Management's Discussion and Analysis

Results of Consolidated Operations

    Net income (loss) and  per-share  amounts for each of the three years in the
period ended December 31, 1997,  were as follows:

(Millions of dollars,  except per-share  amounts)    1997    1996    1995 
Net income (loss)                                    $194    $220    $(31)
Income from continuing operations
  excluding  special items                            184     230     137 
Earnings (loss) per share -
  Net income (loss) -
      Basic                                          4.06    4.45    (.60)
      Diluted                                        4.04    4.43    (.60)
Income from continuing operations 
  excluding special items -
      Basic                                          3.85    4.65    2.65
      Diluted                                        3.83    4.63    2.63

    Net income  (loss) was affected by a number of special  items in each of the
years. In 1997,  special items were principally  nonoperating that 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.  In 1995, special items
related primarily to the company's adoption of Statement of Financial Accounting
Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived  Assets to be Disposed Of." The following table reconciles income
from continuing operations excluding special items to net income:

(Millions of dollars)                                1997    1996    1995
Net income from continuing operations
  excluding special items                            $184    $230    $137
                                                     ----    ----    ----
Special items, net of income taxes - 
  Gains on the sale of equity securities               12      15      --
  Settlements with insurance carriers                   8      44      --
  Gains on the sale of nonstrategic oil 
    and gas properties                                  4       8      --
  Net provision for environmental
    reclamation and remediation of
    inactive sites                                    (13)    (28)    (16)
  Pending/settled litigation                           (1)    (21)     --
  Asset impairment                                     --     (16)   (140)
  Restructuring                                        (1)     (7)     (4)
  Other, net                                            1      (5)     (1)
                                                     ----    ----    ---- 
    Total                                              10     (10)   (161)
                                                     ----    ----    ---- 
Loss from discontinued operations,
  net of income taxes                                  --      --      (7)
                                                     ----    ----    ---- 
Net income (loss)                                    $194    $220    $(31)
                                                     ====    ====    ==== 

    The merger of the company's  North American  onshore  properties  into Devon
Energy Corporation  (Devon) was effective December 31, 1996. This merger affects
the comparability of the periods  presented since the company's  approximate 31%
investment in Devon is accounted for by the equity method (see Note 4). In 1995,
the  company  completed  the  sale  of  substantially  all of its  refining  and
marketing  operations  and completed  the sale of the remaining  assets in 1996.
Therefore,  all 1995 amounts  related to refining and marketing are shown in the
Consolidated Statement of Income as discontinued operations.
    Income from continuing  operations excluding special items for 1997 declined
$46 million from the prior year, due to declines in operating profit for each of
the  business  units.  Excluding  special  items,   exploration  and  production
operating  profit for 1997 was 25% lower than the prior year, while chemical and
coal results were lower by 7% and 41%, respectively. The $93 million increase in
1996 income from continuing  operations  excluding special items,  compared with
1995, was primarily due to oil and gas exploration  and production  results that
more  than  doubled  the  prior  year's  results  and a 14%  increase  from coal
operations,  partially  offset by a 26%  decline in earnings  from the  chemical
unit.  Operating profit excluding  special items was $309 million,  $408 million
and $298 million for 1997, 1996 and 1995, respectively.
    Following is a discussion of the major changes in various items shown in the
Consolidated  Statement of Income.  Certain  amounts for 1996 and 1995 have been
reclassified to conform with the 1997 presentation (see Note 1).
    Consolidated  sales from continuing  operations were $1.7 billion,  compared
with $1.9 billion for 1996 and $1.8  billion for 1995.  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 and coal.  Primary
contributors  to the decline in oil and gas volumes were 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. Lower
average  sales  prices  for coal  were due  primarily  to lower  sales  from the
Galatia,  Illinois,  mine, which produces a higher-priced,  higher-Btu coal than
the Jacobs  Ranch Mine in Wyoming.  Partially  offsetting  these  declines  were
higher prices for natural gas and  increased  pigment  volumes.  The increase in
1996 sales over 1995  resulted  primarily  from higher crude oil and natural gas
prices and higher sales of purchased  third-party  natural gas, partially offset
by  declines  in  titanium  dioxide  pigment  sales  prices and lower  crude oil
volumes.
    Costs and operating expenses were $949 million,  $1 billion and $960 million
for 1997, 1996 and 1995, respectively.  The 1997 amount was 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.  Costs and
operating  expenses for 1996 were higher than 1995,  primarily  due to increased
purchases of natural gas for resale and higher  feedstock  and utility costs for
titanium dioxide pigment.
    Following are general and administrative expenses for 1997, 1996 and 1995:

(Millions of dollars)                                1997    1996    1995
General and administrative expenses
  excluding special items                            $121    $118    $123
                                                     ----    ----    ----
Special items -
  Net provision for environmental reclamation
    and remediation of inactive sites                  20      43      27
  Pending/settled litigation                            2      29      --
  Restructuring                                         2      10       7
  Other, net                                            3       9      --
    Total                                              27      91      34
                                                     ----    ----    ----
General and administrative expenses                  $148    $209    $157
                                                     ====    ====    ====

    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  represents  charges  for the
relocation  of the  exploration  and  production  unit to  Houston,  Texas,  and
severance associated with the divestiture program and the Devon merger.
    Asset  impairments  totaled $25 million in 1996 and related  principally  to
certain  exploration  and  production  properties  in the Gulf of  Mexico.  This
compares with $227 million in 1995,  which resulted from the company's  adoption
of FAS  121 and  the  writedowns  associated  with  the oil and gas  divestiture
program (see Note 11).
    Exploration costs for 1997, 1996 and 1995 were $65 million,  $75 million and
$82 million, respectively. 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. In 1996, the company had lower Gulf
of Mexico  undeveloped  lease  amortization and lower geological and geophysical
costs, partially offset by higher dry hole expense, compared with 1995.
    Interest and debt expense  totaled $46 million in 1997,  $52 million in 1996
and $61 million in 1995.  Decreased debt was the principal  reason for the lower
1997 expense, compared with the prior year. The decrease in 1996 expense was due
to both lower debt and lower average borrowing costs.
    Other income was as follows for each of the years in the  three-year  period
ended December 31, 1997:

(Millions of dollars)                                1997    1996    1995
Other income excluding special items                  $47     $29     $27
                                                      ---     ---     ---
Special items -
  Gains on sales of equity securities                  18      23      --
  Settlements with insurance carriers                  12      67      --
  Gains on the sale of nonstrategic
    oil and gas properties                              6      13      --
  Other, net                                            7      --       2
                                                      ---     ---     ---
    Total                                              43     103       2
                                                      ---     ---     ---
Other income                                          $90    $132     $29
                                                      ===    ====     ===

    Equity  income from Devon was the primary  reason for the  increase in other
income  excluding  special  items for 1997  compared  with the prior year.  Also
contributing were lower foreign currency  transaction losses and higher interest
income.
    
Pending Transactions

    The company  continuously  reviews each  business  unit in an effort to find
innovative ways to maximize shareholder value through existing operations and/or
new opportunities  worldwide.  In a strategy approved by the Board of Directors,
the company's future efforts will be concentrated on oil and gas exploration and
production and titanium dioxide pigments, the principal chemical business.
    The company  intends to exit the coal business as announced in January 1998.
The manner and timing in which the operations will be  discontinued  has not yet
been  determined.  Proceeds and the gain on disposal will vary  depending on the
manner  selected.  Therefore,  coal operations are not presented as discontinued
operations.  Presentation  in future reports will depend on the ultimate  method
and timing of the disposal.
    Since the company has not yet  determined  the manner and timing of the exit
from the coal business,  the effect on consolidated  operating profit, cash flow
and liquidity is not yet determinable. Over the three-year period ended December
31, 1997, coal contributed operating profit excluding special items and net cash
flow  (after-tax cash flow less cash capital  expenditures)  of $185 million and
$150 million, respectively.
    In order to focus on the pigments business,  the company will dispose of its
electrolytic  operations.  The sale of the  ammonium  perchlorate  operation  is
pending and  expected  to close in the first half of 1998.  The gain on the sale
will be  immaterial.  In January 1998,  the company signed a letter of intent to
negotiate  the  sale of  substantially  all of the  remaining  electrolytic  and
specialty-chemical businesses.
    Pigment  production  capacity  will  be  significantly   expanded  with  the
acquisition  of  an  initial  80%  interest  in  Bayer  AG's  European   pigment
operations.  The  company  will have the option to  acquire  the  remaining  20%
interest over a two-year  period  beginning in 2001.  This  transaction  is also
expected to close before June 30, 1998.
    The effect of these  chemical  transactions  on the  consolidated  financial
statements  is expected to be  initially  neutral,  as the  near-term  operating
profit and cash flow from  electrolytics  will  essentially  be  replaced by the
European pigment operations.
    Each of these  transactions  are independent  steps in an ongoing  strategic
plan.  Management   anticipates  that  these  transactions  will  have  positive
long-term impacts on operating profit, cash flow and liquidity that will enhance
shareholder value.

Segment Operations

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

(Millions of dollars)                                1997    1996    1995
Operating profit (loss) excluding
  special items -
    Exploration and production                       $178    $236    $113
    Chemicals                                          84      90     122
    Coal                                               44      75      66
    Other                                               3       7      (3)
                                                     ----    ----    ---- 
      Total                                           309     408     298
Special items                                          (5)    (37)   (234)
                                                     ----    ----    ---- 
Operating profit                                     $304    $371    $ 64
                                                     ====    ====    ====

Exploration and Production
    The company merged its North  American  onshore  exploration  and production
assets into Devon  effective  December 31, 1996, and accounts for the investment
on the  equity  basis.  Therefore,  income  from Devon is not  included  in 1997
operating profit, and the company's proportionate interest in Devon's volumes is
not  included in the 1997  production  and sales shown in the  following  table.

(Millions of dollars, except per-unit amounts)       1997    1996    1995
 Sales                                               $628    $874    $690
                                                     ====    ====    ====
 Operating profit excluding special items            $178    $236    $113
   Special items                                       (3)    (32)   (210)
                                                     ----    ----    ---- 
 Operating profit (loss)                             $175    $204    $(97)
                                                     ====    ====    ==== 
 Proprietary crude oil and condensate
   produced (thousands of barrels per day)             57      69      70
 Average price of crude oil sold
   (per barrel)                                    $18.51  $19.16  $15.99
 Proprietary  natural gas sold
   (MMCF per day)                                     184     281     291
 Average  price of natural gas sold
   (per MCF)                                       $ 2.56   $2.12   $1.52

    Special items in 1997 consisted primarily of additional costs for the unit's
restructuring and relocation to Houston. The 1996 special items were $22 million
for asset  impairments  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 to Houston. The 1995 special items related to FAS
121 asset  impairments  and  writedowns  associated  with the  program to divest
nonstrategic and marginal properties and restructuring charges.
    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,  were the primary reasons for lower 1997 operating
profit excluding  special items.  Improvement in 1996 operating profit excluding
special items,  compared with 1995, resulted primarily from increases of 20% and
39% in the  company's  average  sales  prices  for  crude oil and  natural  gas,
respectively, and a decrease in exploration expenses. Chemicals
    Chemical operating profit and  sales were as follows.  Special items in 1997
were  primarily  for  the  writeoff  of  obsolete  equipment  and  in  1996  for
impairments  and  shutdown  costs  for  a  crosstie-treating  facility  and  the
elimination of a product line at a specialty plant.

(Millions of dollars)                                1997    1996    1995
Sales                                                $760    $692    $707
                                                     ====    ====    ====
Operating profit excluding special items             $ 84    $ 90    $122
  Special items                                        (3)     (5)     --
                                                     ----    ----    ----
Operating profit                                      $81     $85    $122
                                                     ====    ====    ====

    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 the year, average prices received
in 1997 were less than those received in the prior year. 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.  The  decrease in 1996 sales from 1995  resulted  from lower
pigment sales prices.  Operating profit in both 1997 and 1996 was also adversely
affected by higher per-unit  production costs for pigment than in the respective
prior years.
    The  company  has  announced  plans to exit the  electrolytic  business  and
concentrate on its pigment operations. See "Pending Transactions" on page 21.

Coal
    Operating  profit  and  sales  for coal are  shown in the  following  table.
Operating profit in 1995 included a special item for FAS 121 impairments.

(Millions of dollars)                                1997    1996    1995
Sales                                                $323    $365    $353
                                                     ====    ====    ====
Operating profit excluding special items             $ 44    $ 75    $ 66
  Special items                                        --      --     (23)
                                                     ----    ----    ---- 
Operating profit                                     $ 44    $ 75    $ 43
                                                     ====    ====    ====

    Both operating profit and sales for the year were negatively  impacted by an
April 1997 underground ignition and adverse operating conditions at the Galatia,
Illinois,  mine. These conditions continued until the fourth quarter,  resulting
in fewer tons produced at Galatia and higher per-ton costs.  However,  operating
profit benefited from lower per-ton costs and higher volumes at the Jacobs Ranch
mine.  Sales prices were $1.43 per ton lower on average for 1997,  compared with
1996, since a higher portion of tonnage sold was the  lower-priced  Powder River
Basin coal. Higher operating profit and sales in 1996,  compared with 1995, were
the result of $.12  per-ton  higher  average  sales  prices on  slightly  higher
volumes.
    The  company has  announced  its  intention to exit the coal  business.  See
"Pending Transactions" on page 21.

Financial Condition

(Millions of dollars)                                1997    1996    1995
Current ratio                                         1.3     1.7     1.3
Working capital                                    $  166  $  320  $  189
Total debt                                            579     663     735
Total debt less cash                                  396     542     648
Stockholders' equity                               $1,440  $1,367  $1,416
Total debt to total capitalization                     29%     33%     34%
Floating-rate debt to total debt                       11      66      64

Cash Flow
    Net cash provided by operating activities was $569 million in 1997, compared
with $645 million in 1996 and $369 million in 1995.
    The decrease in 1997 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, as undistributed earnings from equity
affiliates represent a noncash item.
    The  increase in 1996 net cash  provided by operating  activities,  compared
with 1995,  was primarily  attributable  to the company's  record net income and
temporary  changes in working  capital and other,  which decreased 1995 net cash
provided by operating  activities  by $211  million.  Although a net loss of $31
million was incurred in 1995, the special charges,  totaling $260 million before
income taxes, were all noncash and did not adversely affect net cash provided by
operations.
    In each of the  years  1997,  1996 and  1995,  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 14). 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.  Proceeds from the
sale of  substantially  all of the company's  refining and marketing  operations
increased cash available by $419 million in 1995.
    Total debt  declined to $579  million at year-end  1997 from $735 million at
year-end  1995.  In 1995,  the company's  Board of Directors  authorized a stock
purchase  program of up to $300  million.  The program was  completed  in August
1997.  Expenditures  were $60  million  in 1997,  $195  million  in 1996 and $45
million  in 1995,  with a total of 4.8  million  shares  purchased  through  the
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.  In 1995, the Board increased the quarterly  dividend  payable January 2,
1996, to $.41 per share from $.38 per share.

Liquidity
    The company's strong balance sheet reflects a solid working capital position
and low debt to capitalization. The company's debt has been rated "A" or "A-" by
various rating agencies,  resulting in low debt costs. At December 31, 1997, the
company's 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.  The 1996 net working capital position of $320 million
was an  increase of $131  million  from the prior year.  This  increase  was the
result of the other cash inflows discussed previously, which were used primarily
to repay short-term borrowings and fund the company's stock purchase program.
    The percentage of total debt to total capitalization was 29% at December 31,
1997, 33% at December 31, 1996, and 34% at year- end 1995.  This  improvement is
the direct result of the company's repayment of debt, which more than offset the
effect of the stock purchase program on total capitalization.
    In October 1997, the company  replaced the majority of its then  outstanding
floating-rate  debt with $300  million of  fixed-rate  securities.  The  company
issued $150 million of 7.125%  (effective rate 7.01%) debentures due October 15,
2027,  and $150 million of 6.625%  (effective  rate 6.54%) notes due October 15,
2007.
    Additionally,  the company and/or its  subsidiaries  have several  revolving
credit  agreements.  At year-end 1997, $37 million was outstanding  under one of
the agreements with interest payable at varying rates. At December 31, 1997, the
company  had unused  lines of credit and  revolving  credit  facilities  of $714
million.  Of this  amount,  $340 million and $265 million can be used to support
the commercial paper borrowings of Kerr-McGee Credit  Corporation and Kerr-McGee
Oil (U.K.) PLC, respectively, both wholly owned subsidiaries.
    Two  revolving  credit  agreements  were  amended in 1997.  The $105 million
revolving  credit  agreement  between  the  company's  wholly  owned  subsidiary
Kerr-McGee China Petroleum Ltd. and several banks was extended to March 6, 2000.
The $37 million  outstanding  at  year-end  1997 was under this  agreement.  The
revolving  credit  agreement  among the  company,  its wholly  owned  subsidiary
Kerr-McGee  Oil (U.K.) PLC and several  banks was amended  from $230  million to
$225 million and separated into two loan facilities. Under one arrangement, $150
million may be borrowed  through April 28, 2000. Under the other, $75 million is
available  through April 28, 1998,  with the provision that one-year  extensions
may be requested.  Interest is payable at varying rates for all of the revolving
credit agreements.
    The company finances capital expenditures through internally generated funds
and various  borrowings.  Cash capital  expenditures  were $341 million in 1997,
$392 million in 1996 and $484 million in 1995, a total of $1.2  billion.  During
this same period, $1.7 billion of net cash was provided by operating  activities
(exclusive of working capital and other changes),  which was approximately  $200
million in excess of cash capital  expenditures  and  dividends  paid during the
period.
    Management  anticipates  that  1998  cash  capital  requirements,  currently
estimated at $520 million (including $60 million for the coal business), 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 16 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  all  of the  company's
operations.  It is the  company's  intent  to hedge 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  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 sell various  foreign
currencies  as  hedges,  principally  for  accounts  receivable  generated  from
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  transaction  when the hedged item
occurs.
    At year-end  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 foreign  currency
contracts at year-end 1997. All amounts are U.S. dollar equivalents.
    
<TABLE>
<CAPTION>
                                                                                          Dec. 31, 1997
                                                     Notional     Weighted-Average       Estimated Fair
(Millions of dollars, except average contract rate)    Amount        Contract Rate                Value
<S>                                                       <C>              <C>                      <C>
Forward contracts to purchase (sell) currencies -
  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.  At year-end 1997, the company's  long-term debt was
comprised of 93%  fixed-rate  instruments,  which minimize  earnings  volatility
related to interest  expense.  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.
All borrowings are in U.S. dollars.
<TABLE>
<CAPTION>

                                                                                  There-            Fair Value
(Millions of dollars)             1998      1999      2000      2001      2002     after     Total    12/31/97
<S>                               <C>       <C>       <C>       <C>       <C>     <C>        <C>    <C>
Fixed-rate debt -
  Principal amount                  $2        $8       $10       $12       $10      $475      $517        $632
  Weighted-average
    interest rate                 9.49%     9.00%     9.61%     9.61%     9.61%     7.05%     7.25%
Variable-rate debt -
  Principal amount                  --        --       $37        --        --        --       $37         $37
  Weighted-average 
    interest rate                   --        --      6.04%       --        --        --      6.04%
</TABLE>

Commodity Prices
    Although no such  contracts  were entered into during 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.  These  contracts  generally had maturities of one
year or less.  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.
    In 1997,  approximately  70% of  the  company's  coal  sales  resulted  from
contracts with durations of at least three years.  At year-end 1997, the average
contract price was in excess of spot prices.

Other
    As a global energy and inorganic chemical company,  Kerr-McGee is subject to
the volatility of crude oil, natural gas and titanium dioxide pigment prices and
risks  associated  with  operations  outside the United States.  The company has
announced  its  intention  to  concentrate  on two primary  businesses - oil and
natural gas  exploration  and  production  and the  production  and marketing of
titanium dioxide pigments.
    Early 1998 oil and gas  prices are below  those  received  in 1997.  Company
management  continuously  monitors the underlying global pricing fundamentals of
these commodities and factors those conditions into its projections and economic
forecasts. In addition, more than 15% of the company's year-end 1997 proprietary
oil  production  was from  Southeast  Asia,  which is in the midst of a currency
crisis.  The company is taking steps to provide  reasonable  assurance  that its
level of risk  remains  manageable,  such as  requiring  letters of credit  from
buyers when management deems appropriate.
    Pigment prices have increased from 1997 levels,  and the industry  continues
to  consolidate.  Management  anticipates  that the  consolidation  trends  will
continue  in the near future and that the  company's  status as one of only four
companies that own the preferred  chloride  technology,  along with its low cost
position, will benefit operating profit, cash flow and liquidity.

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, 1997, the company had received notices that it has been
named a potentially  responsible  party (PRP) with respect to the remediation of
16 existing  EPA  Superfund  sites and may share  liability  at certain of these
sites.  In 1996,  the company  signed a Consent Decree with respect to a site at
Slidell,  Louisiana.  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.  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,  the  company is  uncertain  as to its  involvement  in many of the
sites.  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  sites.  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 1997, $41 million was
added to the reserve for active and inactive  sites.  At December 31, 1997,  the
company's reserve for these sites totaled $243 million. In addition, at year-end
1997,  the  company had  reserves  of $68  million for the future  costs for the
abandonment and removal of offshore well and production facilities at the end of
their productive lives and $23 million for the  decommissioning  and reclamation
of coal mining locations. In the Consolidated Balance Sheet, $251 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, 1997, are as follows:

(Millions of dollars)                             1997    1996    1995    Total
Charges to environmental reserves                 $ 94    $ 56    $ 61    $ 211
Recurring expenses                                  20      19      23       62
Capital expenditures                                17      15      20       52
                                                  ----     ---    ----     ----
  Total                                           $131     $90    $104     $325
                                                  ====     ===    ====     ====

    The  company  has  not  recorded  in  the  financial   statements  potential
reimbursements  from governmental  agencies or other third parties (see Notes 10
and 13).  The  following  table  reflects  the  company's  portion  of the known
estimated  cost  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 1997.

<TABLE>
<CAPTION>

                                                                                       Total Known            Total
                                                                                         Estimated     Expenditures     Total Number
                                                                                              Cost     Through 1997  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.                                     $ 19             $  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 10).        43               29                1

  Slidell, La., Chicago, Ill.,
  and 11 sites individually not
  material                       Various stages of investigation/remediation.                   30               26              492
                                                                                                --               --              ---
                                                                                                92               62              496
                                                                                                                                 ===

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 10). Began shipments to a permanent
                                 disposal facility in 1994.                                    348              185

  Cleveland/Cushing, Okla.       Began cleanup in 1996.                                         48               36

  Cimarron, Okla.                Remediation is complete, and monitoring continues.             36               34
                                                                                               ---              ---
                                                                                               432              255
                                                                                               ---              ---

Non-EPA Superfund sites
individually not material                                                                      154              118
                                                                                               ---              ---
    Total for all sites                                                                       $678             $435
                                                                                              ====             ====

</TABLE>

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

Other

    The use by many existing  computer  systems of a two-digit  year date format
rather than four digits - the Year 2000 issue - impacts the  company's  business
systems and facilities.  In 1996, a formal program was initiated and a number of
project  teams were formed and charged with the  responsibility  of  identifying
areas of  potential  concern and  ensuring  that timely  corrective  actions are
taken. At year-end 1997, the  implementation  of new or modification of existing
business systems was approximately  two-thirds complete, and the review of plant
and facility process controls was under way. Management anticipates modification
or  replacement  of systems will be  essentially  complete by year-end 1998. The
company is also working with key suppliers, vendors and customers to ensure Year
2000  compliance.  The  ultimate  outcome  of the Year  2000  project  cannot be
guaranteed;  however,  the  company  believes  that the  program  under way will
provide a smooth  transition into the year 2000 and reduces risk to a manageable
level.  The cost of  addressing  the Year  2000  issue  is not  material  to the
consolidated results of operations or financial condition of the company.
    During 1997 and early 1998, the Financial  Accounting Standards Board issued
several  pronouncements  related to  financial  statement  disclosure  that will
affect the company's 1998  financial  statement  presentation.  There will be no
effect  on net  income  as a result  of  these  pronouncements.  Following  is a
discussion of the new standards.
    FAS No. 130, "Reporting Comprehensive Income," establishes standards for the
reporting and display of  comprehensive  income and its  components as a part of
the basic  financial  statements.  At the beginning of 1998,  the company had no
significant items to be reported as other comprehensive income.  However,  prior
years'  information will be presented.  The disclosures will be required for the
1998 year-end financial statements, and abbreviated information will be required
for the first quarter.
    FAS No.  131,  "Disclosures  about  Segments  of an  Enterprise  and Related
Information,"  establishes  standards  for  determining  segments and  reporting
information about a company's business segments in annual financial  statements.
Also  required  is  selected  information  about  operating  segments in interim
financial  reports  issued to  shareholders.  The  company  does not foresee any
material  change  to the  operating  segments  currently  reported  in Note  24,
"Reporting by Business Segments." However, the financial  information  presented
will differ.  Quarterly information will be presented in the first 1998 quarter,
and prior periods will be restated.
    FAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," was issued in February 1998. This  statement,  effective for year-end
1998  financial  statements,   revises  disclosures  about  pensions  and  other
postretirement  benefit plans. It does not change the measurement or recognition
of costs associated with those plans.
    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
SOP, the effect of which is to be  recognized  prospectively,  is effective  for
1999 financial statements.

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 internal  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 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,
1997 and 1996,  and the  related  consolidated  statements  of income,  retained
earnings and cash flows for each of the three years in the period ended December
31, 1997.  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, 1997 and 1996, and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

Oklahoma City, Oklahoma,
   February 20, 1998


                                     ARTHUR ANDERSEN LLP
                                              
<TABLE>
                                              
Consolidated Statement of Income

<CAPTION>

(Millions of dollars, except per-share amounts)                                 1997      1996       1995
<S>                                                                           <C>       <C>        <C>   
Sales                                                                         $1,711    $1,931     $1,754
                                                                              ------    ------     ------
Costs and Expenses
   Costs and operating expenses                                                  949     1,016        960
   General and administrative expenses                                           148       209        157
   Depreciation and depletion                                                    263       297        304
   Asset impairment                                                               --        25        227
   Exploration, including dry holes and amortization of undeveloped leases        65        75         82
   Taxes, other than income taxes                                                 53        66         61
   Interest and debt expense                                                      46        52         61
                                                                              ------    ------     ------
        Total Costs and Expenses                                               1,524     1,740      1,852
                                                                              ------    ------     ------
                                                                                 187       191        (98)
Other Income                                                                      90       132         29
                                                                              ------    ------     ------
Income (Loss) from Continuing Operations before Income Taxes                     277       323        (69)
Provision (Benefit) for Income Taxes                                              83       103        (45)
                                                                              ------    ------     ------ 
Income (Loss) from Continuing Operations                                         194       220        (24)
Loss from Discontinued Operations, net of income tax benefit of $4                --        --         (7)
                                                                              ------    ------     ------ 
Net Income (Loss)                                                             $  194    $  220     $  (31)
                                                                              ======    ======     ====== 

Earnings (Loss) per Common Share
   Basic -
      Continuing operations                                                   $ 4.06    $ 4.45     $ (.47)
      Discontinued operations                                                     --        --       (.13)
                                                                              ------    ------     ------ 
         Total                                                                $ 4.06    $ 4.45     $ (.60)
                                                                              ======    ======     ====== 

   Diluted -
      Continuing operations                                                   $ 4.04    $ 4.43     $ (.47)
      Discontinued operations                                                     --        --       (.13)
                                                                              ------    ------     ------ 
         Total                                                                $ 4.04    $ 4.43     $ (.60)
                                                                              ======    ======     ====== 
</TABLE>

<TABLE>
   
Consolidated Statement of Retained Earnings
<CAPTION>
(Millions of dollars, except per-share amounts)                                 1997      1996       1995
<S>                                                                           <C>       <C>        <C>   
Balance at Beginning of Year                                                  $1,348    $1,209     $1,320
   Net income (loss)                                                             194       220        (31)
   Dividends declared (per common share - $1.80 in 1997,
     $1.64 in 1996 and $1.55 in 1995)                                            (86)      (81)       (80)
                                                                              ------    ------     ------ 
Balance at End of Year                                                        $1,456    $1,348     $1,209
                                                                              ======    ======     ======

The accompanying notes are an integral part of these statements.
</TABLE>

<TABLE>

Consolidated Balance Sheet
<CAPTION>


(Millions of dollars)                                                      1997       1996
<S>                                                                      <C>        <C>
ASSETS
Current Assets
   Cash                                                                  $  183     $  121
   Accounts receivable, net of allowance for doubtful
      accounts of $5 in both 1997 and 1996                                  274        375
   Inventories                                                              172        218
   Deposits and prepaid expenses                                             60         91
                                                                         ------     ------
        Total Current Assets                                                689        805
Investments
Equity affiliates                                                           273        244
   Other assets                                                              60         74
Property, Plant and Equipment - Net                                       1,998      1,948
Deferred Charges                                                             76         53
                                                                         ------     ------
          Total Assets                                                   $3,096     $3,124
                                                                         ======     ======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
   Accounts payable                                                      $  247     $  262
   Short-term borrowings                                                     25         37
   Long-term debt due within one year                                         2         --
   Taxes on income                                                           36          5
   Taxes, other than income taxes                                            17         26
   Accrued liabilities                                                      196        155
                                                                         ------     ------
        Total Current Liabilities                                           523        485
                                                                         ------     ------

Long-Term Debt                                                              552        626
                                                                         ------     ------
Deferred Credits and Reserves
   Income taxes                                                             159        131
   Other
                                                                            422        515
                                                                         ------     ------
        Total Deferred Credits and Reserves                                 581        646
                                                                         ------     ------
Stockholders' Equity
   Common stock, par value $1.00 - 150,000,000 shares
     authorized, 54,120,747 shares issued in 1997 and
     53,862,347 shares issued in 1996                                        54         54
   Capital in excess of par value                                           346        334
   Preferred stock purchase rights                                            1          1
   Retained earnings                                                      1,456      1,348
   Unrealized gain on available-for-sale securities                          --         12
   Common stock in treasury, at cost - 6,434,465 shares in 1997 and
     5,568,815 shares in 1996                                              (363)      (306)
   Deferred compensation                                                    (54)       (76)
                                                                         ------     ------ 
        Total Stockholders' Equity                                        1,440      1,367
                                                                         ------     ------
          Total Liabilities and Stockholders' Equity                     $3,096     $3,124
                                                                         ======     ======

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)                                                             1997     1996     1995
<S>                                                                              <C>      <C>      <C>
Cash Flow from Operating Activities
   Net income (loss)                                                             $ 194    $ 220    $ (31)
   Adjustments to reconcile to net cash provided by operating activities -
     Deferred income taxes                                                          36       68      (51)
     Depreciation, depletion and amortization                                      271      307      334
     Asset impairment                                                               --       25      227
     Provision for environmental reclamation and remediation of inactive sites      20       43       54
     Realized gain on available-for-sale securities                                (18)     (23)      --
     Gain on sale of refining and marketing operations, net of income taxes         --       --       (2)
     Gain on sale of exploration and production properties                          (6)     (21)      --
     Retirements and gain on sale of other assets                                   (4)      (3)      (1)
     Noncash items affecting net income                                              1       18       50
     Changes in current assets and liabilities and other, net of effects
        of discontinued operations sold -
          Decrease in accounts receivable                                          132       48       75
          (Increase) decrease in inventories                                        40        1       (1)
          (Increase) decrease in deposits and prepaids                              13       59      (50)
          Decrease in accounts payable and accrued liabilities                     (16)     (37)    (121)
          Increase (decrease) in taxes payable                                      31      (22)     (56)
          Other                                                                   (125)     (38)     (58)
                                                                                 -----    -----    ----- 
            Net cash provided by operating activities                              569      645      369
                                                                                 -----    -----    -----
Cash Flow from Investing Activities
   Capital expenditures                                                           (341)    (392)    (484)
   Proceeds from sale of available-for-sale securities                              21       29       --
   Proceeds from sale of refining and marketing operations                          --       13      419
   Proceeds from sale of exploration and production properties                      18       48       --
   Proceeds from sale of other assets                                               17       11       17
   Proceeds from sale of long-term investments                                      13       17       61
   Purchase of long-term investments                                               (14)      (6)      (8)
                                                                                 -----    -----    ----- 
            Net cash provided by (used in) investing activities                   (286)    (280)       5
                                                                                 -----    -----    -----
Cash Flow from Financing Activities
   Decrease in short-term borrowings                                               (12)     (57)    (218)
   Repayment of long-term debt                                                    (375)     (36)     (35)
   Issuance of long-term debt                                                      299       24       --
   Issuance of common stock                                                         12       16        9
   Dividends paid                                                                  (85)     (83)     (79)
   Purchase of treasury stock                                                      (60)    (195)     (45)
                                                                                 -----    -----    ----- 
            Net cash used in financing activities                                 (221)    (331)    (368)
                                                                                 -----    -----    ----- 

Net Increase in Cash and Cash Equivalents                                           62       34        6
Cash and Cash Equivalents at Beginning of Year                                     121       87       81
                                                                                 -----    -----    -----
Cash and Cash Equivalents at End of Year                                         $ 183    $ 121    $  87
                                                                                 =====    =====    =====

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,   changes  in  equity  in
undistributed earnings are included in the Consolidated Statement of Income. All
material intercompany transactions have been eliminated.
    In connection  with the  restructuring  of the  exploration  and  production
operations,  certain  operating and exploration  expenses for 1996 and 1995 have
been reclassified to general and administrative expense in order to conform with
the  current  year's  presentation.  This  reclassification  had  no  effect  on
exploration and production  operating  profit or consolidated  net income (loss)
for either  period.  Certain  information  in Note 24,  "Reporting  by  Business
Segments," and in the  supplemental  oil and gas  information  shown in Notes 25
through 29 has also been adjusted to reflect this reclassification.
    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
    As the  U.S. dollar has been adopted as the functional  currency for each of
the company's  international  operations,  foreign currency transaction gains or
losses are recognized in the period  incurred.  The company recorded net foreign
currency  transaction  losses of $9 million in 1996.  The net  foreign  currency
transaction losses in 1997 and 1995 were immaterial.

Earnings (Loss) per Common Share
    Basic  earnings  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  earnings 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  earnings per
share was 47,807,916 in 1997,  49,419,993 in 1996 and 51,669,285 in 1995.  After
adding the dilutive effect of the conversion of options to the  weighted-average
number of shares  outstanding,  the shares used to compute diluted  earnings per
share were  48,000,082 in 1997 and  49,657,890 in 1996.  For 1995,  there was no
dilution since the company incurred a loss from continuing operations.
    Not included in the calculation of the denominator for diluted  earnings 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.  See  Note  18,  "Employee  Stock  Option  Plans,"  for a  discussion  of
transactions that occurred after year-end 1997.

Cash Equivalents
    The company  considers all  investments  purchased with a  maturity of three
months or less to be cash equivalents. Cash includes time deposits, certificates
of deposit and U.S. government securities,  all of which totaled $132 million in
1997 and $89 million in 1996.

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 indirect manufacturing expenses associated therewith. 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 application of the unit-of-production or the
straight-line method. In arriving at rates under the unit-of-production  method,
the quantities of recoverable oil, gas and other minerals are established  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 1997,  1996 and 1995 was $8 million,  $9 million and $11 million,
respectively.

Impairment of Long-Lived Assets
    The company  adopted the  provisions  of Statement  of Financial  Accounting
Standards (FAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," during the 1995 third quarter.
    Proved  oil  and  gas   properties   are  reviewed  for   impairment   on  a
field-by-field  basis when facts and circumstances  indicate that their carrying
amount 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. Prior to the third quarter of 1995, proved
properties  were  evaluated  on an  area-of-interest  basis  and  impaired  when
capitalized  costs  exceeded  estimated  future  revenues,  computed by applying
current oil and gas prices to estimated future production, less estimated future
expenditures to develop and produce the reserves.
    Chemical,  coal and 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. Prior to the third
quarter of 1995,  individual  properties were written down when impairments were
deemed to have occurred.
Income Taxes
    Deferred  income taxes are  provided to reflect the future tax  consequences
of  differences  between  the tax  basis 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 final
reclamation and land restoration at coal mining locations and 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.

 Gas-Balancing Arrangements
    Gas-balancing arrangements with partners in  natural gas wells are accounted
for by the entitlements method. At December 31, 1997 and 1996, both the quantity
and dollar  amount of such  arrangements  recorded in the  Consolidated  Balance
Sheet were immaterial.

Lease Commitments
    The  company   utilizes   various  leased   properties  in  its  operations,
principally for office space.  Net lease rental expense was $15 million in 1997,
$14 million in 1996 and $12 million in 1995.
    The aggregate minimum  annual rentals under  noncancelable  leases in effect
on December 31, 1997, totaled $59 million,  of which $11 million is due in 1998,
$9 million in 1999,  $17 million in the period 2000 through 2002 and $22 million
thereafter.

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  requirements 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  will be offset by gains or  losses  on the  hedged  receivable,
capital item or operating cost.
    In 1996 and 1995,  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. Open contracts at year-end 1996 matured between January and December 1997.
Net gains and losses on these contracts in 1997, 1996 and 1995 were immaterial.
    Although no such  contracts  were entered into during 1997,  the company has
periodically used commodities 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. These  contracts  generally have had maturities of
one year or less.  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.  Prior to the sale of the refining and  marketing  operations,  the
company  also  hedged a  portion  of its  refined-product  sales  and  crude oil
purchased for the refineries.
    Management of price risks must consider market  conditions and availability.
As these factors change,  the company adjusts its hedging  strategy and modifies
its futures, forward and option contract positions.

2  Cash Flow Information

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

(Millions of dollars)          1997     1996     1995
Interest paid                   $47      $60      $68
Income taxes paid                15       17       75

    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 $19  million,  $4 million and $24 million at year-end
1997, 1996 and 1995, respectively;  transactions during 1997 associated with the
assignments  of  interest  of  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 16 and 20.
    Effective  December 31, 1996, the company merged its North American  onshore
exploration and production  operations 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.
    The effect of foreign currency  exchange rate  fluctuations on cash and cash
equivalents was immaterial.

3  Inventories
 
    Major categories of inventories at year-end 1997 and 1996 are:

(Millions of dollars)                            1997        1996
Chemicals and other products                     $119        $163
Materials and supplies                             48          49
Crude oil                                           5           6
                                                 ----        ----
  Total                                          $172        $218
                                                 ====        ====


4  Investments - Equity Affiliates
  
    At December  31, 1997 and 1996,  investments  in equity  affiliates  are  as
follows:

(Millions of dollars)                            1997        1996
Devon Energy Corporation                         $217        $193
Javelina Company                                   32          27
National Titanium Dioxide Company Limited          12          12
Other                                              12          12
                                                 ----        ----
  Total                                          $273        $244
                                                 ====        ====

    Effective  December 31, 1996, the company merged its North American  onshore
exploration and production  operations into Devon, a publicly traded oil and gas
exploration and production  company.  The company  received  9,954,000 shares of
Devon common stock  representing an ownership interest in Devon of approximately
31%.  This initial  investment  in Devon was recorded at the value of the assets
given  up  in  accordance   with  APB  No.  29,   "Accounting   for  Nonmonetary
Transactions."  The market value of the  company's  investment in Devon was $383
million at December 31, 1997, 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.
Financial  information  related  to  investments  that are shown as Other in the
preceding table has been excluded.

(Millions of dollars)                            1997     1996     1995
Results of operations -
  Net sales(1)                                   $570     $207     $250
  Total costs and expenses                        413      183      171
  Net income                                      105       22       66
Financial position -
  Current assets                                  198      153
  Property, plant and equipment - net             990      962
  Total assets                                  1,215    1,135
  Current liabilities                             123      130
  Total liabilities                               470      484
  Stockholders' equity                            745      651

(1)  Includes  net sales to the  company of $26  million,  $44  million  and $47
     million for 1997, 1996 and 1995, respectively.


5  Investments - Other Assets

    Investments  in other assets  consist of  the following at December 31, 1997
and 1996:

(Millions of dollars)                                   1997    1996
Net deferred tax asset                                   $22     $23
U.S. government obligations                               19      --
Patents                                                    6       5
Long-term notes receivable, net of $9 allowance
   for doubtful notes in both 1997 and 1996                5      17
Equity securities                                          2      24
Other                                                      6       5
                                                         ---     ---
  Total                                                  $60     $74
                                                         ===     ===


6  Property, Plant and Equipment
<TABLE>

    Fixed assets and related  reserves by business  segment at December 31, 1997
and 1996, are as follows:
<CAPTION>
                                                                     Reserves for
                                                                    Depreciation and
                                                Gross Property         Depletion        Net Property(1)
(Millions of dollars)                             1997    1996        1997    1996       1997    1996
<S>                                             <C>     <C>         <C>     <C>        <C>     <C>   
Exploration and production                      $2,888  $3,192      $1,677  $2,005     $1,211  $1,187
Chemicals                                        1,020     946         506     459        514     487
Coal                                               547     546         331     327        216     219 
Other                                              147     153          90      98         57      55
                                                ------  ------      ------  ------     ------  ------
  Total                                         $4,602  $4,837      $2,604  $2,889     $1,998  $1,948
                                                ======  ======      ======  ======     ======  ======

(1) Includes net assets held for sale of $126 million for  chemicals at December
    31, 1997, and $9 million for exploration and production at December 31, 1996.
    The company also intends to dispose of the coal segment. See Note 11.
</TABLE>

7  Deferred Charges
  
    Deferred charges are as follows at year-end 1997 and 1996:

(Millions of dollars)                                       1997        1996
Pension plan prepayment                                      $42         $33
Preoperating and startup costs                                 8           4
Intangible assets                                              6           3
Other                                                         20          13
                                                             ---         ---
  Total                                                      $76         $53
                                                             ===         ===

8  Debt
 
Lines of Credit and Short-Term Borrowings
    At year-end 1997, the company had available  unused bank lines of credit and
revolving credit  facilities of $714 million.  Of this amount,  $340 million and
$265 million can be used to support  commercial paper borrowing  arrangements of
Kerr-McGee Credit Corporation 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  1997,  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 1997  consisted of a  note payable of $25
million (5.98% interest  rate).  Outstanding at year-end 1996 were notes payable
totaling $15 million (5.97% average interest rate) and commercial paper totaling
$22 million (5.84% average 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  1997 and 1996,  debt
totaling $37 million and $400 million, respectively, was classified as long-term
consistent with this policy.
    Long-term debt consisted of the following at year-end 1997 and 1996:
<TABLE>
<CAPTION>
(Millions of dollars)                                                                 1997    1996
<S>                                                                                   <C>     <C>
Debentures -
  7.125% Debentures due October 15, 2027 (7.01% effective rate)                       $150    $ --
  7% Debentures due November 1, 2011, net of unamortized debt discount of
    $108 million in 1997 and $111 million in 1996 (14.25% effective rate)              142     139
  8-1/2% Sinking fund debentures due June 1, 2006                                       22      34
Commercial paper                                                                        --     266
Guaranteed Debt of Employee Stock Ownership Plan -
  9.61% Series B notes due in installments through January 2, 2005                      51      51
Notes payable -
  6.625%  Notes due  October 15,  2007  (6.54%  effective  rate)                       150      --
  Variable interest rate revolving credit agreements with banks due
    March 6, 2000 (6.04% average rate at December 31, 1997)                             37     114
  Other                                                                                  2      22
                                                                                      ----    ----
                                                                                       554     626
Long-term debt due within one year                                                      (2)     --
                                                                                      ----    ----
    Total                                                                             $552    $626
                                                                                      ====    ====

</TABLE>

    Maturities of long-term  debt due after December 31, 1997, are $2 million in
1998, $8 million in 1999,  $47 million in 2000, $12 million in 2001, $10 million
in 2002 and $475 million thereafter.
    At year-end 1997, the company guaranteed no debt or other liabilities of its
unconsolidated  equity  affiliates.  However,  at  year-end  1996,  the  company
guaranteed its ratable portion of the debt of  unconsolidated  equity affiliates
totaling $7 million.  These borrowings,  which are not included in the preceding
table,  were paid in full by the  unconsolidated  equity affiliates during 1997,
and the company was released as the guarantor.
    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  Other Financial Information
                                             
    Condensed  financial   information  relating  to  the  company's  previously
unconsolidated,  wholly owned  finance  subsidiary  is  summarized  below:

(Millions of dollars)                      1997    1996    1995
Results of operations -
  Interest income                           $17     $25     $25
  Net income                                  4       6       5

                                           1997    1996
Financial position -
  Assets                                   $116    $367
  Liabilities                                (3)   (258)
                                           ----    ---- 
    Stockholder's equity                   $113    $109
                                           ====    ====

10 Contingencies

West Chicago
    In 1973, a wholly owned subsidiary,  Kerr-McGee Chemical Corporation (KMCC),
closed the facility located in West Chicago,  Illinois,  that processed  thorium
ores.  Operations  resulted in some low-level  radioactive  contamination at the
site,  and in 1979,  KMCC 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, KMCC, the City of West Chicago (the City) and the
State reached  agreement on Phase I of the  decommissioning  plan for the closed
West  Chicago  facility,  and KMCC began  shipping  material  from the site to a
licensed permanent disposal facility.
    In February  1997,  KMCC executed an agreement with the City as to the terms
and conditions for completing the final phase of decommissioning  work, the bulk
of which is expected to be completed about four to six years after receiving the
necessary license amendment. The State has indicated approval of this agreement,
and KMCC expects the State to issue a license amendment that will enable KMCC to
complete the final phase of decommissioning work.
    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 KMCC as decommissioning costs are incurred.  KMCC 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 and has designated  KMCC 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
area and  Reed-Keppler  Park),  which require KMCC to conduct removal actions to
excavate  contaminated soils and ship the soils elsewhere for disposal.  Without
waiving any of its rights or  defenses,  KMCC has begun the cleanup of these two
sites.
    Judicial  Proceedings  - In December  1996, a lawsuit was filed  against the
company  and its  subsidiary,  KMCC,  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 KMCC 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 1996 to increase the amount authorized to $65
million plus  inflation  adjustments.  As of December  31,  1997,  KMCC has been
reimbursed approximately $40 million under Title X.

Other Matters
    The plants and facilities of the company and its subsidiaries are subject to
various environmental laws and regulations. The company or its subsidiaries have
been notified that they may be responsible  in varying  degrees for a portion of
the costs to clean up certain waste disposal sites and former plant sites. As of
December 31, 1997,  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 $243 million, which includes
$163  million  for the former  West  Chicago  facility  and $14  million for the
residential area and Reed-Keppler Park.  Reserves have been established based on
these estimates.  Actual costs will be reduced by the amounts  recoverable under
Title X and other  government  programs.  Expenditures  from  inception  through
December 31, 1997, totaled $435 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. The ultimate costs to decommission presently known sites
are difficult to estimate because of the numerous  contingencies,  which include
continually  changing  laws  and  regulations,   the  nature  of  the  company's
businesses and pending legal  proceedings.  Actual costs could differ from those
currently  estimated as information becomes available for sites that are not now
included  in  the  reserve,  if  contamination  is  not as  expected,  or  field
conditions  or other  variables  differ  significantly  from  those that are now
assumed. Therefore, it is not possible to reliably estimate the amount or timing
of all future  expenditures  relating to environmental and other  contingencies.
The company provides for costs related to contingencies  when a loss is probable
and the amount or range of amounts is reasonably estimable. Management believes,
after  consultation  with general  counsel,  that  adequate  reserves  have been
provided for all known contingencies.  However, the ultimate cost will depend on
the outcomes of the previously-noted  uncertainties.  Therefore,  it is possible
that additional reserves could be required in the future.

11 Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

Assets to Be Held and Used
    In 1996 and 1995, certain oil and gas fields in the United States and Canada
and certain coal and other assets were deemed to be impaired  because the assets
were not expected to recover their entire  carrying  value  through  future cash
flows. The impairment loss is included in the  Consolidated  Statement of Income
as Asset  impairment and was  determined as the difference  between the carrying
value and the estimated fair value. The fair value for these impaired assets was
generally  determined based on the estimated present value of future cash flows.
No impairments  were recognized  during 1997. The impairment loss by segment for
1996 and 1995 was as follows.

(Millions of dollars)                       1996      1995
Exploration  and production                  $22       $99
Coal                                          --        23
Other                                         --         1
                                             ---      ----
  Total                                      $22      $123
                                             ===      ====

Assets to Be Disposed Of
     The company intends to withdraw from the electrolytic  chemical business by
mid-1998 (see  Management's  Discussion and Analysis).  The sale of the ammonium
perchlorate  operations is pending, and a letter of intent to negotiate the sale
of substantially all the remaining electrolytic  operations has been signed. The
carrying value of these assets was approximately  $126 million at year-end 1997,
which  does not  exceed  fair  value.  The gain on the  sale is  expected  to be
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.  The majority of these properties were
located onshore in the United States; however,  certain of these properties 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  year-end  1996  oil and gas
reserves or oil and gas  production  or cash flows from  operations  for 1997 or
1996. At year-end 1995,  these  properties  comprised  approximately  10% of the
company's oil and gas reserves,  10% of oil and gas production volumes and 5% of
the company's 1995 cash flows from operations.
    As a result  of the  divestiture  program,  these  nonstrategic  oil and gas
properties  were reduced in 1995 to their  estimated fair value less the cost to
sell if the carrying  value of the property  exceeded such fair value net of the
estimated cost of selling the property.  The carrying  value of the  divestiture
program  properties was $172 million prior to the  recognition of the impairment
loss on the  properties  for which a loss was  indicated.  The  impairment  loss
totaled  $104  million and has been  included in the  Consolidated  Statement of
Income as Asset impairment.  There were no subsequent revisions to the estimated
fair values of these properties.
     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.
    Also held for sale at  December  31,  1995,  were the net  long-term  assets
totaling $5 million of a wholly owned coal mining  operation  in West  Virginia.
This sale was completed in February 1996. The gain on the sale was immaterial.
    Following  are the sales and pretax  income (loss) for assets to be disposed
of at  December  31,  1997,  1996 and  1995,  as  included  in the  Consolidated
Statement  of Income in each of the last three  years.  Any  impairment  loss is
included in the pretax amounts.

(Millions of dollars)                      1997      1996      1995
Sales -
  Exploration and production               $ --       $42     $  64
  Chemicals                                 166       160       158
  Coal                                       --        --        18
                                           ----      ----     -----
    Total                                  $166      $202     $ 240
                                           ====      ====     =====
Income (Loss) -
  Exploration and production               $ --      $  9     $(108)
  Chemicals                                  22        17        23
  Coal                                       --        --        (7)
                                           ----      ----     ----- 
    Total                                  $ 22      $ 26     $ (92)
                                           ====      ====     ===== 

    In January 1998, the company  announced that it would exit the coal business
(see  Management's  Discussion and Analysis).  The timing and method of disposal
have not yet been determined; therefore, the coal segment has not been presented
as a discontinued  operation nor are sales and pretax income included above. See
Note 24, "Reporting by Business Segments," for coal financial information.

12 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)                   1997      1996      1995
Domestic                                $177      $216     $(125)
International                            100       107        56
                                        ----      ----     -----
    Total                               $277      $323     $ (69)
                                        ====      ====     ===== 

    Effective  April 1,  1997,  the  corporate  tax rate in the  United  Kingdom
decreased  from 33% to 31%.  Effective  January 1, 1995,  the income tax rate in
Australia increased from 33% to 36%. The deferred income tax liability and asset
balances were adjusted to reflect these revised rates,  which decreased the 1997
and 1995 international deferred provision for income taxes by $8 and $2 million,
respectively.  The 1997,  1996 and 1995 provision  (benefit) for income taxes on
income from continuing operations is summarized below:

(Millions of dollars)                   1997      1996      1995
U.S. Federal -
  Current                                $15      $ 37      $ (4)
  Deferred                                35        25       (63)
                                         ---      ----      ---- 
                                          50        62       (67)
                                         ---      ----      ---- 
International -
  Current                                 32         5         9
  Deferred                                (1)       32         9
                                         ---      ----      ----
                                          31        37        18
                                         ---      ----      ----
State                                      2         4         4
                                         ---      ----      ----
    Total                                $83      $103      $(45)
                                         ===      ====      ==== 

    At December  31, 1997,  the net deferred tax asset  includes the benefit for
$80 million in net operating loss  carryforwards  that have no expiration dates.
At December 31, 1997,  the company had  additional  foreign net  operating  loss
carryforwards totaling $12 million that expire in 2001. These loss carryforwards
offset a portion of the foreign net deferred tax  liability.  Realization of net
operating  loss  carryforwards  is dependent on  generating  sufficient  taxable
income.  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.
    The net deferred  tax asset,  which is  classified  as  Investments  - Other
assets in the Consolidated  Balance Sheet,  represents the net deferred taxes in
certain foreign  jurisdictions.  Deferred tax liabilities and assets at December
31, 1997 and 1996,  are composed of the  following:

(Millions of dollars)                           1997     1996
Net deferred tax liability -
  Accelerated depreciation                      $240     $259
  Exploration and development                     72       65
  Undistributed earnings of foreign
    subsidiaries                                  28       23
  Postretirement benefits                        (47)     (46)
  Dismantlement, reclamation, remediation 
    and other reserves                           (69)    (113)
  Foreign operating loss carryforward             (4)     (10)
  Other                                          (61)     (47)
                                                ----     ---- 
                                                 159      131
                                                ----     ----
Net deferred tax asset -
  Accelerated depreciation                        13       16
  Foreign operating loss carryforward            (29)     (36)
  Other                                           (6)      (3)
                                                ----     ---- 
                                                 (22)     (23)
                                                ----     ---- 
        Total                                   $137     $108
                                                ====     ====

    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.

                                                    1997     1996     1995
U.S. statutory rate                                 35.0%    35.0%   (35.0)%
  Increases (decreases) resulting from -
    Statutory depletion in excess
      of cost depletion                             (1.5)    (2.6)   (10.4)
    Taxation of foreign  operations                  2.1       .9     (2.0)
    State income taxes                               1.2       .9     (2.2)
    Adjustment of prior years' accruals             (1.6)      .2     (2.0)
    Federal income tax credits                        --      (.2)    (4.1)
    Dividends paid on Employee
      Stock Ownership Plan                           (.6)     (.5)    (2.0)
    Foreign equity income                             --       --     (2.6)
    Contribution of appreciated 
      equity securities                              (.4)    (1.4)      --
    Adjustment of deferred tax balances
      due to tax rate changes                       (2.9)      --     (3.1)
    Other - net                                     (1.3)     (.4)    (1.6)
                                                    ----     ----    ----- 
        Total                                       30.0%    31.9%   (65.0)%
                                                    ====     ====    =====  

    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,
except for a refund claim pending for the years 1984-1992.  The company believes
that it has made  adequate  provision  for income taxes that may become  payable
with respect to open tax years.

13 Other Deferred Credits and Reserves
                                             
    Other  deferred  credits and reserves  consist of  the following at year-end
1997 and 1996:

(Millions of dollars)                            1997        1996
Reserves for site dismantlement,
  reclamation and remediation                    $251        $345
Postretirement benefit obligations                120         117
Other                                              51          53
                                                 ----        ----
      Total                                      $422        $515
                                                 ====        ====

    The company provided for environmental reclamation and remediation of former
plant sites, net of reimbursements received, during each of the years 1997, 1996
and 1995 as follows:

(Millions of dollars)                            1997     1996     1995
Provision, net of reimbursements                  $18      $43      $54
Reimbursements received                            12       10       11

    The  reimbursements,  which pertain to the former  facility in West Chicago,
Illinois, were received pursuant to the Energy Policy Act of 1992 (see Note 10).
An   additional   $49  million   was   provided   in  1995  for   refining   and
marketing-related  sites and included in the  discontinued  operations (see Note
21).
    
14 Stockholders' Equity

    Changes in common stock,  capital in excess of par value and treasury  stock
for 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
                                                                  Common Stock                     Treasury Stock
                                                                                    Capital in
                                                                 Shares       Par    Excess of
(Millions of dollars and thousands of shares)                    Issued     Value    Par Value     Shares      Cost
<S>              <C> <C>                                         <C>        <C>     <C>            <C>         <C> 
Balance December 31, 1994                                        53,304       $53         $309      1,610      $ 63
  Exercise of stock options and stock appreciation rights           210         1            9         --        --
  Stock purchase program                                             --        --           --        835        48
                                                                 ------       ---         ----      -----      ----
Balance December 31, 1995                                        53,514        54          318      2,445       111
  Exercise of stock options and stock appreciation rights           348        --           16         --        --
  Issuance of shares for achievement awards                          --        --           --         (3)       --
  Stock purchase program                                             --        --           --      3,127       195
                                                                 ------       ---         ----      -----      ----
Balance December 31, 1996                                        53,862        54          334      5,569       306
  Exercise of stock options and stock appreciation rights           259        --           12         --        --
  Issuance of shares for achievement awards                          --        --           --         (2)       --
  Stock purchase program                                             --        --           --        867        57
                                                                 ------       ---         ----      -----      ----
Balance December 31, 1997                                        54,121       $54         $346      6,434      $363
                                                                 ======       ===         ====      =====      ====
</TABLE>

    The  company  has 40 million  shares of  preferred  stock  without par value
authorized, and none is issued.
    During 1995, the Board of Directors authorized  management to purchase up to
$300 million of the common stock of the  company.  The program was  completed in
August 1997 with a total of 4,829,000 shares acquired at a cost of $300 million.
    In  1996,   the   company's   Board  of  Directors   replaced  the  existing
stockholder-rights  plan,  which  expired in July 1996,  with a new rights  plan
dated July 9, 1996.  Such rights were  distributed  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 occur, each
right would  entitle the holder (other than the 15% holder) 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.

15 Other Income

    Other  income is as  follows  during  each of  the  years in the  three-year
period ended December 31, 1997:

(Millions of dollars)                            1997     1996     1995
Income from unconsolidated affiliates             $32     $ 14      $12
Gain on sale of available-for-sale securities      18       23       --
Settlements with insurance carriers                12       67       --
Interest                                           12        9       15
Gain on sale of assets                             10       24        2
Other                                               6       (5)      --
                                                  ---     ----      ---
   Total                                          $90     $132      $29
                                                  ===     ====      ===


16 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.  The  company  held no
securities  classified  as held to maturity or trading at December  31, 1997 and
1996.  At December 31, 1997 and 1996,  available-for-sale  securities  for which
fair value can be estimated were as follows:
<TABLE>
<CAPTION>

                                                     1997                               1996
                                             Fair           Gross Unrealized    Fair           Gross Unrealized
(Millions of dollars)                       Value    Cost      Holding Gains   Value    Cost      Holding Gains
<S>                                         <C>      <C>    <C>                <C>      <C>    <C>
U.S. government obligations -
  Maturing within one year                    $ 8     $ 8                $--     $26     $26                $--
  Maturing between one year and four years     19      19                 --      --      --                 --
  Equity securities                            --      --                 --      22       3                 19
                                              ---     ---                ---     ---     ---                ---
    Total                                     $27     $27                $--     $48     $29                $19
                                              ===     ===                ===     ===     ===                ===
</TABLE>

    U.S. government  obligations are carried in  the Consolidated  Balance Sheet
as  Current  Assets or as  Investments  - Other  assets,  depending  upon  their
maturity. Equity securities are carried as Investments - Other assets.
    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.
    The change in  unrealized  holding gains,  net of income taxes,  as shown in
the separate  component of  stockholders'  equity during the  three-year  period
ended December 31, 1997, is as follows:

(Millions of dollars)                          1997       1996       1995
Beginning balance                               $12        $26        $12
  Net unrealized holding gains                    2          9         14
  Net realized gains                            (12)       (15)        --
  Net appreciation of donated securities         (2)        (8)        --
                                                ---        ---        ---
Ending balance                                  $--        $12        $26
                                                ===        ===        ===

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,
1997 and 1996,  the carrying  amount and estimated  fair value of such financial
instruments for which fair value can be determined are as follows:

                                       1997                    1996
                               Carrying    Fair        Carrying    Fair
(Millions of dollars)            Amount   Value          Amount   Value
Cash and cash
  equivalents                      $183    $183            $121    $121
Long-term notes
  receivable                          5       5              17      17
Contracts to sell
  foreign currencies                 --       8              13      33
Contracts to purchase
  foreign currencies                 --     102              --      29
Short-term borrowings                25      25              37      37
Total long-term debt                554     669             626     737

    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 ($65 million hedged in 1997 and $68 million in
1996) and the operating costs and capital expenditures of international chemical
operations ($50 million hedged in 1997 and $28 million in 1996).  The purpose of
these  foreign  currency  hedging  activities is to protect the company from the
risk that the eventual U.S.  dollar 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, $3 million in 1996 and $8 million in 1995.
    At December 31, 1997, the company had foreign  currency  contracts  maturing
between January 1998 and December 1999 to purchase $137 million Australian and 8
million British pounds sterling for $102 million and $12 million,  respectively.
Additionally,  at December  31, 1997,  the company had  contracts to sell for $8
million various foreign currencies,  principally European,  which mature between
January and April 1998. At December 31, 1996,  the company had foreign  currency
contracts that matured between January and December 1997 to purchase $36 million
Australian for $25 million.  Additionally, at December 31, 1996, the company had
contracts  to sell  for $34  million  various  foreign  currencies,  principally
European,  which  matured  between  January and  December  1997.  This  included
contracts  totaling  $14  million  for  anticipated   pigment  sales  that  were
marked-to-market.  Net unrealized  losses on foreign currency  contracts totaled
$13 million at year-end 1997. Net unrealized gains on foreign currency contracts
totaled $4 million at year-end 1996 and $3 million at year-end 1995.
    Although no oil or natural gas futures or option contracts were entered into
during  1997,  the company has  periodically  used these types of  contracts  to
reduce the effect of the price  volatility of crude oil,  natural gas and, prior
to the sale of the refining and  marketing  operations,  refined  products.  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
on crude oil and natural gas 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.  At
year-end 1996, there were no open crude oil or natural gas contracts.
    During 1995, the company sold forward 13 million barrels of crude oil and 19
billion cubic feet of natural gas representing  approximately 49% and 18% of its
worldwide  crude oil and natural gas  production,  respectively,  and 35% of the
refined-product  sales of the  discontinued  refining and marketing  operations.
Hedging gains and losses recognized for 1995 were immaterial.  At year-end 1995,
open crude oil and natural gas contracts had an aggregate value of $151 million,
and the unrecognized loss on these contracts totaled $14 million.
    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 the  quantitative  and  qualitative  disclosure  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.

17 Taxes, Other than Income Taxes
      
    Taxes,  other than  income taxes,  during the years ended December 31, 1997,
1996 and 1995, are composed of the following:

(Millions of dollars)                      1997       1996       1995
Production/severance                        $19        $25        $22
Payroll                                      16         15         14
Property                                      5         10         10
Other                                        13         16         15
                                            ---        ---        ---
    Total                                   $53        $66        $61
                                            ===        ===        ===

18 Employee Stock Option Plans

    The 1987 Long Term Incentive Program (1987 Program)  authorized the issuance
of shares of the company's  common stock through  December 31, 2002, in the form
of stock options,  restricted stock or long-term performance awards. The options
may be accompanied by stock appreciation rights. The 1987 Program was amended in
May 1995 to restore the number of shares  available to be granted to  1,000,000,
bringing the total number of shares authorized to be granted through the program
to 2,740,000.
    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.
    The 1984 Employee Stock Option Plan  authorized the granting of options over
a 10-year  period for up to 1,000,000  shares of common  stock and  accompanying
stock  appreciation  rights.  The 1984 plan was terminated on May 3, 1988. After
that date, no further options could be granted under this plan, although options
and any accompanying stock appreciation rights outstanding at that time could be
exercised prior to their respective expiration dates.
    Transactions  during the past three years under these  plans are  summarized
below:
<TABLE>
<CAPTION>
                                                1987 Incentive Program               1984 Stock Option Plan
                                                        Weighted-Average                    Weighted-Average
                                                          Exercise Price                      Exercise Price
                                                Options       per Option            Options       per Option
<S>                                           <C>       <C>                         <C>     <C>   
Balance outstanding December 31, 1994         1,178,403           $45.11             33,000           $27.58
   Options granted                              409,000            49.31                 --               --
   Options exercised                           (206,821)           43.81             (3,000)           27.06
Options surrendered upon exercise
of stock appreciation rights                     (6,850)           39.80            (20,000)           27.91
   Options forfeited                            (49,369)           45.87                 --               --
                                              ---------                             -------                 
Balance outstanding December 31, 1995         1,324,363            46.61             10,000            27.06
   Options granted                              310,800            63.56                 --               --
   Options exercised                           (333,594)           46.40                 --               --
   Options surrendered upon exercise
of stock appreciation rights                    (48,634)           43.63            (10,000)           27.06
   Options forfeited                             (6,469)           53.00                 --               --
                                              ---------                             -------                 
Balance outstanding December 31, 1996         1,246,466            50.98                 --               --
   Options granted                              325,200            68.90                 --               --
   Options exercised                           (256,986)           45.93                 --               --
   Options surrendered upon exercise
of stock appreciation rights                     (5,000)           32.38                 --               --
   Options forfeited                             (6,703)           57.46                 --               --
   Options expired                                 (400)           54.06                 --               --
                                              ---------                             -------                 
Balance outstanding December 31, 1997         1,302,577            56.48                 --               --
                                              =========                             =======                 

Options exercisable -
   December 31, 1995                            626,759            44.87             10,000            27.06
   December 31, 1996                            623,461            46.44                 --               --
   December 31, 1997                            750,894            50.87                 --               --
</TABLE>

    Following  is the range of exercise  prices and  weighted-average  remaining
life  of  all  stock  options   outstanding   at  December  31,  1997,  and  the
weighted-average  price within each price range of those options outstanding and
those options exercisable at year-end 1997.
<TABLE>
<CAPTION>

            Options Outstanding at December 31, 1997               Options Exercisable at December 31, 1997
                    Range of   Weighted-Average   Weighted-Average                         Weighted-Average
             Exercise Prices          Remaining     Exercise Price                           Exercise Price
  Options         per Option   Contractual Life         per Option         Options               per Option
<S>          <C>      <C>      <C>                <C>                      <C>             <C>   
   38,900      $32.38-$39.57                2.7             $38.00          38,900                   $38.00
  418,518       40.81- 49.25                5.6              45.49         385,183                    45.56
  230,657       50.56- 54.50                6.9              53.14         170,169                    52.77
  457,502       61.00- 64.88                8.7              63.96         138,642                    63.96
  157,000       73.50- 73.50                9.0              73.50          18,000                    73.50
  -------                                                                   ------                         
1,302,577       32.38- 73.50                7.2              56.48         750,894                    50.87
=========                                                                  =======                         
</TABLE>

    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 plan under the
optional  intrinsic value method of APB No. 25,  "Accounting for Stock Issued to
Employees," whereby 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 1997, 1996 and 1995.
    Had compensation expense been determined in accordance with FAS No. 123, the
estimated weighted-average, grant-date fair value would have been $14.37, $13.17
and  $14.54  per  option  for  those  options  granted  in 1997,  1996 and 1995,
respectively.  Use of the  fair-value  method of accounting  for employee  stock
options  would  result  in net  income  and  earnings  per  share  that  are not
materially different from the amounts reported in the financial statements. This
may not be  representative  of  compensation  expense  that might be expected to
result in future years 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.
    The fair value of each option  granted in 1997,  1996 and 1995 was estimated
as of the date of grant using the  Black-Scholes  option  pricing model with the
following weighted-average assumptions.

                                    1997      1996     1995
Expected life (years)                5.8       5.8     10.0
Risk-free interest rate              6.3%      6.1%     7.1%
Expected dividend yield              3.1       3.1      3.1
Expected volatility                 17.5      17.9     19.4

    The number of the  company's  common  shares issued upon exercise of options
after year-end 1997 was not material.
    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,  and
approximately 465,000 options were granted in January 1998.
    The Board of Directors,  subject to stockholder ratification,  also approved
the 1998 Long Term  Incentive  Plan (the 1998 Plan) to be  effective  January 1,
1998. This plan provides for the granting of options, restricted stock and other
awards to key employees.  Stock  appreciation  rights may be associated with the
options. A total of 2,300,000 shares of the company's common stock is authorized
to be issued  under the 1998 Plan,  and in January  1998,  185,000  options were
granted.  These  options will be granted under the 1987 Program if the 1998 Plan
is not ratified by the stockholders.
    The 1987 Program will terminate upon  stockholder  ratification  of the 1998
Plan.  No  further  options  can be  granted  under the 1987  Program  after its
termination,  although options and any accompanying  stock  appreciation  rights
outstanding at that time may be exercised prior to their  respective  expiration
dates.
    Options  under  either the BSOP or the 1998 Plan are granted at prices equal
to the fair market value of the underlying common stock at the time of grant.
    Also in January 1998,  the Board of Directors  approved  provisions to amend
and restate the Executive  Deferred  Compensation Plan (EDCP).  The amendment of
the EDCP adds the company's  common stock as an investment  alternative,  allows
stock option gains to be deferred pretax and implements  certain  administrative
changes.  A total of 500,000  shares of common stock is  authorized to be issued
through the EDCP and periodically  transferred from the company's treasury stock
or purchased in open-market transactions.
    Earnings  per share for 1997 would  have been lower had these  plans been in
existence and had shares been  transferred to the EDCP prior to year-end 1997 or
if any options  granted  under the BSOP or the 1998 Plan had been "in the money"
at year-end.  The impact on basic and diluted earnings per share would have been
dependent  on the  number  of shares  transferred  to the  EDCP,  while  diluted
earnings per share would have been further impacted by the number of incremental
shares   included  in  the   denominator   of  the  diluted   earnings-per-share
computation.
    
19 Restructuring Charges
    
    Restructuring  of the  exploration  and production  operating unit continued
during  1997  with  the  relocation  of the unit to  Houston,  Texas.  This,  in
conjunction with the unit's merger of its North American onshore properties into
Devon (see Note 4) and the 1995  reorganization,  resulted in approximately  300
employees terminating their employment, most of whom were terminated by year-end
1997.
    During the three-year  period ended December 31, 1997, the company accrued a
total of $19 million for the cost of special  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, 1997,  primarily  represents  remaining  severance costs, which are
expected  to be paid and  charged to the  reserve  during  1998.  The  accruals,
expenditures  and reserve  balances are set forth  below:

(Millions of dollars)                                 1997       1996
 Beginning balance                                     $10        $ 5
   Accruals                                              2         10
   Retirement benefits to be paid from plan assets      --         (2)
   Payments                                            (10)        (3)
                                                       ---        --- 
Ending balance                                         $ 2        $10
                                                       ===        ===

20 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  2.7  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.  Deferred   compensation,
representing the unallocated  ESOP shares discussed in the following  paragraph,
is reflected as a reduction of stockholders' equity.
    The  company  stock  acquired  by the ESOP trust is held in a loan  suspense
account. 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 stock is then
allocated  to  participants'  accounts  at  market  value  as the  participants'
contributions  are  made to the  SIP.  Deferred  compensation  reflected  in the
company's  Consolidated  Balance  Sheet is reduced as shares  are  allocated  to
participants'  accounts.  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, 1997 and 1996, the ESOP trust held shares of stock allocated
to participants' accounts and in the loan suspense account as follows:

(Thousands of shares)                   1997      1996
Participants' accounts                 1,343     1,251
Loan suspense account                  1,110     1,290

    The  shares  allocated  to  participants  at  December  31,  1997,  included
approximately  15,000 shares  released in January 1998. The shares  allocated to
participants at December 31, 1996, included approximately 14,000 shares released
in January 1997.
    All  ESOP  shares  are   considered   outstanding   for   earnings-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 $10 million,  $12 million and $14 million in 1997, 1996
and 1995,  respectively.  These amounts include interest expense incurred on the
third-party ESOP debt of $5 million, $6 million and $8 million in 1997, 1996 and
1995,  respectively.  The company  contributed  $1  million,  $9 million and $15
million to the ESOP in 1997, 1996 and 1995, 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 1997, 1996 and 1995. 

21 Discontinued Operations

    During 1995, the company disposed of  substantially  all of its refining and
marketing  operations,  which had been  conducted by wholly owned  subsidiaries,
Kerr-McGee Refining Corporation and Cato Oil and Grease Co. The 1995 gain on the
sale was $2 million,  net of $1 million for income taxes. The operating  results
of the discontinued refining and marketing operations are reported separately in
the Consolidated  Statement of Income.  Revenues  applicable to the discontinued
operations   totaled   $1.1   billion  in  1995.   All  of  the  crude  oil  and
refined-product   inventories  of  the   discontinued   refining  and  marketing
operations  were valued using the last-in,  first-out  (LIFO)  method until sold
during 1995.  LIFO reserves of $12 million were reversed at the time of the sale
of these  inventories.  The sales of the remaining  assets were completed during
1996, and the resulting gains and losses were immaterial.

22 Postretirement Benefits

    The company sponsors  contributory  plans to provide certain health care and
life insurance benefits for retired  employees.  Substantially all the company's
employees may become  eligible for these  benefits if they reach  retirement age
while  working  for the  company;  however,  benefits  available  and  costs  to
individual  employees vary  depending on the  employee's  date of retirement and
date of employment with the company.
    At December 31, 1997 and 1996,  the actuarial and recorded  liabilities  for
postretirement benefits, none of which has been funded, are as follows:
<TABLE>
<CAPTION>
 
                                                                    1997                 1996
(Millions of dollars)                                         Health     Life      Health     Life
<S>                                                           <C>        <C>       <C>        <C>
Actuarial present value of accumulated
  postretirement benefit obligations -
    Retirees                                                   $ (77)    $(19)       $(69)    $(18)
    Fully eligible active participants                            (9)      (2)        (11)      (1)
    Other active participants                                    (21)      (3)        (18)      (4)
                                                               -----     ----        ----     ---- 
      Total                                                     (107)     (24)        (98)     (23)
Unrecognized net (gain) loss                                       6       (3)         --       (4)
                                                               -----     ----        ----     ---- 
       Accrued postretirement expense                          $(101)    $(27)       $(98)    $(27)
                                                               =====     ====        ====     ==== 
</TABLE>

    For the years ended December 31, 1997,  1996 and 1995, the components of net
periodic expense for postretirement benefits were as follows:
<TABLE>
<CAPTION>
   
                                                                    1997           1996            1995
(Millions of dollars)                                           Health  Life    Health  Life    Health Life
<S>                                                             <C>     <C>     <C>     <C>     <C>    <C>
Service cost - benefits earned during the period                    $1    $1        $1    $1        $1   $1
Interest cost on accumulated postretirement benefit obligations      8     1         8     1         8    1
                                                                    --    --        --    --        --   --
    Net postretirement expense                                      $9    $2        $9    $2        $9   $2
                                                                    ==    ==        ==    ==        ==   ==
</TABLE>

    The  following  assumptions  were used in estimating  the actuarial  present
value of the  accumulated  postretirement  benefit  obligations and net periodic
postretirement benefit expense:

                                              1997     1996     1995
Future compensation increases                  5.0%     5.0%    5.00%
Discount rate                                  7.0      7.5     7.25

    The  health  care  cost  trend  rate used to  determine  the  year-end  1997
accumulated   postretirement  benefit  obligation  was  8%  in  1998,  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  accumulated  postretirement  benefit  obligation by $13
million at December 31,  1997.  In  addition,  the  aggregate of the service and
interest cost components of net periodic  postretirement  expense for 1997 would
increase by $1 million.
    
23 Retirement Plans

    Most of the company's employees are covered under noncontributory retirement
plans of the  company  and certain of its  subsidiaries.  The  benefits of these
plans are based primarily on years of service and employees'  remuneration  near
retirement.  The company's policy is to fund the minimum amounts as permitted by
the Employee Retirement Income Security Act of 1974 (ERISA).
    The funded status of plans with assets in excess of accumulated  benefits at
December 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
  
(Millions of dollars)                                                         1997             1996
<S>                                                                           <C>              <C> 
Plan assets at fair value                                                     $639             $538
                                                                              ----             ----
Actuarial present value of accumulated benefit obligations -
   Vested                                                                     (354)            (322)
   Nonvested                                                                   (16)             (13)
                                                                              ----             ---- 
     Total                                                                    (370)            (335)
                                                                              ----             ---- 
     Plan assets in excess of accumulated benefit obligations                 $269             $203
                                                                              ====             ====
Plan assets at fair value                                                     $639             $538
                                                                              ----             ----
Projected benefit obligations -
   Actuarial present value of accumulated benefit obligations                 (370)            (335)
   Projected salary increases                                                  (54)             (46)
                                                                              ----             ---- 
     Total                                                                    (424)            (381)
     Plan assets in excess of projected benefit obligations                    215              157
Unrecognized net asset at January 1, 1987                                      (13)             (17)
Unrecognized prior service costs                                                11               12
Unrecognized net gain                                                         (171)            (119)
                                                                              ----             ---- 
     Pension prepayment at end of year                                        $ 42             $ 33
                                                                              ====             ====
</TABLE>

    The net  periodic  pension credit,  excluding  charges of $2 million in 1996
and $1 million in 1995 related to the  restructuring  program (see Note 19), for
each of the past three years is summarized as follows:

(Millions of dollars)                           1997     1996     1995
Service cost - benefits earned
  during the period                             $ 10      $ 9     $  8
Interest cost on projected
  benefit obligations                             28       27       27
Return on plan assets                           (126)     (70)    (115)
Net amortization and deferral                     79       27       71
                                                ----      ---     ----
    Net pension credit                          $ (9)     $(7)    $ (9)
                                                ====      ===     ==== 

    The amount of benefits that can be covered by the funded plans is limited by
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 projected benefit
obligation  for these  unfunded  plans  totaled  $14  million and $19 million at
December  31,  1997 and 1996,  respectively.  To reflect the amount by which the
accumulated  benefit  obligation  exceeded the accrued pension expense for these
plans, an additional  liability is recorded in the Consolidated Balance Sheet at
both December 31, 1997 and 1996. Offsetting is an intangible asset (see Note 7).
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  $7  million  and  $12  million  at  December  31,  1997  and  1996,
respectively.  Excluding  $6 million  in 1997  related  to the  settlement  of a
significant  portion of the liabilities of the unfunded  supplemental plans, net
periodic  pension expense for these plans was $3 million for 1997 and $4 million
for each of the years 1996 and 1995.
    The  following  assumptions  were used in estimating  the actuarial  present
value of the projected benefit obligation and net periodic pension costs:

                                               1997     1996     1995
Future compensation increases                   5.0%     5.0%    5.00%
Discount rate                                   7.0      7.5     7.25
Long-term rate of return on plan assets         9.0      9.0     9.00


24 Reporting by Business Segments

    The company is an international  energy and chemical company.  The principal
areas of oil and gas  exploration  and  production  are the Gulf of Mexico,  the
United Kingdom sector of the North Sea, China,  Southeast Asia, Yemen and, prior
to December 31, 1996,  onshore in North  America.  The company has domestic coal
and  chemical  operations  and  interests  in  chemical  operations  in  Western
Australia and Saudi Arabia.
<TABLE>
<CAPTION>
                           
(Millions of dollars)                                                           1997       1996       1995
<S>                                                                           <C>        <C>        <C>
Sales - 
   Exploration and production(1)                                              $  628     $  874     $  690
   Chemicals                                                                     760        692        707
   Coal                                                                          323        365        353
   Other                                                                          --         --          4
                                                                              ------     ------     ------
        Total                                                                 $1,711     $1,931     $1,754
                                                                              ======     ======     ======
Operating profit (loss)(2) -
   Exploration and production                                                 $  175     $  204     $  (97)
   Chemicals                                                                      81         85        122
   Coal                                                                           44         75         43
   Other                                                                           4          7         (4)
                                                                              ------     ------     ------ 
        Total                                                                 $  304     $  371     $   64
                                                                              ======     ======     ======
Net operating profit (loss)(2) -
   Exploration and production                                                 $  107     $  136     $  (56)
   Chemicals                                                                      52         53         81
   Coal                                                                           33         57         35
   Other                                                                           2          5         (2)
                                                                                   -          -         -- 
        Total                                                                    194        251         58
Net interest expense                                                             (24)       (30)       (29)
Net nonoperating income (expense)(2)                                              24         (1)       (53)
Loss from discontinued operations, net of income tax benefit                      --         --         (7)
                                                                              ------     ------     ------ 
Net income (loss)                                                             $  194     $  220     $  (31)
                                                                              ======     ======     ====== 
Sales -
   U.S. operations(3)                                                         $1,212     $1,391     $1,237
                                                                              ------     ------     ------
   International operations(4) -
     North Sea - exploration and production                                      215        289        272
     China - exploration and production                                           56         25         --
     Australia - chemicals                                                       185        151        158
     Other                                                                        43         75         87
                                                                                  --         --         --
                                                                                 499        540        517
                                                                              ------     ------     ------
        Total                                                                 $1,711     $1,931     $1,754
                                                                              ======     ======     ======
Operating profit (loss)(2) -
   U.S. operations                                                            $  207     $  256     $   (5)
                                                                              ------     ------     ------ 
   International operations -
     North Sea - exploration and production                                       80         93        108
     China - exploration and production                                            4          2         (5)
     Australia - chemicals                                                        13          9         24
     Other                                                                        --         11        (58)
                                                                              ------     ------     ------ 
                                                                                  97        115         69
                                                                              ------     ------     ------
        Total                                                                 $  304     $  371     $   64
                                                                              ======     ======     ======
</TABLE>

(1)  Includes  primarily  crude  oil  sales  to the  discontinued  refining  and
     marketing operations of $112 million in 1995.
(2)  Includes special items.  Refer to Management's Discussion and Analysis.
(3)  Includes  U.S.  crude oil sales to the  discontinued refining and marketing
     operations of $105 million in 1995.
(4)  Includes  international  crude oil sales to the  discontinued  refining and
     marketing operations of $7 million in 1995.
<TABLE>
<CAPTION>

(Millions of dollars)                                                           1997       1996       1995
<S>                                                                           <C>        <C>        <C>
Depreciation, depletion and amortization expense -
   Exploration and production                                                 $  186     $  218     $  231
   Chemicals                                                                      55         55         52
   Coal                                                                           25         30         29
   Other                                                                           5          4          6
   Discontinued operations                                                        --         --         16
                                                                              ------     ------     ------
        Total                                                                 $  271     $  307     $  334
                                                                              ======     ======     ======
Cash capital expenditures -
   Exploration and production                                                 $  213     $  239     $  371
   Chemicals                                                                      91        118         69
   Coal                                                                           27         29         36
   Other                                                                          10          6          2
   Discontinued operations                                                        --         --          6
                                                                                                         -
        Total                                                                    341        392        484
                                                                              ======     ======     ======
Exploration expenses -
   Petroleum exploration and production -
     Dry hole costs                                                               25         37         34
     Amortization of undeveloped leases                                            8         10         14
     Other                                                                        30         25         31
                                                                                  --         --         --
        Total                                                                     63         72         79
   Minerals and other                                                              2          3          3
                                                                                   -          -          -
        Total exploration expenses                                                65         75         82
   Less - Amortization of oil and gas and minerals leases
     and other noncash expenses                                                   (8)       (14)       (19)
                                                                              ------     ------     ------ 
                                                                                  57         61         63
                                                                              ------     ------     ------
        Total cash capital expenditures and cash exploration expenses         $  398     $  453     $  547
                                                                              ======     ======     ======
Identifiable assets -
   Exploration and production                                                 $1,681     $1,667     $1,748
   Chemicals                                                                     875        886        802
   Coal                                                                          270        276        327
   Other                                                                          38         39         36
                                                                                  --         --         --
        Total                                                                  2,864      2,868      2,913
Corporate assets                                                                 232        256        261
Discontinued operations                                                           --         --         39
                                                                              ------     ------     ------
        Total                                                                 $3,096     $3,124     $3,213
                                                                              ======     ======     ======
Identifiable assets -
   U.S. operations                                                            $1,654     $1,684     $1,663
                                                                              ------     ------     ------
   International operations -
     North Sea - exploration and production                                      699        651        669
     China - exploration and production                                          183        180        149
     Australia - chemicals                                                       243        268        260
     Other                                                                        85         85        172
                                                                                  --         --        ---
                                                                               1,210      1,184      1,250
                                                                              ------     ------     ------
        Total                                                                 $2,864     $2,868     $2,913
                                                                              ======     ======     ======
</TABLE>
<TABLE>
<CAPTION>

(Millions of dollars)                                                           1997       1996       1995
<S>                                                                           <C>        <C>        <C>
Net assets -
   U.S. operations                                                            $  617     $  582     $  623
                                                                              ------     ------     ------
   International operations -
     North Sea - exploration and production                                      475        413        409
     China - exploration and production                                          134        109        106
     Australia - chemicals                                                       152        211        199
     Other                                                                        62         52         79
                                                                                  --         --         --
                                                                                 823        785        793
                                                                              ------     ------     ------
        Total                                                                 $1,440     $1,367     $1,416
                                                                              ======     ======     ======
</TABLE>


25 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, 1997, 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     Expenses    Producing    Results of
(Millions of dollars)    Revenues(1)      Costs  Costs(2) Expenses(2)      Expenses Impairment (Benefits)   Activities Operations(3)
<S>                      <C>         <C>         <C>      <C>         <C>           <C>        <C>         <C>         <C>
1997 -
  Domestic                     $309        $ 50       $25         $25          $105      $ --        $ 39         $ 65           $25
  North Sea                     190          49         7          13            53        --          27           41            --
  China                          56          11         6          16            19        --          --            4            --
  Other international             3           1         6           9             1        --          (4)         (10)            3
                               ----        ----       ---         ---          ----      ----        ----         ----           ---
    Total crude oil and
      natural gas activities    558         111        44          63           178        --          62          100            28
  Other(4)                       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            --
  China                          25           8         5           2             8        --           1            1            --
  Other international            32          10         6           8            15        --          (2)          (5)           --
                               ----        ----       ---         ---          ----      ----        ----         ----           ---
    Total crude oil and
      natural gas activities    694         158        50          72           207        22          64          121            --
  Other(4)                      180         159         1          --             1        --           4           15            --
       --                      ----        ----       ---         ---          ----      ----        ----         ----           ---
        Total                  $874        $317       $51         $72          $208      $ 22        $ 68         $136            --
                               ====        ====       ===         ===          ====      ====        ====         ====           ===
1995 -
  Domestic                     $294         $92       $17         $57          $128      $144        $(58)        $(86)           --
  North Sea                     242          57         8          15            66        --          32           64            --
  Other international            40          11        12           7            20        53         (20)         (43)           --
                               ----        ----       ---         ---          ----      ----        ----         ----           ---
    Total crude oil and
      natural gas activities    576         160        37          79           214       197         (46)         (65)           --
  Other(4)                      114          88         3          --             3         6           5            9            --
       --                      ----        ----       ---         ---          ----      ----        ----         ----           ---
        Total                  $690        $248       $40         $79          $217      $203        $(41)        $(56)           --
                               ====        ====       ===         ===          ====      ====        ====         ====           ===
</TABLE>

(1) Gross revenues  for1995 include sales to affiliated  entities  totaling $112
    million.  Of  this amount, $97  million  and $7  million  were applicable to
    Domestic and North Sea gross revenues, respectively, and $8 million was from
    other activities.
(2) Includes  restructuring charges of $2 million, $10 million and $7 million in
    1997, 1996  and 1995, respectively.  These  charges  are classified as Other
    Related Costs,  with the exception of $1 million  classified  as Exploration
    Expenses in 1995 (see Note 19).
(3) The equity affiliate follows the "full cost" method of accountingfor oil and
    gas exploration and production activities.
(4) 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.

    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 oil equivalent  based on approximate  relative  heating
value (6 MCF equals 1 barrel).
                                            1997        1996        1995
Average sales price -
  Crude oil (per barrel)
    Domestic                              $18.53      $19.36      $15.69
    North Sea                              18.77       19.08       16.31
    China                                  17.71       19.53         --
    Other international                    18.59       17.69       15.21
      Average                              18.51       19.16       15.99

  Natural gas (per MCF)
    Domestic                                2.57        2.16        1.56
    North Sea                               2.52        2.64        2.66
    Other international                       --        1.14         .85
      Average                               2.56        2.12        1.52

Production costs -
  (Per barrel of oil equivalent)
    Domestic                                2.75        3.32        3.78
    North Sea                               4.70        4.33        3.91
    China                                   3.50        5.92          --
    Other international                     4.55        3.41        2.39
      Average                               3.48        3.72        3.68


26 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 1997 and
1996 are set forth in the table  below.  Not  included in the amounts  shown are
$221 million and $209 million that represent the company's proportional interest
in an equity  affiliate's net  capitalized  costs at December 31, 1997 and 1996,
respectively  (see Note 4). The equity affiliate  follows the "full cost" method
of accounting for oil and gas exploration and production activities.
                                           
(Millions of dollars)                                         1997         1996
Capitalized costs -
  Proved properties                                         $2,709       $3,054
  Unproved properties                                          134          104
  Other                                                         45           34
                                                            ------        -----
                                                             2,888        3,192
                                                            ======        =====
Reserves for depreciation, depletion and amortization -
  Proved properties                                          1,623        1,953
  Unproved properties                                           30           29
  Other                                                         24           23
                                                            ------       ------
                                                             1,677        2,005
                                                            ------       ------
      Net capitalized costs                                 $1,211       $1,187
                                                            ======       ======


27 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 pretax 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  upon 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
                          Future     Development  Future                   10%     Discounted         Affiliate's
                            Cash  and Production  Income  Future Net    Annual     Future Net        Standardized
(Millions of dollars)    Inflows           Costs   Taxes  Cash Flows  Discount  Cash Flows(1)             Measure
<S>                      <C>      <C>             <C>     <C>         <C>       <C>            <C> 
1997 -
  Domestic                $1,407          $  403  $  290      $  714      $242         $  472                $205
  North Sea                1,807             813     266         728       266            462                  --
  China                      401             171      42         188        45            143                  --
  Other international        304             153      55          96        42             54                  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                  --
  China                      658             248      95         315        91            224                  --
  Other international        246             147      38          61        26             35                  28
                          ------          ------  ------      ------      ----         ------                ----
    Total                 $5,731          $1,671  $1,323      $2,737      $910         $1,827                $364
                          ======          ======  ======      ======      ====         ======                ====
1995 -
  Domestic                $2,320            $910  $  350      $1,060      $339           $721                $ --
  North Sea                1,494             418     328         748       254            494                  --
  China                      551             179      96         276        81            195                  --
  Other international        297              94      62         141        54             87                  --
                          ------          ------  ------      ------      ----         ------                ----
    Total                 $4,662          $1,601  $  836      $2,225      $728         $1,497                $ --
                          ======          ======  ======      ======      ====         ======                ====
</TABLE>

(1) Includes $(8) million in 1996 and $51 million in 1995 from  properties  held
    for sale (see Note 11).

    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)                                                  1997       1996       1995
<S>                                                                 <C>          <C>       <C>   
Net change in sales, transfer prices and production costs           $(1,121)     $ 847     $  451
Changes in estimated future development costs                           (64)        45       (165)
Sales and transfers less production costs                              (446)      (516)      (402)
Purchases of reserves in place                                           --          1         62
Changes due to extensions, discoveries, etc.                            108        474         58
Changes due to revisions in quantity estimates                           37        116         17
Changes due to sales of reserves in place                                (8)      (139)       (86)
Changes due to reserves merged into equity affiliate                     --       (511)        --
Current period development costs                                        152        155        243
Accretion of discount                                                   261        199        167
Changes in income taxes                                                 384       (289)      (124)
Timing and other                                                          1        (52)       (19)
                                                                     ------     ------     ------ 
   Net change                                                          (696)       330        202
Total at beginning of year                                            1,827      1,497      1,295
                                                                     ------     ------     ------
Total at end of year                                                 $1,131     $1,827     $1,497
                                                                     ======     ======     ======

</TABLE>

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

    The  estimates  of proved  reserves  have  been  prepared  by the  company's
geologists and engineers.  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, 1997.
<TABLE>
<CAPTION>
                                           
                                               Crude Oil and Condensate                       Natural Gas
                                                 (Millions of barrels)                  (Billions of cubic feet)
                                                                    Other                               Other
                                                    North        Interna-                      North Interna-
                                         Domestic     Sea  China   tional  Total     Domestic    Sea   tional  Total
<S>                                      <C>        <C>    <C>   <C>       <C>       <C>       <C>   <C>       <C>
Proved developed and
undeveloped reserves -
    Balance December 31, 1994                  77      75     26       13    191          568    199       82    849
      Revisions of previous estimates           2       1      4        1      8           (6)    --        3     (3)
      Purchases of reserves in place            1      --     --       --      1           45     --       --     45
      Sales of reserves in place               (5)     --     --       --     (5)         (31)    --       (1)   (32)
      Extensions, discoveries and
        other additions                         1      --     --       --      1           25     --        1     26
      Production                              (10)    (14)    --       (2)   (26)         (82)    (8)     (16)  (106)
                                              ---     ---     --       --    ---          ---     --      ---   ---- 
    Balance December 31, 1995(1)               66      62     30       12    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)    (2)      (1)   (25)         (84)   (11)      (9)  (104)
                                              ---     ---     --       --    ---          ---    ---       --   ---- 
    Balance December 31, 1996(1)               44      89     28        7    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)    (3)      (1)   (21)         (56)   (12)      --    (68)
                                               --      --     --       --    ---          ---    ---       --    --- 
    Balance December 31, 1997                  47      81     25       11    164          265    189       46    500
                                               ==      ==     ==       ==    ===          ===    ===       ==    ===
    Proportional interest in
      equity affiliate's reserves
        December 31, 1996                      22      --     --        3     25          172     --       13    185
        December 31, 1997                      22      --     --        3     25          175     --       15    190
                                               ==      ==     ==        =     ==          ===     ==       ==    ===

Proved developed reserves -
    December 31, 1995(1)                       45      50     --       12    107          329    156       65    550
    December 31, 1996(1)                       26      45     20       --     91          183    161       --    344
    December 31, 1997                          28      33     25       11     97          166    147       --    313
    Proportional interest in
      equity affiliate's reserves
        December 31, 1996                      20      --     --        3     23          164     --       13    177
        December 31, 1997                      20      --     --        2     22          142     --       14    156
</TABLE>

(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 11).

    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     China  International       Total
<S>                                        <C>          <C>       <C>    <C>                 <C>
December 31, 1995(1)                            152        94        30             24         300
December 31, 1996(1)                             96       118        28             14         256
December 31, 1997                                91       112        25             19         247
Proportional interest in
  equity affiliate's reserves
    December 31, 1996                            51        --        --              5          56
    December 31, 1997                            52        --        --              5          57
</TABLE>

(1)  Includes 2 million barrels of oil equivalent and  21 million barrels of oil
     equivalent held for sale at December 31, 1996 and 1995, respectively
     (see Note 11).


29 Costs Incurred in Crude Oil and Natural Gas Activities

    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, 1997, are reflected in the following table:
<TABLE>
<CAPTION>
                                             
                                                                  Property
                                                               Acquisition Exploration Development
(Millions of dollars)                                             Costs(1)    Costs(2)    Costs(3)
<S>                                                            <C>         <C>         <C>
1997 -
   Proprietary costs -
     Domestic                                                          $29        $ 31        $ 45
     North Sea                                                          --          15          86
     China                                                              --          26           8
     Other international                                                 2          13          13
                                                                       ---        ----        ----
        Total                                                          $31        $ 85        $152
                                                                       ===        ====        ====
   Proportional interest in equity affiliate's costs -
     Domestic                                                          $ 6        $  6        $ 25
     Other international                                                --          --           2
                                                                       ---        ----        ----
        Total                                                          $ 6        $  6        $ 27
                                                                       ===        ====        ====
1996 -
   Proprietary costs -
     Domestic                                                          $ 6        $ 53        $ 99
     North Sea                                                          --          49          21
     China                                                               1           6          25
     Other international                                                --           9          10
                                                                       ---        ----        ----
        Total                                                          $ 7        $117        $155
                                                                       ===        ====        ====
1995 -
   Proprietary costs -
     Domestic                                                          $84        $ 58        $128
     North Sea                                                           7          28          23
     China                                                               1           2          82
     Other international                                                 1          11          10
                                                                       ---        ----        ----
        Total                                                          $93        $ 99        $243
                                                                       ===        ====        ====
</TABLE>

(1) Includes $29 million applicable to purchases of reserves in place in 1995.
(2) Exploration costs include delay rentals, exploratory dry holes, dry hole and
    bottom  hole  contributions,  geological  and  geophysical  costs,  costs of
    carrying and retaining properties, etc., and capital  expenditures,  such as
    costs of drilling and equipping successful exploratory wells, etc.
(3) Development costs include costs incurred to obtain access to proved reserves
    (surveying, clearing ground, building  roads,  etc.),  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.


30 Supplementary Mineral Ore Reserve and Price Data (Unaudited)

    The following table presents  selected  statistics  related to the company's
mineral operations.  Mineral reserves presented in the following table represent
those  estimated  quantities  of proved and probable ore that,  under  presently
anticipated  conditions,  may be  profitably  recovered  and  processed  for the
extraction of their mineral  content.  Future  production of these  resources is
dependent  on  many  factors,   including  market  conditions  and  governmental
regulations.
<TABLE>
<CAPTION>
                
(Thousands of tons)                                            1997       1996       1995      1994      1993
<S>                                                        <C>        <C>        <C>       <C>       <C>
Proved and probable (demonstrated) reserves, December 31 -
  Coal(1)                                                   506,000    810,400    833,700   864,200   887,900
  Heavy minerals                                              6,500(2)   5,500      5,700     6,000     8,000
Production -
  Coal                                                       32,100     31,300     31,100    25,600    23,300
  Heavy minerals                                                234        149        238       268       263
Average market price (per ton) -
  Coal                                                     $   8.93   $  10.48   $  10.12  $  10.73  $  13.78
  Heavy minerals                                             127.20     142.60     104.40     85.43     69.47
</TABLE>

(1)  See Management's Discussion and Analysis and Note 11.
(2)  Represents  177  million  tons of sand  containing  3.7% heavy  minerals in
     Western  Australia.  The percentages of valuable heavy minerals  within the
     heavy-mineral concentrate  are 4.5% rutile, 61.3% ilmenite,  3.3% leucoxene
     and 11.1% zircon.

31 Quarterly Financial Information (Unaudited)

    A summary of quarterly  consolidated  results for 1997 and 1996 is presented
below. Refer to Management's  Discussion and Analysis for information about 1997
and 1996 special items.
<TABLE>
<CAPTION>
                             
                                                                                             Diluted
                                                               Operating          Net   Earnings per
(Millions of dollars, except per-share amounts)       Sales       Profit       Income   Common Share
<S>                                                  <C>       <C>             <C>      <C>  
1997 Quarter Ended -
March 31                                             $  468         $100         $ 70         $1.45
June 30                                                 412           60           42           .87
September 30                                            402           65           37           .77
December 31                                             429           79           45           .95
                                                     ------         ----         ----         -----
    Total                                            $1,711         $304         $194         $4.04
                                                     ======         ====         ====         =====
1996 Quarter Ended -
March 31                                             $  455          $85         $ 48         $ .94
June 30                                                 470           83           51          1.01
September 30                                            488           89           62          1.27
December 31                                             518          114           59          1.21
                                                     ------         ----         ----         -----
    Total                                            $1,931         $371         $220         $4.43
                                                     ======         ====         ====         =====

</TABLE>

    The  company's  common  stock is listed  for  trading  on the New York Stock
Exchange and was held by approximately 11,300 stockholders of record at year-end
1997.  The ranges of sales  prices and  dividends  declared  during the last two
years are as follows:
                                        Market Prices
                                                                     Dividends
                                    1997               1996          per Share
                                High     Low       High    Low      1997    1996
Quarter Ended -
  March 31                    75        61  7/8   65 3/4  59 3/8    $.45    $.41
  June 30                     67  1/4   55  1/2   67 3/8  56 5/8     .45     .41
  September 30                69 15/16  59 13/16  63 3/8  55 3/4     .45     .41
  December 31                 71  1/2   60  1/8   74 1/8  60 5/8     .45     .41


Six-Year Financial Summary
<TABLE>
<CAPTION>

(Millions of dollars, except per-share amounts)                   1997     1996     1995     1994     1993     1992
<S>                                                             <C>      <C>      <C>      <C>      <C>      <C>   
Summary of Net Income (Loss)
Sales                                                           $1,711   $1,931   $1,754   $1,566   $1,445   $1,379
                                                                ------   ------   ------   ------   ------   ------
Operating costs and expenses                                     1,478    1,688    1,791    1,436    1,267    1,397
Interest and debt expense                                           46       52       61       58       45       64
                                                                ------   ------   ------   ------   ------   ------
  Total costs and expenses                                       1,524    1,740    1,852    1,494    1,312    1,461
                                                                ------   ------   ------   ------   ------   ------
                                                                   187      191      (98)      72      133      (82)
Other income                                                        90      132       29       27       16       47
Provision (benefit) for income taxes                                83      103      (45)      30       54      (23)
                                                                ------   ------   ------   ------   ------   ------ 
Income (loss) from continuing operations before extraordinary
charge and cumulative effect of accounting changes                 194      220      (24)      69       95      (12)
Income (loss) from discontinued operations                          --       --       (7)      21      (18)     (14)
Extraordinary charge                                                --       --       --       --       --       (5)
Cumulative effect of accounting changes                             --       --       --       --       --      (70)
                                                                ------   ------   ------   ------   ------   ------ 
Net income (loss)                                               $  194   $  220   $  (31)  $   90   $   77   $ (101)
                                                                ======   ======   ======   ======   ======   ====== 
Common Stock Information, per Share
Diluted earnings (loss) per common share -
  Continuing operations                                         $ 4.04   $ 4.43   $ (.47)  $ 1.33   $ 1.93   $ (.25)
  Discontinued operations                                           --       --     (.13)     .41     (.36)    (.28)
  Extraordinary charge                                              --       --       --       --       --     (.10)
  Cumulative effect of accounting changes                           --       --       --       --       --    (1.45)
                                                                ------   ------   ------   ------   ------   ------ 
      Total                                                     $ 4.04   $ 4.43   $ (.60)  $ 1.74    $1.57   $(2.08)
Dividends declared                                                1.80     1.64     1.55     1.52     1.52     1.52
Stockholders' equity                                             30.09    28.10    27.52    29.82    29.24    27.93
Market high for the year                                         75.00    74.13    64.00    51.00    56.00    46.38
Market low for the year                                          55.50    55.75    44.00    40.00    41.75    35.63
Market price at year-end                                        $63.31   $72.00   $63.50   $46.25   $45.25   $45.00
Shares outstanding at year-end (thousands)                      47,686   48,294   51,069   51,694   51,655   48,284
Balance Sheet Information
Working capital                                                 $  166   $  320   $  189   $   52   $  102   $  204
Property, plant and equipment - net                              1,998    1,948    2,210    2,489    2,446    2,351
Total assets                                                     3,096    3,124    3,213    3,696    3,506    3,482
Long-term debt                                                     552      626      632      673      590      756
Total debt                                                         579      663      735      993      859      930
Stockholders' equity                                             1,440    1,367    1,416    1,543    1,512    1,350
Cash Flow Information
Net cash provided by operating activities                          569      645      369      356      427      275
Cash capital expenditures                                          341      392      484      410      449      372
Dividends paid                                                      85       83       79       78       73       73
Purchase of treasury stock                                      $   60   $  195   $   45   $   --   $   --   $   --
Ratios and Percentage
Current ratio                                                      1.3      1.7      1.3      1.1      1.1      1.3
Average price/earnings ratio                                      16.2     14.7       NM     26.1     31.1       NM
Total debt to total capitalization                                  29%      33%      34%      39%      36%      41%
Employees
Total wages and benefits                                        $  285   $  289   $  314   $  319   $  319   $  326
Number of employees at year-end                                  3,746    3,851    3,976    5,524    5,812    5,866

</TABLE>

Six-Year Operating Summary
<TABLE>
<CAPTION>

                                                                  1997     1996     1995     1994     1993      1992
<S>                                                             <C>      <C>      <C>      <C>      <C>      <C> 
Exploration and Production
Net proprietary production of crude oil and condensate -
  (thousands of barrels per day)
    Domestic                                                      24.2     30.6     28.9     25.5     27.8      25.5
    North Sea                                                     23.4     30.9     36.7     34.3     16.7      16.0
    China                                                          8.8      3.7       --       --       --        --
    Other international                                             .5      3.4      4.8      7.5      8.7       9.0
                                                                ------   ------   ------   ------   ------       ---
      Total                                                       56.9     68.6     70.4     67.3     53.2      50.5
Average price of crude oil sold (per barrel) -
    Domestic                                                    $18.53   $19.36   $15.69   $14.64   $15.76   $ 18.17
    North Sea                                                    18.77    19.08    16.31    15.15    15.90     18.71
    China                                                        17.71    19.53       --       --       --        --
    Other international                                          18.59    17.69    15.21    13.79    14.80     16.83
      Average                                                   $18.51   $19.16   $15.99   $14.81   $15.64   $ 18.11
Proprietary natural gas sales (MMCF per day)                       184      281      291      271      286       296
Average price of natural gas sold (per MCF)                     $ 2.56   $ 2.12   $ 1.52   $ 1.76   $ 1.92   $  1.56
Net exploratory wells drilled -
    Productive                                                    2.65     4.91     3.71     9.61     2.22      2.59
    Dry                                                           4.42     3.52     9.16     8.47    10.09      5.53
                                                                ------   ------   ------   ------   ------      ----
      Total                                                       7.07     8.43    12.87    18.08    12.31      8.12
Net development wells drilled -
    Productive                                                    9.78    21.33    40.86    22.27    43.90     27.26
    Dry                                                             --     1.04     2.95     4.63     2.33      3.05
                                                                ------   ------   ------   ------   ------      ----
      Total                                                       9.78    22.37    43.81    26.90    46.23     30.31
Undeveloped net acreage (thousands) -
    Domestic                                                       319      265      472      499      523       620
    North Sea                                                      391      428      358      363      243       184
    China                                                        2,184      925      341      282       --        --
    Other international                                         10,124      927    1,424    1,463    2,087       401
                                                                ------   ------   ------   ------   ------       ---
      Total                                                     13,018    2,545    2,595    2,607    2,853     1,205
Developed net acreage (thousands) -
    Domestic                                                       155      209      537      542      539       549
    North Sea                                                       24       33       22       21       21        18
    China                                                           19       19       19       19       19        --
    Other international                                            104      104      159      165      180       187
                                                                ------   ------   ------   ------   ------       ---
      Total                                                        302      365      737      747      759       754
Estimated proved reserves (millions of equivalent barrels)         247      256      300      332      317       302
Chemicals
Industrial and specialty chemical sales (thousands of tons)        488      446      445      381      331       314
Coal  
Sales (millions of tons)                                          36.2     35.3     34.5     27.5     23.5      20.8
Recoverable reserves (millions of tons)                            506      810      834      864      888       906

</TABLE>