<PAGE>
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  -----------
                                
                                   FORM 10-Q

[X]         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

               For the Quarterly Period ended September 30, 1996.

                                       OR

[ ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

   For the Transition Period from . . . . . . . . . . to . . . . . . . . . .

Commission file number 1-10145

                                  -----------

                         LYONDELL PETROCHEMICAL COMPANY
             (Exact name of registrant as specified in its charter)

                                  -----------
 
              Delaware                                 95-4160558
     (State or other jurisdiction of                (I.R.S. Employer
      incorporation or organization)                Identification No.)
 
           1221 McKinney Street,                           77010
       Suite 1600, Houston, Texas                        (Zip Code)
 (Address of principal executive offices)

      Registrant's telephone number, including area code:  (713) 652-7200

                                  -----------

                                 Not Applicable
   (Former name, former address and former fiscal year, if changed since last
                                    report)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____ 
                                             ---
     Number Of Shares Of Common Stock, $1.00 Par Value, Outstanding As Of
September 30, 1996: 80,000,000

   -------------------------------------------------------------------------
<PAGE>
 
                        PART I.  FINANCIAL INFORMATION

                        LYONDELL PETROCHEMICAL COMPANY

                 CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                            FOR THE THREE MONTHS     FOR THE NINE MONTHS    
                                                             ENDED SEPTEMBER 30      ENDED SEPTEMBER 30    
                                                            --------------------     --------------------  
MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS                   1996        1995         1996       1995   
--------------------------------------------                --------    --------     ---------   --------
<S>                                                         <C>         <C>          <C>         <C>       
SALES AND OTHER OPERATING REVENUES:                                                                        
     Unrelated parties                                        $1,179      $1,168        $3,446     $3,523     
     Related parties                                              68          81           205        270     
                                                            --------    ---------    ----------  ---------    
                                                               1,247       1,249         3,651      3,793     
OPERATING COSTS AND EXPENSES:                                                                                 
     Cost of sales                                                                                            
          Unrelated parties                                    1,063         955         3,120      2,828     
          Related parties                                         56          56           180        175     
     Selling, general and administrative expenses                 57          55           174        148     
                                                            --------    ---------    ----------  ---------    
                                                               1,176       1,066         3,474      3,151     
                                                            --------    ---------    ----------  ---------    
                                                                                                              
     Operating income                                             71         183           177        642     
                                                                                                              
Interest expense                                                 (18)        (20)          (61)       (59)    
Interest income                                                    1          --             3          5     
Minority interest in LYONDELL-CITGO                                                                           
     Refining Company Ltd.                                         1          (4)           (3)       (12)    
                                                            --------    ---------    ----------  ---------    
                                                                                                              
     Income before income taxes                                   55         159           116        576     
                                                                                                              
Provision for income taxes                                        20          59            42        214     
                                                            --------    ---------    ----------  ---------    
                                                                                                              
     NET INCOME                                               $   35      $  100        $   74     $  362     
                                                            --------    ---------    ----------  ---------    
                                                                                                              
     EARNINGS PER SHARE                                       $  .43      $ 1.25        $  .92     $ 4.52     
                                                            ========    =========    ==========  =========    
 </TABLE>

                See notes to consolidated financial statements.

                                       1
<PAGE>
 
                        LYONDELL PETROCHEMICAL COMPANY

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                    SEPTEMBER 30   DECEMBER 31
MILLIONS OF DOLLARS                                    1996           1995    
-------------------                                --------------  ------------
<S>                                                <C>             <C>         
ASSETS                                                                        
Current assets:                                                               
     Cash and cash equivalents                          $    32       $     3 
     Restricted cash and cash                               - -             7 
      equivalents                                  
     Accounts receivable:                                                     
          Trade                                             366           340 
          Related parties                                    20            22 
     Inventories                                            269           265 
     Prepaid expenses and other current                      29            41 
      assets                                       --------------  ------------
          Total current assets                              716           678 
                                                   --------------  ------------
Property, plant and equipment                             4,255         3,804 
Less accumulated depreciation and                        (2,050)       (1,990)
 amortization                                      --------------  ------------
                                        
                                                          2,205         1,814 
                                                                              
Deferred charges and other assets                           150           114 
                                                   --------------  ------------
                                                                              
Total assets                                            $ 3,071       $ 2,606 
                                                   ==============  ============
LIABILITIES AND STOCKHOLDERS' EQUITY                                           
Current liabilities:                                                          
     Accounts payable:                                                        
          Trade                                         $   333       $   358 
          Related parties                                     3             1 
     Notes payable                                          133           103 
     Current maturities of long-term debt                   112           150 
     Other accrued liabilities                              103           138
                                                   --------------  ------------
          Total current liabilities                         684           750 
Long-term debt                                            1,177           807 
Other liabilities and deferred credits                      105            95 
Deferred income taxes                                       139           115 
Commitments and contingencies                                                 
Minority interest in LYONDELL-CITGO                         569           459 
 Refining Company Ltd.                                                        
Stockholders' equity:                                                          
     Preferred stock, $.01 par value,                                         
      80,000,000 shares                                                       
       authorized, none outstanding                                           
     Common stock, $1 par value,                                              
      250,000,000 shares                                                      
       authorized, 80,000,000 issued                         80            80 
        and outstanding                                                       
     Additional paid-in capital                             158           158 
     Retained earnings                                      159           142
                                                   --------------  ------------
          Total stockholders' equity                        397           380 
                                                   --------------  ------------
                                                                              
Total liabilities and stockholders' equity              $ 3,071       $ 2,606 
                                                   ==============  ============
</TABLE>

                See notes to consolidated financial statements.

                                       2
<PAGE>
 
                         LYONDELL PETROCHEMICAL COMPANY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                      FOR THE NINE MONTHS  
                                                                        ENDED SEPTEMBER 30 
                                                                      -------------------- 
MILLIONS OF DOLLARS                                                       1996      1995   
-------------------                                                   ----------  -------- 
<S>                                                                   <C>         <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:                                                      
     Net income                                                           $  74      $ 362 
     Adjustments to reconcile net income to net                                            
       cash provided by operating activities:                                              
          Depreciation and amortization                                      78         61 
          Deferred income taxes                                              20          2 
          Increase in accounts receivable                                   (24)        (5)
          Increase in inventories                                            (3)       (84)
          Increase in accounts payable                                        9         14 
          Net change in other working capital accounts                      (19)        (7)
          Minority interest                                                   3         12 
          Other                                                             (42)       (10)
                                                                      ----------  --------        
            Net cash provided by operating activities                        96        345
                                                                      ----------  --------        
                                                                                           
CASH FLOWS FROM INVESTING ACTIVITIES:                                                      
     Additions to property, plant and equipment                            (488)      (781)
     Proceeds from sales of short-term investments                           76         -- 
     Purchases of short-term investments                                    (76)        --
                                                                      ----------  --------
        Net cash used in investing activities                              (488)      (781)
                                                                      ----------  --------                   
CASH FLOWS FROM FINANCING ACTIVITIES:                                                      
     Minority owner contribution                                            106        147 
     Net change in short-term debt                                           30        155 
     Borrowings of long-term debt                                           482        175 
     Repayments of long-term debt                                          (150)       (10)
     Dividends paid                                                         (54)       (54)
                                                                      ----------  --------
        Net cash provided by financing activities                           414        413 
                                                                      ----------  --------  
                
INCREASE (DECREASE) IN CASH, RESTRICTED CASH AND CASH EQUIVALENTS            22        (23)
Cash, restricted cash and cash equivalents at beginning of period            10         94 
                                                                      ----------  --------
Cash, restricted cash and cash equivalents at end of period               $  32      $  71 
                                                                      ==========  ========
</TABLE> 

                See notes to consolidated financial statements.

                                       3
<PAGE>
 
                         LYONDELL PETROCHEMICAL COMPANY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



1.   BASIS OF PREPARATION

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments, consisting
only of normal, recurring adjustments considered necessary for a fair
presentation, have been included. For further information, refer to the
consolidated financial statements and notes thereto for the year ended December
31, 1995 included in the Lyondell Petrochemical Company ("Company" or
"Lyondell") 1995 Annual Report and the Annual Report on Form 10-K and prior
quarterly reports on Form 10-Q pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. The year-end condensed balance sheet data was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles. Certain amounts from prior periods
have been reclassified to conform to the current period presentation.


2.   COMPANY OPERATIONS

The Company operates in two business segments:  petrochemicals and refining.
The petrochemicals segment manufactures a wide variety of petrochemicals
including olefins, polymers, methanol, MTBE and aromatics produced at the
Channelview petrochemical facility ("Channelview Facility").  The Company's
petrochemical products are used primarily in the manufacture of other chemicals
and products, which in turn are used in the production of a wide variety of
consumer and industrial products.  The refining segment operates primarily
through the Company's interest in LYONDELL-CITGO Refining Company Ltd. ("LCR"),
a Texas limited liability company that is owned by subsidiaries of Lyondell and
CITGO Petroleum Corporation ("CITGO"), which manufactures refined petroleum
products, including gasoline, heating oil, jet fuel, aromatics and lubricants.

3.   INVENTORIES

The categories of inventory and their recorded values at September 30, 1996 and
December 31, 1995 were:

<TABLE>
<CAPTION>
               MILLIONS OF DOLLARS       1996      1995
               -------------------     -------    ------  
               <S>                     <C>        <C>
               Crude oil                 $  23    $  55
               Refined products             49       33
               Petrochemicals              152      135
               Materials and supplies       45       42
                                       -------    -----
                   Total inventories     $ 269    $ 265 
                                       =======    =====
 </TABLE>

4.   RESTRICTED FUNDS

As of September 30, 1996 and December 31, 1995, cash in the amount of less than
$1 million and $7 million, respectively, was restricted for use in connection
with LCR capital projects, including the upgrade project ("Upgrade Project") at
the Houston, Texas refinery ("Refinery") and other expenditures as determined by
the LCR 

                                       4
<PAGE>
 
owners. Presented below is a reconciliation of changes in restricted funds for
the nine-month period ended September 30, 1996.

<TABLE>
<CAPTION>
               MILLIONS OF DOLLARS
               -------------------
               <S>                                          <C>
               Restricted cash and cash equivalents at
                December 31, 1995                           $   7
               Minority owner investments:
                Contributions                                 106
                Distributable cash reinvested                  11
               Lyondell investments:
                Loan for Upgrade Project                       91
                Other loans                                    22
                Contributions                                   8
               Proceeds from bank loan                        182
               Additions to fixed assets:
                Upgrade Project                              (387)
               Refining segment - other                       (40)
                                                          ---------
               Restricted cash and cash equivalents at
                September 30, 1996                          $  -- 
                                                          =========
</TABLE> 
 
5.   ACQUISITION OF ALATHON(R) HIGH-DENSITY POLYETHYLENE BUSINESS

On May 1, 1995, the Company acquired the assets associated with Occidental
Chemical Corporation's Alathon(R) high-density polyethylene ("HDPE") business
("ALATHON Business") for $356 million including certain direct costs, plus
approximately $64 million for inventory.  Assets involved in the purchase
include resin production facilities at Victoria and Matagorda, Texas, associated
research and development activities and the rights to the Alathon(R)  trademark.
These facilities have a combined annual production capacity of approximately 1.5
billion pounds of HDPE. The Company financed the acquisition from internal cash
and $230 million of short-term borrowings from its existing financing
arrangements.

The following unaudited pro forma information combines the results of operations
of the Company and the ALATHON Business for the nine months ended September 30,
1995 and assumes that the acquisition of the ALATHON Business occurred on
January 1, 1995.  This unaudited pro forma information may not be indicative of
results that would have actually resulted if this transaction had occurred on
January 1, 1995 or which may be obtained in the future.

<TABLE>
<CAPTION>
 
                                                                         
                                                             FOR THE NINE 
          MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS       MONTHS ENDED 
          --------------------------------------------       SEPTEMBER 30 
                                                                 1995
                                                            --------------
          <S>                                               <C>
          Sales and other operating revenues                   $3,987
          Net income                                              382
          Earnings per share                                     4.78
</TABLE> 

6.   FINANCING ARRANGEMENTS

As of September 30, 1996, LCR was not in compliance with the financial ratio
covenant of adjusted average debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA") contained in LCR's $450 million five-
year term credit facility and its $70 million 364-day revolving working capital
credit facility (together the "LCR
                                       5
<PAGE>
 
Credit Facilities"). Effective as of November 12, 1996, the LCR Credit
Facilities were amended. The substance of these amendments was to replace the
adjusted average debt to EBITDA covenant and one additional financial covenant
with a covenant to maintain a minimum EBITDA. The amendments were retroactively
effective as of the noncompliance date and will continue through June 30, 1997.
As a result of these amendments, LCR is currently in compliance with the terms
of the LCR Credit Facilities.


7.   COMMITMENTS AND CONTINGENCIES

The Company has various purchase commitments for materials, supplies and
services incident to the ordinary conduct of business.  In the aggregate, such
commitments are not at prices in excess of current market.

In connection with the transfer of assets and liabilities from Atlantic
Richfield Company ("ARCO") to the Company, the Company agreed to assume certain
liabilities arising out of the operation of the Company's integrated
petrochemical and petroleum processing business prior to July 1, 1988.  In
connection with the transfer of such liabilities, the Company and ARCO entered
into an agreement ("Cross-Indemnity Agreement") whereby the Company agreed to
defend and indemnify ARCO against certain uninsured claims and liabilities which
ARCO may incur relating to the operation of the business of the Company prior to
July 1, 1988, including certain liabilities which may arise out of pending and
future lawsuits.

ARCO has indemnified the Company under the Cross-Indemnity Agreement with
respect to other claims or liabilities and other matters of litigation not
related to the assets or business included in the Company's consolidated
financial statements.  ARCO has also indemnified the Company for all federal
taxes which might be assessed upon audit of the operations of the Company
included in the ARCO consolidated income tax returns prior to January 12, 1989
and for all state and local taxes for the period prior to July 1, 1988.

In addition to lawsuits for which the Company has indemnified ARCO, the Company
is also subject to various lawsuits and proceedings.  Subject to the uncertainty
inherent in all litigation, management believes the resolution of these
proceedings will not have a material adverse effect on the consolidated
financial statements or liquidity of the Company.

The Company's policy is to be in compliance with all applicable environmental
laws. The Company is subject to extensive environmental laws and regulations
concerning emissions to the air, discharges to surface and subsurface waters and
the generation, handling, storage, transportation, treatment and disposal of
waste materials. Some of these laws and regulations are subject to varying and
conflicting interpretations.  In addition, the Company cannot accurately predict
future developments, such as increasingly strict requirements of environmental
laws, inspection and enforcement policies and compliance costs therefrom which
might affect the handling, manufacture, use, emission or disposal of products,
other materials or hazardous and non-hazardous waste.

Subject to the terms of the Cross-Indemnity Agreement, the Company is currently
contributing funds to the cleanup of two waste sites (French Ltd. and Brio, both
of which are located near Houston, Texas) under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") as amended by the Superfund
Amendments and Reauthorization Act of 1986. The Company is also subject to
certain assessment and remedial actions at the Refinery under the Resource
Conservation and Recovery Act ("RCRA").  In addition, the Company has negotiated
an order with the Texas Natural Resource Conservation Commission ("TNRCC") for
assessment and remediation of groundwater and soil contamination at the
Refinery.

During July 1994, the Company reported results of an independent investigation
conducted by the Audit Committee of the Board of Directors regarding the
compliance status of two process waste-water streams under the applicable
Benzene National Emissions Standard for Hazardous Air Pollutants ("NESHAPS")
regulations and certain related issues raised by an employee.  Noncompliance
with the Benzene NESHAPS regulations and the related reporting requirements can
result in civil penalties and, under certain circumstances, substantial civil
and, 

                                       6
<PAGE>
 
potentially, criminal penalties. The Company received a notice of violation
regarding the two streams and paid a fine of $10,200 to the TNRCC. In addition,
the Company incurred approximately $2 million in capital costs in connection
with these waste water streams to achieve on-going compliance with the Benzene
NESHAPS regulations. Although the Criminal Enforcement Division of the EPA is
conducting a formal investigation, the Company does not believe that any aspects
of the matters described above will subject the Company to criminal liability or
have a material adverse effect on the consolidated financial statements or
liquidity of the Company.

As of September 30, 1996, the Company has accrued $17 million related to CERCLA,
RCRA and TNRCC assessment and remediation costs, of which $5 million is included
in current liabilities while the remaining amounts are expected to be incurred
over the next two to seven years.  In the opinion of management, there is
currently no material range of loss in excess of the amount accrued.  However,
it is possible that new information about the sites for which the reserve has
been established, new technology or future developments such as involvement in
other CERCLA, RCRA, TNRCC or other comparable state law investigations, could
require the Company to reassess its potential exposure related to environmental
matters.

In the opinion of management, any liability arising from the matters discussed
in this note will not have a material adverse effect on the consolidated
financial statements or liquidity of the Company.  However, the adverse
resolution in any reporting period of one or more of the matters discussed in
this note could have a material impact on the Company's results of operations
for that period without giving effect to contribution or indemnification
obligations of co-defendants or others, or to the effect of any insurance
coverage that may be available to offset the effects of any such award.


8.   DIVIDENDS

The Company paid regular quarterly dividends of $.225 per share of common stock
during the first, second and third quarters of 1996.  Additionally, on October
18, 1996, the Board of Directors declared a regular quarterly dividend of $.225
per share of common stock, payable December 15, 1996 to stockholders of record
on November 25, 1996.


9.   EARNINGS PER SHARE

Earnings per share for all periods presented are computed based on the weighted
average number of shares outstanding for the periods, which was 80,000,000
shares.


10.  CAPITALIZED INTEREST

The Company's policy is to capitalize interest cost incurred on debt during the
construction of major projects that exceed one year.  Total interest cost
incurred during the three months and the nine months ended September 30, 1996
were approximately $28 million and $84 million, respectively, of which
approximately $10 million and $23 million, respectively, were capitalized. Total
interest cost incurred during the three months and the nine months ended
September 30, 1995 were approximately $21 million and $61 million, respectively.
Approximately $1 million and $2 million were capitalized during the three months
and the nine months ended September 30, 1995, respectively.


11.  ARCO PIPE LINE FIRE

On July 27, 1996, the Company experienced a fire at its Channelview Facility due
to a rupture in a pipeline owned and operated by ARCO Pipe Line Company ("ARCO
Pipe Line").  Although no operating units were directly 

                                       7
<PAGE>
 
involved in the fire, the damage to the pipeline and electrical systems forced
the Company to shut down the entire Channelview Facility for several days and
the olefins units for two weeks. The impact of the fire to third quarter
operating income primarily consisted of lost profits estimated in excess of $30
million due to business interruptions. This loss was below the Company's
insurance deductible. However, the Company is pursuing recovery of the loss from
ARCO Pipe Line. The Company is unable to predict the amount, if any, of such a
recovery. The Channelview Facility is currently fully operational.

                                       8
<PAGE>
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS


GENERAL

Lyondell Petrochemical Company ("Company" or "Lyondell") operates in two
business segments: petrochemicals and refining. The petrochemical segment
consists of olefins including ethylene, propylene, butadiene, butylenes and
specialty products; polymers including polypropylene, high-density polyethylene
("HDPE") and low-density polyethylene; aromatics produced at the Channelview
petrochemical facility ("Channelview Facility") including benzene and toluene;
methanol; methyl tertiary butyl ether ("MTBE"); and refinery blending stocks.

On May 1, 1995, the Company acquired from Occidental Chemical Corporation resin
production facilities at Victoria and Matagorda, Texas, with a combined annual
production capacity of approximately 1.5 billion pounds of HDPE, associated
research and development activities and the rights to the Alathon(R) trademark
("ALATHON Business").  See Note 5 of" NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)".

The refining segment consists of refined petroleum products, including gasoline,
heating oil and jet fuel; aromatics produced at the Houston, Texas refinery
("Refinery") including benzene, toluene, paraxylene and orthoxylene; lubricants,
including industrial and motor oils; olefins feedstocks; and crude oil resales.

On July 1, 1993, Lyondell and CITGO Petroleum Corporation ("CITGO") announced
the commencement of operations of LYONDELL-CITGO Refining Company Ltd. ("LCR"),
a Texas limited liability company owned by subsidiaries of the Company and
CITGO. LCR owns and operates the refining business formerly owned by the
Company. LCR is undertaking a major upgrade project at the Refinery to enable
the facility to process substantial additional volumes of very heavy crude oil
("Upgrade Project"). CITGO is providing a major portion of the funds for the
Upgrade Project, which through September 30, 1996 totaled cash contributions of
approximately $434 million including cash contributions for the carrying costs
of the construction debt. In addition, through September 30, 1996, CITGO has
contributed $100 million and reinvested approximately $39 million of cash
distributions for funding other capital projects. Lyondell currently expects the
cost of the Upgrade Project to be approximately $1.1 billion. Lyondell expects
to fund one-half of costs in excess of $1 billion in the form of subordinated
loans. The Upgrade Project is expected to be operational by the end of the first
quarter of 1997.

Concurrent with the commencement of operations, LCR entered into a long-term
crude oil supply contract ("Crude Supply Contract") with Lagoven, S.A.
("LAGOVEN"), an affiliate of CITGO. In addition, under terms of a long-term
product sales agreement ("Products Agreement"), CITGO is currently purchasing
all of the light refined products produced at the Refinery. Both LAGOVEN and
CITGO are subsidiaries of Petroleos de Venezuela, S.A., the national oil company
of Venezuela.

The Crude Supply Contract incorporates a formula price based on the market value
of a slate of refined products deemed to be produced from each particular crude
oil or feedstock, less certain deemed and actual costs and a deemed margin which
varies according to the grade of crude oil or other feedstock delivered.  The
actual refining margin earned by LCR under the Crude Supply Contract will vary
depending on, among other things, the efficiency with which LCR conducts its
operations during such period.  If the actual yields, costs or volumes differ
substantially from those contemplated by the Crude Supply Contract, the benefits
of this agreement to LCR could be substantially different than anticipated.
Notwithstanding these limitations, however, the Crude Supply Contract is
designed to reduce the inherent earnings and cash flow volatility of the
refining operations of LCR irrespective of market fluctuations of either crude
oil or refined products.

                                       9
<PAGE>
 
The following table sets forth sales volumes for the Company's major products
for the periods indicated.  Sales volumes include production, purchases of
products for resale, propylene production from the product flexibility unit,
products received on exchange and draws from inventory.

<TABLE>
<CAPTION>
                                                      FOR THE THREE        FOR THE NINE    
                                                          MONTHS              MONTHS       
                                                    ENDED SEPTEMBER 30   ENDED SEPTEMBER 30 
                                                  --------------------   ------------------ 
                                                      1996      1995       1996     1995   
                                                  ---------  ----------   ------- --------
<S>                                               <C>        <C>          <C>     <C>      
SELECTED PETROCHEMICAL PRODUCTS
 (MILLIONS)
     (EXCLUDING INTERSEGMENT SALES):
Ethylene, propylene and polymers (lbs.)            1,678     1,749         5,236    5,113 
Other olefins (lbs.)                                 241       251           738      823 
Methanol (gallons)                                    52        49           156      145 
Aromatics (gallons)                                   40        39           124      118 
                                                                                          
REFINED PRODUCTS (THOUSAND BARRELS PER                                                    
 DAY) (EXCLUDING INTERSEGMENT SALES):                                                     
Gasoline                                             100       112           107      108 
Heating oil (no. 2 distillate)                        48        47            47       50 
Jet fuel                                              23        29            25       30 
Aromatics                                              8         7             7        8 
Other refined products                                54        57            54       56 
                                                  ---------  ----------   ------- --------
   Total refined products volumes                    233       252           240      252 
                                                  =========  ==========   ======= ========                                  
</TABLE>

Summarized below is the segment data for the Company.  Intersegment sales
between the petrochemical and refining segments include olefins feedstocks and
benzene produced at the Refinery and gasoline blending stocks produced at the
Channelview Facility and were made at prices that were based on current market
values.

<TABLE>
<CAPTION>
                                                    FOR THE THREE MONTHS  FOR THE NINE MONTHS
                                                     ENDED SEPTEMBER 30   ENDED SEPTEMBER 30
                                                  ----------------------  -------------------
(MILLIONS OF DOLLARS)                                 1996       1995       1996       1995 
---------------------                             ------------  ---------  ---------  -------
<S>                                                 <C>         <C>        <C>        <C>   
SALES AND OTHER OPERATING REVENUES:                                                         
  Petrochemical segment                               $  681     $  687     $1,873    $2,102
  Refining segment                                       649        644      2,044     1,982
  Intersegment sales                                     (83)       (82)      (266)     (291)
                                                  ------------  ---------  ---------  -------
                                                      $1,247     $1,249     $3,651    $3,793
                                                  ============  =========  =========  =======
COST OF SALES:                                                                              
  Petrochemical segment                               $  558     $  498     $1,593    $1,455
  Refining segment                                       644        595      1,973     1,839
  Intersegment purchases                                 (83)       (82)      (266)     (291)
                                                  ------------  ---------  ---------  -------
                                                      $1,119     $1,011     $3,300    $3,003
                                                  ============  =========  =========  =======
SELLING, GENERAL AND ADMINISTRATIVE                                                         
 EXPENSES:                                                                                  
  Petrochemical segment                               $   28     $   26     $   83    $   58
  Refining segment                                        15         14         48        43
  Unallocated                                             14         15         43        47
                                                  ------------  ---------  ---------  -------
                                                      $   57     $   55     $  174    $  148
                                                  ============  =========  =========  =======
OPERATING INCOME:                                                                           
  Petrochemical segment                               $   95     $  163     $  197    $  589
  Refining segment                                       (10)        35         23       100
  Unallocated                                            (14)       (15)       (43)      (47)
                                                  ------------  ---------  ---------  -------
                                                      $   71     $  183     $  177    $  642
                                                  ============  =========  =========  =======
</TABLE>

                                       10
<PAGE>
 
Summarized below are intersegment sales for the two segments.

<TABLE>
<CAPTION>
                             FOR THE THREE       FOR THE NINE
                                 MONTHS             MONTHS
                           ENDED SEPTEMBER 30   ENDED SEPTEMBER 30
                         --------------------  -------------------
(MILLIONS OF DOLLARS)        1996      1995       1996     1995
---------------------    ----------  --------  --------- --------
<S>                      <C>         <C>       <C>       <C>
  Petrochemical segment       $  53     $  49     $ 154    $ 150
  Refining segment               30        33       112      141
                         ----------  --------  --------- -------     
                              $  83     $  82     $ 266    $ 291
                         ==========  ========  ========= =======
</TABLE> 

RESULTS OF OPERATIONS


OVERVIEW

Net income for the third quarter of 1996 was $35 million or $.43 per share
compared to a net income of $100 million or $1.25 per share for the third
quarter of 1995.  The $65 million decrease was primarily due to lower sales
margins for olefins and aromatics.

Net income was $20 million higher for the third quarter of 1996 compared to the
second quarter of 1996.  This increase was primarily caused by higher sales
margins for polymers and olefins, partially offset by lower sales margins for
aromatics.  The third quarter of 1996 was negatively impacted by business
interruption due to a fire at the Channelview Facility in a pipeline that is
owned and operated by ARCO Pipe Line Company ("ARCO Pipe Line").  See Note 11 
of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)."

Net income for the first nine months of 1996 was $74 million or $.92 per share
compared to a net income of $362 million or $4.52 per share for the first nine
months of 1995.  The $288 million decrease was primarily due to lower sales
margins for olefins, methanol and aromatics.


PETROCHEMICAL SEGMENT

REVENUES  Sales and other operating revenues, including intersegment sales, were
$681 million in the third quarter of 1996 compared to $687 million in the third
quarter of 1995, a decline of $6 million.  Sales and other operating revenues
were $229 million lower in the first nine months of 1996 compared to the first
nine months of 1995.  This decrease was primarily due to lower olefins sales
prices and volumes and lower methanol sales prices, partially offset by higher
sales of HDPE resulting from the acquisition of the ALATHON Business on May 1,
1995.  Compared to the first part of 1995, which was a period of strong market
conditions for petrochemicals generally, sales prices for petrochemicals during
the current periods were lower due to a decline in market conditions which began
in the latter part of 1995.  This decline was due to additional olefins capacity
that came onstream in 1995, slower economic growth and inventory corrections in
olefins derivatives.  Additionally, methanol sales prices were lower during the
first nine months of 1996 compared to the same period in 1995 due to the slower
economic growth and higher industry supply.

COST OF SALES  Cost of sales was $558 million in the third quarter of 1996
compared to $498 million in the third quarter of 1995, an increase of $60
million.  This increase was primarily due to higher olefins feedstock costs
which reflects higher crude oil and refined products prices.

                                       11
<PAGE>
 
Cost of sales was $138 million higher during the first nine months of 1996
compared to the first nine months of 1995.  This increase was primarily due to
the addition of the ALATHON Business and the higher olefins feedstock prices.

SELLING EXPENSES  Selling expenses for the first nine months of 1996 were $83
million, an increase of $25 million compared to the first nine months of 1995.
This increase was primarily caused by selling expenses associated with the
ALATHON business acquired in May 1995.

OPERATING INCOME  On June 2, 1996, the Company's Mont Belvieu, Texas terminal
experienced a fire.  The before-tax impact of the fire to second quarter
operating income was approximately $2 million for equipment write-off and repair
costs plus additional lost profits due to business interruption, all of which
were below the Company's insurance deductible.  On July 27, 1996, the fire at 
the Channelview Facility in a pipeline that is owned and operated by ARCO Pipe
Line forced a shut down of the olefins units for approximately two weeks and
other units for several days. The impact of the fire to third quarter operating
income primarily consisted of lost profits estimated in excess of $30 million
due to business interruptions. This loss was below the Company's insurance
deductible. However, the Company is pursuing recovery of the loss from ARCO Pipe
Line. The Company is unable to predict the amount, if any, of such a recovery.

Operating income for the third quarter of 1996 was $95 million compared to $163
million in the third quarter of 1995.  The $68 million decrease was primarily
due to lower olefins sales margins, partially offset by higher polymers sales
margins.  The lower olefins sales margins during the third quarter of 1996
compared to the third quarter of 1995 resulted primarily from higher petroleum
based feedstock costs which were caused by the higher industry petroleum prices.
Also contributing to the lower olefins sales margins were lower sales prices
which were due to the decline in market conditions which began in the third
quarter of 1995.  Polymers sales margins were higher primarily due to increases
in polymers sales prices, particularly HDPE, as a result of strong demand and
low industry inventories.

Operating income for the third quarter of 1996 compared to the second quarter of
1996 increased $42 million.  This improvement was primarily due to higher
polymers and olefins sales margins.  The higher polymers sales margins were due
to higher prices caused by increased demand, both domestic and international.
Olefins sales margins increased due to higher sales prices resulting from
improved markets which more than offset the impacts of the higher feedstock
costs and the shut down of the Channelview Facility due to the ARCO Pipe Line
fire.

Operating income for the first nine months of 1996 was $197 million compared to
$589 million for the first nine months of 1995.  The $392 million decrease was
primarily due to lower sales margins for olefins and methanol.  The lower
olefins sales margins during the first nine months of 1996 compared to the first
nine months of 1995 primarily resulted from lower sales prices and higher
feedstock costs.  Olefins sales prices were lower due to the decline in market
conditions which began in the third quarter of 1995.  Higher olefins feedstock
costs resulted from the higher industry petroleum prices.  Methanol sales
margins were lower due to a significant decline in prices which began late in
the first quarter of 1995 due to slower growth in MTBE-related demand for
reformulated gasoline and an increase in methanol supply.


REFINING SEGMENT

REVENUES  Sales and other operating revenues for the third quarter of 1996 were
$649 million, an increase of $5 million compared to the third quarter of 1995.
Sales and other operating revenues for the first nine months of 1996 were $2.0
billion, an increase of $62 million compared to the first nine months of 1995.
These increases were primarily due to higher sales prices for light refined
products and crude oil resales which were caused by higher industry petroleum
prices, partially offset by lower orthoxylene and paraxylene prices.
Orthoxylene prices were at historical highs during the first half of 1995 before
returning to a more normal level in the fourth quarter 

                                       12
<PAGE>
 
of 1995 due to increased production and lower demand which was further impacted
by customers' inventory reductions. The decline in paraxylene prices began in
the second quarter of 1996 due to additional capacity and continued customers'
inventory reductions in the polyethylene terephthalate (PET) and polyester
fibers businesses.

COST OF SALES  Cost of sales was $644 million during the third quarter of 1996
compared to $595 million during the third quarter of 1995, an increase of $49
million.  Cost of sales was $2.0 billion during the first nine months of 1996,
an increase of $134 million compared to the first nine months of 1995.  These
increases were primarily caused by higher crude oil and other petroleum
feedstock costs and higher cost for crude oil that was resold due to higher
industry crude oil prices.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES  Selling, general and
administrative expenses were $1 million higher in the third quarter of 1996
compared to the third quarter of 1995 and were $5 million higher during the
first nine months of 1996 compared to the first nine months of 1995.  The
increase for the nine month period was primarily due to higher employee
compensation and various outside consulting services.

OPERATING INCOME  Operating loss for the third quarter of 1996 was $10 million
compared to an operating income of $35 million for the third quarter of 1995.
The $45 million decrease was primarily due to lower aromatics margins.  Margins
were lower in 1996 primarily due to the significantly lower sales prices and to
the higher industry petroleum feedstock costs.

Operating income for the third quarter of 1996 compared with the second quarter
of 1996 decreased $15 million.  This decrease in operating income was primarily
due to lower paraxylene sales margins.  The lower paraxylene sales margins were
primarily due to the lower paraxylene sales prices.

Operating income for the first nine months of 1996 was $23 million compared to
$100 million for the first nine months of 1995.  The $77 million decrease was
primarily due to lower aromatics and refined products sales margins and to
higher period costs.  Overall, aromatics sales margins were lower in 1996
primarily due to generally lower sales prices, particularly orthoxylene.
Refined products sales margins decreased due to higher crude oil and other
feedstock prices which more than offset higher refined product sales prices.
Refinery period costs were higher due to higher personnel compensation, property
taxes and depreciation, partially offset by lower maintenance expenses.


UNALLOCATED

GENERAL AND ADMINISTRATIVE EXPENSES  General and administrative expenses were $1
million lower in the third quarter of 1996 compared to the third quarter of 1995
and were $4 million lower in the first nine months of 1996 compared to the first
nine months of 1995.  These decreases were primarily due to a reduced charge for
management incentive compensation and lower materials, supplies and equipment
expense.

INTEREST EXPENSE  Interest expense was $2 million lower during the third quarter
of 1996 compared to the third quarter of 1995 due to higher capitalization of
interest related to the Upgrade Project.  Interest expense was $2 million higher
during the first nine months of 1996 compared to the first nine months of 1995.
The higher interest expense was primarily due to a net increase in debt
outstanding resulting from the issuance of new debt in February 1996.

INCOME TAX  The effective income tax rate during the third quarter of 1996 and
during the first nine months of 1996 was 35.8 percent and 36.1 percent,
respectively.  State income tax was the primary difference between the effective
tax rates and the 35 percent federal statutory rate.

                                       13
<PAGE>
 
FINANCIAL CONDITION

Lyondell's cash provided by operating activities was $96 million in the first
nine months of 1996 compared to cash provided of $345 million during the first
nine months of 1995.  This $249 million decrease in cash flow from operating
activities is attributable to the $288 million decrease in net income, partially
offset primarily by changes in working capital.

Cash used in investing activities during the first nine months of 1996 consisted
of capital expenditures of $488 million, of which $387 million was for the
Upgrade Project at the Refinery, $26 million was for environmentally related
projects primarily at the Refinery and $75 million was for other projects at the
various petrochemical facilities and at the Refinery.  Upgrade Project
expenditures during the first nine months of 1996 were funded by $182 million
from external borrowings by LCR, $106 million of contributions by CITGO, the
minority owner of LCR, and $91 million from Lyondell in the form of subordinated
loans to LCR.  The $8 million excess of cash expenditures over funding for the
Upgrade Project was provided by funds held in a restricted cash account.

In February 1996, the Company issued $300 million of debt securities ("Debt
Securities") consisting of $150 million of 6.5 percent notes due 2006 and $150
million of 7.55 percent debentures due 2026.  A portion of the proceeds received
from the sale of the Debt Securities was used to repay short-term debt during
the first quarter of 1996, and the remainder was used for retirement of maturing
long-term debt and general corporate purposes.  The Debt Securities are
unsecured obligations and rank on a parity with all other unsecured and
unsubordinated debt of the Company.

As of September 30, 1996, LCR was not in compliance with the financial ratio
covenant of adjusted average debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA") contained in LCR's $450 million five-
year term credit facility and its $70 million 364-day revolving working capital
credit facility (together the "LCR Credit Facilities"). Effective as of November
12, 1996, the LCR Credit Facilities were amended. The substance of these
amendments was to replace the adjusted average debt to EBITDA covenant and one
additional financial covenant with a covenant to maintain a minimum EBITDA. The
amendments were retroactively effective as of the noncompliance date and will
continue through June 30, 1997. As a result of these amendments, LCR is
currently in compliance with the terms of the LCR Credit Facilities.

The Mont Belvieu terminal fire on June 2, 1996 will result in an approximate $13
million capital expenditure to replace damaged equipment.  As a result, the
Company has deferred certain capital expenditures with the overall impact of
increasing the 1996 capital budget by $8 million, to $133 million, excluding
expenditures for the upgrade project at the Refinery.

The Company paid regular quarterly dividends of $.225 per share of common stock
during the first, second and third quarters of 1996.  Additionally, on October
18, 1996, the Board of Directors declared a regular quarterly dividend of $.225
per share of common stock, payable December 15, 1996 to stockholders of record
on November 25, 1996.


CURRENT BUSINESS OUTLOOK

A strengthening economy provided an improved environment for polymers and
olefins during the third quarter of 1996 compared to the earlier part of 1996.
This improvement was partially offset by higher olefins feedstock costs and the
shut down of the Channelview Facility for two weeks during the third quarter due
to the ARCO Pipe Line fire which occurred during July 1996.

During the remainder of 1996, management expects that olefins supply and demand
fundamentals will continue to be more favorable than in the latter part of 1995
with demand growth exceeding capacity additions and less 

                                       14
<PAGE>
 
significant downstream inventory corrections. However, olefins profitability
continues to be negatively impacted by higher feedstock costs. Polymers demand
is beginning to show signs of weakening in the fourth quarter.

Methanol business conditions returned to more typical levels in the latter part
of 1995 and first nine months of 1996 from the very favorable conditions that
existed during the early part of 1995.  Although methanol demand growth is still
good, natural gas feedstock prices are rising because of winter seasonal demand,
and substantial new capacity is expected in various parts of the world over the
next few years.  While the Company expects its methanol business to remain
profitable, it is not likely that methanol profitability will return in the
near-term to the high levels of late 1994 and early 1995.

During the first nine months of 1996, profit performance from refined products
benefited from high processing rates of heavy Venezuelan crude oil.  However,
this improvement was offset by lower margins due to rising feedstock costs for
the crude oil runs not covered by the Crude Supply Contract.  Operating rates
for the crude oil purchased outside the Crude Supply Agreement were reduced
significantly in the third quarter due to poor economics.  Management does not
expect industry margins to improve in the fourth quarter, and profit performance
will be further negatively impacted by the planned maintenance turnaround on the
fluid catalytic cracking unit during the fourth quarter of 1996.  Aromatics are
in a weaker environment entering the fourth quarter of 1996 due to lower margins
resulting from higher feedstock costs and continuing sales price decreases for
paraxylene.

Management believes that the Company has improved its refining business with the
formation of LCR and the resulting benefits of the Crude Supply Contract and
Products Agreement.  These arrangements are designed to diminish the impact of
market volatility and stabilize cash flows at attractive levels relative to
historic performance.  However, management expects that startups, shutdowns,
revamps and tie-ins to the existing facilities will continue to affect LCR's
operating efficiency and profitability as various units of the Upgrade Project
approach completion during the remainder of 1996 and early 1997.  Until the
Upgrade Project is operational, which is expected to occur by the end of the
first quarter of 1997, LCR's crude oil volume which is not purchased under the
Crude Supply Contract continues to be sensitive to market conditions.  The poor
market conditions that have characterized the Gulf Coast refining business for
the past several years have continued in 1996.

Profitability and cash flows for the petrochemical and refining businesses are
affected by industry supply and demand, feedstock cost volatility, capital
expenditures required to meet more stringent environmental standards, repair and
maintenance costs and downtime of production units due to maintenance
turnarounds.  Turnarounds on major units can have significant financial impacts
due to the associated loss of production, resulting in lower profitability.  LCR
plans to perform a turnaround of its fluid catalytic cracking unit in the fourth
quarter of 1996, and a turnaround of the Company's Matagorda HDPE plant is
planned to begin during the first quarter of 1997.

The Company believes that business conditions will be such that cash balances,
cash generated from operating activities and existing lines of credit will be
adequate to meet future cash requirements for scheduled debt repayments,
necessary capital expenditures and to sustain for the reasonably foreseeable
future the regular quarterly dividend.  However, the Company continually
evaluates its cash requirements and allocates cash in order to maximize
stockholder returns.

Certain of the statements in this Current Business Outlook Section are forward-
looking statements that involve risks and uncertainties, and the factors
described herein could cause actual results to differ materially from the
estimates contained herein.

                           __________________________

Management cautions against projecting any future results based on present or
prior earnings levels because of the cyclical nature of the refining and
petrochemical industries and uncertainties associated with the United States and
worldwide economies and current and potential United States governmental
regulatory actions.

                                       15
<PAGE>
 
                          PART II. OTHER INFORMATION


ITEM 1.   LEGAL PROCEEDINGS

1.        There have been no material developments with respect to the Company's
          legal proceedings previously reported in the 1995 Annual Report on
          Form 10-K or subsequent Quarterly Reports on Form 10-Q.


ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          (a)  Exhibits

               4.5(b)     Amendment No. 2 to the LYONDELL-CITGO Refining Company
                          Ltd. $70,000,000 Credit Agreement.

               4.6(b)     Amendment No. 2 to the LYONDELL-CITGO Refining Company
                          Lt. $450,000,000 Credit Agreement.

               27         Financial Data Schedule.

          (b)  Reports on Form 8-K

               The following Current Reports on Form 8-K were filed during the
               quarter ended September 30, 1996 and through the date hereof.

                    Date of Report    Item No.      Financial Statements
                    --------------    --------      --------------------

                    July 29, 1996     5             None

                                      16
<PAGE>
 
                                   SIGNATURE



Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


 
                                            Lyondell Petrochemical Company
                                                      (Registrant)
 
 
Dated:   November 13, 1996                           JOSEPH M. PUTZ
                                            --------------------------------
                                                          (Signature)
                                                         Joseph M. Putz
                                                   Vice President and Controller
                                                   (Duly Authorized Officer and
                                                   Principal Accounting Officer)

                                       17