<PAGE>
 
                           SCHEDULE 14A INFORMATION

          PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
                    EXCHANGE ACT OF 1934 (AMENDMENT NO.  )
        
Filed by the Registrant [x]

Filed by a Party other than the Registrant [_] 

Check the appropriate box:

[_]  Preliminary Proxy Statement        [_]  Confidential, for Use of the 
                                             Commission Only (as permitted by
                                             Rule 14a-6(e)(2))
[x]  Definitive Proxy Statement 

[_]  Definitive Additional Materials 

[_]  Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

                               PENNZOIL COMPANY
--------------------------------------------------------------------------------
               (Name of Registrant as Specified In Its Charter)

                               PENNZOIL COMPANY
--------------------------------------------------------------------------------
   (Name of Person(s) Filing Proxy Statement, if other than the Registrant)

   
Payment of Filing Fee (Check the appropriate box):

[X]  $125 per Exchange Act Rules Q-11(c)(i)(ii), or 14a-6(i)(ii), or 14a-6(i)(2)
     or Item 22(a)(2) of Schedule 14A.

[_]  $500 per each party to the controversy pursuant to Exchange Act Rule
     14a-6(i)(3).

[_]  Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

   
     (1) Title of each class of securities to which transaction applies:

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


     (2) Aggregate number of securities to which transaction applies:

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


     (3) Per unit price or other underlying value of transaction computed
         pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
         the filing fee is calculated and state how it was determined):

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

     (4) Proposed maximum aggregate value of transaction:

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


     (5) Total fee paid:

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

[_]  Fee paid previously with preliminary materials.
     
[_]  Check box if any part of the fee is offset as provided by Exchange
     Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
     was paid previously. Identify the previous filing by registration statement
     number, or the Form or Schedule and the date of its filing.
     
     (1) Amount Previously Paid:
 
     -------------------------------------------------------------------------


     (2) Form, Schedule or Registration Statement No.:

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


     (3) Filing Party:
      
     -------------------------------------------------------------------------


     (4) Date Filed:

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


<PAGE>
 
 
                                                                           LOGO
 
 
 
                                                       NOTICE OF ANNUAL MEETING
                                                                 APRIL 24, 1997
                                                            AND PROXY STATEMENT
<PAGE>
 
TABLE OF CONTENTS
 
<TABLE>
<S>                                                                          <C>
Letter to the Shareholders..................................................   1
Notice of Annual Meeting....................................................   2
Proxy Statement.............................................................   3
    I Election of Directors.................................................   4
     Nominees...............................................................   4
     Directors with Terms Expiring in 1998 and 1999.........................   5
     Board Organization and Meetings........................................   7
     Director Remuneration..................................................   7
     Certain Transactions...................................................   7
     Security Ownership of Directors and Officers...........................   8
     Compliance with Section 16(a) of the Exchange Act......................   8
     Executive Compensation.................................................   8
     Compensation Committee Interlocks and Insider Participation............  12
     Report of Compensation Committee on Executive Compensation.............  12
     Performance Graph......................................................  15
   II Approval of Appointment of Independent Public Accountants.............  16
  III Approval of 1997 Incentive Plan.......................................  16
  IV Other Business.........................................................  20
  Additional Information....................................................  20
     Security Ownership of Certain Shareholders.............................  20
     Shareholder Proposals for 1998 Meeting.................................  20
     Advance Notice Required for Shareholder Nominations and Proposals......  20
  Exhibit A -- 1997 Incentive Plan.......................................... A-1
</TABLE>
 
<PAGE>

                [LETTERHEAD OF PENNZOIL COMPANY APPEARS HERE] 
 
 
 
 
DEAR SHAREHOLDER:                                                March 21, 1997
 
  You are cordially invited to attend the annual meeting of shareholders to be
held at the Alley Theatre, 615 Texas Avenue, Houston, Texas on April 24, 1997
at 10:00 a.m. For those of you who cannot be present at this 108th annual
meeting, we urge that you participate by indicating your choices on the
enclosed proxy and completing and returning it at your earliest convenience.
 
  This booklet includes the notice of the meeting and the proxy statement,
which contains information about the Board and its committees and personal
information about each of the nominees for the Board. Other matters on which
action is expected to be taken during the meeting are also described.
 
  It is important that your shares are represented at the meeting, whether or
not you are able to attend personally. Accordingly, you are requested to sign,
date and mail promptly the enclosed proxy in the envelope provided.
 
  On behalf of the Board of Directors, thank you for your continued support.


                                       /s/ JAMES L. PATE
                                       James L. Pate
                                       Chairman of the Board, President
                                       and Chief Executive Officer
 
 
 
                                       1
<PAGE>
 
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 24, 1997
 
TO THE SHAREHOLDERS OF
PENNZOIL COMPANY:
 
  The annual meeting of shareholders of Pennzoil Company will be held at the
Alley Theatre, 615 Texas Avenue, Houston, Texas, on Thursday, April 24, 1997
at 10:00 a.m., Houston time, for the following purposes:
 
  1.To elect four directors.
 
  2.To approve the appointment of Arthur Andersen LLP as independent public
  accountants for 1997.
 
  3. To consider and act upon a proposed 1997 Incentive Plan covering
     1,000,000 shares of the Common Stock of the Company.
 
  4. To transact such other business as may properly come before the meeting
     or any adjournment thereof.
 
  The Board of Directors has fixed the close of business on February 28, 1997
as the record date for determining shareholders entitled to notice of and to
vote at the meeting.
 
  You are cordially invited to attend the meeting in person. Even if you plan
to attend the meeting, however, you are requested to mark, sign, date and
return the accompanying proxy as soon as possible.
 
                                    By Order of the Board of Directors
 
                                              /s/ LINDA F. CONDIT
                                              Linda F. Condit
                                              Vice President and
                                              Corporate Secretary
March 21, 1997
Pennzoil Place, P.O. Box 2967
Houston, Texas 77252-2967
 
                                       2
<PAGE>
 
                [LETTERHEAD OF PENNZOIL COMPANY APPEARS HERE]
 
 
PROXY STATEMENT
 
  This Proxy Statement and the accompanying proxy card are being mailed to
shareholders beginning on or about March 21, 1997. They are furnished in
connection with the solicitation by the Board of Directors of Pennzoil Company
(the "Company") of proxies from the holders of the Company's common stock
("Common Stock") for use at the annual meeting of shareholders to be held at
the time and place and for the purposes set forth in the accompanying notice.
In addition to the solicitation of proxies by mail, proxies may also be
solicited by telephone, telegram or personal interview by regular employees of
the Company. The Company has retained D. F. King & Co., Inc. to solicit
proxies at a fee estimated not to exceed $10,000 plus reasonable expenses. The
Company will pay all costs of soliciting proxies. The Company will also
reimburse brokers or other persons holding stock in their names or in the
names of their nominees for their reasonable expenses in forwarding proxy
material to beneficial owners of such stock.
 
  All duly executed proxies received prior to the meeting will be voted in
accordance with the choices specified thereon. As to any matter for which no
choice has been specified in a duly executed proxy, the shares represented
thereby will be voted FOR the election as directors of the nominees listed
herein, FOR approval of the appointment of Arthur Andersen LLP as the
Company's independent public accountants, FOR approval of the proposed 1997
Incentive Plan and in the discretion of the persons named in the proxy in
connection with any other business that may properly come before the annual
meeting. A shareholder giving a proxy may revoke it at any time before it is
voted at the annual meeting by filing with the Corporate Secretary an
instrument revoking it, by delivering a duly executed proxy bearing a later
date or by appearing at the annual meeting and voting in person.
 
  As of February 28, 1997, the record date for determining shareholders
entitled to vote at the annual meeting, the Company had outstanding and
entitled to vote 46,897,455 shares of Common Stock. Each share entitles the
holder to one vote on each matter submitted to a vote of shareholders and to
cumulative voting in the election of directors. The requirement for a quorum
at the annual meeting is the presence in person or by proxy of holders of a
majority of the outstanding shares of Common Stock. In cumulative voting for
directors, each shareholder is entitled to a number of votes equal to the
number of shares held multiplied by the number of directors to be elected; the
shareholder may cast all such votes for a single director or may cast them for
any or all of the nominees in any manner the shareholder chooses. Information
regarding the vote required for approval of other particular matters is set
forth in the discussion of those matters appearing elsewhere in this Proxy
Statement.
 
  The Annual Report to Shareholders, which includes financial statements of
the Company for the year ended December 31, 1996, has been mailed to all
shareholders. The Annual Report is not a part of the proxy solicitation
material.
 
 
                                       3
<PAGE>
 
I ELECTION OF DIRECTORS
 
  Four directors are to be elected. The names of Messrs. Howard H. Baker, Jr.,
Harry H. Cullen, James L. Pate and Gerald B. Smith will be placed in
nomination, and the persons named in the proxy will vote in favor of such
nominees unless authority to vote in the election of directors is withheld.
Messrs. Baker, Cullen and Pate are currently directors of the Company. The
term of office for all directors to be elected will be a three-year term
expiring on the date of the annual meeting in 2000 (or until their respective
successors are duly elected and qualified).
 
  The persons named in the proxy may act with discretionary authority in the
event of cumulative voting or if any nominee should become unavailable for
election, although management is not currently aware of any circumstances
likely to result in the exercise of discretionary authority with respect to
cumulative voting. There are no conditions precedent to the exercise of
cumulative voting. The proxies being solicited by the Board of Directors do
not provide a means whereby express cumulative voting instructions can be
given on the proxy. Accordingly, in order to vote cumulatively (other than
through discretionary authority given pursuant to management's proxy), a
shareholder would need to vote by ballot at the meeting. In accordance with
the Company's By-laws, the four directors will be elected by a plurality of
the votes cast.
 
  NOMINEES -- The following summaries set forth information concerning the
four nominees for election as directors at the meeting, including each
nominee's age, position with the Company, if any, and business experience
during the past five years.
 
                                  Name, age and business experience
                                  ---------------------------------

                  HOWARD H. BAKER, JR. has been a partner with the law firm of
                  Baker, Donelson, Bearman & Caldwell since 1988. From 1987 to
                  1988, he was Chief of Staff to the President of the United
                  States. Mr. Baker also served three terms as a member of the
                  United States Senate and was Senate Majority Leader from
[PHOTO APPEARS    1981 to 1985 and Minority Leader from 1977 to 1981. He has
    HERE]         served as a director of the Company since 1991 and is a
                  member of the Finance Committee of the Board. Mr. Baker is
                  chair of the Mayo Foundation, a director of Federal Express
                  Corporation and United Technologies Corporation and a regent
                  of the Smithsonian Institution. He is 71 years of age and
                  lives in Huntsville, Tennessee.
 
                  HARRY H. CULLEN has been engaged for more than the past five
                  years in oil and gas exploration and production. He has
[PHOTO APPEARS    served as a director of the Company since 1992 and is a
    HERE]         member of the Compensation and Executive Committees of the
                  Board. Mr. Cullen is also a director of Cullen/Frost
                  Bankers, Inc. He is 61 years of age and lives in Houston.
 
                                       4
<PAGE>
 
                                Name, age and business experience
                                ---------------------------------

                  JAMES L. PATE was named Chairman of the Board of the Company
                  in 1994. He has been President and Chief Executive Officer
                  of the Company for more than the past five years. Mr. Pate
[PHOTO APPEARS    has served as a director of the Company since 1989, is
    HERE]         Chairman of the Executive Committee of the Board and is
                  Chairman of the Finance Committee of the Board. Mr. Pate is
                  also a director of Bowater Incorporated. He is 61 years of
                  age and lives in Houston.
 
                  GERALD B. SMITH has been Chairman and Chief Executive
                  Officer of Smith, Graham & Co. Asset Managers L.P., a fixed
                  income investment management firm, for more than the past
[PHOTO APPEARS    five years. He is a member of the management board of
    HERE]         Rorento N.V., a director of Sisters of Charity of the
                  Incarnate Word Healthcare System and a member of the audit
                  committee of Northern Borders Partners, L.P. He is 46 years
                  of age and lives in Houston.
 
  DIRECTORS WITH TERMS EXPIRING IN 1998 AND 1999 -- The following summaries
set forth information concerning the seven directors of the Company whose
present terms of office will continue until 1998 or 1999, including each
director's age, position with the Company, if any, and business experience
during the past five years.
 
                                Name, age and business experience
                                ---------------------------------
 
                  W. J. BOVAIRD has served as Chairman of the Board of The
                  Bovaird Supply Company (investments) for more than the past
                  five years. Mr. Bovaird has served as a director of the
[PHOTO APPEARS    Company since 1972 and is a member of the Finance Committee
    HERE]         of the Board. He is 72 years of age and lives in Tulsa,
                  Oklahoma. Mr. Bovaird's current term as a director of the
                  Company expires in 1998.
 
                  W. L. LYONS BROWN, JR. served as Chairman of the Board of
                  Brown-Forman Corporation, a major diversified producer and
                  marketer of fine quality consumer products, until his
                  retirement in 1995. He was also Chief Executive Officer of
                  Brown-Forman Corporation from 1975 until 1993. He has served
[PHOTO APPEARS    as a director of the Company since 1991 and is a member of
    HERE]         the Audit Committee of the Board. Mr. Brown is also a
                  director of Westvaco Corporation and an advisory director of
                  Bessemer Holdings, L.P. He is 60 years of age and lives in
                  Prospect, Kentucky. Mr. Brown's current term as a director
                  of the Company expires in 1998.
 
 
                                       5
<PAGE>
 
                                Name, age and business experience
                                ---------------------------------
 
                  ERNEST H. COCKRELL has been engaged for more than the past
                  five years in oil and gas exploration and production. He has
                  served as a director of the Company since 1978 and is
[PHOTO APPEARS    Chairman of the Compensation Committee and a member of the
    HERE]         Audit and Executive Committees of the Board. Mr. Cockrell is
                  also a director of Southwest Bancorporation of Texas, Inc.
                  and Southwest Bank of Texas. He is 51 years of age and lives
                  in Houston. Mr. Cockrell's current term as a director of the
                  Company expires in 1998.
 
                  ALFONSO FANJUL has been Chairman of the Board and Chief
                  Executive Officer of Flo-Sun Incorporated (sugar and real
                  estate) for more than the past five years. He is also
                  Chairman of the Board and Chief Executive Officer of
                  Okeelanta Corporation (sugar), Chairman, Chief Executive
[PHOTO APPEARS    Officer and President of Central Romana Corporation, Ltd.
    HERE]         (sugar, real estate and cattle) and Chairman of the Board of
                  Florida Atlantic Investments, Inc. (real estate). Mr. Fanjul
                  has served as a director of the Company since 1984 and is a
                  member of the Compensation Committee of the Board. He is 59
                  years of age and lives in Palm Beach, Florida. Mr. Fanjul's
                  current term as a director of the Company expires in 1999.
 
                  BERDON LAWRENCE has been President of Hollywood Marine,
                  Inc., a Gulf Coast operator of tank barges and tow boats
                  handling petrochemical and petroleum products, for more than
[PHOTO APPEARS    the past five years. Mr. Lawrence has served as a director
    HERE]         of the Company since 1990 and is a member of the Executive
                  Committee of the Board. He is 54 years of age and lives in
                  Houston. Mr. Lawrence's current term as a director of the
                  Company expires in 1999.
 
                  BRENT SCOWCROFT is a consultant on national and
                  international security affairs. From 1989 to 1993, he was
                  Assistant to the President of the United States for National
                  Security Affairs. He has served as a director of the Company
                  since 1993 and is a member of the Finance Committee of the
[PHOTO APPEARS    Board. Mr. Scowcroft is also a director of Enron Global
    HERE]         Power & Pipelines L.L.C., Northrop Grumman Corporation and
                  Qualcomm Incorporated and a member of the board of trustees
                  of the Rand Corporation. He is 72 years of age and lives in
                  Bethesda, Maryland. Mr. Scowcroft's current term as a
                  director of the Company expires in 1999.
 
                                       6
<PAGE>
 
                                Name, age and business experience
                                ---------------------------------
 
                  CYRIL WAGNER, JR. has been a partner in Wagner & Brown, a
                  firm involved in oil and gas exploration and production, for
                  more than the past five years. He has served as a director
[PHOTO APPEARS    of the Company since 1992 and is Chairman of the Audit
    HERE]         Committee of the Board. Mr. Wagner is also a director of
                  Texas Commerce Bancshares, Inc. He is 63 years of age and
                  lives in Midland, Texas. Mr. Wagner's current term as a
                  director of the Company expires in 1999.
 
  BOARD ORGANIZATION AND MEETINGS -- The members of the Audit Committee and
the Compensation Committee of the Board of Directors indicated in the above
summaries are not employees of the Company. The Audit Committee of the Board
recommends the appointment of independent public accountants to conduct audits
of the Company's financial statements, reviews with the independent
accountants the plan and results of the auditing engagement, approves other
professional services provided by the independent accountants and evaluates
the independence of the accountants. The Audit Committee also reviews the
scope and results of procedures for internal auditing of the Company and the
adequacy of the Company's system of internal accounting controls. The
Compensation Committee approves, or in some cases recommends to the Board,
remuneration arrangements and compensation plans involving the Company's
directors, executive officers and certain other employees whose compensation
exceeds specified levels. The Compensation Committee also acts on the granting
of stock options and conditional stock units under the Company's stock option
plans and conditional stock award programs. The Board does not have a standing
nominating committee or other committee performing a similar function.
 
  During 1996, the Board of Directors held seven meetings. During 1996, the
Audit Committee met two times, and the Compensation Committee met three times.
During 1996, all members of the Board of Directors attended at least 75% of
the total of all Board meetings and applicable committee meetings.
 
  DIRECTOR REMUNERATION -- Each director, other than a regularly employed
officer of the Company, receives a director's fee of $30,000 per annum for
service on the Board of Directors and a committee fee of $2,000 per committee
per annum for service on the Audit, Executive, Finance and Compensation
Committees. Each such director also receives an additional fee of $1,000 for
each Board, Executive Committee or other committee meeting attended. All
directors are reimbursed for their travel and other expenses involved in
attendance at Board and committee meetings. In addition, Mr. Scowcroft
received $100,000 in 1996 in remuneration for services as a director
consulting on special international projects.
 
  CERTAIN TRANSACTIONS -- Mr. Baker is a partner in the law firm of Baker,
Donelson, Bearman & Caldwell, which represents the Company from time to time
in connection with certain matters pursuant to a retainer arrangement.
 
                                       7
<PAGE>
 
  SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS -- The following tabulation
sets forth the shares of Common Stock of the Company beneficially owned
directly or indirectly as of March 10, 1997 (i) by the Company's nominees for
director, continuing directors, chief executive officer and five other most
highly compensated executive officers and (ii) by all the foregoing and other
current executive officers of the Company as a group.
 
<TABLE>
<CAPTION>
                                              AMOUNT AND NATURE OF
                                            BENEFICIAL OWNERSHIP (1)
                                            ------------------------
                                                                     PERCENTAGE
                     NAME                      DIRECT       OTHER     OF CLASS
                     ----                   ------------ ----------- ----------
   <S>                                      <C>          <C>         <C>
   David P. Alderson, II...................       61,170     --           *
   Howard H. Baker, Jr.....................        3,000     --           *
   Clyde W. Beahm..........................       37,752     --           *
   W. J. Bovaird...........................        6,535     --           *
   W. L. Lyons Brown, Jr...................        6,500       3,321      *
   Ernest H. Cockrell......................      151,515      10,000      *
   Harry H. Cullen.........................       16,115     --           *
   Alfonso Fanjul..........................          200      30,300      *
   Thomas M. Hamilton......................       61,739     --           *
   Berdon Lawrence.........................       15,000     --           *
   James L. Pate...........................      269,163     --           *
   William M. Robb.........................       56,349     --           *
   Brent Scowcroft.........................        2,500     --           *
   James W. Shaddix........................       70,449     --           *
   Gerald B. Smith.........................          500     --           *
   Cyril Wagner, Jr........................       19,900     --           *
   All the above and all other current
    executive
    officers as a group (22 persons).......      840,566      43,621    1.9%
</TABLE>
--------
(1) Pursuant to regulations of the Securities and Exchange Commission (the
    "SEC"), securities must be listed as beneficially owned by a person who
    directly or indirectly holds or shares the power to vote or dispose of the
    securities, whether or not the person has any economic interest in the
    securities. In addition, a person is deemed a beneficial owner if he has
    the right to acquire beneficial ownership within 60 days, including upon
    exercise of a stock option or conversion of a convertible security. Shares
    of Common Stock listed under the "Direct" column include those owned by
    the individuals and members of their immediate families (or held by any of
    them in family trusts). Securities owned by certain family members are
    included in the foregoing table even in certain instances where the
    possession or sharing of voting or dispositive power is not acknowledged.
    The "Direct" column also includes shares subject to stock options
    exercisable within 60 days (55,516 for Mr. Alderson, 36,265 for Mr. Beahm,
    60,836 for Dr. Hamilton, 243,549 for Mr. Pate, 51,120 for Mr. Robb, 58,539
    for Mr. Shaddix, and 562,811 for all the above and all other current
    executive officers as a group). Shares shown under the "Other" column
    include ownership through corporations or subsidiaries of corporations in
    which the named individuals are officers or directors or charitable
    foundations in which the named individuals are officers, directors or
    trustees.
 
*  Less than 1%.
 
  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT -- Section 16(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the
Company's directors and executive officers to file with the SEC and the New
York Stock Exchange initial reports of ownership and reports of changes in
ownership of Common Stock. Based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, the Company believes that all its directors and
executive officers during 1996 complied on a timely basis with all applicable
filing requirements under Section 16(a) of the Exchange Act.
 
 
                                       8
<PAGE>
 
  EXECUTIVE COMPENSATION -- Set forth below is information regarding the
compensation of the Company's Chief Executive Officer (the "CEO") and the
other five most highly compensated executive officers of the Company (together
with the CEO, the "named officers").
 
  Summary Compensation Table. The summary compensation table set forth below
contains information regarding the compensation of each of the named officers
for services rendered in all capacities during 1994, 1995 and 1996.
 
                          SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                              LONG-TERM
                                                            COMPENSATION
                                                        ---------------------
                                ANNUAL COMPENSATION            AWARDS
                             -------------------------- ---------------------
                                                                   SECURITIES
                                                OTHER              UNDERLYING   ALL
                                                ANNUAL              OPTIONS/   OTHER
                                               COMPEN-  RESTRICTED    SARS    COMPEN-
       NAME AND                                 SATION    STOCK     (SHARES)  SATION
  PRINCIPAL POSITION    YEAR  SALARY   BONUS     (1)    AWARDS (2)    (3)       (4)
  ------------------    ---- -------- -------- -------- ---------- ---------- -------
<S>                     <C>  <C>      <C>      <C>      <C>        <C>        <C>
James L. Pate           1996 $708,500 $739,500 $190,900  $401,400   100,000   $52,900
 Chairman of the Board, 1995  656,500    --     218,200   264,800    85,000    68,000
 President and Chief    1994  626,500  204,000    --      133,400      --      65,000
 Executive Officer
David P. Alderson, II
 (5)                    1996 $265,000 $200,000 $ 61,600  $ 80,300    18,500   $19,000
 Group Vice President-- 1995  241,300    --      61,100    53,000    16,500    22,000
 Finance & Accounting   1994  229,700   61,000    --       53,900      --      21,700
Clyde W. Beahm          1996 $234,600 $125,000 $ 62,200  $ 73,900    18,300   $16,300
 Group Vice President-- 1995  193,800    --      62,400    44,100    13,500    16,700
 Products Marketing     1994  174,600   49,600    --       42,700      --      13,200
Thomas M. Hamilton (6)  1996 $407,600 $   --   $ 61,600  $392,900    40,000   $29,600
 Executive Vice         1995  360,500    --      59,700    79,400    75,000    30,400
 President              1994  345,400   49,700    --       81,700      --      27,400
William M. Robb         1996 $264,200 $115,000 $ 61,600  $ 71,800    15,000   $18,800
 Group Vice President-- 1995  248,200    --      58,900    57,400    18,000    20,700
 Products Manufacturing 1994  237,500   38,900    --       55,000      --      18,000
James W. Shaddix        1996 $266,400 $200,000 $ 61,600  $ 80,300    18,500   $19,100
 General Counsel        1995  245,500    --      59,300    53,000    17,000    22,400
                        1994  233,900   61,000    --       55,000      --      22,700
</TABLE>
--------
(1) Amounts shown for 1996 include aircraft usage charges of $108,800 for Mr.
    Pate; a perquisite allowance of $59,400 for Mr. Pate and $42,400 for
    Messrs. Alderson, Beahm, Hamilton, Robb and Shaddix; and excess medical
    coverage of $19,200 for Messrs. Pate, Alderson, Hamilton, Robb and Shaddix
    and $19,800 for Mr. Beahm. Amounts shown for 1995 include club membership
    fees and related costs of $101,800 for Mr. Pate; a perquisite allowance of
    $59,400 for Mr. Pate and $42,400 for Messrs. Alderson, Beahm, Hamilton,
    Robb and Shaddix; and excess medical coverage of $16,400 for Messrs. Pate,
    Alderson, Hamilton, Robb and Shaddix and $17,800 for Mr. Beahm. Excludes
    perquisites and other benefits for 1994 because the aggregate amounts
    thereof do not exceed the lesser of $50,000 or 10% of the total of annual
    salary and bonus reported for any named officer.
(2) Amounts shown under Restricted Stock Awards are the aggregate market value
    on January 1 of the year indicated of shares of Common Stock underlying
    common stock units awarded on such date under the Company's Conditional
    Stock Award Programs. Each common stock unit awarded is to be distributed
    in the form of a share of Common Stock at the end of a five-year period,
    provided certain conditions as to continued employment are met. In the
    interim, participants receive dividend equivalents on their common stock
    units as though they were shares of Common Stock. The aggregate common
    stock units held at the end of 1996 and their values were 22,000 units,
    $1,243,000 for Mr. Pate; 5,210 units, $294,400 for Mr. Alderson; 4,430
    units, $250,300 for Mr. Beahm; 14,130 units, $798,300 for Dr. Hamilton;
    5,130 units, $289,800 for Mr. Robb; and 5,230 units, $295,500 for Mr.
    Shaddix. Such values are calculated by multiplying the closing market
    price of the Common Stock on December 31, 1996 ($56.50) by the number of
    common stock units held at such date.
 
                                        (footnotes continued on following page)
 
                                       9
<PAGE>
 
(3) All options were granted in tandem with stock appreciation rights, but
    there is currently in effect a moratorium on the exercise of any such
    stock appreciation rights.
(4) Amounts shown under All Other Compensation include (i) amounts contributed
    or accrued for 1996 under the Company's Savings and Investment Plan and
    related supplemental agreements ($49,200 for Mr. Pate, $17,000 for Mr.
    Alderson, $14,600 for Mr. Beahm, $26,500 for Dr. Hamilton, $16,800 for Mr.
    Robb and $17,200 for Mr. Shaddix and (ii) amounts paid by the Company in
    1996 for certain premiums on term life insurance ($3,700 for Mr. Pate,
    $2,000 for Mr. Alderson, $1,700 for Mr. Beahm, $3,100 for Dr. Hamilton,
    $2,000 for Mr. Robb and $2,000 for Mr. Shaddix).
(5) Prior to June 13, 1996, Mr. Alderson was also Treasurer of the Company.
(6) Dr. Hamilton resigned as Executive Vice President of the Company effective
    December 17, 1996.
 
  Option/SAR Grants. Shown below is further information on grants of stock
options during 1996 to the named officers reflected in the Summary
Compensation Table on page 9.
 
                           OPTION/SAR GRANTS IN 1996
 
<TABLE>
<CAPTION>
                                         INDIVIDUAL GRANTS
                         --------------------------------------------------
                            NUMBER OF     PERCENT OF
                           SECURITIES       TOTAL
                           UNDERLYING    OPTIONS/SARS                        GRANT
                          OPTIONS/SARS    GRANTED TO   EXERCISE               DATE
                         GRANTED IN 1996  EMPLOYEES   PRICE (PER EXPIRATION  VALUE
                          (SHARES) (1)     IN 1996    SHARE) (2)    DATE      (3)
                         --------------- ------------ ---------- ---------- --------
<S>                      <C>             <C>          <C>        <C>        <C>
James L. Pate...........     100,000         11.5%     $39.625   3/26/2006  $665,700
David P. Alderson, II...      18,500          2.1%     $39.625   3/26/2006  $123,200
Clyde W. Beahm..........      18,300          2.1%     $39.625   3/26/2006  $121,800
Thomas M. Hamilton......      40,000          4.6%     $39.625   3/26/2006  $266,300
William M. Robb.........      15,000          1.7%     $39.625   3/26/2006  $ 99,900
James W. Shaddix........      18,500          2.1%     $39.625   3/26/2006  $123,200
</TABLE>
--------
(1) All the above options were granted on March 26, 1996, and all the above
    options become exercisable in 33 1/3% increments on each of the first,
    second and third anniversaries of the date of grant. Such options were
    granted in tandem with stock appreciation rights, but there is currently
    in effect a moratorium on the exercise of any such stock appreciation
    rights. All the above options were granted pursuant to the Company's 1992
    Stock Option Plan.
(2) The option exercise price is 100% of the average of the high and low
    trading prices of the Common Stock on the New York Stock Exchange on the
    date of grant (March 26, 1996) and may be paid in cash or previously owned
    shares of Common Stock.
(3) Based on the Black-Scholes option pricing model adapted for use in valuing
    executive stock options. The actual value, if any, that may be realized
    will depend on the excess of the underlying stock price over the exercise
    price on the date the option is exercised, so that there is no assurance
    the value realized will be at or near the value estimated by the Black-
    Scholes model. The estimated values under the model are based on the
    following assumptions: expected volatility based on a three-year
    historical volatility of month-end Common Stock prices (20.8%), a risk-
    free rate of return based on a 10-year zero-coupon U.S. Treasury rate at
    the time of grant (6.2%), an average of dividend yields on Common Stock
    for prior three years (5.4%), an option exercise period of 10 years (with
    the exercise occurring at the end of such period) and no adjustment for
    the risk of forfeiture over the three-year vesting period.
 
                                      10
<PAGE>
 
  Option Exercises and 1996 Year-End Option/SAR Holdings. Shown below is
information with respect to unexercised options to purchase Common Stock
granted in 1996 and prior years to the named officers and held by them at
December 31, 1996. None of the named officers exercised options or tandem
stock appreciation rights in 1996.
 
                       YEAR-END 1996 OPTION/SAR HOLDINGS
 
<TABLE>
<CAPTION>
                             NUMBER OF SECURITIES
                            UNDERLYING UNEXERCISED         VALUE OF UNEXERCISED
                                OPTIONS HELD AT           IN-THE-MONEY OPTIONS AT
                               DECEMBER 31, 1996           DECEMBER 31, 1996 (1)
                         ----------------------------- -----------------------------
                         EXERCISABLE UNEXERCISABLE (2) EXERCISABLE UNEXERCISABLE (2)
                         ----------- ----------------- ----------- -----------------
<S>                      <C>         <C>               <C>         <C>
James L. Pate...........   181,883        156,667       $594,400      $2,303,800
David P. Alderson, II...    43,850         29,500       $132,500      $  431,800
Clyde W. Beahm..........    25,665         27,300       $105,700      $  406,700
Thomas M. Hamilton......    64,169         90,001       $477,400      $1,412,500
William M. Robb.........    40,120         27,000       $136,900      $  383,600
James W. Shaddix........    46,706         29,834       $138,400      $  435,400
</TABLE>
--------
(1) The excess, if any, of the market value of Common Stock at December 31,
   1996 ($56.50) over the option exercise price.
 
(2) All of these options become immediately exercisable upon a change in
   control of the Company.
 
  Retirement Plan and Supplemental Agreements. The Company has a tax-qualified
retirement plan applicable to salaried employees generally. The retirement
plan generally provides for annual retirement benefits approximating between
1.1% and 1.6% of a calculated career average compensation multiplied by the
number of years of service. For purposes of the retirement plan, career
average compensation approximates the lesser of an employee's final five-year
average compensation and his 1993 annual compensation. The annual benefits
under the retirement plan are net of certain offsets based on social security
benefits and reflect limitations mandated by the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), on the maximum amounts payable.
The Company has agreements with Messrs. Pate, Alderson, Beahm, Robb and
Shaddix to supplement their benefits under the tax-qualified retirement plan
in the event and to the extent the aforesaid limitations on annual benefits
mandated by ERISA reduce the retirement benefits that otherwise would be
payable under such plan. The Company also has a deferred compensation
agreement with Mr. Pate designed to bring his total annual retirement benefits
from all sources (including social security and benefits from prior employers)
to 57% of his annual salary rate at retirement. This percentage is comparable
to the proportion that retirement benefits provided by the Company's regular
retirement plan (and social security) for the majority of the Company's
employees bear to remuneration at the time of retirement. In addition, the
deferred compensation agreement provides for continuation of medical expense
reimbursement plan coverage for the participant, his spouse and dependents.
Based on salaries as of December 31, 1996, estimated annual benefits payable
upon retirement at normal retirement age (65) from all sources would be
$416,100 for Mr. Pate, $149,300 for Mr. Alderson, $48,400 for Mr. Beahm,
$100,800 for Mr. Robb and $140,100 for Mr. Shaddix.
 
  Termination of Employment and Change-in-Control Arrangements. The Company
maintains an Executive Severance Plan for selected employees providing for
severance benefits upon a termination of employment for reasons other than
cause within two years after a change in control of the Company. Benefits are
payable only in the event there occurs each of (i) a change in control of the
Company, (ii) a designation by the Board of Directors and the Compensation
Committee that the employee is likely to be adversely affected by the change
in control and (iii) a subsequent termination of employment within two years
for reasons other than cause. Benefits are prorated if the employee is within
three years of normal retirement age (65) at termination of employment.
Participants in the plan include Messrs. Alderson,
 
                                      11
<PAGE>
 
Beahm, Robb and Shaddix. Such severance benefits generally include a payment
of up to three times a participant's annual salary and incentive bonus and
continuation of life insurance and medical coverage for one year following
termination of employment.
 
  The Company also has agreements with Messrs. Pate, Alderson, Beahm, Robb and
Shaddix that provide for the acceleration of benefits in the event of the
occurrence, as determined by the Board of Directors, of a change in control of
the Company that has a reasonable likelihood of causing the forfeiture of
benefits that such persons otherwise would have earned by depriving them of
the opportunity to fulfill applicable service and age prerequisites. The
agreements provide that the covered persons will receive, in the event of such
a change in control but without regard to any termination of employment, cash
payments equal to the appreciated value of all unvested, nonqualified stock
options. The agreements also provide, in the event of termination of
employment of a covered employee within six months following such a change in
control, (a) for cash payments generally equal to the unvested amounts under
the Company's Savings and Investment Plan (as well as the agreements providing
for reimbursement of benefits that would be payable under such Plan but for
limitations imposed by ERISA) forfeitable on the date of termination of
employment, (b) for continuation of life insurance and, in certain instances,
medical expense coverage for one year, (c) for cash payments equal to the
discounted value of benefits otherwise payable under the deferred compensation
agreements referred to above under "-- Retirement Plan and Supplemental
Agreements," based on an assumed continuation of employment until age 65 and
actuarially determined life expectancies, (d) in certain instances, for cash
payments in settlement of long-term medical benefits otherwise payable and (e)
for cash payments equal to the discounted value of benefits otherwise payable
under a supplemental disability plan and a salary continuation plan. Deferred
compensation agreements and certain supplemental benefit agreements under
which payments are currently being made have been supplemented by the Company
to provide, upon a change in control of the Company, for the cash-out of
retirement, spouse and medical benefits. In addition, the Company's
conditional stock award programs provide for acceleration of benefits upon a
change in control. The dollar amounts that would be payable under the
agreements and plan described in this and the preceding paragraph and the
other plans providing payments triggered by a change in control, exclusive of
amounts attributable to benefits already vested, would be (as of December 31,
1996) $5,217,400 for Mr. Pate, $2,018,700 for Mr. Alderson, $1,676,300 for Mr.
Beahm, $1,682,600 for Mr. Robb and $2,017,600 for Mr. Shaddix. In addition, a
change in control would result in the accelerated payment of benefits already
earned and vested over a period of years in the amounts of $3,330,400 for Mr.
Pate, $370,100 for Mr. Alderson, $271,100 for Mr. Beahm, $355,500 for Mr. Robb
and $407,600 for Mr. Shaddix.
 
  Other Matters. In 1977, the Board of Directors formally adopted and
confirmed a policy relating to the use of Company facilities. In certain
circumstances, the policy requires use by officers of Company facilities in
order to increase the time available for performance of Company business and
for reasons of security and other corporate purposes. Under applicable federal
income tax regulations, the Company imputes income to employees of the Company
for federal income tax purposes with respect to their use of Company
facilities when and to the extent required by the regulations. When the
policies and procedures adopted by the Board have been duly observed, it is
contemplated that the Company will hold employees harmless from any tax
(including penalty and interest) sought to be imposed on a basis in excess of
the amount of income imputed by the Company as described above. To date, no
amounts have been paid or requested to reimburse employees for such a tax.
 
  COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION -- The members
of the Compensation Committee of the Board are Messrs. Cockrell, Cullen and
Fanjul, all of whom are nonemployee directors.
 
  REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION --
 
  Compensation Philosophy. The Company's executive compensation program has
been designed to help the Company attract, motivate and retain the executive
talent that the Company needs in order to
 
                                      12
<PAGE>
 
maximize its return to shareholders. To this end, the Company's executive
compensation program provides appropriate compensation levels and incentive
pay that varies based on corporate, business unit and individual performance.
 
  Base salary, annual incentives, long-term incentives and executive benefits
are the elements of compensation provided to the Company's executives. The
Compensation Committee's philosophy is to place more emphasis on variable
incentive pay and less emphasis on base salary because the primary
compensation program objective is to reward executives for maximizing long-
term returns to shareholders. The Compensation Committee determines
appropriate levels of compensation for executive positions based on
information drawn from compensation surveys, proxy statements for comparative
organizations and compensation consultants. The proxy statement analyses on
pay levels generally use the same group of companies shown as industry peer
companies in the Company's total shareholder return performance graphs ("peer
group"). However, the Compensation Committee also considers proxy data for
other energy companies in the Houston market. The data drawn from compensation
surveys are for energy and general industry companies with revenues comparable
to the Company's revenues.
 
  Base Salary Program. The Company's base salary program is based on a
philosophy of providing salaries that are equivalent with the market median
for companies of comparable size (as measured by revenues). In aggregate, the
Company's executive salaries are consistent with this philosophy. Base salary
levels are also based on each individual employee's performance over time and
each individual's role in the Company. Consequently, employees with higher
levels of sustained performance over time and/or employees assuming greater
responsibilities are paid correspondingly higher salaries. Executive salaries
are reviewed annually based on a variety of factors, including individual
performance, company performance, general levels of market salary increases
and the Company's overall financial results. Individual performance assessment
is subjective; the Compensation Committee considers earnings levels, progress
in implementing strategic initiatives and effectiveness in business
development efforts in establishing base salary increases for executives. No
specific performance formula or weighting of these or other factors is used in
determining base salary levels. In 1996, the CEO's salary was increased from
$660,000 to $730,000 based on median market salaries for companies of
comparable size (with consideration also given to base salaries for CEOs in
the peer group) and on the performance indicators described above.
 
  Annual Incentive Plan. The Company's annual incentive plan is intended to
(1) reward key employees based on company, business unit and individual
performance, (2) motivate key employees and (3) provide appropriate cash
compensation opportunities to plan participants. Under the plan, target award
opportunities, which are based at the market 55th percentile, vary by
individual position and are expressed as a percent of base salary. The amount
that a particular executive may earn is directly dependent on the individual's
position, responsibility and ability to impact the Company's financial
success.
 
  For 1996, the Company set an annual incentive plan performance goal of a
minimum level of earnings without any debt increase. The payouts under the
annual incentive plan were subject to a 20% reduction if general and
administrative expenses exceeded targets. The performance goal was exceeded by
a significant amount. The plan provided for individual incentive payouts based
on a combination of corporate, business unit and individual/team strategic
performance. For senior level management (including all named officers), 50%
of the award was based on corporate performance, 30% was based on business
unit performance and 20% was based on key individual/team strategic
performance. Corporate performance objectives, which were equally weighted,
were return on average equity (ROAE) compared to the peer group and a ratio of
earnings before interest, taxes, depreciation and amortization (EBITDA) to
revenue relative to targets. The business unit performance objectives varied
by unit but included such items as cash flow, cost management, reserve
replacement, economic value added, market share and environmental and safety
effectiveness. For corporate positions, weighted average business unit results
(with the weighting determined by unit assets) were considered in determining
the 30% of the incentive
 
                                      13
<PAGE>
 
based on business unit performance. The individual/team strategic element of
the plan was administered on a subjective basis with no specific weightings
assigned to individual performance factors.
 
  In 1996, the Company experienced a significant improvement in its financial
and operating performance. As a result, the Company exceeded targeted levels
of performance on the EBITDA to revenue ratio. The Company also performed
above targeted levels on the ROAE measure, after adjustments for unrealized
gains on the Company's Chevron Corporation common stock holdings, for certain
joint venture start-up expenses and for a severance charge. Business unit
performance varied, falling both above and below targets. Consequently, total
incentive awards varied from slightly below to slightly above targeted levels
for business units and corporate staff.
 
  The CEO's annual incentive payout for 1996 performance was $739,500. The
award was based on the same corporate and business unit performance measures
described above for other executives as well as an assessment by the
Compensation Committee of the CEO's individual performance in contributing to
the improvement in financial results and growth in shareholder return. The
total award was between targeted and maximum levels.
 
  Long-Term Incentive Plans. The Company has several types of long-term
incentive awards intended to achieve various objectives. Stock options are the
primary long-term incentive award used by the Company and are granted at 100%
of fair market value at the date of grant. Conditional stock grants are also
used and are made to increase executive share ownership levels and reward
executives for maintaining and enhancing the Company's total shareholder
return. In addition, the Company has a long-term performance plan, which
rewards participants for improving the Company's total shareholder return
relative to the peer group. Awards under this plan are paid (if earned) after
the completion of three-year performance cycles, the first of which will
conclude at the end of 1997. The total award level under the aggregate of
incentive awards is targeted at the market 55th percentile.
 
  In 1996, the CEO received stock options for 100,000 shares of Common Stock
and 9,500 shares of conditional stock. The actual stock option and conditional
stock awards provided to the CEO in 1996 (when considered together with the
targeted value of the long-term performance plan) placed the CEO's total long-
term incentive at approximately the market 75th percentile. This award was
above normal targeted levels because of the efforts taken by the CEO to
improve the company's operating and financial results.
 
  Other Plans and Benefits. The Company's executive officers participate in
several other compensation plans and benefit programs. These programs provide
benefits generally related to salary levels and length of service (as in the
case of retirement plan benefits, savings plan benefits, disability benefits
and death benefit coverages), or are independent of salary levels (such as the
perquisite allowances and medical coverages). There is no specific
performance-based relationship between benefits under these plans and
corporate performance (except that savings plan contributions are invested in
Common Stock).
 
  Section 162(m). The proposed 1997 Incentive Plan of the Company contained
within this proxy statement provides for stock option grants, annual incentive
plan awards and long-term performance plan awards to be qualified as
performance-based compensation under Section 162(m) of the Internal Revenue
Code (the "Code"). The Company has not taken steps to qualify its conditional
stock as performance-based pay at this time. Conditional stock is provided to
executives as both a performance incentive and a retention incentive. It is
also a competitive form of compensation which is common among energy
companies. The Company intends to qualify the 1997 Incentive Plan of the
Company under Section 162(m).
 
  This report is furnished by the Compensation Committee of the Board of
Directors.
 
                                          Ernest H. Cockrell, Chairman
                                          Harry H. Cullen
                                          Alfonso Fanjul
 
February 20, 1997
 
                                      14
<PAGE>
 
  PERFORMANCE GRAPHS --
 
  Five Years Ended December 31, 1996. The following performance graph compares
the cumulative total shareholder return on the Common Stock to the cumulative
total return of the Standard & Poor's 500 Stock Index and the Standard &
Poor's Oil-Integrated Domestic Index for the last five years. The graph
assumes that the value of the investment in the Common Stock and each index
was $100 at December 31, 1991 and that all dividends were reinvested.
 
 
 
                                    [GRAPH]

<TABLE>
<CAPTION>
                                                              S&P Oil
                                 Penzoil                     Integrated
                                 Company        S&P 500       Domestic
                             ---------------   ---------    ----------
<S>                           <C>               <C>          <C>
1991                          100.00            100.00       100.00
1992                           94.395           107.6989     102.2256
1993                          105.9915          118.4191     107.762
1994                           93.241           119.9759     116.4146
1995                           94.2651          165.0073     128.7237
1996                          128.7072          202.8684     162.7914
</TABLE>
 
  Supplemental Information for Year Ended December 31, 1996. The following
supplemental performance graph compares the cumulative total shareholder
return on the Common Stock to the cumulative total return on the Standard &
Poor's 500 Stock Index and the Standard & Poor's Oil-Integrated Domestic Index
for the most recent twelve-month period ended December 31, 1996 (on a month-
by-month basis at the end of each calendar month). The graph assumes that the
value of the investment in the Common Stock and each index was $100 at
December 31, 1995 and that all dividends were reinvested.
 
 
 
                                    [GRAPH]

<TABLE>
<CAPTION>
                                                              S&P Oil
                                 Penzoil                     Integrated
                                 Company        S&P 500       Domestic
                             ---------------   ---------    ----------
<S>                           <C>               <C>          <C>
Dec 1995                      100.00            100.00       100.00
                               96.1538          103.3996     100.6668
Feb 1996                       90.5325          104.3615     100.9804
                               94.6746          105.3663     110.5199
Apr 1996                      105.3924          106.9183     112.9519
                              103.0107          109.671      113.9082
Jun 1996                      110.7514          110.0891     112.798
                              117.6359          105.2281     108.6995
Aug 1996                      127.8131          107.461      112.2516
                              127.2144          113.4933     118.5146
Oct 1996                      122.7033          116.6222     120.8402
                              135.3345          125.4297     128.8267
Dec 1996                      136.5376          122.945      126.4658
</TABLE>
 
                                      15
<PAGE>
 
II APPROVAL OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
  The Board of Directors, upon recommendation of its Audit Committee, has
approved and recommends the appointment of Arthur Andersen LLP as independent
public accountants to conduct an audit of the Company's financial statements
for the year 1997. This firm has acted as independent public accountants for
the Company for many years.
 
  Members of Arthur Andersen LLP will attend the annual meeting and will be
available to respond to questions which may be asked by shareholders. Such
members will also have an opportunity to make a statement at the meeting if
they desire to do so.
 
  The Board of Directors recommends that shareholders approve the appointment
of Arthur Andersen LLP as the Company's independent public accountants. In
accordance with the Company's By-laws, approval of the appointment of
independent public accountants will require the affirmative vote of a majority
of the shares of Common Stock voted at the meeting. Accordingly, abstentions
and broker non-votes applicable to shares present at the meeting will not be
included in the tabulation of votes cast on this matter.
 
III APPROVAL OF 1997 INCENTIVE PLAN
 
  DESCRIPTION OF THE 1997 INCENTIVE PLAN -- The Company in the past has used
stock options and conditional stock to attract and retain key employees in the
belief that employee stock ownership and stock-related compensation devices
encourage a community of interest between employees and shareholders. Because
fewer than 160,000 shares remained available for grant under existing plans as
of December 31, 1996, the Board of Directors began considering the creation of
new incentive plans for the Company. Accordingly, the Board of Directors in
February 1997 adopted, subject to shareholder approval, a 1997 Incentive Plan
(the "1997 Plan"), covering an aggregate of 1,000,000 shares of Common Stock.
The objectives of the Incentive Plan are to (i) attract and retain the
services of key employees and (ii) encourage a sense of proprietorship in and
stimulate the active interest of those persons in the development and
financial success of the Company by making awards ("Awards") designed to
provide participants in the 1997 Plan with a proprietary interest in the
growth and performance of the Company.
 
  Persons eligible for Awards are (i) key employees holding positions of
responsibility with the Company or any of its subsidiaries and whose
performance can have a significant effect on the success of the Company, and
(ii) individuals who are expected to become such key employees within six
months of the date of an Award. As of March 6, 1997, there were at least 154
employees of the Company and its subsidiaries, consisting of executive
officers and certain other key employees of the Company and its subsidiaries,
who would be eligible to participate in the 1997 Plan. It is expected that the
1997 Plan will provide incentives for a period of approximately two years,
after which time it may be appropriate for the Company to implement another
similar plan.
 
  The Compensation Committee of the Company's Board of Directors (the
"Committee") will administer the 1997 Plan. The Committee will have the
exclusive power to administer the 1997 Plan, to take all actions specifically
contemplated thereby or necessary or appropriate in connection with the
administration thereof, to interpret the 1997 Plan, to adopt such rules,
regulations and guidelines for carrying out its purposes as the Committee may
deem necessary or proper in keeping with the objectives of the 1997 Plan and
to correct any defect or reconcile any inconsistency in the 1997 Plan. The
Committee may, in its discretion, among other things, extend or accelerate the
exercisability of an Award, accelerate the vesting of or eliminate or make
less restrictive any restrictions contained in any Award, waive any
restriction or other provision of the 1997 Plan or in any Award or otherwise
amend or modify any Award in any manner that is either (i) not adverse to that
participant holding the Award or (ii) consented to by that participant. The
Committee may also make an Award to an individual who it expects to become an
employee of the Company or any of its subsidiaries within six months of the
Award, subject to such
 
                                      16
<PAGE>
 
individual being so employed by the Company or a subsidiary thereof within
such period. The Committee may delegate to the chief executive officer and
other senior officers of the Company its duties under the 1997 Plan.
 
  The Board of Directors may amend, modify, suspend or terminate the 1997 Plan
for the purpose of addressing any changes in legal requirements or for any
other lawful purpose, except that (i) no amendment or alteration that would
adversely affect the rights of any participant under any Award previously
granted to such participant shall be made without the consent of such
participant and (ii) no amendment or alteration shall be effective prior to
its approval by the stockholders of the Company to the extent such approval is
required by applicable legal requirements. The Board of Directors may make
certain adjustments in the event of any subdivision, split or consolidation of
outstanding shares of Common Stock, any declaration of a stock dividend
payable in shares of Common Stock, any recapitalization or capital
reorganization of the Company, any consolidation or merger of the Company with
another corporation or entity, any adoption by the Company of any plan of
exchange affecting the Common Stock or any distribution to holders of Common
Stock of securities or property (other than normal cash dividends).
 
  Awards may be in the form of, among other things (i) rights to purchase a
specified number of shares of Common Stock at a specified price ("Options"),
(ii) rights to receive a payment, in cash or Common Stock, equal to the fair
market value or other specified value of a number of shares of Common Stock on
the rights exercise date over a specified strike price ("SARs"), (iii) grants
of restricted or unrestricted Common Stock or units denominated in Common
Stock, (iv) grants denominated in cash and (v) grants denominated in cash,
Common Stock, units denominated in Common Stock or any other property which
are made subject to the attainment of one or more performance goals
("Performance Awards").
 
  The Committee will determine the employees to receive Awards and the terms,
conditions and limitations applicable to each such Award, which conditions
may, but need not, include continuous service with the Company, achievement of
specific business objectives, attainment of specified growth rates, increases
in specified indices or other comparable measures of performance. Performance
Awards may include more than one performance goal, and a performance goal may
be based on one or more business criteria applicable to the grantee, the
Company as a whole or one or more of the Company's business units and may
include any of the following: increased revenue; net income; earnings before
interest, taxes, depreciation and amortization (EBITDA); other earnings
measures; economic value added (EVA); cash flow measures; stock price; market
share; return on equity or capital; return on revenue measures; costs; oil and
gas volumes; petroleum reserve measures and safety and environmental
performance measures.
 
  FEDERAL INCOME TAX CONSEQUENCES -- The following is a summary of the general
rules of present federal income tax law relating to the tax treatment of stock
awards, incentive stock options ("ISOs"), non-qualified stock options ("NSOs")
and SARs issued under the 1997 Plan. The discussion is general in nature and
does not take into account a number of considerations which may apply in light
of the particular circumstances of a participant under the 1997 Plan.
 
  Stock Awards and Related Tax Payments. Under the Code, federal income tax
consequences with respect to a stock award depend on the facts and
circumstances of each stock award and, in particular, the nature of the
restrictions imposed with respect to the shares which are the subject of the
stock award. In general, if shares which are the subject of the stock award
are actually issued to a participant, but are subject to a "substantial risk
of forfeiture" (for example, if rights to ownership of the shares are
conditioned upon the future performance of substantial services by the
participant), a taxable event generally occurs only when the risk of
forfeiture lapses. At such time as the substantial risk of forfeiture lapses,
the participant will realize ordinary income to the extent of the excess of
the fair market value of the shares on the date the risk of forfeiture lapses
over the participant's cost for such shares (if any), and the same amount is
then deductible by the Company as compensation expense. If the restrictions
with respect to the shares that are the subject of such stock award, by their
nature, do not subject the key
 
                                      17
<PAGE>
 
employee to a "substantial risk of forfeiture" of the shares, then the
participant will realize ordinary income with respect to the shares to the
extent of the excess at the time of the grant of the fair market value of the
shares over the participant's cost; and the same amount is then deductible by
the Company. If no shares are actually issued to the participant at the time
the stock award is granted, the participant will generally realize ordinary
income at the time the participant receives shares free of any substantial
risk of forfeiture, and the amount of such income will be equal to the fair
market value of the shares at such time over the participant's cost, if any;
and the same amount is then deductible by the Company. The Company's
deductions for compensation paid under the Plan are in all cases subject to
certain applicable tax law limitations.
 
  Options. Some of the options issuable under the 1997 Plan may constitute
ISOs within the meaning of Section 422 of the Code, while other options
granted under the 1997 Plan may be NSOs. The Code provides for tax treatment
of stock options qualifying as ISOs that may be more favorable to participants
than the tax treatment accorded NSOs. Generally, upon the exercise of an ISO,
the optionee will recognize no income for federal income tax purposes. The
difference between the exercise price of the ISO and the fair market value of
the stock at the time of exercise is an item of tax preference that may
require payment of an alternative minimum tax. On the sale of shares acquired
by exercise of an ISO (assuming that the sale does not occur within two years
of the date of grant of the option or within one year from the date of
exercise), any gain will be taxed to the optionee as long-term capital gain.
In contrast, upon the exercise of an NSO, the optionee recognizes taxable
income (subject to withholding) in an amount equal to the difference between
the then-fair market value of the shares on the date of exercise and the
exercise price. Upon any sale of such shares by the optionee, any difference
between the sale price and the fair market value of the shares on the date of
exercise of the NSO will be treated generally as capital gain or loss. No
deduction is available to the Company upon the grant or exercise of an ISO
(although a deduction may be available if the participant sells the shares so
purchased before the applicable holding periods expire), whereas, upon
exercise of an NSO, the Company is entitled to a deduction in an amount equal
to the income recognized by the participant. Except with respect to death or
disability, an optionee has three months after termination of employment in
which to exercise an ISO and retain favorable tax treatment at exercise.
 
  Stock Appreciation Rights. The amount of any cash or the fair market value
of any stock received by a participant upon the exercise of SARs under the
1997 Plan will be subject to ordinary income tax in the year of receipt, and
the Company will be entitled to a deduction for such amount.
 
  Other. In general, a federal income tax deduction is allowed to the Company
in an amount equal to the ordinary income recognized by a participant with
respect to awards under the 1997 Plan, provided that such amount constitutes
an ordinary and necessary business expense of the Company, that such amount is
reasonable and that the Company satisfies any withholding obligation with
respect to such income.
 
  CURRENT MORATORIUM ON EXERCISE OF SARS -- The current moratorium on the
exercise of SARs under the Company's existing stock option plans (referred to
above under "Executive Compensation") shall also apply to SARs granted (either
alone or in tandem with Options) under the 1997 Plan. Should the Compensation
Committee determine to lift this moratorium in the future, current accounting
practices would require the Company to recognize compensation expense with
respect to SARs equal in the aggregate to the excess from time to time of the
market value of Common Stock subject to SARs over the specified strike price
of the SARs, less the federal income tax benefit to the Company.
 
                                      18
<PAGE>
 
  ALLOCATION OF AWARDS UNDER THE 1997 PLAN -- The following table illustrates
the allocation of Awards to be made over the life of the 1997 Plan:
 
<TABLE>
<CAPTION>
      NAME OR POSITION                                AWARDS (1)
      ----------------                                ---------
      <S>                                          <C>
      James L. Pate                                not determinable
      David P. Alderson, II                        not determinable
      Clyde W. Beahm                               not determinable
      Thomas M. Hamilton                                 -0- (2)
      William M. Robb                              not determinable
      James W. Shaddix                             not determinable
      All executive officers                       not determinable
      All non-executive directors                        -0-
      All employees other than executive officers  not determinable
</TABLE>
--------
(1) The allocation of Awards under the 1997 Plan is not currently determinable
    as such allocation is dependent upon future decisions to be made by the
    Compensation Committee in its sole discretion, subject to applicable
    provisions of the 1997 Plan. As of March 1, 1997, grants of Options had
    been made under the 1997 Plan covering the following number of shares of
    Common Stock at an exercise price of $60.8125 per share: all executive
    officers as a group other than the named officers, 70,000 shares.
(2) Dr. Hamilton resigned as Executive Vice President of the Company effective
    December 17, 1996.
 
  SECTION 162(M) OF THE INTERNAL REVENUE CODE -- Section 162(m) of the Code
disallows deductions for compensation in excess of $1 million for certain
executives of publicly held corporations, unless such compensation meets the
requirements of Section 162(m) as "performance-based" compensation. If the
1997 Plan is approved by shareholders, the Company will be entitled to deduct
for federal income tax purposes certain performance-based compensation paid
under the 1997 Plan to the CEO and other participating officers
notwithstanding the $1 million limitation under Section 162(m) of the Code.
The Company expects that all Options, SARs and Performance Awards under the
1997 Plan will qualify as performance-based compensation under Section 162(m).
 
  BOARD RECOMMENDATION AND REQUIRED VOTE -- In order to continue the
objectives embodied in the Company's existing benefit plans of providing
important incentives to retain in the employ of the Company persons of
training, experience and ability, of attracting new employees whose services
are considered valuable and of encouraging a sense of proprietorship and
stimulating the active interest of such persons in the development and
financial success of the Company, the Board of Directors recommends approval
of the 1997 Plan so as to make an additional 1,000,000 shares of Common Stock
available for use for Awards in connection with the 1997 Plan. In accordance
with Section 162(m) of the Code, approval of the 1997 Plan will require the
affirmative vote of a majority of the shares of Common Stock cast with respect
to the consideration of the 1997 Plan. Accordingly, abstentions and broker
nonvotes applicable to shares present at the meeting will not be included in
the tabulation of votes cast on this matter.
 
  The foregoing description summarizes the principal terms and conditions of
the 1997 Plan, does not purport to be complete and is qualified in its
entirety by reference to the 1997 Plan, a copy of which is included as Exhibit
A hereto.
 
                                      19
<PAGE>
 
IV OTHER BUSINESS
 
  Management does not intend to bring any business before the meeting other
than the matters referred to in the accompanying notice. If, however, any
other matters properly come before the meeting, it is intended that the
persons named in the accompanying proxy will vote pursuant to discretionary
authority granted in the proxy in accordance with their best judgment on such
matters. The discretionary authority includes matters that the Board of
Directors does not know are to be presented at the meeting by others.
 
ADDITIONAL INFORMATION
 
  SECURITY OWNERSHIP OF CERTAIN SHAREHOLDERS -- The following table sets forth
information as to persons known to possess voting or dispositive power over
more than 5% of the Company's outstanding Common Stock.
 
<TABLE>
<CAPTION>
  TITLE OF         NAME AND ADDRESS OF      NUMBER OF PERCENTAGE
    CLASS           BENEFICIAL OWNER         SHARES    OF CLASS
  --------         -------------------      --------- ----------
<S>           <C>                           <C>       <C>
 Common Stock State Farm Mutual             3,746,692    8.0%
               Automobile Insurance Company
                One State Farm Plaza
                Bloomington, Illinois 61710
</TABLE>
 
  The information in the foregoing table regarding State Farm Mutual
Automobile Insurance Company ("State Farm") is based on filings made with the
SEC reflecting ownership of Common Stock as of December 31, 1996. The filings
state that the shares of Common Stock were acquired in the ordinary course of
business and not for the purpose of influencing control of the Company. The
filings indicate sole voting and dispositive power for 3,746,692 shares of
Common Stock by State Farm and related entities.
 
  SHAREHOLDER PROPOSAL FOR 1998 MEETING -- In order to be included in the
Company's proxy material for its 1998 annual meeting of shareholders, eligible
proposals of shareholders intended to be presented at the annual meeting must
be received by the Company on or before November 21, 1997 (directed to the
Corporate Secretary of the Company at the address indicated on the first page
of this Proxy Statement).
 
  ADVANCE NOTICE REQUIRED FOR SHAREHOLDER NOMINATIONS AND PROPOSALS -- The By-
laws of the Company require timely advance written notice of shareholder
nominations of director candidates and of any other proposals to be presented
at an annual meeting of shareholders. In the case of director nominations by
shareholders, the By-laws require that 60 days' advance written notice be
delivered to the Company's Corporate Secretary (at the address indicated on
the first page of this Proxy Statement) and set forth for each person whom the
shareholder proposes to nominate for election or re-election as a director,
(a) the name, age, business address and residence address of such person, (b)
the principal occupation or employment of such person, (c) the number of
shares of each class of capital stock of the Company beneficially owned by
such person and (d) the written consent of such person to having such person's
name placed in nomination at the meeting and to serve as of a director if
elected. The shareholder giving the notice must also include the name and
address, as they appear on the Company's books, of such shareholder and the
number of shares of each class of voting stock of the Company that are then
beneficially owned by such shareholder.
 
                                      20
<PAGE>
 
  In the case of other proposals by shareholders at an annual meeting, the By-
laws require that 60 days' advance written notice be delivered to the
Company's Corporate Secretary (at the address indicated on the first page of
this Proxy Statement) and set forth (a) a description of each proposal desired
to be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (b) the name and address, as they appear on
the Company's books, of the shareholder proposing such business and any other
shareholders known by such shareholder to be supporting such proposal, (c) the
class and number of shares of the Company's stock that are beneficially owned
by the shareholder on the date of such notice and (d) any financial interest
of the shareholder in such proposal. A copy of the By-laws of the Company
setting forth the requirements for the nomination of director candidates by
shareholders and the requirements for proposals by shareholders may be
obtained from the Company's Corporate Secretary at the address indicated on
the first page of this Proxy Statement.
 
                                   By Order of the Board of Directors
 
                                      /s/ James L. Pate
                                   ----------------------------------
                                          James L. Pate
                                          Chairman
 
March 21, 1997
 
                                      21
<PAGE>
 
                                                                      EXHIBIT A
 
                              1997 INCENTIVE PLAN
                                      OF
                               PENNZOIL COMPANY
 
  1. Plan. This 1997 Incentive Plan of Pennzoil Company was adopted by the
Company to reward certain corporate officers and key employees of the Company.
 
  2. Objectives. This Plan is designed to attract and retain key employees of
the Company and its Subsidiaries, to encourage a sense of proprietorship and
to stimulate the active interest of such persons in the development and
financial success of the Company and its Subsidiaries. These objectives are to
be accomplished by making Awards under this Plan and thereby providing
Participants with a proprietary interest in the growth and performance of the
Company and its Subsidiaries.
 
  3. Definitions. As used herein, the terms set forth below shall have the
following respective meanings:
 
  "Authorized Officer" means the Chairman of the Board or the Chief Executive
Officer of the Company (or any other senior officer of the Company to whom
either the Chairman or the Chief Executive Officer shall delegate the
authority to execute any Award Agreement).
 
  "Award" means the grant of any Option, SAR, Stock Award, Cash Award or
Performance Award, whether granted singly, in combination or in tandem, to a
Participant pursuant to such applicable terms, conditions and limitations as
the Committee may establish in order to fulfill the objectives of the Plan.
 
  "Award Agreement" means a written agreement between the Company and a
Participant setting forth the terms, conditions and limitations applicable to
an Award.
 
  "Board" means the Board of Directors of the Company.
 
  "Cash Award" means an award denominated in cash.
 
  "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
 
  "Committee" means the Compensation Committee of the Board or such other
committee of the Board as is designated by the Board to administer the Plan.
 
  "Common Stock" means the Common Stock, par value $0.83 1/3 per share, of the
Company.
 
  "Company" means Pennzoil Company, a Delaware corporation.
 
  "Director" means an individual serving as a member of the Board.
 
  "Dividend Equivalents" means, with respect to shares of Restricted Stock
that are to be issued at the end of the Restriction Period (including
conditional stock), an amount equal to all dividends and other distributions
(or the economic equivalent thereof) that are payable to stockholders of
record during the Restriction Period on a like number of shares of Common
Stock.
 
  "Employee" means an employee of the Company or any of its Subsidiaries.
 
  "Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time.
 
  "Fair Market Value" of a share of Common Stock means, as of a particular
date, (i) if shares of Common Stock are listed on a national securities
exchange, the mean between the highest and lowest sales price per share of
Common Stock reported on the consolidated transaction reporting system for the
 
                                      A-1
<PAGE>
 
principal national securities exchange on which shares of Common Stock are
listed on that date, or, if there shall have been no such sale so reported on
that date, on the last preceding date on which such a sale was so reported,
(ii) if shares of Common Stock are not so listed but are quoted on the Nasdaq
National Market, the mean between the highest and lowest sales price per share
of Common Stock reported by the Nasdaq National Market on that date, or, if
there shall have been no such sale so reported on that date, on the last
preceding date on which such a sale was so reported, (iii) if the Common Stock
is not so listed or quoted, the mean between the closing bid and asked price
on that date, or, if there are no quotations available for such date, on the
last preceding date on which such quotations are available, as reported by the
Nasdaq Stock Market, or, if not reported by the Nasdaq Stock Market, by the
National Quotation Bureau Incorporated or (iv) if shares of Common Stock are
not publicly traded, the most recent value determined by an independent
appraiser appointed by the Company for such purpose.
 
  "Incentive Option" means an Option that is intended to comply with the
requirements set forth in Section 422 of the Code.
 
  "Nonqualified Stock Option" means an Option that is not an Incentive Option.
 
  "Option" means a right to purchase a specified number of shares of Common
Stock at a specified price.
 
  "Participant" means an individual to whom an Award has been made under this
Plan.
 
  "Performance Award" means an Award made to a Participant pursuant to this
Plan that is subject to the attainment of one or more Performance Goals.
 
  "Performance Goal" means a standard established by the Committee to
determine in whole or in part whether a Performance Award shall be earned.
 
  "Plan" means this 1997 Incentive Plan of Pennzoil Company, as amended from
time to time.
 
  "Restricted Stock" means any Common Stock that is restricted or subject to
forfeiture provisions.
 
  "Restriction Period" means a period of time beginning as of the date upon
which an Award of Restricted Stock is made pursuant to this Plan and ending as
of the date upon which the Common Stock subject to such Award is no longer
restricted or subject to forfeiture provisions.
 
  "SAR" means a right to receive a payment, in cash or Common Stock, equal to
the excess of the Fair Market Value (or other specified valuation) of a
specified number of shares of Common Stock on the date the right is exercised
over a specified strike price, in each case, as determined by the Committee.
 
  "Stock Award" means an award in the form of shares of Common Stock or units
denominated in shares of Common Stock.
 
  "Stock Based Awards Limitations" shall have the meaning set forth in Section
8(b)(ii).
 
  "Subsidiary" means (i) in the case of a corporation, any corporation of
which the Company directly or indirectly owns shares representing more than
50% of the combined voting power of the shares of all classes or series of
capital stock of such corporation which have the right to vote generally on
matters submitted to a vote of the stockholders of such corporation and (ii)
in the case of a partnership or other business entity not organized as a
corporation, any such business entity of which the Company directly or
indirectly owns more than 50% of the voting, capital or profits interests
(whether in the form of partnership interests, membership interests or
otherwise).
 
  4. Eligibility. Individuals eligible for Awards under this Plan are (i)
those key Employees who hold positions of responsibility and whose
performance, in the judgment of the Committee, can have a
 
                                      A-2
<PAGE>
 
significant effect on the success of the Company and its Subsidiaries, and
(ii) individuals who are expected to become such Employees within six months
of the date of the Award.
 
  5. Common Stock Available for Awards. Subject to the provisions of paragraph
14 hereof, there shall be available for Awards under this Plan granted wholly
or partly in Common Stock (including rights or options that may be exercised
for or settled in Common Stock) an aggregate of 1,000,000 shares of Common
Stock. All 1,000,000 shares of Common Stock shall be available for Incentive
Options. The number of shares of Common Stock that are the subject of Awards
under this Plan, if forfeited or terminated, unexercised upon expiration or
settled in cash in lieu of Common Stock or in a manner such that all or some
of the shares covered by an Award are not issued to a Participant, or if
exchanged for Awards that do not involve Common Stock, shall again immediately
become available for Awards hereunder. The Committee may from time to time
adopt and observe such procedures concerning the counting of shares against
the Plan maximum as it may deem appropriate. The Board and the appropriate
officers of the Company shall from time to time take whatever actions are
necessary to file any required documents with governmental authorities, stock
exchanges and transaction reporting systems to ensure that shares of Common
Stock are available for issuance pursuant to Awards.
 
  6. Administration.
 
    (a) This plan shall be administered by the Committee. The Committee shall
  consist of at least two members of the Board.
 
    (b) Subject to the provisions hereof, the Committee shall have full and
  exclusive power and authority to administer this Plan and to take all
  actions that are specifically contemplated hereby or are necessary or
  appropriate in connection with the administration hereof. The Committee
  shall also have full and exclusive power to interpret this Plan and to
  adopt such rules, regulations and guidelines for carrying out this Plan as
  it may deem necessary or proper, all of which powers shall be exercised in
  the best interests of the Company and in keeping with the objectives of
  this Plan. The Committee may, in its discretion, provide for the extension
  of the exercisability of an Award, accelerate the vesting or exercisability
  of an Award, eliminate or make less restrictive any restrictions contained
  in an Award, waive any restriction or other provision of this Plan or an
  Award or otherwise amend or modify an Award in any manner that is either
  (i) not adverse to the Participant to whom such Award was granted or (ii)
  consented to by such Participant. The Committee may make an award to an
  individual who it expects to become an Employee within the next six months,
  provided that such award shall be subject to the individual actually
  becoming an Employee within such time period. The Committee may correct any
  defect or supply any omission or reconcile any inconsistency in this Plan
  or in any Award in the manner and to the extent the Committee deems
  necessary or desirable to further the Plan purposes. Any decision of the
  Committee in the interpretation and administration of this Plan shall lie
  within its sole and absolute discretion and shall be final, conclusive and
  binding on all parties concerned.
 
    (c) No member of the Committee or officer of the Company to whom the
  Committee has delegated authority in accordance with the provisions of
  paragraph 7 of this Plan shall be liable for anything done or omitted to be
  done by him or her, by any member of the Committee or by any officer of the
  Company in connection with the performance of any duties under this Plan,
  except for his or her own willful misconduct or as expressly provided by
  statute.
 
  7. Delegation of Authority. The Committee may delegate to the Chief
Executive Officer and to other senior officers of the Company its duties under
this Plan pursuant to such conditions or limitations as the Committee may
establish.
 
  8. Awards.
 
    (a) The Committee shall determine the type or types of Awards to be made
  under this Plan and shall designate from time to time the individuals who
  are to be the recipients of Awards. Each Award
 
                                      A-3
<PAGE>
 
  may be embodied in an Award Agreement, which shall contain such terms,
  conditions and limitations as shall be determined by the Committee in its
  sole discretion and shall be signed by the Participant to whom the Award is
  made and by an Authorized Officer for and on behalf of the Company. Awards
  may consist of those listed in this paragraph 8(a) and may be granted
  singly, in combination or in tandem. Awards may also be made in combination
  or in tandem with, in replacement of, or as alternatives to, grants or
  rights under this Plan or any other employee plan of the Company or any of
  its Subsidiaries, including the plan of any acquired entity. An Award may
  provide for the grant or issuance of additional, replacement or alternative
  Awards upon the occurrence of specified events, including the exercise of
  the original Award granted to a Participant. All or part of an Award may be
  subject to conditions established by the Committee, which may include, but
  are not limited to, continuous service with the Company and its
  Subsidiaries, achievement of specific business objectives, increases in
  specified indices, attainment of specified growth rates and other
  comparable measurements of performance. Upon the termination of employment
  by a Participant who is an Employee, any unexercised, deferred, unvested or
  unpaid Awards shall be treated as set forth in the applicable Award
  Agreement.
 
      (i) Stock Option. An Award may be in the form of an Option. An Option
    awarded pursuant to this Plan may consist of an Incentive Option or a
    Nonqualified Option. The price at which shares of Common Stock may be
    purchased upon the exercise of an Option shall be not less than the
    Fair Market Value of the Common Stock on the date of grant. Subject to
    the foregoing provisions, the terms, conditions and limitations
    applicable to any Option awarded pursuant to this Plan, including the
    term of any Option and the date or dates upon which it becomes
    exercisable, shall be determined by the Committee.
 
      (ii) Stock Appreciation Right. An Award may be in the form of an SAR.
    The terms, conditions and limitations applicable to any SAR awarded
    pursuant to this Plan, including the term of any SAR and the date or
    dates upon which it becomes exercisable, shall be determined by the
    Committee.
 
      (iii) Stock Award. An Award may be in the form of a Stock Award,
    including the award of Restricted Stock or conditional stock units. The
    terms, conditions and limitations applicable to any Stock Award granted
    pursuant to this Plan shall be determined by the Committee.
 
      (iv) Cash Award. An Award may be in the form of a Cash Award. The
    terms, conditions and limitations applicable to any Cash Award granted
    pursuant to this Plan shall be determined by the Committee.
 
      (v) Performance Award. Without limiting the type or number of Awards
    that may be made under the other provisions of this Plan, an Award may
    be in the form of a Performance Award. A Performance Award shall be
    paid, vested or otherwise deliverable solely on account of the
    attainment of one or more pre-established, objective Performance Goals
    established by the Committee prior to the earlier to occur of (x) 90
    days after the commencement of such period of service to which the
    Performance Goal relates and (y) the lapse of 25% of such period of
    service (as scheduled in good faith at the time the goal is
    established), and in any event while the outcome is substantially
    uncertain. A Performance Goal is objective if a third party having
    knowledge of the relevant facts could determine whether the goal is
    met. Such a Performance Goal may be based on one or more business
    criteria that apply to the individual, one or more business units of
    the Company, or the Company as a whole, and may include one or more of
    the following: increased revenue; net income; earnings before interest,
    taxes, depreciation and amortization (EBITDA); other earnings measures;
    economic value added (EVA); cash flow measures; stock price; market
    share; return on equity or capital; return on revenue measures; costs;
    oil and gas volumes; petroleum reserve measures and safety and
    environmental performance measures. Unless otherwise stated, such a
    Performance Goal need not be based upon an increase or positive result
    under a particular business criterion and could
 
                                      A-4
<PAGE>
 
    include, for example, maintaining the status quo or limiting economic
    losses (measured, in each case, by reference to specific business
    criteria). In interpreting Plan provisions applicable to Performance
    Goals and Performance Awards, it is the intent of the Plan to conform
    with the standards of Section 162(m) of the Code and Treasury
    Regulation (S) 1.162-27(e)(2)(i), and the Committee in establishing
    such goals and interpreting the Plan shall be guided by such
    provisions. Prior to the payment of any compensation based on the
    achievement of Performance Goals, the Committee must certify in writing
    that applicable Performance Goals and any of the material terms thereof
    were, in fact, satisfied. Subject to the foregoing provisions, the
    terms, conditions and limitations applicable to any Performance Awards
    made pursuant to this Plan shall be determined by the Committee.
 
    (b) Notwithstanding anything to the contrary contained in this Plan, the
  following limitations shall apply to any Award made hereunder:
 
      (i) no Participant may be granted, during any one calendar year
    period, Awards consisting of Options or SARs that are exercisable for
    more than 250,000 shares of Common Stock;
 
      (ii) no Participant may be granted, during any one calendar year
    period, Stock Awards covering or relating to more than 10,000 shares of
    Common Stock (the limitation set forth in this clause (ii), together
    with the limitation set forth in clause (i) above, being hereinafter
    collectively referred to as the "Stock Based Awards Limitations"); and
 
      (iii) no Participant may be granted Awards consisting of cash or in
    any other form permitted under this Plan (other than Awards consisting
    of Options or SARs or otherwise consisting of shares of Common Stock or
    units denominated in such shares) in respect of any one calendar year
    period having a value determined on the date of grant in excess of
    $2,000,000.
 
  9. Payment of Awards.
 
    (a) General. Payment of Awards may be made in the form of cash or Common
  Stock, or a combination thereof, and may include such restrictions as the
  Committee shall determine, including, in the case of Common Stock,
  restrictions on transfer and forfeiture provisions. If payment of an Award
  is made in the form of Restricted Stock, the applicable Award Agreement
  relating to such shares shall specify whether they are to be issued at the
  beginning or end of the Restriction Period. In the event that shares of
  Restricted Stock are to be issued at the beginning of the Restriction
  Period, the certificates evidencing such shares (to the extent that such
  shares are so evidenced) shall contain appropriate legends and restrictions
  that describe the terms and conditions of the restrictions applicable
  thereto. In the event that shares of Restricted Stock are to be issued at
  the end of the Restricted Period, the right to receive such shares shall be
  evidenced by book entry registration or in such other manner as the
  Committee may determine.
 
    (b) Deferral. With the approval of the Committee, amounts payable in
  respect of Awards may be deferred and paid either in the form of
  installments or as a lump-sum payment. The Committee may permit selected
  Participants to elect to defer payments of some or all types of Awards in
  accordance with procedures established by the Committee. Any deferred
  payment of an Award, whether elected by the Participant or specified by the
  Award Agreement or by the Committee, may be forfeited if and to the extent
  that the Award Agreement so provides.
 
    (c) Dividends and Interest. Rights to dividends or Dividend Equivalents
  may be extended to and made part of any Award consisting of shares of
  Common Stock or units denominated in shares of Common Stock, subject to
  such terms, conditions and restrictions as the Committee may establish. The
  Committee may also establish rules and procedures for the crediting of
  interest on deferred cash payments and on Dividend Equivalents for Awards
  consisting of shares of Common Stock or units denominated in shares of
  Common Stock.
 
    (d) Substitution of Awards. At the discretion of the Committee, a
  Participant may be offered an election to substitute an Award for another
  Award or Awards of the same or different type.
 
                                      A-5
<PAGE>
 
  10. Stock Option Exercise. The price at which shares of Common Stock may be
purchased under an Option shall be paid in full at the time of exercise in
cash or, if elected by the optionee, the optionee may purchase such shares by
means of tendering Common Stock or surrendering another Award, including
Restricted Stock, valued at Fair Market Value on the date of exercise, or any
combination thereof. The Committee shall determine acceptable methods for
Participants to tender Common Stock or other Awards. The Committee may provide
for procedures to permit the exercise or purchase of such Awards by use of the
proceeds to be received from the sale of Common Stock issuable pursuant to an
Award. Unless otherwise provided in the applicable Award Agreement, in the
event shares of Restricted Stock are tendered as consideration for the
exercise of an Option, a number of the shares issued upon the exercise of the
Option, equal to the number of shares of Restricted Stock used as
consideration therefor, shall be subject to the same restrictions as the
Restricted Stock so submitted as well as any additional restrictions that may
be imposed by the Committee.
 
  11. Taxes. The Company shall have the right to deduct applicable taxes from
any Award payment and withhold, at the time of delivery or vesting of cash or
shares of Common Stock under this Plan, an appropriate amount of cash or
number of shares of Common Stock or a combination thereof for payment of taxes
required by law or to take such other action as may be necessary in the
opinion of the Company to satisfy all obligations for withholding of such
taxes. The Committee may also permit withholding to be satisfied by the
transfer to the Company of shares of Common Stock theretofore owned by the
holder of the Award with respect to which withholding is required. If shares
of Common Stock are used to satisfy tax withholding, such shares shall be
valued based on the Fair Market Value when the tax withholding is required to
be made. The Committee may provide for loans, on either a short term or demand
basis, from the Company to a Participant to permit the payment of taxes
required by law.
 
  12. Amendment, Modification, Suspension or Termination. The Board may amend,
modify, suspend or terminate this Plan for the purpose of meeting or
addressing any changes in legal requirements or for any other purpose
permitted by law, except that (i) no amendment or alteration that would
adversely affect the rights of any Participant under any Award previously
granted to such Participant shall be made without the consent of such
Participant and (ii) no amendment or alteration shall be effective prior to
its approval by the stockholders of the Company to the extent such approval is
required by applicable legal requirements.
 
  13. Assignability. Unless otherwise determined by the Committee and provided
in the Award Agreement, no Award or any other benefit under this Plan
constituting a derivative security within the meaning of Rule 16a-1(c) under
the Exchange Act shall be assignable or otherwise transferable, except by will
or the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee Retirement
Income Security Act, or the rules thereunder. The Committee may prescribe and
include in applicable Award Agreements other restrictions on transfer. Any
attempted assignment of an Award or any other benefit under this Plan in
violation of this paragraph 13 shall be null and void.
 
  14. Adjustments.
 
    (a) The existence of outstanding Awards shall not affect in any manner
  the right or power of the Company or its stockholders to make or authorize
  any or all adjustments, recapitalizations, reorganizations or other changes
  in the capital stock of the Company or its business or any merger or
  consolidation of the Company, or any issue of bonds, debentures, preferred
  or prior preference stock (whether or not such issue is prior to, on a
  parity with or junior to the Common Stock) or the dissolution or
  liquidation of the Company, or any sale or transfer of all or any part of
  its assets or business, or any other corporate act or proceeding of any
  kind, whether or not of a character similar to that of the acts or
  proceedings enumerated above.
 
    (b) In the event of any subdivision or consolidation of outstanding
  shares of Common Stock, declaration of a dividend payable in shares of
  Common Stock or other stock split, then (i) the number
 
                                      A-6
<PAGE>
 
  of shares of Common Stock reserved under this Plan, (ii) the number of
  shares of Common Stock covered by outstanding Awards in the form of Common
  Stock or units denominated in Common Stock, (iii) the exercise or other
  price in respect of such Awards, (iv) the appropriate Fair Market Value and
  other price determinations for such Awards and (v) the Stock Based Awards
  Limitations, shall each be proportionately adjusted by the Board to reflect
  such transaction. In the event of any other recapitalization or capital
  reorganization of the Company, any consolidation or merger of the Company
  with another corporation or entity, the adoption by the Company of any plan
  of exchange affecting the Common Stock or any distribution to holders of
  Common Stock of securities or property (other than normal cash dividends or
  dividends payable in Common Stocks), then (i) the number of shares of
  Common Stock covered by outstanding Awards in the form of Common Stock or
  units denominated in Common Stock, (ii) the exercise or other price in
  respect of such Awards, (iii) the appropriate Fair Market Value and other
  price determinations for such Awards and (iv) the Stock Based Awards
  Limitations, shall each be proportionately adjusted by the Board to reflect
  such transaction; provided that such adjustments shall only be such as are
  necessary to maintain the proportionate interest of the holders of the
  Awards and preserve, without exceeding, the value of such Awards. In the
  event of a corporate merger, consolidation, acquisition of property or
  stock, separation, reorganization or liquidation, the Board shall be
  authorized to issue substitute Awards, as appropriate, for previously
  issued Awards or to assume previously issued Awards as part of such
  adjustment.
 
  15. Restrictions. No Common Stock or other form of payment shall be issued
with respect to any Award unless the Company shall be satisfied based on the
advice of its counsel that such issuance will be in compliance with applicable
federal and state securities laws. Certificates evidencing shares of Common
Stock delivered under this Plan (to the extent that such shares are so
evidenced) may be subject to such stop transfer orders and other restrictions
as the Committee may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, any securities
exchange or transaction reporting system upon which the Common Stock is then
listed or to which it is admitted for quotation and any applicable federal or
state securities law. The Committee may cause a legend or legends to be placed
upon such certificates (if any) to make appropriate reference to such
restrictions.
 
  16. Unfunded Plan. Insofar as it provides for Awards of cash, Common Stock
or rights thereto, this Plan shall be unfunded. Although bookkeeping accounts
may be established with respect to Participants who are entitled to cash,
Common Stock or rights thereto under this Plan, any such accounts shall be
used merely as a bookkeeping convenience. The Company shall not be required to
segregate any assets that may at any time be represented by cash, Common Stock
or rights thereto, nor shall this Plan be construed as providing for such
segregation, nor shall the Company, the Board or the Committee be deemed to be
a trustee of any cash, Common Stock or rights thereto to be granted under this
Plan. Any liability or obligation of the Company to any Participant with
respect to an Award of cash, Common Stock or rights thereto under this Plan
shall be based solely upon any contractual obligations that may be created by
this Plan and any Award Agreement, and no such liability or obligation of the
Company shall be deemed to be secured by any pledge or other encumbrance on
any property of the Company. Neither the Company nor the Board nor the
Committee shall be required to give any security or bond for the performance
of any obligation that may be created by this Plan.
 
  17. Governing Law. This Plan and all determinations made and actions taken
pursuant hereto, to the extent not otherwise governed by mandatory provisions
of the Code or the securities laws of the United States, shall be governed by
and construed in accordance with the laws of the State of Delaware.
 
  18. Effectiveness. This Plan shall be effective on February 10, 1997, but
this Plan and all Awards made hereunder prior to the 1997 annual meeting of
the Company's stockholders are conditioned upon the approval of this Plan by
the stockholders of the Company at such meeting. If the stockholders of the
Company should fail to so approve this Plan, this Plan shall terminate and
cease to be of any further force or effect, and all grants of Awards hereunder
shall be null and void.
 
                                      A-7
<PAGE>
 
 
 
 
 
LOGO
<PAGE>
 
FORM 34-102 (3)
Unless a contrary direction
is given, this proxy will be
voted FOR all the directors
listed below and FOR all other
items.
SIGN BELOW

                 P R O X Y



__________________________________________________    ____________________,1997
Signature (If signing as Attorney, Administrator,            Date
Executor, Guardian, Trustee or Corporate Officer,
please add your title as such.)


                               PENNZOIL COMPANY
Proxy Solicited on Behalf of Board of Directors, Annual Meeting of Shareholders 
                     to be held Thursday, April 24, 1997.

The undersigned hereby appoints David P. Alderson, II, Linda F. Condit and Bruce
K. Misamore, jointly and severally, proxies with full power of substitution and 
resubstitution and with discretionary authority, to represent and to vote, in 
accordance with the instructions set forth below, all shares of Common Stock 
which the undersigned is entitled to vote at the 1997 annual meeting of 
shareholders of Pennzoil Company, and any adjournments thereof. In their 
discretion, the proxies may vote cumulatively for the election of directors 
(other than any for whom authority to vote is withheld below) and upon such 
other business as may properly come before the meeting.


1. ELECTION OF DIRECTORS:
   Nominees are Howard H. Baker, Jr., Harry H. Cullen, James L. Pate and
    Gerald B. Smith.
   (INSTRUCTION: To withhold authority to vote for any individual nominee, 
    strike a line through the nominee's name above.) 

     [ ] FOR all nominees listed above, except as marked to the contrary above

     [ ] WITHHOLD AUTHORITY to vote for all nominees listed above


2. TO APPROVE THE APPOINTMENT OF ARTHUR ANDERSEN LLP as the independent public 
   accountants of the Company.

     [ ] FOR         [ ] AGAINST         [ ] ABSTAIN


3. TO APPROVE A PROPOSED 1997 INCENTIVE PLAN.

     [ ] FOR         [ ] AGAINST         [ ] ABSTAIN