                   1997              per Share
                               ------------------      ------------------   -------------
                                 High     Low           High     Low         1998    1997
                               -------    -------      --------  --------   -----    ----
<S>                            <C>        <C>          <C>       <C>        <C>      <C>
Quarter Ended -
  March 31                     73 3/16    55 7/8       75        61 7/8     $.45     $.45
  June 30                      70 1/4     56 5/8       67 1/4    55 1/2      .45      .45
  September 30                 60 1/2     38           69 15/16  59 13/16    .45      .45
  December 31                  47 9/16    36 3/16      71 1/2    60 1/8      .45      .45
</TABLE>



<TABLE>

Five-Year Financial Summary
<CAPTION>

(Millions of dollars, except per-share amounts)                             1998          1997        1996         1995        1994
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>           <C>         <C>         <C>          <C>  
Summary of Net Income (Loss)
Sales                                                                    $ 1,396       $ 1,388     $ 1,566     $ 1,401      $ 1,272
                                                                         -------       -------     -------     -------      -------
Costs and operating expenses                                               1,735         1,199       1,397       1,480        1,187
Interest and debt expense                                                     58            47          52          60           59
                                                                         -------       -------     -------     -------      -------
  Total costs and expenses                                                 1,793         1,246       1,449       1,540        1,246
                                                                         -------       -------     -------     -------      -------
                                                                            (397)          142         117        (139)          26
Other income                                                                  22            90         132          29           27
Provision (benefit) for income taxes                                        (148)           71          85         (52)          18
                                                                         -------       -------     -------     -------      -------
Income (loss) from continuing operations                                    (227)          161         164         (58)          35
Income from discontinued operations                                          277            33          56          27           55
                                                                         -------       -------     -------     -------      -------
Net income (loss)                                                        $    50       $   194     $   220     $   (31)     $    90
                                                                         =======       =======     =======     =======      =======

Common Stock Information, per Share
Diluted net income (loss) -
  Continuing operations                                                  $ (4.78)      $  3.36     $  3.30     $ (1.12)     $   .67
  Discontinued operations                                                   5.84           .68        1.13         .52         1.07
                                                                         -------       -------     -------         ---         ----
    Total                                                                $  1.06       $  4.04     $  4.43     $  (.60)     $  1.74
                                                                         =======       =======     =======     =======      =======

Dividends declared                                                       $  1.80       $  1.80     $  1.64     $  1.55      $  1.52
Stockholders' equity                                                       28.26         30.09       28.10       27.52        29.82
Market high for the year                                                   73.19         75.00       74.13       64.00        51.00
Market low for the year                                                    36.19         55.50       55.75       44.00        40.00
Market price at year-end                                                 $ 38.25       $ 63.31     $ 72.00     $ 63.50      $ 46.25
Shares outstanding at year-end (thousands)                                47,167        47,686      48,294      51,069       51,694

Balance Sheet Information
Working capital                                                          $   215       $   166     $   320     $   189      $    52
Property, plant and equipment - net                                        2,288         1,998       1,948       2,210        2,489
Total assets                                                               3,341         3,096       3,124       3,213        3,696
Long-term debt                                                               901           552         626         632          673
Total debt                                                                   944           579         663         735          993
Stockholders' equity                                                       1,333         1,440       1,367       1,416        1,543

Cash Flow Information
Net cash provided by operating activities                                     99           569         645         369          356
Cash capital expenditures                                                    550           341         392         484          410
Dividends paid                                                                86            85          83          79           78
Purchase of treasury stock                                               $    25       $    60     $   195     $    45      $    --

Ratios and Percentage
Current ratio                                                                1.4           1.3         1.7         1.3          1.1
Average price/earnings ratio                                                51.6          16.2        14.7          NM         26.1
Total debt to total capitalization                                            41%           29%         33%         34%          39%

Employees
Total wages and benefits                                                 $   283       $   285     $   289     $   314      $   319
Number of employees at year-end                                            3,367         3,746       3,851       3,976        5,524
</TABLE>


<TABLE>

Five-Year Operating Summary
<CAPTION>

                                                                             1998         1997        1996         1995        1994
                                                                             ----         ----        ----         ----        ----
<S>                                                                        <C>          <C>         <C>          <C>         <C>  
Exploration and Production
Net proprietary production of crude oil and condensate -
 (thousands of barrels per day)
   Domestic                                                                  22.2         24.2        30.6         28.9        25.5
   North Sea                                                                 34.4         23.4        30.9         36.7        34.3
   Other international                                                       10.2          9.3         7.1          4.8         7.5
                                                                             ----         ----        ----         ----        ----
     Total                                                                   66.8         56.9        68.6         70.4        67.3
                                                                             ====         ====        ====         ====        ====

Average price of crude oil sold (per barrel) -
   Domestic                                                                $11.70       $18.53      $19.36       $15.69      $14.64
   North Sea                                                                11.97        18.77       19.08        16.31       15.15
   Other international                                                      11.96        17.75       18.63        15.21       13.79
   Average                                                                 $11.88       $18.51      $19.16       $15.99      $14.81

Proprietary natural gas sales (MMCF per day)                                  198          184         281          291         271
Average price of natural gas sold (per MCF)                                $ 2.18       $ 2.56      $ 2.12       $ 1.52      $ 1.76
Net exploratory wells drilled -
   Productive                                                                1.40         2.65        4.91         3.71        9.61
   Dry                                                                       7.42         4.42        3.52         9.16        8.47
                                                                             ----         ----        ----        -----       -----
     Total                                                                   8.82         7.07        8.43        12.87       18.08
                                                                             ====         ====        ====        =====       =====

Net development wells drilled -
   Productive                                                               11.30         9.78       21.33        40.86       22.27
   Dry                                                                       1.00           --        1.04         2.95        4.63
                                                                            -----         ----       -----        -----       -----
     Total                                                                  12.30         9.78       22.37        43.81       26.90
                                                                            =====         ====       =====        =====       =====

Undeveloped net acreage (thousands) -
   Domestic                                                                   465          319         265          472         499
   North Sea                                                                  715          391         428          358         363
   Other international                                                      9,225       12,308       1,852        1,765       1,745
                                                                           ------       ------       -----        -----       -----
     Total                                                                 10,405       13,018       2,545        2,595       2,607
                                                                           ======       ======       =====        =====       =====

Developed net acreage (thousands) -
   Domestic                                                                   159          155         209          537         542
   North Sea                                                                   69           24          33           22          21
   Other international                                                        537          123         123          178         184
                                                                              ---          ---         ---          ---         ---
     Total                                                                    765          302         365          737         747
                                                                              ===          ===         ===          ===         ===

Estimated proved reserves (millions of equivalent barrels)                    283          247         256          300         332

Chemicals
Industrial and specialty chemical sales (thousands of metric tons)            481          443         405          404         346
</TABLE>