================================================================================

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NO. 1-5591

PENNZOIL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 74-1597290
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

PENNZOIL PLACE, P.O. BOX 2967
HOUSTON, TEXAS 77252-2967
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including area code: (713) 546-4000

Securities registered pursuant to Section 12(b) of the Act:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ---------------------------------------------- --------------------------

Common Stock, par value $0.83 1/3 per share New York Stock Exchange
Pacific Stock Exchange

Rights to Purchase Preferred Stock New York Stock Exchange
Pacific Stock Exchange

Debentures New York Stock Exchange

6 1/2% Exchangeable Senior Debentures due January 15, 2003
4 3/4% Exchangeable Senior Debentures due October 1, 2003

Securities registered pursuant to Section 12(g) of the Act: None

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----

Aggregate market value of the voting stock held by non-affiliates of the
registrant: $1.9 billion as of January 31, 1996.

Number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date, January 31, 1996: Common Stock, par
value $0.83 1/3 per share -- 46,381,131.

DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE PROXY STATEMENT TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A
UNDER THE SECURITIES EXCHANGE ACT OF 1934 IN CONNECTION WITH THE COMPANY'S 1996
ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III
HEREOF (TO THE EXTENT SET FORTH IN ITEMS 10, 11, 12 AND 13 OF PART III OF THIS
ANNUAL REPORT ON FORM 10-K).

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PART I

ITEM 1. BUSINESS AND ITEM 2. PROPERTIES.

Pennzoil Company ("Pennzoil") is an energy company engaged primarily in oil
and gas exploration and production, in processing, refining and marketing of oil
and motor oil and refined products and in fast automotive oil change operations.
Pennzoil's operations are conducted primarily through subsidiaries. Pennzoil
Exploration and Production Company ("PEPCO") conducts the majority of Pennzoil's
oil and gas exploration and production operations. The refining of oil and the
processing and marketing of motor oil, refined products and industrial
specialties are conducted by Pennzoil Products Company ("PPC"). Jiffy Lube
International, Inc. ("Jiffy Lube") franchises, owns and operates automotive fast
lubrication and fluid maintenance service centers. Richland Development
Corporation ("Richland") manages Pennzoil's real estate holdings and provides
staff support for Pennzoil and its subsidiaries.

As of December 31, 1995, Pennzoil beneficially owned 18,071,036 shares of
common stock of Chevron Corporation ("Chevron"). At the current dividend rate,
Pennzoil receives $36.1 million annually in dividends on the 18,071,036 Chevron
shares. Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources and Liquidity" and Note
1 of Notes to Consolidated Financial Statements for additional information.

INDUSTRY SEGMENT FINANCIAL INFORMATION

The tabular presentation below sets forth certain financial information
regarding Pennzoil's industry segments (i.e., oil and gas, motor oil and refined
products, franchise operations and sulphur). Pennzoil's foreign operations
historically have not been material in relation to consolidated revenues,
operating income and identifiable assets.

1995 1994 1993
--------- --------- ---------
(EXPRESSED IN THOUSANDS)

REVENUES
Oil and Gas............................................. $ 732,356 $ 833,938 $ 878,630
Motor Oil & Refined Products............................ 1,539,351 1,509,694 1,507,563
Franchise Operations.................................... 289,222 258,102 219,865
Sulphur(1).............................................. -- 71,902 74,021
Other(2)................................................ 87,133 59,673 258,129
Intersegment sales(3)................................... (158,076) (170,366) (155,841)
--------- --------- ---------
$2,489,986 $2,562,943 $2,782,367
========= ========= =========
OPERATING INCOME (LOSS)
Oil and Gas(4).......................................... $ 91,967 $ (4,901) $ 159,180
Motor Oil & Refined Products(5)......................... 12,044 41,767 90,029
Franchise Operations.................................... 13,188 2,814 (17,573)
Sulphur(1).............................................. -- (57,407) (20,763)
Impairment of long-lived assets(6)...................... (399,830) -- --
Other(2)................................................ 74,024 55,598 253,668
--------- --------- ---------
Total operating income (loss)................. (208,607) 37,871 464,541
Corporate administrative expense........................ 74,720 66,324 65,552
Interest expense, net(4)................................ 194,348 476,641 179,548
Income tax provision (benefit).......................... (172,533) (221,355) 59,205
--------- --------- ---------
Income (loss) before extraordinary items and cumulative
effect of change in accounting principle.............. $(305,142) $(283,739) $ 160,236
========= ========= =========

(Table continued on following page)

1
3

1995 1994 1993
--------- --------- ---------
(EXPRESSED IN THOUSANDS)

IDENTIFIABLE ASSETS
Oil and Gas(4).......................................... $1,991,895 $2,529,188 $2,059,115
Motor Oil & Refined Products............................ 871,506 704,271 656,313
Franchise Operations.................................... 339,968 304,380 305,669
Sulphur(1).............................................. -- 53,309 100,888
Other................................................... 160,979 159,306 177,353
Corporate(4)............................................ 943,483 966,009 1,590,766
Intersegment eliminations............................... (55) (653) (3,901)
--------- --------- ---------
$4,307,776 $4,715,810 $4,886,203
========= ========= =========
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
Oil and Gas(4).......................................... $ 270,792 $ 411,597 $ 275,489
Motor Oil & Refined Products(5)......................... 30,458 51,877 27,014
Franchise Operations.................................... 18,086 15,830 14,123
Sulphur(1).............................................. -- 54,375 8,386
Other................................................... 695 663 805
Corporate............................................... 5,088 4,844 5,162
--------- --------- ---------
$ 325,119 $ 539,186 $ 330,979
========= ========= =========
CAPITAL EXPENDITURES(7)
Oil and Gas(8).......................................... $ 297,617 $ 630,432 $ 360,496
Motor Oil & Refined Products(9)......................... 134,883 40,361 71,535
Franchise Operations.................................... 40,773 18,937 21,701
Sulphur(1).............................................. -- 8,548 2,295
Other................................................... 504 761 329
Corporate............................................... 3,989 6,458 28,766
--------- --------- ---------
$ 477,766 $ 705,497 $ 485,122
========= ========= =========

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

(1) In October 1994, Pennzoil entered into an agreement with Freeport-McMoRan
Resource Partners, Limited Partnership ("Freeport-McMoRan") providing for
the sale by Pennzoil to Freeport-McMoRan of substantially all the domestic
assets of Pennzoil's sulphur segment. In connection with this transaction,
Pennzoil's sulphur segment recorded a charge to depreciation, depletion and
amortization expense ("DD&A") of $50.2 million in September 1994. The
transaction was completed in January 1995. Pennzoil continues to operate
its related international sulphur business. Beginning with January 1995,
the results of such operations are included in other segment operating
income. Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Sulphur" and Note 10 of
Notes to Consolidated Financial Statements for additional information.

(2) For 1995 and 1994, these amounts primarily represent dividend income from
Pennzoil's investment in Chevron common stock. For 1993, this amount
primarily represents a pretax gain of $171.6 million from Pennzoil's sale
of 8,158,582 shares of Chevron common stock for a net price of $88.38 per
share and dividend income from Pennzoil's investment in Chevron common
stock.

(3) Substantially all intersegment sales, which are priced at market, are
from the oil and gas segment to the motor oil and refined products segment.

(4) In October 1994, Pennzoil settled a dispute with the Internal Revenue
Service ("IRS") relating to a proposed tax deficiency based on an audit of
Pennzoil's 1988 federal income tax return. In connection with this
settlement, Pennzoil paid $556.0 million to the IRS in October 1994 from
cash, cash equivalents and current marketable securities and other
investments on hand. In addition, as a result of the IRS settlement,
Pennzoil increased the balance of its investment in PEPCO (at the time
named Pennzoil Petroleum Company) capital stock for financial reporting
purposes and, therefore, the carrying value of PEPCO's oil and gas
properties by $390.3 million, and such increased investment resulted in a
$93.9 million increase in DD&A recognized in October 1994 relating to
PEPCO's oil and gas properties from the date of the acquisition of PEPCO to
the date of the IRS settlement. These adjustments resulted in a net
increase in property, plant and equipment of $296.4 million as of September
30, 1994, while interest charges and DD&A adjustments related to the IRS
settlement reduced Pennzoil's 1994 pretax income by $388.2 million.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Oil and Gas" and Note 8 of Notes to
Consolidated Financial Statements for additional information.

(5) As of September 30, 1994, PPC ceased processing crude oil at its refinery
in Roosevelt, Utah. In connection therewith, PPC recorded a total charge of
$32.5 million, $24.3 million of which was charged to DD&A.

(6) Effective July 1, 1995, Pennzoil adopted the requirements of Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." As a result, Pennzoil recorded a pretax charge of $399.8 million as of
July 1, 1995 to reflect the impairment of long-lived assets. Included in
the pretax charge of $399.8 million for the impairment of long-lived assets
were charges related to the oil and gas, motor oil and refined products,
franchise operations and corporate segments of $378.9 million, $3.5
million, $3.5 million and $13.9 million, respectively. Charges for the
impairment of long-lived assets resulting from the adoption of SFAS No. 121
have not been included in DD&A in the table above. Reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Oil and Gas" and Note 1 of Notes to Consolidated Financial
Statements for additional information.

(7) Includes interest capitalized of $4,231,000, $9,027,000 and $11,420,000 in
1995, 1994 and 1993, respectively.

(8) For 1994, capital expenditures for the oil and gas segment include
$230,924,000 allocated to the oil and gas properties added as a result of
the acquisition of Co-enerco Resources Ltd. ("Co-enerco"). Reference is
made to Note 10 of Notes to Consolidated Financial Statements for
additional information. Capital expenditures for 1994 do not include any
amounts paid with respect to the IRS settlement discussed in footnote (4)
above.

(9) For 1995, capital expenditures for the motor oil & refined products segment
include $598,000 allocated to property, plant and equipment added as a
result of PPC's acquisition of the assets of the Viscosity Oil division
("Viscosity Oil") of Case Corporation ("Case"). Reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Motor Oil & Refined Products" and Note 10 of Notes to
Consolidated Financial Statements for additional information.

2
4

Narrative descriptions of these business segments follow, with emphasis on
1995 developments. Unless otherwise indicated by the context, references to
Pennzoil include its subsidiaries.

OIL AND GAS

In the oil and gas segment, Pennzoil engages in the acquisition,
exploration, exploitation and development of prospective and proved oil and gas
properties, the production and sale of crude oil, condensate and natural gas
liquids and the production, treatment and sale of natural gas. The bulk of
Pennzoil's production is derived from established fields in Texas, Louisiana,
Utah, Alberta and federal waters offshore Louisiana, Texas and California.

In June 1994, Pennzoil Canada, Inc. ("Pennzoil Canada"), an indirect wholly
owned subsidiary of Pennzoil, acquired Co-enerco, a Canadian oil and gas
exploration and production company operating in Alberta, northeastern British
Columbia and southeastern Saskatchewan. The results of operations of Co-enerco
subsequent to June 30, 1994 have been included in Pennzoil's consolidated
statement of income. Reference is made to "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Oil and Gas" and Note 10 of
Notes to Consolidated Financial Statements for additional information.

OIL AND GAS RESERVES. The following table sets forth information regarding
Pennzoil's net proved reserves and the present value (discounted at 10%) of the
estimated future net cash flows before deduction of income taxes from the
production and sale of those reserves. The reserves are reported by Ryder Scott
Company Petroleum Engineers, Houston, Texas ("Ryder Scott") and Outtrim Szabo
Associates Ltd., Calgary, Canada ("Outtrim Szabo") in accordance with criteria
prescribed by SFAS No. 69, "Disclosures About Oil and Gas Producing Activities."
The summary reports of Ryder Scott and Outtrim Szabo on the reserve estimates as
of December 31, 1995, which include certain definitions and assumptions, are set
forth as exhibits to this Annual Report on Form 10-K. Such information as to
reserve estimates includes reserves of each of PEPCO, Pennzoil Canada, PPC and
Pennzoil. The summary reports of Ryder Scott and Outtrim Szabo on the reserve
estimates as of December 31, 1994, and the summary reports of Ryder Scott on the
reserve estimates as of December 31, 1993 are included in Pennzoil's previously
filed Annual Reports on Form 10-K.

Information regarding ownership interests, prices, costs and other factual
data was furnished to Ryder Scott and Outtrim Szabo by Pennzoil. To facilitate
timely issuance of the reserve estimates, estimated production data were used
for the last few months of each year. Pennzoil believes that use of the actual
production data would not have resulted in any material change in the estimates
of reserves or pretax future net cash flows.

TOTAL PROVED RESERVES
----------------------------
DECEMBER 31
----------------------------
1995 1994 1993
------ ------ ------

Crude oil, condensate and natural gas liquids
(millions of barrels)
United States......................................... 175 205 199
Foreign(1)............................................ 26 15 2
------ ------ ------
201 220 201
====== ====== ======
Natural gas (billion cubic feet ("Bcf"))
United States(2)...................................... 1,255 1,341 1,453
Foreign(1)............................................ 214 204 38
------ ------ ------
1,469 1,545 1,491
====== ====== ======
Present value (10% discount rate) of estimated future net
cash flows before deduction of income taxes (in
millions)(3)
United States......................................... $2,587 $1,778 $2,213
Foreign............................................... 178 180 45
------ ------ ------
$2,765 $1,958 $2,258
====== ====== ======

(Table continued on following page)

3
5

PROVED DEVELOPED RESERVES
----------------------------
DECEMBER 31
----------------------------
1995 1994 1993
------ ------ ------

Crude oil, condensate and natural gas liquids
(millions of barrels)
United States.................................................. 151 176 162
Foreign........................................................ 11 15 2
------ ------ ------
162 191 164
====== ====== ======
Natural gas (Bcf)
United States(2)............................................... 1,132 1,242 1,306
Foreign........................................................ 202 192 35
------ ------ ------
1,334 1,434 1,341
====== ====== ======
Present value (10% discount rate) of estimated future net cash
flows before deduction of income taxes (in millions)(3)
United States.................................................. $2,318 $1,696 $2,049
Foreign........................................................ 138 175 40
------ ------ ------
$2,456 $1,871 $2,089
====== ====== ======

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

(1) Included in 1995 reserves are 1 million barrels of crude oil, condensate
and natural gas liquids and 5 Bcf of natural gas attributable to an
operating service agreement in Venezuela between Maraven, S.A., a Petroleos
De Venezuela S.A. affiliate, and a joint venture between Pennzoil Venezuela
Corporation, S.A., an indirect wholly owned subsidiary of Pennzoil, and
Vinccler S.A. Under this agreement, all mineral rights are owned by the
government of Venezuela. Reference is made to "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Oil and Gas"
for additional information.

(2) United States natural gas reserves for 1995, 1994 and 1993 exclude 156 Bcf,
161 Bcf and 162 Bcf, respectively, of carbon dioxide gas for sale or use in
Pennzoil's operations.

(3) Reference is made to "Supplemental Financial and Statistical
Information -- Unaudited -- Oil and Gas Information" on pages F-32 through
F-38 hereof for additional information regarding Pennzoil's proved reserves
and estimated future net revenues therefrom, including presentation of
Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
calculated in accordance with SFAS No. 69.

No significant change in Pennzoil's proved reserves as set forth above has
occurred as a result of any major discovery or other event since December 31,
1995.

No estimates of Pennzoil's total proved net oil or gas reserves have been
filed with or included in reports to any federal authority or agency other than
the Securities and Exchange Commission ("SEC") since January 1, 1995.

4
6

OIL AND GAS PROPERTIES. The following table shows Pennzoil's developed and
undeveloped oil and gas acreage as of December 31, 1995.

DEVELOPED UNDEVELOPED
ACREAGE(1) ACREAGE(2)
----------------- -----------------
GROSS NET GROSS NET
----- ----- ----- -----
(EXPRESSED IN THOUSANDS)

United States
Alabama..................................... 8 4 -- --
Arkansas.................................... 24 5 2 --
Colorado.................................... -- -- 35 35
Kansas...................................... 43 40 1 --
Louisiana................................... 241 189 22 19
Mississippi................................. 24 18 14 10
Montana..................................... -- -- 350 168
New Mexico.................................. 17 11 694 691
New York.................................... 16 14 5 4
North Dakota................................ 3 2 -- --
Ohio........................................ 6 6 1 1
Pennsylvania................................ 179 149 158 136
Texas....................................... 496 363 84 43
Utah........................................ 135 63 27 21
West Virginia............................... 376 343 80 60
United States Waters
Offshore Alaska.......................... 7 1 5 1
Offshore California...................... 4 1 11 3
Offshore Louisiana....................... 344 216 85 65
Offshore Texas........................... 65 30 127 113
----- ----- ----- -----
Total United States........................... 1,988 1,455 1,701 1,370
Foreign(3)
Azerbaijan.................................. -- -- 107 10
Canada...................................... 335 207 913 650
Egypt....................................... -- -- 305 171
Qatar....................................... -- -- 675 675
Venezuela................................... -- -- 1,436 1,005
----- ----- ----- -----
Total Foreign................................. 335 207 3,436 2,511
----- ----- ----- -----
Total......................................... 2,323 1,662 5,137 3,881
===== ===== ===== =====

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

(1) Developed acreage represents the spacing units or other acreage assignable
to productive wells.
(2) Undeveloped acreage is acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial
quantities of oil and gas, regardless of whether such acreage contains
proved reserves.
(3) Acreage in foreign areas other than Canada is operated under production
sharing arrangements, service contracts or other contractual arrangements
not involving lease or fee ownership.

5
7

The following table shows the approximate number of Pennzoil's productive
oil and gas wells as of December 31 for the years shown. Productive wells
consist of producing wells and wells capable of production in commercial
quantities.

GROSS WELLS(1) NET WELLS(1)
------------------------- -----------------------
1995 1994 1993 1995 1994 1993
----- ------ ------ ----- ----- -----

Oil
United States..................... 6,892 7,264 7,632 3,977 4,135 4,316
Foreign........................... 619 984 330 411 508 52
Natural gas
United States..................... 1,674 2,149 2,243 1,067 1,232 1,237
Foreign........................... 369 523 114 239 259 22
----- ------ ------ ----- ----- -----
9,554 10,920 10,319 5,694 6,134 5,627
===== ====== ====== ===== ===== =====

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

(1) "Gross Wells" includes all wells in which Pennzoil has an interest. "Net
Wells" reflects Pennzoil's percentage ownership interest in each "Gross
Well." One or more completions in the same bore hole are counted as one
well. Any well in which one of multiple completions is an oil completion is
classified as an oil well.

PRODUCTION AND SALES. The following table summarizes the average daily
production of Pennzoil, net of all royalties, overriding royalties and other
outstanding interests for the periods indicated. Natural gas production refers
only to marketable production of natural gas on an "as sold" basis. All
production in the following table categorized as "foreign" is production in
Canada.

1995 1994 1993
------- ------- -------

Crude oil, condensate and natural gas liquids (barrels per
day)
United States............................................... 60,069 64,140 63,294
Foreign..................................................... 7,074 4,569 979
------- ------- -------
67,143 68,709 64,273
======= ======= =======
Natural gas (thousand cubic feet ("Mcf") per day)
United States............................................... 607,163 689,461 641,111
Foreign..................................................... 55,148 27,501 8,288
------- ------- -------
662,311 716,962 649,399
======= ======= =======

The following table shows the weighted average sales prices received by
Pennzoil for its production and the average production (lifting) costs per unit
of production.

YEAR ENDED DECEMBER 31, 1995
----------------------------
UNITED
STATES FOREIGN TOTAL
------ ------ ------

Crude oil, condensate and natural gas liquids (per barrel)....... $14.15 $15.64 $14.31
Natural gas (per Mcf)............................................ $ 1.51 $ .92 $ 1.46
Production (lifting) costs per equivalent barrel(1)(2)........... $ 3.40 $ 3.32 $ 3.39

YEAR ENDED DECEMBER 31, 1994
----------------------------
UNITED
STATES FOREIGN TOTAL
------ ------ ------

Crude oil, condensate and natural gas liquids (per barrel)....... $13.65 $14.96 $13.74
Natural gas (per Mcf)............................................ $ 1.81 $ 1.38 $ 1.79
Production (lifting) costs per equivalent barrel(1)(2)........... $ 3.82 $ 3.43 $ 3.80

(Table continued on following page)

6
8

YEAR ENDED DECEMBER 31, 1993
----------------------------
UNITED
STATES FOREIGN TOTAL
------ ------ ------

Crude oil, condensate and natural gas liquids (per barrel)....... $14.90 $14.45 $14.90
Natural gas (per Mcf)............................................ $ 2.05 $ 1.32 $ 2.04
Production (lifting) costs per equivalent barrel(1)(2)........... $ 4.16 $ 4.02 $ 4.16

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

(1) For purposes of providing common units of measure, natural gas is converted
to a Btu-equivalent barrel of liquid on the basis of relative energy
content (6 Mcf per barrel).

(2) Production (lifting) costs are costs incurred to operate and maintain wells
and related equipment and facilities. They do not include depreciation,
depletion and amortization of capitalized acquisition, exploration and
development costs, exploration expenses, general and administrative
expenses, interest expense or income tax. Differences between sales prices
and production (lifting) costs do not represent profit.

Pennzoil sells its crude oil and condensate production generally at posted
field prices less any applicable transportation charges, its natural gas liquids
production at negotiated prices and its natural gas production generally under a
combination of 30-day spot, short-term and long-term sales contracts.

In April 1995, Pennzoil Gas Marketing Company, an indirect wholly owned
Pennzoil subsidiary, and BRING Gas Services Corp., a subsidiary of Brooklyn
Union Gas Co., formed PennUnion Energy Services, L.L.C. ("PennUnion"), a 50-50
gas marketing joint venture. Pennzoil contributed $3.7 million in cash to
PennUnion. Pennzoil has committed over 90% of its natural gas production from
the continental United States through March 31, 1998 to be marketed by
PennUnion. PennUnion's natural gas marketing efforts are primarily constrained
only by normal free marketplace competition and by regulatory limitations
described generally below under the caption "Government Regulation."

Pennzoil has a price risk management program that permits utilization of
agreements and financial instruments (such as futures, forward and option
contracts and swaps and collars) to reduce the price risk associated with
fluctuations in crude oil and natural gas prices. Reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity" for additional information.

DRILLING ACTIVITY. The following table shows Pennzoil's net productive and
dry exploratory and development wells completed for the periods shown.
Completion occurs upon the installation of permanent equipment for the
production of oil or gas, or, in the case of dry holes, upon reporting
abandonment to the appropriate regulatory agency.

NET EXPLORATORY NET DEVELOPMENT
WELLS WELLS
-------------------- ----------------------
1995 1994 1993 1995 1994 1993
---- ---- ---- ----- ---- -----

Oil Wells(1)
United States................................... 6.5 8.2 1.3 45.1 36.1 41.3
Foreign......................................... 8.3 4.5 -- 1.5 1.9 --
Gas Wells(1)
United States................................... 7.4 22.2 13.0 48.6 45.1 29.7
Foreign......................................... 11.7 2.8 -- 21.1 1.2 2.2
Dry Holes(2)
United States................................... 1.5 7.1 2.6 -- 1.0 1.0
Foreign......................................... 6.0 5.4 2.0 2.1 -- --
---- ---- ---- ----- ---- -----
41.4 50.2 18.9 118.4 85.3 74.2
==== ==== ==== ===== ==== =====

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

(1) For purposes of this tabulation, a productive well is an exploratory or a
development well that is not a dry hole. One or more completions in the
same bore hole are counted as one well. Any well in which one of multiple
completions is an oil completion is classified as an oil well.

(2) A dry hole is an exploratory or development well found to be incapable of
producing either oil or gas in sufficient quantities to justify completion
as an oil or gas well.

As of December 31, 1995, Pennzoil was participating in the drilling or
awaiting completion of 23 gross (22.2 net) wells onshore and 11 gross (8.9 net)
wells offshore the United States.

7
9

NORTH AMERICA -- ASSET HIGHGRADING PROGRAM. During 1995, Pennzoil continued
its assessment of its domestic oil and gas properties and its related asset
highgrading program commenced in 1992. This assessment has resulted in the
categorization of Pennzoil's oil and gas properties into core and noncore
producing areas and core and noncore producing fields within core areas, and the
disposition of substantially all properties and fields categorized as noncore
assets.

From the beginning of 1992 through 1995 Pennzoil disposed of approximately
600 producing oil and gas fields, including approximately 150 fields in 1995.
The fields disposed of in 1995 primarily consisted of noncore properties in the
Gulf of Mexico, Permian Basin, Mid-Continent and Gulf Coast. The noncore assets
disposed of over the four-year period would have represented less than 12% of
the reported value of Pennzoil's current proven oil and gas reserves and did not
factor into Pennzoil's future reserve development plans. After completion in the
first quarter of 1996 of currently pending transactions, Pennzoil, through
acquisitions, sales and trades of interests in producing oil and gas fields,
will have approximately 100 core oil and gas properties in the United States and
will have substantially completed its asset highgrading program and the related
disposition of noncore assets. Reference is made to "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Oil and Gas" for
additional information.

NORTH AMERICA -- PRODUCTION COSTS. Oil and gas production volumes decreased
in 1995 primarily as a result of the disposal of noncore assets. During 1995,
Pennzoil produced an average of approximately 178,000 barrels of oil equivalent
("BOE") per day compared to an average of approximately 188,000 BOE per day
during 1994, including almost 15,000 BOE per day of production associated with
properties sold during 1995. Total production costs and expenses per BOE,
excluding exploration expense and DD&A, were reduced from $5.93 in 1993 to $5.32
in 1994 and to $5.09 in 1995.

NORTH AMERICA -- EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES. In the
Gulf of Mexico, Pennzoil owns a 70% working interest in South Marsh Island Block
35 and completed a well in November 1995 with initial production of
approximately 10 million cubic feet ("MMcf") per day of natural gas. Pennzoil
began projects in 1995 on South Marsh Island Block 23 that are expected to
increase production by approximately 35 MMcf per day of natural gas by mid-1996.
Pennzoil also holds a 100% working interest in a multi-well development program
and facility modification at Ship Shoal Block 154. Pennzoil's current
redevelopment of this field should increase production from less than 100
barrels per day of liquids to approximately 7,000 barrels per day of liquids and
18 MMcf per day of natural gas by mid-1996. Additionally, a discovery well
drilled at West Cameron Block 580, where Pennzoil has a 75% working interest,
encountered a significant gas discovery. Facilities are currently under
construction, and production of approximately 70 MMcf per day of natural gas and
3,000 barrels per day of liquids should commence during the second half of 1996.
In December 1995, Pennzoil began drilling a subsalt test well in South Marsh
Island Block 97. Pennzoil is the operator and has a 50% working interest. In
deepwater, Pennzoil has a 20% working interest in the Shell Oil Company operated
Garden Banks Block 127/128 subsalt natural gas discovery. The field should begin
production in 1997, with peak rates estimated to reach 250 to 300 MMcf per day
of natural gas in 1998.

Onshore, a 3-D seismic program begun in 1994 led to a significant gas
discovery in 1995 in the Tinsley Field in Mississippi. Two wells were drilled,
and a third is planned for the first half of 1996. Initial production in the
second quarter of 1996 is expected to be approximately 15 MMcf per day of
natural gas and 1,000 barrels per day of liquids. Pennzoil has an approximate
92% working interest in the prospective area. In Quarantine Bay, Louisiana,
Pennzoil has a 100% working interest in four wells drilled in 1995 that are
currently producing 5 MMcf per day of natural gas and 1,000 barrels per day of
liquids. Two additional wells are currently planned to be drilled in the first
half of 1996. In addition, during 1995, Pennzoil increased its interest in the
SACROC Unit in West Texas and initiated a major redevelopment program. Gross
production of liquids increased 2,000 barrels per day during the last three
months of 1995.

INTERNATIONAL. In September 1994, the State Oil Company of the Azerbaijan
Republic ("SOCAR") and a consortium of foreign oil companies, which includes
Pennzoil, signed an oil production sharing contract for development of the
Azeri, Chirag and a deepwater portion of the Gunashli fields in the Caspian Sea.
The contract was ratified by the Azerbaijan Parliament in November 1994 and was
made effective in December 1994. The contract covers the basic tenets of the
project, including profit splits, taxation, project management

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mechanism, legal issues, hiring practices and other details. The combined fields
are located 120 miles offshore in the southern portion of the Caspian Sea in
approximately 400 feet of water. Aggregate capital investment for all members of
the consortium is estimated to be between $7 and $8 billion over the 30-year
life of the project to develop an estimated 4 billion barrels of recoverable
reserves. Current members of the consortium and their respective interests are
SOCAR (10.00%), Amoco (17.01%), British Petroleum (17.127%), Delta-Nimir
(1.68%), Exxon (5.00%), LUKoil (10.00%), McDermott (2.45%), Pennzoil (9.82%),
Ramco (2.08%), Statoil (8.563%), Turkish Petroleum Company (6.75%) and Unocal
(9.52%). The contract includes a $300 million bonus to be paid by the consortium
to the government of Azerbaijan in a phased manner over the life of the project,
50% of which has already been paid. Reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Oil
and Gas" for additional information.

In September 1995, the consortium elected to pursue dual export routes for
transporting early oil production from the Caspian Sea, one north through an
existing pipeline system to a Russian port on the Black Sea, and the second west
through Azerbaijan and Georgia to the Black Sea. The western route will require
construction of 73 miles of pipeline to interconnect existing lines. All
necessary treaties and commercial agreements between governments and the western
companies for the northern route became effective in February 1996. Spending on
the early oil project will begin to accelerate as a result of these actions.
Pennzoil has recorded 14 million barrels of crude oil reserves relating to early
oil from this project.

In November 1995, Pennzoil announced that its Pennzoil Caspian Development
Corporation subsidiary had entered into a definitive exploration, development
and production sharing contract with SOCAR covering the Karabakh prospect in the
Caspian Sea offshore Azerbaijan. Participating in the project with Pennzoil
(30%) are units of LUKoil of Russia (7.5%), Agip of Italy (5%) and LUKAgip, a
subsidiary of LUKoil and Agip (50%). In addition, a commercial affiliate of
SOCAR has a 7.5% interest as a contractor party. The exploration, development
and production sharing agreement was ratified by the Azerbaijan Parliament on
February 13, 1996. The Karabakh prospect is located north of the
Azeri-Chirag-Gunashli deepwater unit and outside the Apsheron trend
approximately 50 miles offshore in approximately 600 feet of water. The work
commitment will include a seismic program and exploratory drilling over a period
of three years, which period may be extended an additional one-and-a-half years.
Should commercial hydrocarbons be discovered, the agreement will have a
development and production period of 25 years, which may be extended an
additional 5 years under certain conditions.

Also in Azerbaijan, Pennzoil had completed work in 1994 on a comprehensive
gas gathering and compression system to capture, compress and transport to shore
approximately 150 MMcf per day of natural gas previously being vented from the
Gunashli field. As of December 31, 1995, over one-quarter of Pennzoil's
investment in the gas utilization project had been recovered through credit
toward Pennzoil's portion of bonus payments made to the government of Azerbaijan
with respect to the Karabakh prospect and the Azeri-Chirag-Gunashli fields,
direct payments from SOCAR during 1995 and other credits. Pennzoil's remaining
investment in the gas utilization project will be reimbursed through future
payments from SOCAR funded by bonus payments to be made by other participants in
the Karabakh prospect and in the Azeri-Chirag-Gunashli fields and additional
credits toward Pennzoil's future bonus payments with respect to the
Azeri-Chirag-Gunashli fields.

In July 1995, a joint venture between Pennzoil Venezuela Corporation, S.A.,
an indirect wholly owned subsidiary of Pennzoil, and Vinccler S.A. entered into
an operating service agreement with Maraven, S.A., a Petroleos De Venezuela S.A.
affiliate, to operate the East Falcon Unit in northwestern Venezuela. This unit
includes an oil field in which production operations were suspended in 1968, two
undeveloped gas fields and several prospects. Under this service agreement,
Pennzoil is required to incur all costs attributable to exploration, development
and production activities. The service agreement allows for Pennzoil to recover
such costs through a per-barrel fee for operating this unit, which contains
estimated gross proved remaining reserves available through field reactivation
of 12 million BOE. Early production should begin by mid-1996 and is estimated to
reach about 2,000 barrels per day of liquids by the end of 1996.

In September 1995, Pennzoil and Forum Exploration Co. ("Forum
Exploration"), an independent Egyptian oil company, signed a farm-in agreement
giving Pennzoil an 87.5% working interest in Forum Exploration's South-West
Gebel El-Zeit concession in the southern Gulf of Suez, offshore Egypt. Pennzoil

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Egypt, Inc. ("Pennzoil Egypt"), an indirect wholly owned subsidiary of Pennzoil,
will be the operator for this farm-in agreement. The Pennzoil/Forum Exploration
group is committed to a minimum of $3 million in exploration expenditures over
the next three years. An additional phase, which is at the option of the
Pennzoil/Forum Exploration group, would consist of three additional years of
exploration with a minimum expenditure of $5 million. Seismic activity is
currently in progress.

Late in 1995, Pennzoil and a subsidiary of Agip of Italy were awarded the
West Feiran Block in the Gulf of Suez. Each company has a 50% interest. The West
Feiran Block, equivalent to 17 Gulf of Mexico blocks, lies in the east central
part of the Gulf of Suez and is surrounded by several giant oil fields.
Ratification by the Egyptian Parliament is expected in the first half of 1996.

CAPITAL BUDGET. Pennzoil's capital budget currently provides that its
capital expenditures, including interest capitalized, for domestic and
international oil and gas exploration and development during 1996 are estimated
to be $232.8 million, compared to $297.6 million of capital expenditures in
1995. Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources and Liquidity" for
additional information.

OPERATING RISKS. Pennzoil conducts or participates in certain offshore oil
and gas operations which are subject to the hazards of marine operations, such
as capsizing, collision and adverse weather and sea conditions, as well as risks
of blowouts and fires, which are generally present in all oil and gas drilling.
In the past, production from offshore operations has been delayed on several
occasions as a result of pipeline breaks, hurricanes, blowouts and other
unforeseen events. In addition, Pennzoil's foreign oil and gas operations are
subject to certain risks, such as nationalization, confiscation, renegotiation
of existing contracts and currency fluctuations. Pennzoil monitors political,
regulatory and economic developments in any foreign country in which it
operates.

MOTOR OIL & REFINED PRODUCTS

Pennzoil's motor oil and refined products operations are conducted by PPC.
These operations include the procurement and refining of crude oil and the
blending, packaging and marketing of motor oil and refined products.

MANUFACTURING. PPC owns and operates two lube oil and specialty refineries,
one located near Oil City, Pennsylvania ("Rouseville") and the other, operated
by PPC's wholly owned subsidiary, Atlas Processing Company ("Atlas"), located in
Shreveport, Louisiana. The paraffinic lube base stocks produced by these
refineries are used primarily in the blending of motor oil and other lubricants
by PPC's marketing division. The lube oil and specialty refineries also produce
waxes, petrolatums, special cut kerosenes, transformer oils, process oils and
other naphthenic base oils for use in producing industrial specialty products or
for sale to industrial customers. Jet fuel is also supplied by the Atlas
refinery to several commercial airlines.

As of September 30, 1994, PPC ceased processing crude oil at its refinery
in Roosevelt, Utah. PPC continues to purchase crude oil from the
Bluebell-Altamont Field and other nearby fields in Utah and maintains a
transportation terminal at the refinery site.

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The following table sets forth information with respect to raw material
supplied and processed, refining capacity and utilization of PPC's refineries
during the years indicated.

1995 1994 1993
------ ------ ------
(BARRELS PER DAY EXCEPT
PERCENTAGES)

Raw Material
Supplied
Crude oil and condensate
Pennzoil's domestic production.......................... 21,695 28,513 22,623
Purchased from others................................... 28,381 29,283 36,062
Net decrease (increase) in inventory...................... (2,110) 907 537
------ ------ ------
47,966 58,703 59,222
====== ====== ======
Processed(1)
Oil City, Pennsylvania.................................... 10,968 15,752 15,629
Shreveport, Louisiana..................................... 36,998 38,734 37,356
Roosevelt, Utah(2)........................................ -- 4,217 6,237
------ ------ ------
47,966 58,703 59,222
====== ====== ======
Refining capacity (at year end)
Oil City, Pennsylvania....................................... 16,500 16,500 16,500
Shreveport, Louisiana........................................ 46,200 46,200 46,200
Roosevelt, Utah(2)........................................... -- -- 8,000
------ ------ ------
62,700 62,700 70,700
====== ====== ======
Refinery utilization(1)(2)..................................... 76.5% 85.4% 83.8%
====== ====== ======

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

(1) Processed volumes and refinery utilization are lower in 1995 primarily due
to the Rouseville refinery fire which occurred in the fourth quarter and to
an extended maintenance turnaround at the Atlas refinery which occurred in
the fourth quarter.

(2) As of September 30, 1994, PPC ceased processing crude oil at its refinery in
Roosevelt, Utah.

PPC purchases from others the requirements of its marketing operations not
produced in its own refineries.

PPC owns and operates two lubricating specialty plants located in Karns
City, Pennsylvania and Dickinson, Texas. These plants manufacture petrolatums,
white oils, ink solvents, sulfonates, waxes and other specialty petroleum
products using feedstocks from PPC's refineries. These products are marketed by
PPC's PENRECO(R) and MAGIE BROS(R) divisions directly to manufacturers and
end-users. Additionally, Pennzoil continues to expand industrial specialty sales
into international markets, particularly in Asia, South America and Central
America.

In June 1994, PPC and Conoco, Inc. ("Conoco") commenced work on a joint
venture project at Conoco's refinery in Lake Charles, Louisiana. Operating
through a 50-50 joint venture partnership called Excel Paralubes, the companies
are constructing a new, state-of-the-art lube oil hydrocracker facility
estimated to cost approximately $500 million, which is being funded with project
financing. The facility will produce approximately 18,000 barrels per day of
high-quality base oils, the base ingredient in finished lubricants. Site
preparation began in the third quarter of 1994, and the facility is expected to
be completed in late 1996, with operations commencing in early 1997. Conoco is
acting as construction manager and operator of the plant with support positions
staffed by both companies. The facility will be a low cost producer of high-
quality base oils and is intended to make PPC self-sufficient in high-quality
lube base stocks. Additionally, construction is under way for a residual
catalytic cracking unit at the Atlas refinery, which should substantially lower
the effective cost of base oils produced at the facility.

In April 1995, PPC and the Polymers Division of Petrolite Corporation
("Petrolite") formed a 50-50 partnership called BARECO(R) Products to market a
broad line of wax products to domestic and international purchasers of paraffin,
microcrystalline and related synthetic waxes. Pennzoil transports partially
refined

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feedstock from Utah to its Rouseville refinery, which produces paraffinic waxes
and related products. The new wax products, along with certain waxes from
Petrolite and existing wax products from Pennzoil's Atlas and Rouseville
refineries, are marketed through the partnership. Pennzoil is investing more
than $23 million in its Rouseville refinery and its packaging plant in nearby
Reno, Pennsylvania in connection with this venture.

In July 1995, PPC agreed to purchase a one-third ownership interest in a
manufacturing and marketing company located in Caracas, Venezuela. The company,
Aceites y Solventes Venezolanos Vassa S.A., has constructed and is commissioning
a facility in Cardon, Venezuela to manufacture white oils, solvents, and
transformer oils for sale primarily in South America, Central America and the
Caribbean. Pennzoil's capital investment will be approximately $14.5 million, a
portion of which will be funded through nonrecourse project financing.

In July 1995, PPC and a joint venture partner began work on a project to
build and operate a liquids terminal at the Port of Shreveport, Louisiana. The
opening of the Red River to navigation has provided the opportunity for PPC to
use less expensive waterborne freight for access to new feedstocks and markets
for the Atlas refinery and PPC's Shreveport packaging facility. Completion is
planned for October 1996.

In October 1995, an explosion and fire occurred at PPC's Rouseville
refinery. Two PPC employees and three contractor employees were killed. Several
other injuries were reported. As of the date hereof, results of Occupational
Safety and Health Administration ("OSHA") investigations have not been released.
The major damage identified was to the tanks, piping and electrical lines in the
area of the fire. Some portions of the new wax plant project were damaged, and
project completion has been delayed until August 1996. Reference is made to Note
8 of Notes to Consolidated Financial Statements for additional information.

MARKETING. PENNZOIL(R) motor oil and lubricants are produced in five
domestic company-owned and operated blending and packaging plants (Portland,
Oregon; Shreveport, Louisiana; Rouseville, Pennsylvania; Vernon, California; and
St. Louis, Missouri). In addition, two industrial packaging plants, one located
in Mundy's Corner, Pennsylvania, and the other in Marion, Illinois, produce
lubricants for the commercial and industrial markets.

PENNZOIL(R) products are sold in all 50 states through 152 independent
distributors and 58 company-owned distribution facilities. Additionally,
PENNZOIL(R) brand gasoline is marketed through approximately 393 retail outlets
located in Pennsylvania, Ohio, New York, Virginia, West Virginia, Tennessee and
Kentucky. Kerosenes, diesel oils, fuel oils and other distillates are marketed
at both the retail and wholesale levels through distributors.

PPC competes with a number of other companies in the sale of motor oil and
refined products. Competition is based on price, service and quality, with
quality being of particular importance in the case of motor oils and other
petroleum specialty products.

PPC is one of America's leading marketers of fuel injector and carburetor
cleaners and other car care products under the GUMOUT(R) name. These products
are sold primarily to the consumer through retail channels, but GUMOUT(R) has an
increasing presence in the installed market (fast lubes, service stations, auto
dealers, etc.). WOLF'S HEAD(R) lubricants are also marketed as a secondary
value-priced line throughout the U.S., alongside the PENNZOIL(R) lubricants
brand. In addition, PPC is a master distributor for GOJO(R) hand cleaner
products, PRESTONE(R) antifreeze and FRIGC(R) FR-12[TM] refrigerant.

In September 1995, PPC acquired the assets of the Viscosity Oil division of
Case for $33.6 million. Viscosity Oil is a leading supplier of premium-quality
lubricants to the North American off-road industry, and it supplies lubricants
to substantially all the Case dealer network, with locations in all 50 states
and Canada. In addition, Viscosity Oil supplies virtually all of the
factory-fill lubricants for Case's North American manufacturing plants. As part
of the acquisition, a long-term supply agreement was entered into whereby
Pennzoil will supply the aftermarket lubricant products that Case will continue
to sell to its dealerships. The agreement also calls for Pennzoil to supply
factory-fill lubricants to Case.

PENNZOIL(R) motor oil and lubricants are marketed in 62 countries through
44 distributors, three licensees, four joint ventures and ten company-owned
marketing distribution centers.

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International expansion continued in 1995 with PPC signing joint venture
contracts in Peru, Argentina and China. PPC also reached a tentative agreement
to increase its ownership position in its Indian joint venture, subject to
government approval. PPC's licensee in Indonesia began production at a new
refining, blending and packaging plant during 1995. PPC continued to experience
volume growth in most international markets including Australia, Canada, Mexico
and the Far East region.

In December 1995, PPC formed a 50-50 joint venture with Lithcon Petroleum
Inc. ("Lithcon") in Tianjin, China to form a lubricants manufacturing and
marketing company. Marketing of lubricants imported from the U.S. is set for the
first quarter of 1996 with local production planned for the third quarter.
Earlier in 1995, Pennzoil, Lithcon and SINOPEC Yue Hua (Zhuhai) Petrochemical
Company, a marketing arm of SINOPEC, the Chinese government oil company, formed
a joint venture to produce and market Pennzoil aftermarket fuel additives in
eight southern provinces in China.

In December 1995, PPC purchased a 45% equity share in Isopetrol S.A., a
lubricants marketing and manufacturing company located in Lima, Peru. This
investment will allow PPC to increase its access to Peru and neighboring
markets. In addition, the agreement provides PPC an ownership interest in a
lubricants blending, packaging and grease plant located in Callao, Peru.

In December 1995, PPC announced that it had selected Frankfurt, Germany as
the site for its European headquarters. All European operations will be managed
from the Frankfurt, Germany headquarters. PPC will create a new European
division apart from its existing divisions in the United States. In addition,
Pennzoil will consolidate its production facilities in Europe in its plant in
Barcelona, Spain during 1996. The facility in Barcelona will supply all of PPC's
current requirements in Europe. As a result of the consolidation of production,
Pennzoil plans to sell its plant in Zaandam, Netherlands, which has been
reporting losses for several years.

PPC considers the trademarks used in its motor oil and refined products
operations to have significant marketing value, primarily in identifying
Pennzoil and its products.

The following table sets forth information with respect to quantities sold
externally by PPC's marketing and manufacturing operations during the years
indicated.

1995 1994 1993
------ ------ ------
(BARRELS PER DAY)

Gasoline and naphtha................................. 20,618 24,168 25,106
Distillates and gas oils............................. 26,434 29,978 28,512
Lubricating oil and other specialty products......... 22,966 23,079 23,072
Residual fuel oils................................... 3,381 3,361 2,160
------ ------ ------
73,399 80,586 78,850
====== ====== ======

FRANCHISE OPERATIONS

Jiffy Lube franchises, owns and operates automotive service centers. JIFFY
LUBE(R) service centers offer convenient automotive maintenance services. Jiffy
Lube's standard full service includes an oil change and filter replacement,
chassis lubrication, checking for proper tire inflation, window washing,
interior vacuuming, checking and topping off of transmission, differential,
windshield washer, battery and power steering fluid levels and air filter and
windshield wiper blade examination. JIFFY LUBE(R) service centers also provide
other authorized services and products at additional cost.

In March 1995, Jiffy Lube and the Sears Merchandise Group ("Sears") agreed
to open fast-oil change units in Sears Auto Centers over the next three years.
Under the agreement, Jiffy Lube remodels, equips and operates service areas
within Sears Auto Centers, while Sears continues to utilize the remaining bays
for its operations. As a first step, Sears and Jiffy Lube have agreed to set up
approximately 240 Jiffy Lube-owned and franchised centers and had 28 centers
open at the end of 1995.

At December 31, 1995, 1,207 JIFFY LUBE(R) service centers were open
worldwide, including 1,198 in the United States. Domestically, franchisees
operated 721 of the service centers and Jiffy Lube owned and

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operated the remaining 477. The JIFFY LUBE(R) service centers generally are
clustered in metropolitan areas throughout the United States.

SULPHUR

OTHER INTERESTS

Richland owns approximately 576,000 acres of surface properties and certain
mineral rights to approximately 726,000 acres in the Raton Basin area of New
Mexico and Colorado. The table included under the caption "Oil and Gas -- Oil
and Gas Properties," showing Pennzoil's developed and undeveloped oil and gas
acreage, includes the mineral rights to 726,000 acres held by Richland in the
Raton Basin.

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EMPLOYEES

The following table sets forth the number of Pennzoil employees by segment
at December 31 of each of the years indicated:

1995 1994 1993
------ ------ ------

Oil and Gas...................................................... 1,270 1,670 1,627
Motor Oil & Refined Products..................................... 2,770 2,860 2,929
Franchise Operations............................................. 5,176 5,090 4,425
Sulphur.......................................................... -- 247 257
Corporate and Other.............................................. 542 634 663
------ ------ ------
Total.................................................. 9,758 10,501 9,901
====== ====== ======

The decrease in employees between December 31, 1994 and 1995 is primarily
attributable to a workforce reduction program and the disposition of Pennzoil's
domestic sulphur operations. The increase in employees between December 31, 1993
and 1994 is primarily attributable to an increase in the number of company-owned
service centers in the franchise operations segment.

Approximately 8% of Pennzoil's employees are represented by various labor
unions. Collective bargaining agreements are in force with most of the unions.

Pennzoil is subject to various federal and state laws and regulations
governing employment practices and working conditions, including Title VII of
the Civil Rights Act of 1964, as amended, the Equal Pay Act of 1963, the Civil
Rights Act of 1991, the Americans with Disabilities Act of 1990, the Family and
Medical Leave Act of 1993, the Drug Free Workplace Act of 1989, the Age
Discrimination in Employment Act of 1967, as amended, the Rehabilitation Act of
1973, as amended, the Vietnam Era Veterans' Readjustment Assistance Act of 1974,
as amended, the Occupational Safety and Health Act of 1970, the Fair Labor
Standards Act of 1938, as amended, the National Labor Relations Act of 1935, as
amended, and Executive Order 11246.

GOVERNMENT REGULATION

Pennzoil's operations are affected from time to time in varying degrees by
political developments and federal and state laws and regulations. In
particular, oil and gas operations and economics are affected by changing price
control, tax and other laws relating to the petroleum industry and by constantly
changing administrative regulations.

NATURAL GAS ACT, NATURAL GAS POLICY ACT AND NATURAL GAS WELLHEAD DECONTROL
ACT. Until recently, Pennzoil and other natural gas producers were subject to
comprehensive sales price and service regulation by the Federal Energy
Regulatory Commission ("FERC") under the Natural Gas Act and the Natural Gas
Policy Act of 1978. However, the Natural Gas Wellhead Decontrol Act of 1989
provided for the phased elimination of all remaining federal natural gas pricing
and sales regulation of "first sales", including all wellhead sales and sales by
nonpipeline marketing entities, by January 1, 1993. As a result, all natural gas
sales by Pennzoil can be made at market prices.

The FERC's jurisdiction over the interstate natural gas transportation
industry was unaffected by the Natural Gas Wellhead Decontrol Act. However, as a
result of "first sale" deregulation and in an effort to increase competition in
the selling and purchasing of natural gas, FERC has issued a series of orders
that have led to the restructuring of the interstate pipelines' rates and
services and the granting to the pipelines' customers, producers and other
nonpipeline natural gas merchants of open and nondiscriminatory access to the
pipelines' transportation, storage and related services. This restructuring has
occurred over several years, culminating in 1992 with FERC's issuance of Order
No. 636, which caused all interstate pipelines to restructure their services
along open access principles, commencing with the 1993-1994 winter heating
season. In addition to its industry-wide orders such as Order No. 636, FERC
issued numerous individual pipeline orders in highly contested proceedings. As a
result, numerous appeals of these orders are now pending, and

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Pennzoil cannot predict what action the reviewing courts or FERC may take on
these matters. Under current arrangements, however, the marketing flexibility of
nonpipeline natural gas merchants such as Pennzoil has been significantly
enhanced.

PETROLEUM PRICE CONTROL AND ALLOCATION LAWS. From time to time, the federal
government has imposed allocation and price controls upon firms engaged in
marketing crude oil and other petroleum products. However, since the 1981
lifting of federal price controls, sales of crude oil and other petroleum
products have been made at market prices.

FEDERAL AND STATE PRODUCTION REGULATIONS. Pennzoil's oil and gas
exploration and production operations are subject to various types of regulation
at the federal, state and local levels. Federal regulation of Pennzoil's
offshore Gulf of Mexico leases is accomplished by the Minerals Management
Service of the Department of the Interior ("MMS"). The FERC also has
jurisdiction over certain offshore activities pursuant to the Outer Continental
Shelf Lands Act. State regulation typically includes requiring drilling permits
and the maintenance of bonds in order to drill or operate wells; the regulation
of the location of wells, the method of drilling and casing of wells and the
surface use and restoration of properties upon which wells are drilled; and the
plugging and abandoning of wells. Pennzoil's operations are also subject to
various conservation regulations, including regulation of the size of drilling
and spacing units or proration units, the density of wells that may be drilled
in a given area and the unitization or pooling of oil and gas properties. In
this regard, some states allow the forced pooling or integration of lands and
leases. In addition, state conservation laws establish maximum rates of
production from oil and gas wells, generally prohibit the venting or flaring of
gas and impose certain requirements regarding the ratability of production. The
effect of these regulations may be to limit the amounts of crude oil, condensate
and natural gas Pennzoil can produce from its wells and the number of wells or
the locations at which Pennzoil can drill.

ENVIRONMENTAL MATTERS. Pennzoil's operations in the United States are
subject to numerous federal, state and local laws and regulations controlling
the discharge of materials into the environment or otherwise relating to the
protection of the environment and human health and safety.

The 1990 Amendments to the federal Clean Air Act require, among other
things, more stringent controls on industrial plants in areas of high air
pollution, a tightening of fuel and emission standards for motor vehicles
(including certain requirements to use reformulated gasoline) and the imposition
by the Environmental Protection Agency ("EPA") of restrictions on the emissions
of hazardous air pollutants. While the precise effect of the 1990 Amendments to
the Clean Air Act on Pennzoil and other industrial companies is uncertain
because most of the Act's requirements will be implemented through EPA
regulations to be issued over a period of years, it is likely that the programs
governing hazardous air pollutants and auto fuels and emissions will require
changes in procedures and equipment in certain of Pennzoil's operations that
could impose substantial costs on Pennzoil. For example, in 1993, Pennzoil was
required to incur capital expenditures of $26.6 million for a diesel
desulfurization and dewaxing project at its Atlas refinery in Shreveport,
Louisiana.

The U.S. Oil Pollution Act of 1990 ("OPA '90") imposes a variety of
requirements on "responsible parties" (which can include Pennzoil or its
subsidiaries) related to the prevention of oil spills and liability for damages
resulting from such spills. OPA '90 also obligates responsible parties to
demonstrate certain levels of financial responsibility. The effect of OPA '90 on
Pennzoil and other offshore oil and gas operators is uncertain because the MMS
has not yet finalized implementing regulations. Pennzoil cannot predict the
final form of the financial responsibility regulations that will be adopted by
the MMS, but such regulations have the potential to result in the imposition of
substantial costs on Pennzoil.

Pennzoil is also subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), the Resource Conservation and Recovery Act and similar state
statutes. In response to liabilities associated with these activities, accruals
have been established when reasonable estimates are possible. Pennzoil adjusts
the accruals when new remediation responsibilities are discovered and probable
costs become estimable, or when current remediation estimates must be adjusted
to reflect new information.

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Pennzoil's assessment of the potential impact of these environmental laws
is subject to uncertainty due to the difficult process of estimating remediation
costs that are subject to ongoing and evolving change. Initial estimates of
remediation costs reflect a broad-based analysis of site conditions and
potential environmental and human health impacts derived from preliminary site
investigations (including soil and water analysis, migration pathways and
potential risk). Later changes in these initial estimates may be based on
additional site investigations, completion of feasibility studies (comparing and
selecting from among various remediation methods and technologies) and risk
assessments (determining the degree of current and future risk to the
environment and human health, based on current scientific and regulatory
criteria) and the actual implementation of the remediation plan. This process
occurs over relatively long periods of time and is influenced by regulatory and
community approval processes and is subject to the ongoing development of
remediation technologies. Pennzoil's assessment analysis takes into account the
condition of each site at the time of estimation, the degree of uncertainty
surrounding the estimates for each phase of remediation and other site-specific
factors.

Capital outlays of approximately $101.9 million have been made by Pennzoil
since January 1993 with respect to environmental protection. Capital
expenditures for environmental control facilities are currently expected to be
approximately $27 million in 1996. Reference is made to "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Capital
Resources and Liquidity -- Environmental Matters" for additional information.

FRANCHISEE MATTERS. Jiffy Lube is subject to, and devotes substantial
efforts to compliance with, a variety of federal and state laws governing
franchise sales and marketing and franchise trade practices. Although the
regulatory environment differs by state, applicable laws and regulations
generally require disclosure of business information in connection with the sale
of franchises. Certain state regulations also affect the ability of the
franchisor to revoke or refuse to renew a franchise. Jiffy Lube seeks to comply
with applicable regulatory requirements. However, given the scope of Jiffy
Lube's business and the nature of franchise regulations, compliance problems can
be encountered from time to time.

ITEM 3. LEGAL PROCEEDINGS.

(A) CURTAILMENT DAMAGE ACTIONS. Reference is made to Note 8 of Notes to
Consolidated Financial Statements for information regarding a lawsuit filed in
1974 in which Pennzoil has been joined as a defendant for damages allegedly
caused by curtailment of deliveries of gas by United Gas Pipe Line Company, a
former Pennzoil subsidiary, to its customers.

(B) CLASS ACTION. In April 1994, a lawsuit styled Lazy Oil, Inc. vs. Witco
Corporation; Quaker State Corporation; and Pennzoil Company, was filed in the
United States District Court for the Western District of Pennsylvania. Three
other suits, Andreassi vs. Witco Corporation; Quaker State Corporation; and
Pennzoil Company, and Thomas A. Miller Oil vs. Witco Corporation; Quaker State
Corporation; and Pennzoil Company, and Wynnewood Drilling Associates v. Witco
Corporation; Quaker State Corporation; Quaker State Oil Refining Corporation;
Pennzoil Company; and Pennzoil Products Company, were also filed in 1994,
containing allegations substantially identical to those in the Lazy Oil case.
All four suits have been consolidated for discovery and trial. The consolidated
case, styled Lazy Oil Co., John B. Andreassi and Thomas A. Miller Oil Co. on
behalf of themselves and other similarly situated vs. Witco Corporation; Quaker
State Corporation; Quaker State Oil Refining Corp.; Pennzoil Company and
Pennzoil Products Company is currently pending in the United States District
Court for the Western District of Pennsylvania, Erie Division. This class action
suit brought by purchasers of "Penn Grade crude" alleges that, from 1981 to
1995, the defendants engaged in a combination and conspiracy in unreasonable
restraint of trade in violation of Section 1 of the Sherman Act, by allegedly
acting to fix, lower, maintain and stabilize the purchase price of "Penn Grade
crude" sold by the plaintiffs and the other class members to the defendants. The
plaintiffs also allege that the defendants have fraudulently concealed their
alleged combination and conspiracy. The plaintiffs seek injunctive relief,
alleged damages sustained by the plaintiffs and the class members and recovery
of attorneys' fees and costs. Plaintiffs' motion for class certification was not
opposed by defendants, and the Court has certified a class of plaintiffs
consisting of all persons who sold "Penn Grade crude" to any of the defendants
between 1981 and June 30, 1995. Quaker State and the plaintiffs have agreed on a
proposed settlement of

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$4.4 million payable by Quaker State, which is pending before the court for
approval. Pennzoil is contesting the case vigorously.

(c) RAMCO DISPUTE. In October 1995, PEPCO, Pennzoil International, Inc.,
Pennzoil Caspian Corporation and Pennzoil Caspian Development Corporation filed
an action, styled Pennzoil Exploration and Production Company, et al. v. Ramco
Energy Limited and Ramco Hazar Energy Limited, in the United States District
Court for the Southern District of Texas, Houston Division, against Ramco Hazar
Energy Limited, formerly known as Ramco Energy Limited (collectively "Ramco").
The federal suit seeks to compel Ramco to arbitrate certain disputes that have
arisen between it and the Pennzoil plaintiffs pursuant to the Federal
Arbitration Act and the Convention on the Recognition and Enforcement of Foreign
Arbitral Awards. The underlying dispute involves Ramco's asserted claim to an
interest in the Karabakh prospect, an oil and gas field located in the
territorial waters of the Azerbaijan Republic in the Caspian Sea and which
Pennzoil Caspian Development Corporation, SOCAR and other foreign oil companies
have agreed to explore and develop. After the filing of the federal action, the
Pennzoil plaintiffs filed an Original Petition for Declaration Relief in the
281st Judicial District Court of Harris County, Texas. The state suit, styled
Pennzoil Exploration and Production Company, et al. v. Ramco Energy Limited and
Ramco Hazar Energy Limited, which is expressly conditioned upon a determination
in the federal suit that the disputes between the Pennzoil plaintiffs and Ramco
are not subject to arbitration, seeks a declaration that the Pennzoil plaintiffs
have not breached any agreements with Ramco, and do not owe and/or have not
breached any fiduciary or other legal duty to Ramco including, without
limitation, a duty of good faith and fair dealing. In November 1995, Ramco
asserted a counterclaim in the state court action, asserting breach of contract
and breach of fiduciary duties. The counterclaim seeks a declaratory judgment
granting Ramco a participation interest in the Karabakh prospect, compensatory
damages, exemplary damages, attorney's fees, costs of court and other
unspecified relief. In January 1996, the judge in the federal suit granted in
part the Pennzoil plaintiffs' motion to compel arbitration and ordered
arbitration to be held in Stockholm, Sweden. The Pennzoil plaintiffs and the
Ramco defendants have each asked the judge to reconsider portions of his order.
The court has not ruled upon the motions for reconsideration.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matter was submitted during the fourth quarter of 1995 to a vote of
security holders.

ITEM S-K 401(b). EXECUTIVE OFFICERS OF THE REGISTRANT.

(a) Set forth below are the names and ages of the executive officers of
Pennzoil (at February 28, 1996). Positions, unless otherwise specified, are with
Pennzoil.

DAVID P. ALDERSON, II (46)
Group Vice President -- Finance and Accounting and Treasurer

CLYDE W. BEAHM (58)
Group Vice President -- Products Marketing

LINDA F. CONDIT (48)
Vice President and Corporate Secretary

THOMAS M. HAMILTON (52)
Executive Vice President

MICHAEL J. MARATEA (51)
Vice President and Controller

JAMES L. PATE (60)(1)
Chairman of the Board,
President and Chief Executive Officer

WILLIAM M. ROBB (51)
Group Vice President -- Products Manufacturing

JAMES W. SHADDIX (49)
General Counsel

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

(1) Director of Pennzoil and member of Executive Committee.

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(b) Officers are appointed annually to serve for the ensuing year or until
their successors have been appointed. Officers listed above have held their
present offices for at least the past five years except for those named below,
who have had the business experience indicated during that period. Positions,
unless specified otherwise, are with Pennzoil.

DAVID P. ALDERSON, II -- Group Vice President -- Finance and Accounting since
December 1995 and Treasurer since August 1989. Group Vice President -- Finance
from February 1992 to December 1995. Senior Vice President -- Finance prior
thereto.

CLYDE W. BEAHM -- Group Vice President -- Products Marketing since January 1996.
Group Vice President -- Franchise Operations from July 1992 to January 1996.
Executive Vice President -- Franchise Operations from February 1992 to July
1992. Senior Vice President -- Franchise Operations from May 1991 to February
1992. Vice President -- Quick Lube Operations prior thereto.

LINDA F. CONDIT -- Vice President since December 1995 and Corporate Secretary
since March 1990.

THOMAS M. HAMILTON -- Executive Vice President since December 1995. Group Vice
President -- Oil and Gas from December 1991 to December 1995. Chief
Executive -- Frontier and International Operating Company of BP Exploration
prior thereto.

MICHAEL J. MARATEA -- Vice President since February 1996 and Controller since
May 1995. Vice President -- Process Improvement of Pennzoil Exploration and
Production Company from October 1993 to May 1995 and Assistant Controller
prior thereto.

JAMES L. PATE -- Chairman of the Board since May 1994 and President and Chief
Executive Officer since March 1990.

WILLIAM M. ROBB -- Group Vice President -- Products Manufacturing since October
1992. Executive Vice President -- Manufacturing of Pennzoil Products Company
prior thereto.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

The following table shows high and low sales prices for the common stock of
Pennzoil as reported on the New York Stock Exchange (consolidated transactions
reporting system), the principal market in which the common stock is traded, and
dividends paid per share for the calendar quarters indicated. The common stock
is also listed for trading on the Pacific Stock Exchange, as well as the
Toronto, London and Swiss stock exchanges.

1995 1994
------------------------- -------------------------
MARKET PRICE MARKET PRICE
---------------- ----------------
QUARTER ENDED HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
------------------------------------ ------ ------ ----- ------ ------ -----

March 31............................ $48.38 $43.00 $.75 $56.38 $49.13 $.75
June 30............................. $50.88 $46.50 $.75 $52.50 $45.75 $.75
September 30........................ $47.50 $43.50 $.75 $52.38 $46.63 $.75
December 31......................... $44.88 $34.63 $.25 $52.88 $43.00 $.75

Pennzoil has paid quarterly dividends for 72 consecutive years.

As of December 29, 1995, Pennzoil had 18,602 record holders of its common
stock.

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ITEM 6. SELECTED FINANCIAL DATA.

The following table contains selected financial data for the five years
indicated.

YEAR ENDED DECEMBER 31
--------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(EXPRESSED IN MILLIONS EXCEPT PER SHARE AMOUNTS)

Revenues................................... $2,490.0 $2,562.9 $2,782.4 $2,356.7 $2,314.8
Income (loss) from
Continuing operations (1)................ $ (305.1) $ (283.8) $ 160.3 $ 17.4 $ 40.1
Discontinued operations (2).............. -- -- -- 11.7 29.9
Extraordinary items (3).................. -- -- (18.4) (16.6) --
Cumulative effect of changes in
accounting principles (4)............. -- (4.9) -- 115.7 (49.0)
-------- -------- -------- -------- --------
Net income (loss).......................... $ (305.1) $ (288.7) $ 141.9 $ 128.2 $ 21.0
Earnings (loss) per share
Continuing operations (1)................ $ (6.60) $ (6.16) $ 3.80 $ .43 $ .99
Discontinued operations (2).............. -- -- -- .29 .74
-------- -------- -------- -------- --------
Earnings (loss) per share before
extraordinary items and cumulative
effect of changes in accounting
principles............................ $ (6.60) $ (6.16) $ 3.80 $ .72 $ 1.73
Extraordinary items (3).................. -- -- (.44) (.41) --
Cumulative effect of changes in
accounting principles (4)............. -- (.11) -- 2.85 (1.21)
-------- -------- -------- -------- --------
Total............................ $ (6.60) $ (6.27) $ 3.36 $ 3.16 $ .52
Dividends per common share................. $ 2.50 $ 3.00 $ 3.00 $ 3.00 $ 3.00
Total assets............................... $4,307.8 $4,715.8 $4,886.2 $4,457.2 $5,108.0
Debt
Notes payable(5)......................... $ -- $ 337.2 $ 433.0 $ 339.3 $ 291.0
Long-term debt, including current
maturities, and capital lease
obligations........................... 2,585.7 2,254.6 2,077.8 2,031.7 2,321.7
-------- -------- -------- -------- --------
Total debt................................. $2,585.7 $2,591.8 $2,510.8 $2,371.0 $2,612.7
Total shareholders' equity (6)............. $ 836.2 $1,204.3 $1,505.8 $1,180.2 $1,164.1

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

(1) Reference is made to Notes 1 and 8 of Notes to Consolidated Financial
Statements.

(2) Represents results of Purolator Products Company, which was sold in 1992.

(3) In 1993 and 1992, Pennzoil redeemed amounts outstanding under several debt
facilities using proceeds from various sources. The premiums and related
unamortized discount and debt issue costs relating to these redemptions
resulted in extraordinary charges of $18.4 million ($28.3 million before
tax), or $.44 per share, in 1993 and $16.6 million ($25.2 million before
tax), or $.41 per share, in 1992.

(4) Reference is made to Note 6 of Notes to Consolidated Financial Statements
for discussion of 1994 events. In December 1992, Pennzoil announced its
decision to change its method of accounting for income taxes by adopting
the requirements of SFAS No. 109, "Accounting for Income Taxes," effective
as of January 1, 1992. As a result of adopting SFAS No. 109, Pennzoil
recognized a cumulative, one-time benefit from the change in accounting
principle for periods prior to 1992 of $115.7 million, or $2.85 per share,
as of the first quarter of 1992. In December 1991, Pennzoil announced its
decision to change its method of accounting for postretirement benefit
costs other than pensions by adopting the new requirements of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
effective as of January 1, 1991. Pennzoil recorded a charge of $49.0
million ($74.2 million before tax), or $1.21 per share, in 1991 to reflect
the cumulative effect of the change in accounting principle for periods
prior to 1991.

(5) As of December 31, 1995, borrowings under Pennzoil's commercial paper and
short-term variable-rate credit arrangements totaled $468.9 million, all of
which has been classified as long-term debt. Pennzoil does not intend or
expect to use working capital in 1996 for the settlement of these
borrowings and Pennzoil has the ability, by using existing revolving credit
arrangements, to refinance this short-term debt on a long-term basis.
Similar borrowings were reflected as short-term debt in prior years.

(6) Reference is made to Note 1 of Notes to Consolidated Financial Statements.

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

Reference is made to Industry Segment Financial Information included in
Item 1, Business and Item 2, Properties and the Consolidated Financial
Statements beginning on page F-3 for additional information.

RESULTS OF OPERATIONS

A net loss of $305.1 million, or $6.60 per share, was recorded for 1995
compared to a net loss of $288.7 million, or $6.27 per share, for 1994 and net
income of $141.9 million, or $3.36 per share, for 1993.

Effective July 1, 1995, Pennzoil adopted the requirements of SFAS No. 121.
As a result, Pennzoil recorded a charge of $265.5 million ($399.8 million before
tax), or $5.74 per share, as of July 1, 1995 to reflect the impairment of
long-lived assets, which included charges of $378.9 million before tax related
to the impairment of certain proved oil and gas properties. Reference is made to
"-- Oil and Gas" and Note 1 of Notes to Consolidated Financial Statements for
additional information.

In October 1995, Pennzoil announced a cost reduction program to reduce
general and administrative expenses. As a result of this program, Pennzoil
recorded a charge of $19.9 million in December 1995 associated with a workforce
reduction.

Results for 1994 include net charges of $210.4 million ($388.2 million
before tax), or $4.57 per share, associated with the settlement of a dispute
with the IRS relating to a proposed tax deficiency based on an audit of
Pennzoil's 1988 federal income tax return. Reference is made to "-- Capital
Resources and Liquidity" and Note 8 of Notes to Consolidated Financial
Statements for additional information.

Results of operations for 1994 also include a $21.1 million ($32.5 million
before tax), or $.46 per share, charge associated with the cessation of crude
oil processing at PPC's Roosevelt, Utah refinery, a $32.6 million ($50.2 million
before tax), or $.71 per share, charge in connection with the agreement
providing for the sale by Pennzoil to Freeport-McMoRan of substantially all the
domestic assets of Pennzoil's sulphur segment, and a $9.9 million ($15.2 million
before tax), or $.22 per share, charge to reflect adjustments of recorded values
of certain real estate properties. Reference is made to "-- Sulphur" for
additional information related to Pennzoil's sale of its domestic sulphur
assets.

Effective January 1, 1994, Pennzoil changed its method of accounting for
postemployment benefit costs by adopting the new requirements of SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." As a result, Pennzoil
recorded a charge of $4.9 million ($7.6 million before tax), or $.11 per share,
as of January 1, 1994, to reflect the cumulative effect of a change in
accounting principle for the periods prior to 1994.

In November 1993, Pennzoil sold 8,158,582 shares of Chevron common stock in
a block trade on the New York Stock Exchange ("NYSE") for a net price of $88.38
per share. The sale resulted in a net realized gain of $137.0 million ($171.6
million before tax), or $3.25 per share. Reference is made to "-- Capital
Resources and Liquidity" for additional information.

In 1993, Pennzoil redeemed an aggregate of $388.6 million principal amount
of indebtedness. The premiums and related unamortized discount and debt issue
costs relating to these redemptions resulted in an extraordinary charge of $18.4
million ($28.3 million before tax), or $.44 per share, in 1993.

In August 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted,
establishing a new 35% corporate income tax rate effective January 1, 1993. As a
result of the increase in the marginal income tax rate and other tax law
changes, Pennzoil recorded a one-time, non-cash charge of $16.0 million, or $.38
per share, in 1993 to adjust its deferred income tax liabilities and assets for
the effect of the change in income tax rates.

Investment and other income, net, for 1995 and 1994 primarily represents
dividend income from Pennzoil's investment in Chevron common stock. Investment
and other income, net, for 1993 primarily represents a pretax gain of $171.6
million from Pennzoil's sale of 8,158,582 shares of Chevron common stock and
dividend income from Pennzoil's investment in Chevron common stock. Pennzoil
beneficially owned

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18,071,036 shares of Chevron common stock as of December 31, 1995 (Chevron
effected a "two-for-one" split of its common stock in June 1994). The shares of
Chevron common stock beneficially owned by Pennzoil are classified as
non-current marketable securities and other investments in the accompanying
consolidated balance sheet. Reference is made to "-- Capital Resources and
Liquidity" for additional information.

OIL AND GAS

Results of Operations. The oil and gas segment recorded operating income of
$92.0 million in 1995, excluding $378.9 million associated with the SFAS No. 121
impairment, but including $1.0 million in other nonrecurring net charges. This
compares with an operating loss of $4.9 million in 1994, which included $93.9
million related to the settlement of a tax dispute with the IRS, and other
nonrecurring net charges totaling $36.8 million. Operating income in 1993 was
$159.2 million. After adjustment for nonrecurring items, operating income was
down $34.8 million in 1995 compared to 1994. This was primarily due to a $78.4
million reduction in aggregate natural gas realizations due to lower natural gas
prices, partially offset by a $36.3 million reduction in operating expenses and
a $9.8 million increase in aggregate liquids price realizations. Total
production costs and expenses per BOE, excluding exploration expense and DD&A,
were reduced from $5.93 in 1993 to $5.32 in 1994 and to $5.09 in 1995.

Effective July 1, 1995, Pennzoil adopted the requirements of SFAS No. 121,
which is intended to establish more consistent accounting standards for
measuring the recoverability of long-lived assets. In certain instances, SFAS
No. 121 specifies that the carrying values of assets be written down to fair
values, which, for Pennzoil, resulted in write-downs of proved oil and gas
properties that were not required under its prior impairment policy. In
determining whether an asset is impaired under the new standard, assets are
required to be grouped at the lowest level for which there are identifiable cash
flows that are largely independent of the cash flows of other groups of assets.
On this basis, certain proved oil and gas fields in North America were deemed to
be impaired because they were not expected to individually recover their entire
carrying value. However, SFAS No. 121 does not allow for the write-up of proved
oil and gas fields which are expected to individually recover more than their
carrying value. The pretax charge for the asset impairment of Pennzoil's proved
oil and gas properties was $378.9 million. The fair values used in calculating
the write-down required for such properties were determined by using the present
value of expected future cash flows or estimates of market value based on
transactions for comparable properties, as appropriate. Prior to the adoption of
SFAS No. 121, Pennzoil periodically reviewed the carrying amounts of proven
properties and an impairment reserve was provided as conditions warranted.
Reference is made to "Supplemental Financial and Statistical
Information -- Unaudited -- Oil and Gas Information" for information on the
standardized measure of discounted future net cash flows relating to proved oil
and gas reserves.

As a result of the IRS settlement in October 1994, Pennzoil increased the
balance of its investment in PEPCO (at the time named Pennzoil Petroleum
Company) capital stock for financial reporting purposes and, therefore, the
carrying value of PEPCO's oil and gas properties by $390.3 million, and such
increased investment resulted in a $93.9 million increase in DD&A recognized in
October 1994 relating to PEPCO's oil and gas properties from the date of the
acquisition of PEPCO to the date of the IRS settlement. These adjustments
resulted in a net increase in property, plant and equipment of $296.4 million as
of September 30, 1994, while interest charges and DD&A adjustments related to
the IRS settlement reduced Pennzoil's 1994 pretax income by $388.2 million.
Reference is made to Note 8 of Notes to Consolidated Financial Statements for
additional information.

DD&A in 1994 and 1993 included charges of $29.8 and $17.7 million,
respectively, to increase an impairment reserve originally established in 1988
related to Pennzoil's net investment in offshore California producing
properties. Generally lower offshore California oil prices, a reassessment of
remaining reserves and revisions to other projected economic parameters led
Pennzoil to determine that additional impairments were necessary.

Oil and gas production volumes decreased approximately 6% for 1995 compared
to 1994. The decrease in production volumes was primarily due to the sale of
noncore oil and gas assets. Natural gas produced for sale in 1995 was 662,311
Mcf per day, compared with 716,962 Mcf per day and 649,399 Mcf per day in 1994
and

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1993, respectively. Realized natural gas prices averaged $1.46 per Mcf in 1995
compared to $1.79 per Mcf in 1994 and $2.04 per Mcf in 1993. Liquids volumes in
1995 were 67,143 barrels per day, compared to 68,709 and 64,273 barrels per day
in 1994 and 1993, respectively. Liquids prices received in 1995 averaged $14.31
per barrel, compared with $13.74 per barrel in 1994 and $14.90 per barrel in
1993.

The results of operations from Pennzoil's oil and gas segment are subject
to volatility resulting from changes in crude oil and natural gas prices.
Pennzoil has a price risk management program that permits utilization of
agreements and financial instruments (such as futures, forward and option
contracts and swaps and collars) to reduce the price risk associated with
fluctuations in crude oil and natural gas prices. Reference is made to
"-- Capital Resources and Liquidity" for additional information.

During 1995, Pennzoil continued its assessment of its domestic oil and gas
properties and its related asset highgrading program commenced in 1992. This
assessment has resulted in the categorization of Pennzoil's oil and gas
properties into core and noncore producing areas and core and noncore producing
fields within core areas, and the disposition of substantially all properties
and fields categorized as noncore assets. From the beginning of 1992 through
1995, Pennzoil disposed of approximately 600 producing oil and gas fields,
including approximately 150 fields in 1995. Proceeds from the sales of these
noncore assets in 1995 totaled $164.8 million, resulting in gains of $9.7
million.

Expenses associated with exploration activities in 1995 were $39.8 million
compared with $61.0 million in 1994 and $70.7 million in 1993. Exploration
expenses in 1995 decreased $21.2 million compared to 1994. Dry hole charges were
down $17.1 million and impairments of unproved property costs were down $5.6
million from the prior year. The decrease in dry hole expense for 1995 compared
to 1994 was primarily due to a higher percentage of successful wells drilled.

Operating results for 1995 include charges totaling $9.1 million for
workforce reduction expenses resulting from a general and administrative cost
reduction program announced in October 1995 and workforce reduction expenses
during 1995 that were identified prior to the October program.

Operating results for 1994 include a charge of $24.3 million for the
write-down of an investment in a Siberian drilling partnership and $13.8 million
in charges associated with the impending disposition of other noncore assets.

In April 1995, Pennzoil Gas Marketing Company, an indirect wholly owned
Pennzoil subsidiary, and BRING Gas Services Corp., a subsidiary of Brooklyn
Union Gas Co., formed PennUnion, a 50-50 gas marketing joint venture. Pennzoil
contributed $3.7 million in cash to PennUnion. Pennzoil has committed over 90%
of its natural gas production from the continental United States through March
31, 1998 to be marketed by PennUnion. Pennzoil earned pretax operating income of
approximately $.8 million related to its share of PennUnion's operating earnings
in 1995.

Exploration, Development and Production Activities. In July 1995, a joint
venture between Pennzoil Venezuela Corporation, S.A., an indirect wholly owned
subsidiary of Pennzoil, and Vinccler S.A. entered into an operating service
agreement with Maraven, S.A., a Petroleos De Venezuela S.A. affiliate, to
operate the East Falcon Unit in northwestern Venezuela. This unit includes an
oil field in which production operations were suspended in 1968, two undeveloped
gas fields and several prospects. Under this service agreement, Pennzoil is
required to incur all costs attributable to exploration, development and
production activities. The service agreement allows for Pennzoil to recover such
costs through a per-barrel fee for operating this unit, which contains estimated
gross proved remaining reserves available through field reactivation of 12
million BOE. Early production should begin by mid-1996 and is estimated to reach
about 2,000 barrels per day of liquids by the end of 1996.

In September 1995, Pennzoil and Forum Exploration, an independent Egyptian
oil company, signed a farm-in agreement giving Pennzoil an 87.5% working
interest in Forum Exploration's South-West Gebel El-Zeit concession in the
southern Gulf of Suez, offshore Egypt. Pennzoil Egypt, an indirect wholly owned
subsidiary of Pennzoil, will be the operator for this farm-in agreement. The
Pennzoil/Forum Exploration group is committed to a minimum of $3 million in
exploration expenditures over the next three years. An additional phase, which
is at the option of the Pennzoil/Forum Exploration group, would consist of three

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additional years of exploration with a minimum expenditure of $5 million.
Seismic activity is currently in progress.

In June 1994, Pennzoil Canada, an indirect wholly owned subsidiary of
Pennzoil, acquired Co-enerco, a Canadian oil and gas exploration and production
company operating in Alberta, northeastern British Columbia and southeastern
Saskatchewan. Pennzoil Canada paid $230.9 million in cash in connection with the
acquisition of Co-enerco and the repayment of Co-enerco's outstanding bank debt,
which was financed primarily through two credit facilities. The acquisition of
Co-enerco was accounted for using the purchase method of accounting, and the
results of operations of Co-enerco subsequent to June 30, 1994 have been
included in Pennzoil's consolidated statement of income. Reference is made to
Notes 3 and 10 of Notes to Consolidated Financial Statements for additional
information.

In July 1994, Pennzoil Qatar, Inc. ("Pennzoil Qatar"), an indirect wholly
owned subsidiary of Pennzoil, was awarded the rights to explore acreage of Block
8 offshore Qatar. The block is located 50 miles from shore in the Arabian Gulf
and is adjacent to three large producing oil fields. Under the production
sharing agreement, Pennzoil Qatar has committed to a seismic acquisition and
drilling program over the next four years. Drilling will begin in late 1996,
with four wells planned over the next several years.

In September 1994, SOCAR and a consortium of foreign oil companies, which
includes Pennzoil, signed an oil production sharing contract for development of
the Azeri, Chirag and a deepwater portion of the Gunashli fields in the Caspian
Sea. The contract was ratified by the Azerbaijan Parliament in November 1994 and
was made effective in December 1994. Aggregate capital investment for all
members of the consortium is estimated to be between $7 and $8 billion over the
30-year life of the project to develop an estimated 4 billion barrels of
recoverable reserves. Pennzoil's 9.82% share has the potential to add net
reserves estimated in the range of 300 million barrels once the area is
developed. The contract includes a $300 million bonus to be paid by the
consortium to the government of Azerbaijan in a phased manner over the life of
the project. The bonus payment is payable in three installments. The first bonus
payment made by the consortium was equal to 50% of the total bonus. Pennzoil's
proportionate share was $17.8 million, of which $11.9 million was paid in cash

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and $5.9 million was credited toward Pennzoil's prior investment in a gas
utilization project in Azerbaijan. The second bonus payment, equal to 25% of the
total bonus, will be due 30 days from the date when production in the contract
area reaches an average rate of 40,000 barrels of crude oil per day and is
sustained for a period of 60 days. The remaining bonus payment will be due
within 30 days from the date when crude oil has been exported from the main
export pipeline for a sustained period of 60 days.

In November 1994, Pennzoil Egypt, an indirect wholly owned subsidiary of
Pennzoil, and its Spanish partner, Repsol Exploracion Egypto S.A., were selected
to explore the southeast Gulf of Suez Block offshore Egypt. The block is
approximately the size of 44 Gulf of Mexico blocks. The agreement calls for
acquisition of 3-D seismic data and the drilling of one well over the next two
years following final approval of the agreement.

Capital Expenditures. Capital expenditures for the oil and gas segment in
1995 were $297.6 million compared to $399.5 million in 1994, excluding
expenditures related to Pennzoil's acquisition of Co-enerco, and $360.5 million
in 1993. Total capital expenditures for this segment in 1996 are budgeted at
$232.8 million. Reference is made to "-- Capital Resources and Liquidity" for
additional information.

MOTOR OIL & REFINED PRODUCTS

Operating Results. Operating income in 1995 for this segment was $12.0
million compared with operating income of $41.8 million in 1994 and $90.0
million in 1993. Lower earnings in 1995 were primarily the result of charges
related to a fire at the Rouseville refinery, costs associated with the shutdown
of The Eureka Pipe Line Company ("Eureka"), which operated a crude oil gathering
system in West Virginia, costs associated with restructuring European marketing
operations and litigation settlement expenses. In addition, PPC incurred
expenses of $9.0 million in 1995 associated with Excel Paralubes, the 50-50
joint venture partnership between PPC and Conoco.

Excluding nonrecurring charges, lower earnings in the manufacturing
division in 1995 resulted primarily from lower refining and specialty product
margins. Total processed volume at the refineries of 47,966 barrels per day in
1995 was 10,737 barrels per day lower than 1994 and 11,256 barrels per day lower
than 1993. Lower processed volumes resulted from the cessation of crude oil
processing at the refinery in Roosevelt, Utah as of September 30, 1994, coupled
with the effects of the fourth quarter 1995 fire at the Rouseville refinery and
a maintenance turnaround at the Atlas refinery in Shreveport, Louisiana.

Lower earnings in the domestic marketing division, excluding nonrecurring
charges, were the result of lower GUMOUT(R) sales volumes and margins, higher
advertising, freight and other expenses, lower motor oil volumes and lower
revenues from other products. Domestic motor oil volumes were about 1% lower
than 1994 and about even with 1993 levels. Total international motor oil and
other lubricating product sales volumes, including those sold through licenses
and joint ventures, increased 7.6% when compared to 1994 and 46% when compared
to 1993.

In October 1995, an explosion and fire occurred at PPC's Rouseville
refinery. Two PPC employees and three contractor employees were killed. Several
other injuries were reported. As of the date hereof, results of OSHA
investigations have not been released. The major damage identified was to the
tanks, piping and electrical lines in the area of the fire. Some portions of the
new wax plant project were damaged, and project completion has been delayed
until August 1996. A charge of $20.0 million was taken in the fourth quarter of
1995 for losses related to the fire. Reference is made to Note 8 of Notes to
Consolidated Financial Statements for additional information.

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In November 1995, PPC sold the assets of Eureka, a wholly owned subsidiary
that operated a crude oil gathering system in West Virginia. PPC recorded a
charge of $5.7 million for estimated costs associated with the disposal of the
facility.

Business Activities. In June 1994, PPC and Conoco commenced work on a joint
venture project at Conoco's refinery in Lake Charles, Louisiana. Operating
through a 50-50 joint venture partnership called Excel Paralubes, the companies
are constructing a new, state-of-the-art lube oil hydrocracker facility
estimated to cost approximately $500 million, which is being funded with project
financing. The facility will produce approximately 18,000 barrels per day of
high-quality base oils, the base ingredient in finished lubricants. Site
preparation began in the third quarter of 1994, and the facility is expected to
be completed in late 1996, with operations commencing in early 1997. Conoco is
acting as construction manager and operator of the plant with support positions
staffed by both companies.

In April 1995, PPC and the Polymers Division of Petrolite formed a 50-50
partnership called BARECO(R) Products to market a broad line of wax products to
domestic and international purchasers of paraffin, microcrystalline and related
synthetic waxes. Pennzoil transports partially refined feedstock from Utah to
its Rouseville refinery, which produces paraffinic waxes and related products.
The new wax products, along with certain waxes from Petrolite and existing wax
products from Pennzoil's Atlas and Rouseville refineries, are marketed through
the partnership. Pennzoil is investing more than $23 million in its Rouseville
refinery and its packaging plant in nearby Reno, Pennsylvania in connection with
this venture.

In July 1995, PPC agreed to purchase a one-third ownership interest in a
manufacturing and marketing company located in Caracas, Venezuela. The company,
Aceites y Solventes Venezolanos Vassa S.A., has constructed and is commissioning
a facility in Cardon, Venezuela to manufacture white oils, solvents and
transformer oils for sale primarily in South America, Central America and the
Caribbean. Pennzoil's capital investment will be approximately $14.5 million, a
portion of which will be funded through nonrecourse project financing.

In September 1995, PPC acquired the assets of the Viscosity Oil division of
Case for $33.6 million. Viscosity Oil is a leading supplier of premium-quality
lubricants to the North American off-road industry and it supplies lubricants to
substantially all the Case dealer network, with locations in all 50 states and
Canada. In addition, Viscosity Oil supplies virtually all of the factory-fill
lubricants for Case's North American manufacturing plants. As part of the
acquisition, a long-term supply agreement was entered into whereby Pennzoil will
supply the aftermarket lubricant products that Case will continue to sell to its
dealerships. The agreement also calls for Pennzoil to supply factory-fill
lubricants to Case. The acquisition was financed by a combination of cash on
hand and borrowings under Pennzoil's commercial paper facilities and short-term
variable-rate credit arrangements.

Capital Expenditures. Capital expenditures for the motor oil and refined
products segments were $134.9 million in 1995, $40.4 million in 1994 and $71.5
million in 1993. The 1993 expenditures included $26.6 million for a diesel
desulphurization and dewaxing project at the Atlas refinery in Shreveport,
Louisiana, which was required to meet requirements promulgated under the 1990
Amendments to the federal Clean Air Act. Also included were expenditures of $6.3
million for a feasibility study for the base oil plant joint venture with Conoco
and $4.8 million for the acquisition of property, plant and equipment of a
blending plant in Spain (acquired in the first quarter of 1993). Capital
expenditures for 1994 were primarily at a level to maintain operations. Capital
expenditures in 1995 included $52.3 million for the construction of a refinery
complex

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designed to convert the Atlas refinery's lube oil by-products into clean burning
gasoline and diesel fuels. This upgrade project will allow Atlas to
significantly diversify its production capabilities and to realize higher
profits from by-products, which are currently sold at low values. Also included
was $19.2 million in expenditures for facilities at the Rouseville refinery to
enable production of additional waxes in connection with the previously
announced Petrolite joint venture. The 1996 capital budget of $214.3 million
includes funds of $129.2 million for completion of the Atlas upgrade project.

FRANCHISE OPERATIONS

Operating Results. The franchise operations segment, operating through
Jiffy Lube, recorded operating income of $13.2 million during 1995, compared to
operating income of $2.8 million in 1994 and an operating loss of $17.6 million
in 1993. Operating income in 1995 continued to improve significantly due to
ongoing improvements in company center revenues and lower operating costs.
Operating results for 1995 include nonrecurring charges of $6.0 million for a
litigation settlement and $.3 million from severance charges associated with a
general and administrative cost reduction program. Operating results for 1994
included charges of $8.2 million for reserves for identified self-insured
claims, estimated environmental remediation costs, various litigation settlement
charges and other miscellaneous items. As of December 31, 1995, Jiffy Lube
operated 477 company-owned service centers.

Operating results for 1993 included a charge of $10.0 million for estimated
costs associated with centers that Jiffy Lube decided to eliminate. Jiffy Lube
had determined that these centers were not viable as company-operated centers
and had been unsuccessful in subleasing many of these centers for alternative
uses. This provision for estimated costs takes into consideration the present
value of future lease obligations related to operating leases (less estimated
sublease rental revenue of existing subleases) and the estimated fair value of
land, buildings, leaseholds and leasehold improvements. Additionally, 1993
results included approximately $12.7 million for the settlement of certain
litigation, estimated environmental costs and write-downs of other individually
insignificant investments to reflect Jiffy Lube's estimate of the net
realizability of those investments.

Systemwide service center sales reported to Jiffy Lube for the year ended
December 31, 1995 increased $49.1 million, or approximately 8%, to $656.6
million, compared with the prior year, and increased $117.3 million, or
approximately 22%, compared with 1993. Average ticket prices increased to $34.71
for the year ended December 31, 1995, compared with $34.09 and $33.60 for the
years ended December 31, 1994 and 1993, respectively.

Business Activities. In March 1995, Jiffy Lube and Sears agreed to open
fast-oil change units in Sears Auto Centers over the next three years. Under the
agreement, Jiffy Lube remodels, equips and operates service areas within the
Sears Auto Centers, while Sears continues to utilize the remaining bays for its
operations. As a first step, Sears and Jiffy Lube have agreed to set up
approximately 240 Jiffy Lube-owned and franchised centers and had 28 centers
open at the end of 1995.

During the year ended December 31, 1995, Jiffy Lube acquired 52 centers
with estimated values of $30.2 million and real estate with estimated values of
$6.0 million in exchange for cash of $35.3 million, liabilities and debt assumed
of $1.3 million and four centers with a net book value of $.4 million. Also,
during the year ended December 31, 1995, nineteen centers were sold with an
estimated value of $1.9 million for $2.6 million in cash and $.3 million in
forgiveness of debt.

During the year ended December 31, 1994, Jiffy Lube acquired 22 centers
with estimated values of $5.2 million and real estate with estimated values of
$1.1 million, in exchange for cash of $5.2 million, forgiveness of amounts due
Jiffy Lube of $1.1 million, liabilities and debt assumed of $.6 million and 4
centers with a net book value of $.3 million. During the year ended December 31,
1993, Jiffy Lube acquired 70 centers with estimated values of $15.8 million and
real estate with estimated values of $.9 million in exchange for cash of $12.2
million, forgiveness of amounts due Jiffy Lube of $.9 million, liabilities
assumed of $.5 million, debt assumed of $.4 million and real estate valued at
$1.6 million.

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Capital Expenditures. Capital expenditures for the franchise operations
segment were $40.8 million in 1995, compared to $18.9 million and $21.7 million
in 1994 and 1993, respectively. Capital expenditures for 1996 are estimated to
be approximately $26.2 million.

SULPHUR

In October 1994, Pennzoil entered into an agreement with Freeport-McMoRan
providing for the sale by Pennzoil to Freeport-McMoRan of substantially all the
domestic assets of Pennzoil's sulphur segment. The transaction was completed in
January 1995. Pennzoil continues to operate its international sulphur business.
Beginning in January 1995, the results of such operations are included in other
segment operating income. As consideration under the agreement, Freeport-McMoRan
assumed certain liabilities of Pennzoil relating to or arising out of the
business of Pennzoil's sulphur segment, and Pennzoil will be entitled to receive
a series of quarterly installment payments from Freeport-McMoRan for periods
through December 31, 2014, subject to the prevailing market price of sulphur.
The installment payments, recorded at their estimated fair value of $22.5
million as of September 30, 1994, may be terminated earlier by Freeport-McMoRan
(through the exercise of a call option providing for a $65 million payment to
Pennzoil), or by Pennzoil (through the exercise of a put option providing for a
$10 million payment to Pennzoil). Neither the call option nor the put option may
be exercised prior to January 1999. In connection with this transaction,
Pennzoil's sulphur segment recorded a charge to DD&A of $50.2 million in
September 1994. As of December 31, 1995, Pennzoil has received $3.7 million in
installment payments.

Excluding the $50.2 million pretax charge, the sulphur segment recorded an
operating loss of $7.2 million in 1994 compared to a loss of $20.8 million in
1993. The average Green Markets Tampa Recovered Contract Price range for sulphur
had a mid-point of $57.00 per long ton in 1994 compared to a 1993 mid-point of
$64.00 per long ton. Intense competition in the domestic market pushed sulphur
prices down, primarily because of aggressive marketing by U.S. producers.
Partially offsetting these lower sulphur prices in 1994 were lower unit costs
due to reduced workforce expenses and reduced gas and water treatment costs at
the Culberson mine.

During 1994, sulphur sales volumes were 1.2 million long tons compared to
1.1 million long tons in 1993. The lower level of sales volumes in 1994 and 1993
was primarily due to reduced market share resulting from lower priced imports
from Canada and increased recovered production domestically.

OTHER

Other operating income in 1995 was $74.0 million, compared to $55.6 million
in 1994 and $253.7 million in 1993. The increase in other operating income in
1995 was primarily the result of a favorable resolution of a Texas franchise tax
issue, which resulted in Pennzoil's receiving a $23.2 million refund. In
addition, Pennzoil received approximately $1.5 million in interest associated
with the franchise tax refund. This increase in income was partially offset by
lower investment income as the result of having lower investable funds during
the year, primarily due to the October 1994 payment to the IRS associated with a
settlement related to a tax dispute. Reference is made to Note 8 of Notes to
Consolidated Financial Statements for additional information. Other operating
income for 1994 includes a $15.2 million charge to reflect an adjustment of
recorded values of certain real estate properties. The higher level of other
income in 1993 was primarily due to the gains of $171.6 million on the sale of
shares of Chevron common stock and $10.5 million on the sale of shares of Pogo
Producing Company common stock. Dividend income on the Chevron common stock was
$34.8 million for 1995, $33.4 million for 1994 and $60.2 million for 1993.

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Other revenues, net of related expenses, are included in the consolidated
statement of income under "Investment and Other Income, Net" which consists of
the following:

1995 1994 1993
-------- -------- --------
(EXPRESSED IN THOUSANDS)

Interest income.................................... $ 9,411 $ 36,841 $ 11,002
Dividend income.................................... 34,850 33,766 60,496
Realized gains on sales of marketable securities
and
other investments................................ -- 500 182,057
Net gains on sales of assets....................... 7,739 37,530 35,222
Settlements and refunds............................ 25,913 1,793 824
Other income (expense), net........................ 26,786 (22,316) 15,299
-------- -------- --------
$104,699 $ 88,114 $304,900
======== ======== ========

Substantially all interest and dividend income is from marketable
securities and other cash investments.

INTEREST CHARGES, NET

During 1995, Pennzoil's interest charges, net of interest capitalized,
increased $12.0 million over 1994 levels, excluding interest charges of $294.3
million associated with the 1994 IRS settlement. Reference is made to Note 8 of
Notes to Consolidated Financial Statements for additional information. The
increase in interest charges net of capitalized interest, is due primarily to
slightly higher average borrowings at higher rates and lower capitalized
interest.

YEAR ENDED DECEMBER 31
--------------------------------------
1995 1994 1993
-------- -------- --------
(EXPRESSED IN THOUSANDS)

Interest expense............................... $198,579 $191,356 $190,968
Interest expense on IRS settlement............. -- 294,312 --
Less: Interest capitalized..................... 4,231 9,027 11,420
-------- -------- --------
$194,348 $476,641 $179,548
======== ======== ========

CAPITAL RESOURCES AND LIQUIDITY

CASH FLOW. Pennzoil had cash and cash equivalents of $23.6 million and
$24.9 million at December 31, 1995 and 1994, respectively. Cash flow generated
from operations and proceeds from the sales of assets in 1995 totaled
approximately $639.4 million. These funds were used primarily for capital
expenditures ($473.4 million), for the acquisition of Viscosity Oil ($33.6
million) and for payment of cash dividends ($115.6 million).

In October 1995, Pennzoil announced certain actions intended to increase
capital available for investment and growth opportunities. Pennzoil announced
that it was implementing a new program intended to reduce annual general and
administrative expenses, thereby resulting in future annual cost savings, and it
was reducing its fourth quarter dividend payment to $0.25 per share from the
$0.75 per share quarterly dividend that had been paid since 1988. At the reduced
quarterly dividend level, equivalent to an annualized dividend of $1.00 per
share, Pennzoil will conserve approximately $92 million annually which can be
used for investment and growth opportunities.

PRICE RISK MANAGEMENT. Pennzoil has a price risk management program that
permits utilization of agreements and financial instruments (such as futures,
forward and option contracts and swaps and collars) to reduce the price risks
associated with fluctuations in crude oil and natural gas prices. The primary
purpose of the program, as it relates to 1996 crude oil and natural gas
production, is to help provide Pennzoil with sufficient cash from operations in
1996 to fund its capital spending program without increasing debt. As of
December 31, 1995, Pennzoil had entered into transactions that committed an
average of approximately 313,000 Mcf of natural gas per day for 1996 to be sold
at fixed prices (New York Mercantile Exchange

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("NYMEX")-based) ranging from $1.73 to $2.67 per Mcf, with a weighted average
price of $1.86 per Mcf, and Pennzoil had entered into transactions that
committed an average of approximately 37,000 barrels of crude oil per day for
1996 to be sold at fixed prices (NYMEX-based) ranging from $16.75 per barrel to
$19.20 per barrel, with a weighted average price of $17.13 per barrel. As of
February 23, 1996, Pennzoil had entered into transactions that committed an
average of approximately 273,000 Mcf of natural gas per day for the remainder of
1996 to be sold at fixed prices (NYMEX-based) ranging from $1.80 to $2.86 per
Mcf, with the weighted average price of $1.80 per Mcf, and Pennzoil had entered
into transactions that committed an average of approximately 37,000 barrels of
crude oil per day for the remainder of 1996 to be sold at fixed prices
(NYMEX-based) ranging from $16.75 to $18.86 per barrel, with a weighted average
price of $17.07 per barrel. Pennzoil will constantly review and may alter its
hedged positions as conditions change. Pennzoil has not hedged crude oil or
natural gas prices beyond 1996.

INVESTMENT IN CHEVRON CORPORATION. As of December 31, 1995, Pennzoil
beneficially owned 18,071,036 shares of Chevron common stock, which have been
deposited with exchange agents for possible exchange for $402.5 million and
$500.0 million principal amount of exchangeable debentures of Pennzoil due
January 15, 2003 and October 1, 2003, respectively, at exchange rates equivalent
to $42 1/16 and $58 13/16 per share of Chevron common stock, respectively.
Reference is made to Note 3 of Notes to Consolidated Financial Statements for
additional information. The current quarterly dividend rate on Chevron common
stock is $.50 per share. At the current dividend rate, Pennzoil receives $36.1
million annually in dividends on the 18,071,036 Chevron shares.

In November 1993, Pennzoil sold 8,158,582 shares of Chevron common stock in
a block trade on the NYSE for a price of $89.00 per share before commissions
($88.38 per share net of commissions). The sale resulted in a net realized gain
of $137.0 million ($171.6 million before tax), or $3.25 per share. Reference is
made to Note 2 of Notes to Consolidated Financial Statements for additional
information.

CREDIT FACILITIES. In February 1995, Pennzoil's Board of Directors
increased the limit on the aggregate amount of commercial paper that Pennzoil
may issue under its commercial paper programs from $250.0 million to $500.0
million. Borrowings under Pennzoil's commercial paper facilities totaled $343.9
and $243.9 million at December 31, 1995 and December 31, 1994, respectively, and
are included in long-term debt and short-term notes payable, respectively in the
accompanying consolidated balance sheet. The average interest rates applicable
to outstanding commercial paper were 6.13% and 4.43% during 1995 and 1994,
respectively.

Pennzoil's current revolving credit facility with a group of banks provides
for up to $600 million of unsecured revolving credit borrowings through May 28,
1996, with any outstanding borrowings on such date being converted into a term
credit facility terminating on May 30, 1997. Pennzoil has the option, subject to
the extension of additional credit by new or existing banks, of increasing the
size of the facility by $100 million. Outstanding borrowings under Pennzoil's
revolving credit facilities totaled $50.0 million and $205.0 million at December
31, 1995 and 1994, respectively. The average interest rate applicable to amounts
outstanding under Pennzoil's revolving credit facilities was 6.10% and 4.69%
during 1995 and 1994, respectively.

Pennzoil Canada, an indirect wholly owned subsidiary, has a U.S. $185
million credit facility with a syndicate of banks, the borrowings under which
are guaranteed by Pennzoil. Pennzoil Canada also has an additional working
capital credit facility with a Canadian bank, the borrowings of which are
guaranteed by Pennzoil. These facilities provide for revolving credit borrowings
through May 28, 1996, with any outstanding borrowings on such date being
converted into term credit facilities terminating on May 30, 1997. Combined
borrowings under these facilities totaled U.S. $220.0 million and U.S. $195.0
million as of December 31, 1995 and December 31, 1994, respectively. The average
interest rate applicable to amounts outstanding under these facilities was 6.16%
and 5.27% during 1995 and 1994, respectively.

Pennzoil has several short-term variable-rate credit arrangements with
certain banks. Pennzoil's Board of Directors has limited aggregate borrowings
under these credit arrangements to $200.0 million. Outstanding borrowings
totaled $125.0 million and $93.3 million at December 31, 1995 and 1994,
respectively, and are included in long-term debt and short-term notes payable,
respectively, in the accompanying consolidated balance sheet. The average
interest rates applicable to amounts outstanding under these arrangements were
5.95% and 4.31% during 1995 and 1994, respectively. None of the banks under
these credit arrangements has

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any obligation to continue to extend credit after the maturities of outstanding
borrowings or to extend the maturities of any borrowings.

As of December 31, 1995, borrowings under Pennzoil's commercial paper and
short-term variable-rate credit arrangements totaled $468.9 million, all of
which has been classified as long-term debt. Pennzoil does not intend or expect
to use working capital in 1996 for the settlement of these borrowings and
Pennzoil has the ability, by using existing revolving credit arrangements, to
refinance this short-term debt on a long-term basis. Similar borrowings totaling
$337.2 million were reflected as short-term debt as of December 31, 1994.

Reference is made to Note 3 of Notes to Consolidated Financial Statements
for additional information regarding Pennzoil's credit facilities.

SETTLEMENT OF IRS DISPUTE. Reference is made to Note 8 of Notes to
Consolidated Financial Statements for information concerning Pennzoil's
settlement in October 1994 of a dispute with the IRS relating to a proposed tax
deficiency based on an audit of Pennzoil's 1988 federal income tax return.

CAPITAL EXPENDITURES. Total capital expenditures for 1995 were $477.8
million, including $4.2 million of interest capitalized, an increase of $3.2
million from comparable 1994 capital expenditure levels. For 1995, capital
expenditures for motor oil and refined products include $0.6 million allocated
to property, plant and equipment related to Pennzoil's acquisition of Viscosity
Oil in September 1995.

The table below summarizes the current 1996 capital budget by segment
compared with 1995 and 1994 capital expenditures, excluding expenditures related
to Pennzoil's acquisition of Co-enerco in 1994. The capital budget is reassessed
from time to time, and could, for example, be adjusted to reflect changes in oil
and gas prices and other economic factors.

1996
BUDGET 1995 1994
------ ------ ------
(EXPRESSED IN MILLIONS)

Oil and Gas.................................... $232.8 $297.6 $399.5
Motor Oil & Refined Products................... 214.3 134.9 40.4
Franchise Operations........................... 26.2 40.8 18.9
Sulphur........................................ -- -- 8.5
Corporate and Other............................ .6 4.5 7.3
------ ------ ------
$473.9 $477.8 $474.6
====== ====== ======

Pennzoil currently expects to generate funds for its budgeted 1996 capital
expenditures from a combination of some, or all, of the following: cash flows
from operations, the sale of noncore assets, borrowings under its credit
facilities and commercial paper program, available cash and proceeds from future
debt issuances.

ENVIRONMENTAL MATTERS. Pennzoil continues to make capital and operating
expenditures relating to the environment, including expenditures associated with
its compliance with federal, state and local environmental regulations. As they
continue to evolve, environmental protection laws are expected to have an
increasing impact on Pennzoil's operations. In connection with pollution
abatement efforts related to current operations, Pennzoil made capital
expenditures of approximately $29 million in 1995 and $37 million in 1994.
Capital expenditures for environmental control facilities are currently expected
to be approximately $27 million in 1996. Pennzoil's recurring operating
expenditures relating to environmental compliance activities are not material.

Pennzoil is subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
CERCLA, the Resource Conservation and Recovery Act and similar state statutes.
In response to liabilities associated with these activities, accruals have been
established when reasonable estimates are possible. Such accruals primarily
include estimated costs associated with remediation. Pennzoil has not used
discounting in determining its accrued liabilities for environmental
remediation, and no claims for possible recovery from third party insurers or
other parties related to environmental costs have been recognized in Pennzoil's
consolidated financial statements. Pennzoil adjusts the accruals when new

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remediation responsibilities are discovered and probable costs become estimable,
or when current remediation estimates must be adjusted to reflect new
information.

In connection with Pennzoil's disposition of Purolator Products Company
("Purolator") in 1992, Pennzoil and Purolator entered into an indemnification
agreement, pursuant to which Pennzoil agreed to reimburse Purolator for the
costs and expenses of certain environmental remediation activities at a plant
operated by Purolator in Elmira Heights, New York, and certain environmental
remediation activities, if any, required at one other site located near the
Elmira facility and a landfill site located in Metamora, Michigan. Pennzoil had
a reserve of $15.7 million and $16.2 million recorded with respect to its
obligations under its indemnification agreement with Purolator as of December
31, 1995 and 1994, respectively. Reference is made to Note 8 of Notes to
Consolidated Financial Statements for additional information.

Certain of Pennzoil's subsidiaries are involved in matters in which it has
been alleged that such subsidiaries are potentially responsible parties ("PRPs")
under CERCLA or similar state legislation with respect to various waste disposal
areas owned or operated by third parties. In addition, certain of Pennzoil's
subsidiaries are involved in other environmental remediation activities,
including the removal, inspection and replacement, as necessary, of underground
storage tanks. As of December 31, 1995 and 1994, Pennzoil's consolidated balance
sheet included accrued liabilities for environmental remediation of $38.1
million and $44.9 million, respectively, which amounts include reserves with
respect to Pennzoil's obligations under its indemnification agreement with
Purolator referred to in the previous paragraph. Of these reserves, $5.2 million
and $8.8 million are reflected in the consolidated balance sheet as current
liabilities as of December 31, 1995 and 1994, respectively, and $32.9 million
and $36.1 million are reflected as other liabilities as of December 31, 1995 and
1994, respectively. Pennzoil does not currently believe there is a reasonable
possibility of incurring additional material costs in excess of the current
accruals recognized for such environmental remediation activities. With respect
to the sites in which Pennzoil subsidiaries are PRPs, Pennzoil's conclusion is
based in large part on (i) the availability of defenses to liability, including
the availability of the "petroleum exclusion" under CERCLA and similar state
laws, and/or (ii) Pennzoil's current belief that its share of wastes at a
particular site is or will be viewed by the EPA or other PRPs as being de
minimis. As a result, Pennzoil's monetary exposure is not expected to be
material.

OTHER MATTERS. Pennzoil does not currently consider the impact of inflation
to be significant in the businesses in which Pennzoil operates.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The consolidated financial statements of Pennzoil, together with the report
thereon of Arthur Andersen LLP dated February 23, 1996 and the supplementary
financial data specified by Item 302 of Regulation S-K, are set forth on pages
F-1 through F-38 hereof. (See Item 14 for Index.)

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not Applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information appearing under the captions "Nominees," "Directors with
Terms Expiring in 1997 and 1998" and "Compliance with Section 16(a) of the
Exchange Act" set forth within the section entitled "Election of Directors" in
Pennzoil's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 is incorporated herein by reference.
See also Item S-K 401(b) appearing in Part I of this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION.

The information appearing under the captions "Director Remuneration,"
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" set forth within the section entitled "Election of Directors" in
Pennzoil's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information appearing under the caption "Security Ownership of
Directors and Officers" set forth within the section entitled "Election of
Directors" and under the caption "Security Ownership of Certain Shareholders"
set forth within the section entitled "Additional Information" in Pennzoil's
definitive Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information appearing under the captions "Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" set forth
within the section entitled "Election of Directors" and under the caption
"Security Ownership of Certain Shareholders" set forth within the section
entitled "Additional Information" in Pennzoil's definitive Proxy Statement to be
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 is
incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(A)(1) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

PAGE
---

Report of Independent Public Accountants............................. F-1
Consolidated Statement of Income..................................... F-3
Consolidated Balance Sheet........................................... F-4
Consolidated Statement of Shareholders' Equity....................... F-6
Consolidated Statement of Cash Flows................................. F-7
Notes to Consolidated Financial Statements........................... F-8

The supplementary financial data specified by Item 302 of Regulation S-K
are included in "Supplemental Financial and Statistical
Information -- Unaudited" beginning on page F-32.

33
35

(A)(2) FINANCIAL STATEMENT SCHEDULES.

Schedules of Pennzoil and its subsidiaries are omitted because of the
absence of the conditions under which they are required or because the required
information is included in the financial statements or notes thereto.

(A)(3) EXHIBITS.

*3(a) -- Restated Certificate of Incorporation of Pennzoil Company dated May
3, 1995 (Pennzoil Company 10-Q (March 31, 1995), SEC File No. 1-5591,
Exhibit 3).
3(b) -- By-laws of Pennzoil Company, as amended through December 7, 1995.
*4(a) -- Indenture dated as of February 15, 1986 (the "1986 Indenture")
between Pennzoil Company and Mellon Bank, N.A., Trustee (Pennzoil
Company 10-Q (June 30, 1986), SEC File No. 1-5591, Exhibit 4(a)).
*4(b) -- Officer's Certificate dated as of March 16, 1987 delivered pursuant
to the terms of the 1986 Indenture setting forth the terms of
Pennzoil Company's 9% Debentures due April 1, 2017 (Pennzoil Company
10-Q (March 31, 1987), SEC File
No. 1-5591, Exhibit 4(a)).
*4(c) -- Officer's Certificate dated as of April 14, 1989 delivered pursuant
to the terms of the 1986 Indenture setting forth the terms of
Pennzoil Company's 10 5/8% Debentures due June 1, 2001 (Pennzoil
Company 10-Q (March 31, 1989), SEC File No. 1-5591, Exhibit 4(a)).
*4(d) -- Officer's Certificate dated as of November 14, 1989 delivered
pursuant to the terms of the 1986 Indenture setting forth the terms
of Pennzoil Company's 10 1/8% Debentures due November 15, 2009 and
9 5/8% Notes due November 15, 1999 (Pennzoil Company 10-K (1989), SEC
File No. 1-5591, Exhibit 4(n)).
*4(e) -- Officer's Certificate dated as of November 19, 1990 delivered
pursuant to the terms of the 1986 Indenture setting forth the terms
of Pennzoil Company's 10 1/4% Debentures due November 1, 2005
(Pennzoil Company 10-K (1990), SEC File No. 1-5591, Exhibit 4(n)).
*4(f) -- Instrument of Resignation, Appointment and Acceptance dated as of
April 1, 1991 among Pennzoil Company, Mellon Bank, N.A., as Retiring
Trustee, and Texas Commerce Bank National Association, as Successor
Trustee, under the 1986 Indenture (Pennzoil Company 10-K (1991), SEC
File No. 1-5591, Exhibit 4(p)).
*4(g) -- Indenture dated as of December 15, 1992 (the "1992 Indenture")
between Pennzoil Company and Texas Commerce Bank National
Association, Trustee (Pennzoil Company 10-K (1992), SEC File No.
1-5591, Exhibit 4(o)).
*4(h) -- First Supplemental Indenture dated as of January 13, 1993 to the 1992
Indenture (Pennzoil Company 10-K (1992), SEC File No. 1-5591, Exhibit
4(p)).
*4(i) -- Second Supplemental Indenture dated as of October 12, 1993 to the
1992 Indenture (Pennzoil Company 10-K (1993), SEC File No. 1-5591,
Exhibit 4(i)).
*4(j) -- Rights Agreement dated as of October 28, 1994 between Pennzoil
Company and Chemical Bank, as Rights Agent (Pennzoil Company 8-K
(October 28, 1994), SEC File No. 1-5591, Exhibit 1).
Pennzoil Company agrees to furnish to the Commission upon request a copy
of any agreement defining the rights of holders of long-term debt of
Pennzoil Company and all its subsidiaries for which consolidated or
unconsolidated financial statements are required to be filed, under
which the total amount of securities authorized does not exceed 10%
of the total assets of Pennzoil Company and its subsidiaries on a
consolidated basis.
+*10(a) -- 1978 Stock Option Plan of Pennzoil Company, as amended (Registration
No. 2-67268, Exhibit 4(a)).
+*10(b) -- 1981 Stock Option Plan of Pennzoil Company (Registration No. 2-76935,
Exhibit 4(a)).

34
36

+*10(c) -- 1982 Stock Option Plan of Pennzoil Company (Pennzoil Company 10-K
(1982), SEC File No. 1-5591, Exhibit 10(e)).
+*10(d) -- Pennzoil Company Salary Continuation Plan (Pennzoil Company 10-K
(1982), SEC File No. 1-5591, Exhibit 10(g)).
+*10(e) -- Pennzoil Company Supplemental Disability Plan effective January 1,
1978 (Pennzoil Company 10-K(1977), SEC File No. 1-5591, Exhibit
5(y)).
+*10(f) -- Pennzoil Company Supplemental Life Insurance Plan effective January
1, 1978, as amended (Pennzoil Company 10-K (1980), SEC File No.
1-5591, Exhibit 10(g)).
+*10(g) -- Pennzoil Company Deferred Compensation Plan (Pennzoil Company 10-K
(1981), SEC File No. 1-5591, Exhibit 10(i)).
+*10(h) -- Specimen of Pennzoil Company Deferred Compensation Agreement
(Pennzoil Company 10-K (1982), SEC File No. 1-5591, Exhibit
10(j)(1)).
+*10(i) -- Specimen of Pennzoil Company agreements regarding certain benefits
payable in the event of a change in control (Pennzoil 10-Q (September
30, 1982), SEC File
No. 1-5591, Exhibit 28).
+*10(j) -- Pennzoil Company Section 415 Excess Benefit Agreements (Pennzoil
Company 10-Q (March 31, 1980), SEC File No. 1-5591, Exhibit 5).
+*10(k) -- Pennzoil Company Medical Expenses Reimbursement Plan effective
January 1, 1978 (Pennzoil Company 10-K(1977), SEC File No. 1-5591,
Exhibit 5(v)).
+*10(l) -- Pennzoil Company 1985 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (April 25, 1985), SEC File No.
1-5591, Exhibit B).
+*10(m) -- Pennzoil Company Executive Severance Plan (Pennzoil Company 10-K
(1987), SEC File No. 1-5591, Exhibit 10(t)).
+*10(n) -- 1990 Stock Option Plan of Pennzoil Company (Pennzoil Company
definitive proxy material (April 26, 1990), SEC File No. 1-5591,
Exhibit A).
+*10(o) -- Pennzoil Company 1990 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (April 26, 1990), SEC File No.
1-5591, Exhibit B).
+*10(p) -- 1992 Stock Option Plan of Pennzoil Company (Pennzoil Company
definitive proxy material (April 13, 1993), SEC File No. 1-5591,
Exhibit A).
+*10(q) -- Pennzoil Company 1993 Conditional Stock Award Program (Pennzoil
Company definitive proxy material (April 13, 1993), SEC File No.
1-5591, Exhibit B).
11 -- Computation of Ratio of Earnings to Fixed Charges for the years ended
December 31, 1995, 1994, 1993, 1992 and 1991.
21 -- List of Subsidiaries of Pennzoil Company.
23(a) -- Consent of Arthur Andersen LLP.
23(b) -- Consent of Ryder Scott Company Petroleum Engineers.
23(c) -- Consent of Outtrim Szabo Associates Ltd.
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
99(a) -- Summary of Reserve Report of Ryder Scott Company Petroleum Engineers
as of December 31, 1995 relating to oil and gas reserves.
99(b) -- Summary of Reserve Report of Outtrim Szabo Associates, Ltd. as of
December 31, 1995 relating to oil and gas reserves.

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

* Incorporated by reference.

+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.

(B) REPORTS ON FORM 8-K.

During the fourth quarter of 1995, Pennzoil filed a Current Report on Form
8-K with the SEC dated as of October 26, 1995 to report the issuance of a press
release disclosing a cost reduction program, a reduction in quarterly dividend
payments and third quarter 1995 earnings.

35
37

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

PENNZOIL COMPANY

By: JAMES L. PATE
------------------------------------
(JAMES L. PATE, CHAIRMAN OF THE
BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER)

Date: February 27, 1996

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- -------------------

JAMES L. PATE Principal Executive Officer February 27, 1996
- --------------------------------------------- and Director
(JAMES L. PATE, CHAIRMAN OF THE BOARD,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER)

DAVID P. ALDERSON, II Principal Financial and February 27, 1996
- --------------------------------------------- Accounting Officer
(DAVID P. ALDERSON, II, GROUP VICE PRESIDENT
-- FINANCE AND ACCOUNTING AND TREASURER)

HOWARD H. BAKER, JR.*
W. J. BOVAIRD*
W. L. LYONS BROWN, JR.*
ERNEST H. COCKRELL* A majority of the Directors
HARRY H. CULLEN* of the Registrant
ALFONSO FANJUL* February 27, 1996
BERDON LAWRENCE*
BRENT SCOWCROFT*
CYRIL WAGNER, JR.*

*By: DAVID P. ALDERSON, II
- -------------------------------------------
(DAVID P. ALDERSON, II, ATTORNEY-IN-FACT)

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Pennzoil Company:

We have audited the accompanying consolidated balance sheet of Pennzoil
Company (a Delaware corporation) and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pennzoil Company and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

As discussed in Note 1 to the Consolidated Financial Statements, effective
July 1, 1995, the Company changed its method of accounting for the impairment of
long-lived assets. Also, as discussed in Notes 1 and 6 to the Consolidated
Financial Statements, the Company changed its method of accounting for certain
investments in debt and equity securities and postemployment benefits as of
January 1, 1994.

ARTHUR ANDERSEN LLP

Houston, Texas
February 23, 1996

F-1
39

[THIS PAGE INTENTIONALLY LEFT BLANK]

F-2
40

PENNZOIL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

YEAR ENDED DECEMBER 31
------------------------------------------
1995 1994 1993
---------- ---------- ----------
(EXPRESSED IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)

REVENUES
Net sales.......................................... $2,385,287 $2,474,829 $2,477,467
Investment and other income, net................... 104,699 88,114 304,900
---------- ---------- ----------
2,489,986 2,562,943 2,782,367
COSTS AND EXPENSES
Cost of sales...................................... 1,537,737 1,543,605 1,543,054
Selling, general and administrative expenses....... 419,530 388,365 372,473
Depreciation, depletion and amortization (Note
8).............................................. 325,119 539,186 330,979
Impairment of long-lived assets (Note 1)........... 399,830 -- --
Exploration expenses............................... 39,782 61,033 70,713
Taxes, other than income........................... 51,315 59,207 66,159
Interest charges (Note 8).......................... 198,579 485,668 190,968
Interest capitalized............................... (4,231) (9,027) (11,420)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX...................... (477,675) (505,094) 219,441
Income tax provision (benefit)....................... (172,533) (221,355) 59,205
---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE.......................................... (305,142) (283,739) 160,236
Extraordinary items (Note 3)......................... -- -- (18,380)
Cumulative effect of change in accounting principle
(Note 6)........................................... -- (4,948) --
---------- ---------- ----------
NET INCOME (LOSS).................................... $ (305,142) $ (288,687) $ 141,856
========= ========= =========
EARNINGS (LOSS) PER SHARE
Total before extraordinary items and cumulative
effect of change in accounting principle........ $ (6.60) $ (6.16) $ 3.80
Extraordinary items................................ -- -- (.44)
Cumulative effect of change in accounting
principle....................................... -- (.11) --
---------- ---------- ----------
TOTAL...................................... $ (6.60) $ (6.27) $ 3.36
========= ========= =========
DIVIDENDS PER COMMON SHARE........................... $ 2.50 $ 3.00 $ 3.00
========= ========= =========

See Notes to Consolidated Financial Statements.

F-3
41

PENNZOIL COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

ASSETS

DECEMBER 31
--------------------------
1995 1994
---------- ----------
(EXPRESSED IN THOUSANDS)

CURRENT ASSETS
Cash and cash equivalents........................................ $ 23,615 $ 24,884
Receivables...................................................... 335,876 460,248
Inventories
Crude oil, natural gas and sulphur............................ 41,363 38,239
Motor oil and refined products................................ 119,830 126,019
Materials and supplies, at average cost.......................... 23,808 29,059
Deferred income tax.............................................. 26,452 19,735
Other current assets............................................. 33,881 30,068
---------- ----------
TOTAL CURRENT ASSETS..................................... 604,825 728,252
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and Gas, successful efforts method of accounting............. 4,724,836 4,806,532
Motor Oil & Refined Products..................................... 967,518 864,032
Franchise Operations............................................. 203,876 171,438
Sulphur (Note 10)................................................ -- 190,109
Other............................................................ 149,838 145,767
---------- ----------
TOTAL PROPERTY, PLANT AND EQUIPMENT...................... 6,046,068 6,177,878
Less accumulated depreciation, depletion, amortization and
valuation allowances.......................................... 3,628,043 3,349,035
---------- ----------
NET PROPERTY, PLANT AND EQUIPMENT........................ 2,418,025 2,828,843
---------- ----------
OTHER ASSETS
Marketable securities and other investments (Note 1)............. 910,334 833,400
Other............................................................ 374,592 325,315
---------- ----------
TOTAL OTHER ASSETS....................................... 1,284,926 1,158,715
---------- ----------
TOTAL ASSETS....................................................... $4,307,776 $4,715,810
========= =========

See Notes to Consolidated Financial Statements.

F-4
42

PENNZOIL COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

LIABILITIES AND SHAREHOLDERS' EQUITY

DECEMBER 31
--------------------------
1995 1994
---------- ----------
(EXPRESSED IN THOUSANDS)

CURRENT LIABILITIES
Current maturities of long-term debt............................. $ 2,263 $ 1,760
Notes payable (Note 3)........................................... -- 337,212
Accounts payable................................................. 303,787 222,022
Taxes accrued.................................................... 2,487 5,574
Interest accrued................................................. 35,358 33,066
Payroll accrued.................................................. 23,989 24,979
Other current liabilities........................................ 81,450 52,048
---------- ----------
TOTAL CURRENT LIABILITIES................................ 449,334 676,661
LONG-TERM DEBT, less current maturities............................ 2,507,855 2,174,921
DEFERRED INCOME TAX................................................ 227,941 371,644
OTHER LIABILITIES.................................................. 286,414 288,320
---------- ----------
TOTAL LIABILITIES........................................ 3,471,544 3,511,546
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY
Common stock, $0.83 1/3 par -- authorized 100,000,000 shares and
52,208,888 shares issued for 1995, authorized 75,000,000
shares and 52,208,888 shares issued for 1994.................. 43,507 43,507
Additional capital............................................... 324,812 326,862
Retained earnings................................................ 627,257 1,047,993
Net unrealized holding gain on marketable securities (Note 1).... 155,629 112,668
Cumulative foreign currency translation adjustment and other..... (2,036) (848)
Common stock in treasury, at cost, 5,838,810 shares in 1995
and 6,081,726 shares in 1994.................................. (312,937) (325,918)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY............................... 836,232 1,204,264
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................... $4,307,776 $4,715,810
========= =========

See Notes to Consolidated Financial Statements.

F-5
43

PENNZOIL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ---------- ------- ---------- ------- ----------
(EXPRESSED IN THOUSANDS)

COMMON STOCK, $0.83 1/3 par --
Authorized 100,000,000 shares for
1995 and 75,000,000 shares for
1994 and 1993
Balance January 1 and December
31.............................. 52,209 $ 43,507 52,209 $ 43,507 52,209 $ 43,507
------- ---------- ------- ---------- ------- ----------
ADDITIONAL CAPITAL
Balance January 1.................. 326,862 327,939 293,009
Shares reissued................. (2,050) (1,077) 34,930
---------- ---------- ----------
Balance December 31................ 324,812 326,862 327,939
---------- ---------- ----------
RETAINED EARNINGS
Balance January 1.................. 1,047,993 1,474,741 1,459,069
Net income (loss)............... (305,142) (288,687) 141,856
Dividends on common stock....... (115,594) (138,061) (126,184)
---------- ---------- ----------
Balance December 31................ 627,257 1,047,993 1,474,741
---------- ---------- ----------
NET UNREALIZED HOLDING GAIN ON
MARKETABLE SECURITIES (Note 1)
Balance January 1.................. 112,668 106,796 --
Change in net unrealized holding
gain.......................... 42,961 5,872 --
---------- ---------- ----------
Balance December 31................ 155,629 112,668 --
---------- ---------- ----------
CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENT AND OTHER
Balance January 1.................. (848) (2,746) 705
Translation adjustment.......... (1,176) 1,886 (3,446)
Change in additional minimum
pension liability............. (12) 12 (5)
---------- ---------- ----------
Balance December 31................ (2,036) (848) (2,746)
---------- ---------- ----------
COMMON STOCK IN TREASURY, at cost
Balance January 1.................. (6,082) (325,918) (6,299) (337,637) (11,493) (616,041)
Shares acquired................. -- -- (5) (215) -- --
Shares reissued................. 243 12,981 222 11,934 5,194 278,404
------- ---------- ------- ---------- ------- ----------
Balance December 31................ (5,839) (312,937) (6,082) (325,918) (6,299) (337,637)
------- ---------- ------- ---------- ------- ----------
TOTAL SHAREHOLDERS' EQUITY........... 46,370 $ 836,232 46,127 $1,204,264 45,910 $1,505,804
======= ========= ======= ========= ======= =========

See Notes to Consolidated Financial Statements.

F-6
44

PENNZOIL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31
----------------------------------------
1995 1994 1993
--------- ---------- -----------
(EXPRESSED IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................... $(305,142) $ (288,687) $ 141,856
Adjustments to reconcile net income (loss) to net
cash
provided by operating activities:
Depreciation, depletion and amortization (Note
8).......................................... 325,119 539,186 330,979
Impairment of long-lived assets (Note 1)....... 399,830 -- --
Dry holes and impairments...................... 11,448 34,162 51,140
Deferred income tax............................ (175,446) (115,215) (77,475)
Tax payment associated with IRS
settlement (Note 8)......................... -- (261,696) --
Extraordinary loss on early extinguishment of
debt........................................ -- -- 18,380
Realized gains on sales of marketable
securities and other investments............ -- (500) (182,057)
Gains on sales of assets....................... (7,739) (37,530) (35,222)
Non-cash and other nonoperating items.......... 52,153 86,746 33,592
Cumulative effect of change in accounting
principle................................... -- 4,948 --
Change in operating assets and liabilities
(Note 1).................................... 146,813 (194,745) 5,684
--------- ---------- -----------
Net cash provided by (used in) operating
activities................................ 447,036 (233,331) 286,877
--------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................ (473,360) (473,320) (474,992)
Acquisition of Viscosity Oil (Note 10).............. (33,642) -- --
Acquisition of Co-enerco Resources Ltd. (Note 10)... -- (230,924) --
Purchases of marketable securities and other
investments...................................... (664,553) (480,389) (928,159)
Proceeds from sales of marketable securities and
other investments................................ 655,482 1,160,106 981,101
Proceeds from sales of assets....................... 192,316 117,090 97,102
Other investing activities.......................... (7,368) (41,523) 1,949
--------- ---------- -----------
Net cash provided by (used in) investing
activities................................ (331,125) 51,040 (322,999)
--------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (repayments) of notes payable, net......... 131,722 (95,819) 93,685
Debt repayments..................................... (210,906) (401,438) (1,624,612)
Proceeds from issuances of debt..................... 77,598 579,963 1,630,759
Net proceeds from issuance of common stock.......... -- -- 303,300
Dividends paid...................................... (115,594) (138,061) (126,184)
Other financing activities.......................... -- 255 717
--------- ---------- -----------
Net cash provided by (used in) financing
activities................................ (117,180) (55,100) 277,665
--------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... (1,269) (237,391) 241,543
CASH AND CASH EQUIVALENTS, beginning of period........ 24,884 262,275 20,732
--------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of period.............. $ 23,615 $ 24,884 $ 262,275
========= ========= ==========

See Notes to Consolidated Financial Statements.

F-7
45

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --

General Policies --

The accompanying consolidated financial statements include all
majority-owned subsidiaries of Pennzoil Company ("Pennzoil"). All significant
intercompany accounts and transactions have been eliminated.

Certain prior period items have been reclassified in the consolidated
financial statements in order to conform with the current year presentation.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Marketable Securities and Other Investments --

Effective January 1, 1994, Pennzoil changed its method of accounting for
certain investments in debt and equity securities by adopting the requirements
of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." This standard requires that,
except for debt securities classified as "held-to-maturity," investments in debt
and equity securities must be reported at fair value. As a result, Pennzoil's
investment in Chevron Corporation ("Chevron") common stock, which shares are
classified as "available for sale," is reported at fair value, with the
unrealized gain excluded from earnings and reported as a separate component of
shareholders' equity. As of January 1, 1994, Pennzoil beneficially owned
9,035,518 shares of Chevron common stock that were acquired at an average cost
of $67.36 per share. The fair market value for the shares of Chevron common
stock held by Pennzoil as of January 1, 1994 was $87.125 per share based on the
closing transaction price for Chevron shares reported on the New York Stock
Exchange ("NYSE") on December 31, 1993.

After giving effect to a "two-for-one" split of Chevron common stock in
June 1994, Pennzoil beneficially owned 18,071,036 shares of Chevron common stock
as of December 31, 1994, acquired at an average cost of $33.68 per share.

Realized gains on Pennzoil's remaining investment in Chevron common stock
are subject to the exchange rights of holders of Pennzoil's $402.5 million
outstanding principal amount of 6 1/2% Exchangeable Senior Debentures due
January 15, 2003 (the "6 1/2% Debentures") and $500.0 million outstanding
principal amount of 4 3/4% Exchangeable Senior Debentures due October 1, 2003
(the "4 3/4% Debentures"), all of which are exchangeable at the option of the
holders thereof for shares of Chevron common stock owned by Pennzoil. Reference
is made to Note 3 for additional information. The fair market value of the
shares of Chevron common stock held by Pennzoil as of December 31, 1995 and 1994
was $46.914 and $43.270, respectively per share, based on the closing
transaction price for Chevron common stock reported on the NYSE on December 29,
1995 and December 30, 1994 of $52.375 and $44.625 per share, reduced by a $5.461
and $1.355 per share reserve, respectively, for exchange rights relating to
Pennzoil's outstanding 6 1/2% Debentures and 4 3/4% Debentures.

Adoption of SFAS No. 115 resulted in an increase in shareholders' equity of
$106.8 million as of January 1, 1994, representing the net unrealized gain
related to Pennzoil's investment in Chevron common stock. Prior year financial
statements have not been restated to reflect the new accounting method. As of
December 31, 1995 and December 31, 1994, the net unrealized after-tax gain
included in shareholders' equity related to Pennzoil's investment in Chevron
common stock was $155.5 million and $112.7 million, respectively.

F-8
46

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The cost, market value and unrealized gains related to Pennzoil's
marketable securities are as follows:

UNREALIZED
AT DECEMBER 31 COST MARKET GAINS
-------- -------- --------
(EXPRESSED IN THOUSANDS)

1995
Non-current marketable securities and other
investments:
Chevron Corporation common stock.................... $608,565 $847,792 $239,227
Other marketable securities and investments......... 62,341 62,542 201
-------- -------- --------
Total non-current marketable securities
and other investments............................... $670,906 $910,334 $239,428
======== ======== ========
1994
Non-current marketable securities and other
investments:
Chevron Corporation common stock.................... $608,565 $781,902 $173,337
Other marketable securities and investments......... 51,498 51,498 --
-------- -------- --------
Total non-current marketable securities
and other investments............................... $660,063 $833,400 $173,337
======== ======== ========

In November 1993, Pennzoil sold 8,158,582 shares of Chevron common stock in
a block trade on the NYSE for a price of $89.00 per share before commissions
($88.38 per share net of commissions). The sale resulted in a net realized gain
of $137.0 million ($171.6 million before tax), or $3.25 per share. The cost of
the securities sold is based on the average cost of each security held at the
time of sale.

Pennzoil's investments in debt securities are classified as
"held-to-maturity" based on Pennzoil's ability and intent to hold those
securities to maturity. Such securities are carried at cost, net of unamortized
premium or discount, if any, and consist solely of domestic commercial paper.
All of Pennzoil's "held-to-maturity" securities approximate their fair values
based on the relatively short maturities of those investments and on quoted
market prices, where such prices are available.

Other income effects from marketable securities and other investments are
discussed under the caption "Investment and Other Income, Net" below.

Investment and Other Income, Net --

Other revenues, net of related expenses, are included in "Investment and
Other Income, Net," which consists of the following:

1995 1994 1993
-------- -------- --------
(EXPRESSED IN THOUSANDS)

Interest income.......................................... $ 9,411 $ 36,841 $ 11,002
Dividend income.......................................... 34,850 33,766 60,496
Realized gains on sales of marketable securities and
other investments...................................... -- 500 182,057
Net gains on sales of assets............................. 7,739 37,530 35,222
Settlements and refunds.................................. 25,913 1,793 824
Other income (expense), net.............................. 26,786 (22,316) 15,299
-------- -------- --------
$104,699 $ 88,114 $304,900
======== ======== ========

Substantially all interest and dividend income is from marketable
securities and other cash investments.

F-9
47

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Receivables --

Current receivables include trade accounts and notes receivable and are net
of allowances for doubtful accounts of $9.6 million in 1995 and $10.5 million in
1994. Long-term receivables consist of notes receivable and are net of
allowances for doubtful accounts of $1.7 million in 1995 and $.9 million in
1994.

At December 31, 1995 and 1994, current receivables included notes
receivable of $7.5 million and $10.7 million, respectively. Other assets
included long-term notes receivable of $40.5 million and $39.7 million at
December 31, 1995 and 1994, respectively.

Inventories --

A majority of inventories is reported at cost using the last-in, first-out
("LIFO") method, which is lower than market. Substantially all other inventories
are reported at cost using the first-in, first-out method. Inventories valued on
the LIFO method totaled $111.7 million at December 31, 1995 and $122.2 million
at December 31, 1994. The current cost of LIFO inventories was approximately
$176.4 million and $182.5 million at December 31, 1995 and 1994, respectively.

Oil and Gas Producing Activities --

Pennzoil follows the successful efforts method of accounting for oil and
gas operations. Under the successful efforts method, lease acquisition costs are
capitalized. Significant unproved properties are reviewed periodically on a
property-by-property basis to determine if there has been impairment of the
carrying value, with any such impairment charged currently to exploration
expense. All other unproved properties are generally aggregated and a portion of
such costs estimated to be nonproductive, based on historical experience, is
amortized on an average holding period basis.

Exploratory drilling costs are capitalized pending determination of proved
reserves. If proved reserves are not discovered, the exploratory drilling costs
are expensed. Other exploration costs are also expensed. All development costs
are capitalized. Provision for depreciation, depletion and amortization expense
("DD&A") is determined on a field-by-field basis using the unit-of-production
method. Estimated costs of future dismantlement and abandonment of wells and
production platforms, net of salvage values, are accrued as part of DD&A using
the unit-of-production method; actual costs are charged to accumulated
depreciation, depletion and amortization.

Pennzoil follows the sales method of accounting for natural gas imbalances.
Under the sales method, revenue is recognized on all production delivered by
Pennzoil to its purchasers, regardless of Pennzoil's ownership interest in the
respective property. At December 31, 1995, Pennzoil's gas imbalance reflects a
net underproduced position of 2.7 billion cubic feet of gas. The company expects
to recover this imbalance from its co-owners through future production or
alternative arrangements.

In April 1995, Pennzoil Gas Marketing, an indirect wholly owned Pennzoil
subsidiary, and BRING Gas Services Corp., a subsidiary of Brooklyn Union Gas
Co., formed PennUnion Energy Services, L.L.C. ("PennUnion"), a 50-50 gas
marketing joint venture. Pennzoil has committed over 90% of its natural gas
production from the continental United States through March 31, 1998 to be
marketed by PennUnion. During 1995, Pennzoil made natural gas sales to PennUnion
totaling approximately $192.3 million, of which $1.9 million was due Pennzoil at
December 31, 1995.

Property, Plant and Equipment and Depreciation, Depletion and Amortization --

Effective July 1, 1995, Pennzoil adopted the requirements of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," which is intended to establish more consistent accounting
standards for measuring the recoverability of long-lived assets. In certain

F-10
48

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

instances, SFAS No. 121 specifies that the carrying values of assets be written
down to fair values, which, for Pennzoil, resulted in write-downs of proved oil
and gas properties that were not required under its prior impairment policy. In
determining whether an asset is impaired under the new standard, assets are
required to be grouped at the lowest level for which there are identifiable cash
flows that are largely independent of the cash flows of other groups of assets.
On this basis, certain proved oil and gas fields in North America were deemed to
be impaired because they were not expected to individually recover their entire
carrying value. The adoption of SFAS No. 121 resulted in Pennzoil recording a
pretax charge of $399.8 million for asset impairments, of which $378.9 million
was attributable to the impairment of Pennzoil's proved oil and gas properties.
The fair values used in calculating the write-down required for such properties
were determined by using the present value of expected future cash flows or
estimates of market value based on transactions for comparable properties, as
appropriate. Prior to the adoption of SFAS No. 121, Pennzoil periodically
reviewed the carrying amounts of proven properties and an impairment reserve was
provided as conditions warranted.

Sulphur properties were generally depreciated and depleted on the
unit-of-production method, except assets having an estimated life less than the
estimated life of the mineral deposits, which were depreciated on the
straight-line method. In October 1994, Pennzoil entered into an agreement with
Freeport-McMoRan Resource Partners, Limited Partnership ("Freeport-McMoRan")
providing for the sale by Pennzoil to Freeport-McMoRan of substantially all the
domestic assets of Pennzoil's sulphur segment. The transaction was completed in
January 1995. Reference is made to Note 10 for additional information.

All other properties are depreciated on straight-line or accelerated
methods in amounts calculated to allocate the cost of properties over their
estimated useful lives.

The estimated costs of major maintenance, including turnarounds at
refineries, are accrued. Other expenditures for maintenance and repairs are
charged against income as incurred. Renewals and improvements are treated as
additions to property, plant and equipment, and items replaced are treated as
retirements.

Price Risk Management and Other Hedging Activities --

Pennzoil has a price risk management program that permits utilization of
agreements and financial instruments (such as futures, forward and option
contracts and swaps and collars) to reduce the price risks associated with
fluctuations in crude oil and natural gas prices. Gains and losses on these
instruments are recognized in income when the associated hedged commodities are
sold, and realized gains or losses related to anticipated production are treated
as deferred credits or charges and are included in other current liabilities or
other current assets.

Deferred losses included in other current assets in the accompanying
balance sheet related to these hedging activities totaled $11.7 million at
December 31, 1995. Reference is made to Notes 4 and 5 for additional
information. There were no deferred gains or losses recorded on the company's
balance sheet as of December 31, 1994. Prior to the hedging of its 1996 oil and
natural gas production, Pennzoil's price risk management activities were not
material to its results of operations.

Pennzoil also periodically hedges some of its monetary liabilities and
commitments denominated in foreign currencies. Gains and losses from foreign
currency hedges were recognized in "Other Income" and were not material in 1995
or 1994.

Environmental Expenditures --

Environmental expenditures are expensed or capitalized in accordance with
generally accepted accounting principles. Liabilities for these expenditures are
recorded when it is probable that obligations have been incurred and the amounts
can be reasonably estimated. Reference is made to Note 8 for a discussion of
amounts recorded for these liabilities.

F-11
49

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Intangible Assets --

Substantially all intangible assets, included in other assets in the
accompanying consolidated balance sheet, relate to goodwill recognized in
business combinations accounted for as purchases. Goodwill included in other
assets in the accompanying consolidated balance sheet was $118.4 million at
December 31, 1995 and $88.2 million at December 31, 1994, net of accumulated
amortization of $26.3 million and $19.9 million, respectively. Goodwill is being
amortized on a straight-line basis over periods ranging from 20 to 40 years.
Amortization expense recorded during 1995 and 1994 was $8.5 million and $7.1
million, respectively.

Cash Flow Information --

For purposes of the consolidated statement of cash flows, all highly liquid
investments purchased with a maturity of three months or less are considered to
be cash equivalents. The effect of changes in foreign exchange rates on cash
balances has been immaterial. Cash used in operating activities includes cash
payments for interest (net of amounts capitalized) of $188.9 million, $469.3
million and $183.6 million in 1995, 1994 and 1993, respectively. Interest
capitalized for 1995, 1994 and 1993 was $4.2 million, $9.0 million and $11.4
million, respectively. During 1995, Pennzoil received a cash tax refund, net of
payments of $107.2 million. Income taxes paid, net of refunds, during 1994 and
1993 were $395.1 million and $5.5 million, respectively. Cash payments for
interest and income taxes in 1994 include $294.3 million and $261.7 million,
respectively, paid to the Internal Revenue Service ("IRS") resulting from the
settlement of a dispute relating to a proposed tax deficiency based on an audit
of Pennzoil's 1988 federal income tax return. Reference is made to Note 8 for
additional information.

Changes in operating assets and liabilities, net of effects from the
purchases of equity interests in certain businesses acquired, consist of the
following:

YEAR ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
-------- --------- --------
(EXPRESSED IN THOUSANDS)

Receivables
Current federal income taxes receivable............... $ (5,958) $(107,404) $ 27,597
Other receivables..................................... 2,680 340 (27,662)
Inventories............................................. 10,923 (577) 3,263
Payables
Current federal income taxes payable.................. 101,446 (87,566) 87,566
Accounts payable and accrued liabilities.............. 73,725 35,151 (44,760)
Other assets and liabilities............................ (36,003) (34,689) (40,320)
-------- --------- --------
$146,813 $(194,745) $ 5,684
======== ========= ========

Earnings Per Share --

Earnings per share are computed based on the weighted average shares of
common stock outstanding. The average shares used in earnings per share
computations for the years 1995, 1994 and 1993 were 46,245,222, 46,013,506 and
42,187,739, respectively.

Foreign Operations --

Consolidated income (loss) from continuing operations before income tax
includes losses from foreign operations of $99.8 million, $53.4 million and
$17.3 million in 1995, 1994 and 1993, respectively.

F-12
50

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(2) INCOME TAXES --

Accounting for Income Taxes --

Pennzoil accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.

Federal, State and Foreign --

Federal, state and foreign income tax expense (benefit) for continuing
operations consists of the following:

YEAR ENDED DECEMBER 31
---------------------------------------
1995 1994 1993
--------- --------- ---------
(EXPRESSED IN THOUSANDS)

Current
United States........................................ $ 1,800 $(111,200) $ 133,210
Foreign.............................................. 741 1,185 710
State................................................ 372 3,875 2,760
Deferred
United States........................................ (142,627) (115,067) (80,947)
Foreign.............................................. (24,039) (1,306) (236)
State................................................ (8,780) 1,158 3,708
--------- --------- --------
$(172,533) $(221,355) $ 59,205
========= ========= ========

Reference is made to Note 3 for information regarding the tax benefit
applicable to the extraordinary loss on the early retirement of debt. In
addition, reference is made to Note 6 for information regarding the deferred tax
benefits applicable to the cumulative effect of the change in accounting for
postemployment benefit costs.

Pennzoil's net deferred tax liability is as follows:

DECEMBER 31
-----------------------
1995 1994
--------- ---------
(EXPRESSED IN
THOUSANDS)

Deferred tax liability....................................... $ 463,239 $ 613,461
Deferred tax asset........................................... (283,029) (277,428)
Valuation allowance.......................................... 21,279 15,876
--------- ---------
Net deferred tax liability......................... $ 201,489 $ 351,909
========= =========

F-13
51

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities are as follows:

DECEMBER 31
-----------------------
1995 1994
--------- ---------
(EXPRESSED IN THOUSANDS)

Investment in Chevron common stock........................... $ 56,708 $ 56,708
Unrealized gain on equity securities......................... 83,800 60,668
Property, plant and equipment................................ 260,788 424,603
Proceeds from issuance of exchangeable debentures
treated as option proceeds................................. 40,953 40,953
Original issue discount on exchangeable debentures........... (33,326) (36,414)
Alternative minimum tax credit carryforward.................. (74,608) (72,305)
Net operating loss carryforwards............................. (30,098) (22,021)
Other, net................................................... (124,007) (116,159)
Valuation allowance.......................................... 21,279 15,876
--------- ---------
Net deferred tax liability......................... $ 201,489 $ 351,909
========= =========

The increase in the valuation allowance in 1995 is primarily attributable
to the increase in state net operating loss carryforwards.

The principal items accounting for the difference in income taxes on income
(loss) from continuing operations computed at the federal statutory rate and
income taxes as recorded are as follows:

YEAR ENDED DECEMBER 31
------------------------------------
1995 1994 1993
--------- --------- --------
(EXPRESSED IN THOUSANDS)

Income tax provision (benefit) at statutory rate........ $(167,187) $(176,783) $ 76,804
Increases (reductions) resulting from:
Dividends received deduction.......................... (8,535) (8,306) (14,744)
State income taxes, net............................... (5,465) 3,271 4,204
Taxes on foreign income in excess of statutory rate... (618) 1,280 308
Nondeductible goodwill................................ 11,815 4,848 1,258
Change in tax law..................................... -- -- 16,000
Reversal of valuation allowance....................... -- (44,043) (25,500)
Other, net............................................ (2,543) (1,622) 875
--------- --------- --------
Income tax provision (benefit).......................... $(172,533) $(221,355) $ 59,205
========= ========= ========

Reference is made to Note 8 for information regarding a settlement
agreement entered into with the IRS in October 1994 relating to a proposed tax
deficiency based on an audit of Pennzoil's 1988 federal income tax return.

As a result of the IRS settlement, Pennzoil reduced its tax basis in the
shares of Chevron common stock beneficially owned by Pennzoil. In January 1995,
Pennzoil filed an amended 1993 federal income tax return to reflect the increase
in taxable income for the 1993 sale of shares of Chevron common stock, which was
substantially offset by the utilization of a net operating loss carryforward.
Reference is made to Note 1 for additional information. Realization of the net
operating loss carryforward resulted in the 1994 reversal of a valuation
allowance of approximately $44 million. The valuation allowance had previously
been reduced in 1993 by $25.5 million to reflect the net operating loss
utilization resulting from the 1993 sale of shares of Chevron common stock on a
pre-settlement basis.

F-14
52

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of December 31, 1995, Pennzoil had a United States net operating loss
carryforward of approximately $6 million, which is available to reduce future
regular federal income taxes payable. Additionally, for purposes of determining
alternative minimum tax, an approximately $4 million net operating loss is
available to offset future alternative minimum taxable income. Utilization of
these regular and alternative minimum tax net operating losses, to the extent
generated in separate return years, is limited based on the separate taxable
income of the subsidiary, or its successor, generating the loss. If not used,
these carryovers will expire in the years 2000 to 2006. In addition, Pennzoil
has approximately $75 million of alternative minimum tax credits indefinitely
available to reduce future regular tax liability to the extent it exceeds the
related alternative minimum tax otherwise due. All net operating loss and credit
carryover amounts are subject to examination by the tax authorities.

Pennzoil also has state net operating loss carryforwards, the tax effect of
which were approximately $28 million as of December 31, 1995. A valuation
allowance of approximately $17 million has been established to offset the
portion of the deferred tax asset related to loss carryforwards expected to
expire before their utilization.

(3) DEBT --

Debt outstanding was as follows:

DECEMBER 31
-------------------------
1995 1994
---------- ----------
(EXPRESSED IN THOUSANDS)

Debentures and notes
9 5/8% due 1999................................................... $ 200,000 $ 200,000
10 5/8% due 2001.................................................. 150,000 150,000
6 1/2% due 2003................................................... 402,500 402,500
4 3/4% due 2003................................................... 500,000 500,000
10 1/4% due 2005.................................................. 250,000 250,000
10 1/8% due 2009.................................................. 200,000 200,000
9% due 2017....................................................... 38,500 38,500
Revolving credit facilities with banks.............................. 270,000 400,000
Jiffy Lube
Contingent notes.................................................. 5,795 9,052
Mortgages......................................................... 2,885 3,143
Other secured debt................................................ 6,420 11,220
Commercial paper.................................................... 343,934 243,892
Variable-rate credit arrangements................................... 125,000 93,320
Other (including debenture premiums and discounts).................. 15,084 12,266
---------- ----------
Total debt, including current maturities.......................... 2,510,118 2,513,893
Less amounts classified as short-term
Commercial paper.................................................. -- 243,892
Variable-rate credit arrangements................................. -- 93,320
Debentures, notes and other....................................... 606 167
Jiffy Lube........................................................ 1,657 1,593
---------- ----------
2,263 338,972
---------- ----------
Total long-term amount............................................ $2,507,855 $2,174,921
========== ==========

F-15
53

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Pennzoil Canada, Inc. ("Pennzoil Canada"), an indirect wholly owned
subsidiary of Pennzoil, has a U.S. $185 million credit facility with a syndicate
of banks, the borrowings under which are guaranteed by Pennzoil. Pennzoil Canada
also has an additional working capital credit facility with a Canadian bank, the
borrowings of which are guaranteed by Pennzoil. These facilities provide for
revolving credit borrowings through May 28, 1996, with any outstanding
borrowings on such date being converted into term credit facilities terminating
on May 30, 1997. Combined borrowings under these facilities totaled U.S. $220.0
million and U.S. $195.0 million as of December 31, 1995 and December 31, 1994,
respectively. The average interest rate applicable to amounts outstanding under
these facilities was 6.16% and 5.27% during 1995 and 1994, respectively.

In February 1995, Pennzoil's Board of Directors increased the limit on the
aggregate amount of commercial paper that Pennzoil may issue under its
commercial paper programs from $250.0 million to $500.0 million. Borrowings
under Pennzoil's commercial paper facilities totaled $343.9 million and $243.9
million at December 31, 1995 and 1994, respectively, and are included in
long-term debt and short-term notes payable, respectively, in the accompanying
consolidated balance sheet. The average interest rates applicable to outstanding
commercial paper were 6.13% and 4.43% during 1995 and 1994, respectively.

The 6 1/2% Debentures and the 4 3/4% Debentures are exchangeable at the
option of the holders thereof at any time prior to maturity, unless previously
redeemed, for shares of Chevron common stock beneficially owned by Pennzoil at
exchange rates of 23.774 shares and 17.004 shares, respectively, per $1,000
principal amount of the 6 1/2% Debentures and the 4 3/4% Debentures (the
equivalent of $42 1/16 per share and $58 13/16 per share, respectively), subject
to adjustment in certain events. In lieu of delivering certificates representing
shares of Chevron common stock in exchange for the 6 1/2% Debentures and the
4 3/4% Debentures, Pennzoil may, at its option, pay to any holder surrendering
the 6 1/2% Debentures and the 4 3/4% Debentures an amount in cash equal to the
market price of the shares for which the 6 1/2% Debentures and the 4 3/4%
Debentures are exchangeable. Pennzoil has deposited all 18,071,036 shares of
Chevron common stock beneficially owned by Pennzoil with exchange agents for
possible exchange for the 6 1/2% Debentures and the 4 3/4% Debentures. Under the
instruments governing the 6 1/2% Debentures and the 4 3/4% Debentures, Pennzoil
may not pledge, mortgage, hypothecate or grant a security interest in, or permit
any mortgage, pledge, security interest or other

F-16
54

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

lien upon, the shares of Chevron common stock deposited with exchange agents and
deliverable in exchange for the 6 1/2% Debentures and the 4 3/4% Debentures.
Pennzoil may at any time obtain from the exchange agents or otherwise authorize
or direct the exchange agents to release all or part of the 18,071,036 shares of
Chevron common stock deposited with the exchange agents. However, in the event
Pennzoil obtains or otherwise releases any shares of Chevron common stock
subject to exchange, each holder of a 6 1/2% Debenture or a 4 3/4% Debenture
will generally have the right, at such holder's option, to require Pennzoil to
repurchase all or a portion of such holder's debentures at a premium.

In 1993, Pennzoil redeemed an aggregate of $388.6 million principal amount
of indebtedness. The premiums and related unamortized discount and debt issue
costs relating to these redemptions resulted in extraordinary charges of $18.4
million ($28.3 million before tax), or $.44 per share, in 1993.

At December 31, 1995, maturities of long-term debt for the years ending
December 31, 1996 to 2000 were $2.3 million, $747.8 million, $2.6 million,
$200.4 million and $.6 million, respectively. These maturities include $270.0
million and $468.9 million in 1997 related to the maturities of Pennzoil's
revolving credit facilities and borrowings under commercial paper and short-term
variable-rate credit arrangements, respectively. Such maturities also include
$5.8 million for the year ending December 31, 1997, related to non-interest
bearing promissory notes of Jiffy Lube International, Inc. ("Jiffy Lube"), a
wholly owned subsidiary of Pennzoil, the payment of which is contingent upon the
future profitability of Jiffy Lube.

(4) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK --

Financial Instruments with Off-Balance-Sheet Risk --

Pennzoil is a party to various financial instruments with off-balance-sheet
risk as part of its normal course of business, including financial guarantees
and contractual commitments to extend financial guarantees, credit and other
assistance to customers, franchisees and other third parties. These financial
instruments involve, to varying degrees, elements of credit risk which are not
recognized in Pennzoil's consolidated balance sheet.

In connection with the issuance of debt by Excel Paralubes ("Excel"), a
partnership between Atlas Processing Company (an indirect wholly owned
subsidiary of Pennzoil) ("Atlas") and Conoco Inc., Pennzoil has guaranteed to
Excel and its lenders Atlas' obligations under Excel's project documents until
completion of the lubricating base oil facility being constructed by Excel in
Westlake, Louisiana. Prior to completion, these obligations include completing
the project or retiring Atlas' portion of Excel's debt in accordance with its
terms. The Pennzoil guarantee will terminate upon completion of the project and
will be replaced by a guarantee by Pennzoil Products Company ("PPC"), a wholly
owned subsidiary of Pennzoil. As of December 31, 1995, Atlas' portion of Excel's
outstanding debt was $126.0 million.

Other financial guarantees primarily relate to debt and lease obligation
guarantees with expiration dates of up to twenty years issued to third parties
to guarantee the performance of customers and franchisees in the fast-lube
industry. Commitments to extend credit are also provided to fast lube industry
participants to finance equipment purchases, working capital needs and, in some
cases, the acquisition of land and construction of improvements. Contractual
commitments to extend credit and other assistance are in effect as long as
certain conditions established in the respective contracts are met. Contractual
commitments to extend financial guarantees are conditioned on the occurrence of
specified events. The largest of these commitments is to provide a guarantee for
letters of credit issued by third parties to meet the reinsurance requirements
of Pennzoil's captive insurance subsidiary. This commitment has no stated
maturity and is expected to vary in amount from year to year to meet the
reinsurance requirements. Reserves established for reported and incurred but not
reported insurance losses in the amount of $34.6 million and $35.4 million have
been recognized in Pennzoil's consolidated balance sheet as of December 31, 1995
and 1994, respectively. The credit risk to Pennzoil is mitigated by the
insurance subsidiary's portfolio of high-quality, short-term

F-17
55

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

investments used to collateralize the letters of credit. At December 31, 1995,
the market value of the collateral represented approximately 165% of the
estimated credit risk.

In connection with Pennzoil's disposition of Purolator Products Company
("Purolator") in 1992, Pennzoil entered into an agreement with the Pension
Benefit Guaranty Corporation ("PBGC"), pursuant to which Pennzoil agreed that,
for up to five years, in the event of the termination of any or all the employee
benefit plans of Purolator that are subject to Title IV of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the inability
of the PBGC in good faith to collect the amounts of any unfunded benefit
liabilities under Purolator's plans from Purolator or any person controlling
Purolator, Pennzoil would guarantee up to $7.0 million of such unfunded benefit
liabilities.

Pennzoil has entered into forward exchange contracts to hedge some of its
foreign currency exposure. Pennzoil has also utilized financial agreements and
instruments (such as futures, forward and option contracts and swaps and
collars) to reduce the price risks associated with fluctuations in crude oil and
natural gas prices. With respect to natural gas, as of December 31, 1995,
Pennzoil had entered into transactions that committed an average of
approximately 313,000 thousand cubic feet ("Mcf") of natural gas per day for
1996 to be sold at fixed prices (New York Mercantile Exchange ("NYMEX")-based)
ranging from $1.73 to $2.67 per Mcf, with a weighted average price of $1.86 per
Mcf. With respect to crude oil, as of December 31, 1995, Pennzoil had entered
into transactions that committed an average of approximately 37,000 barrels of
crude oil per day for 1996 to be sold at fixed prices (NYMEX-based) ranging from
$16.75 per barrel to $19.20 per barrel, with a weighted average price of $17.13
per barrel. Pennzoil conducts its price risk management program with major
financial institutions and industry partners which the company believes present
a minimal credit risk. Pennzoil is exposed to potential market risk if its
physical markets for delivery do not substantially correlate with markets
designated as indices in the financial instruments used for price risk
management. To date, Pennzoil has not experienced significant credit or market
risk losses related to its price risk management program.

Following are the amounts related to Pennzoil's financial guarantees and
contractual commitments to extend financial guarantees, credit and other
assistance and forward foreign currency exchange contracts as of December 31,
1995 and 1994.

CONTRACT OR
NOTIONAL AMOUNTS
----------------------
1995 1994
-------- -------
(EXPRESSED IN
THOUSANDS)

Excel Paralubes financial guarantees................................. $126,000 $ --
Other financial guarantees........................................... 10,096 13,981
Commitments to extend financial guarantees
Guarantees of letters of credit.................................... 26,941 16,469
Other guarantees................................................... 9,418 29,460
Commitments to extend credit support, credit and other assistance.... -- 705
Forward foreign currency exchange contracts.......................... 3,436 --
------- -------
Total........................................................... $175,891 $60,615
======= =======

Pennzoil's exposure to credit losses in the event of nonperformance by the
other parties to these financial instruments is represented by the contractual
or notional amounts. Decisions to extend financial guarantees and commitments
and the amount of remuneration and collateral required are based on management's
credit evaluation of the counterparties on a case-by-case basis. The collateral
held varies but may include accounts receivable, inventory, equipment, real
property, securities and personal assets. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.

F-18
56

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Concentrations of Credit Risk --

Pennzoil extends credit to various companies in the oil and gas, motor oil
and refined products and fast lube industries in the normal course of business.
Within these industries, certain concentrations of credit risk exist. These
concentrations of credit risk may be similarly affected by changes in economic
or other conditions and may, accordingly, impact Pennzoil's overall credit risk.
However, management believes that consolidated receivables are well diversified,
thereby reducing potential credit risk to Pennzoil, and that allowances for
doubtful accounts are adequate to absorb estimated losses as of December 31,
1995. Pennzoil's policies concerning collateral requirements and the types of
collateral obtained for on-balance-sheet financial instruments are the same as
those described above under "Financial Instruments with Off-Balance-Sheet Risk."

At December 31, 1995, receivables related to these group concentrations in
the oil and gas, motor oil and refined products and fast lube industries were
$86.6 million, $260.6 million, and $26.4 million, respectively, compared with
$128.1 million, $223.3 million and $31.8 million, respectively, at December 31,
1994.

(5) FAIR VALUE OF FINANCIAL INSTRUMENTS --

Balance Sheet Financial Instruments --

The carrying amounts of Pennzoil's short-term financial instruments,
including cash equivalents, current marketable securities and other investments,
trade accounts receivable, trade accounts payable and notes payable, approximate
their fair values based on the short maturities of those instruments and on
quoted market prices, where such prices are available.

The following table summarizes the carrying amounts and estimated fair
values of Pennzoil's other balance sheet financial instruments.

DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------- -----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
(EXPRESSED IN THOUSANDS)

Notes receivable........................... $ 46,290 $ 47,483 $ 49,532 $ 46,776
Long-term investments...................... 911,274 911,274 856,683 856,683
Long-term debt............................. 2,510,118 2,775,626 2,176,681 2,195,688

The following methods and assumptions were used to estimate the fair value
of each class of financial instrument included above:

Notes Receivable. The estimated fair value of notes receivable is
based on discounting future cash flows using estimated year-end interest
rates at which similar loans have been made to borrowers with similar
credit ratings for the same remaining maturities.

Long-Term Investments. The estimated fair value of long-term
investments is based on quoted market prices at year end for those
investments, adjusted for any reserves for debenture exchange rights, where
applicable. Reference is made to Note 1 for additional information.

Long-Term Debt. The estimated fair value of Pennzoil's long-term debt
is based on quoted market prices or, where such prices are not available,
on estimated year-end interest rates of debt with the same remaining
average maturities and credit quality.

F-19
57

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Off-Balance Sheet Financial Instruments --

The estimated fair value of certain financial guarantees written and
commitments to extend financial guarantees was $7.8 million and $8.5 million as
of December 31, 1995 and December 31, 1994, respectively. The estimated fair
value of certain financial guarantees written and commitments to extend
financial guarantees is based on the estimated cost to Pennzoil to obtain third
party letters of credit to relieve Pennzoil of its obligations under such
guarantees or, in the case of certain lease guarantees related to Jiffy Lube
franchisees, the present value of expected future cash flows using a discount
rate commensurate with the risks involved.

The estimated value of amounts owed by Pennzoil under its open commodity
price hedges was approximately $29.2 million as of December 31, 1995; such
amounts (to the extent realized) are expected to be substantially offset by
increases in the market prices of the underlying commodities. As of December 31,
1994, Pennzoil did not have any significant open commodity price hedges. The
estimated value of Pennzoil's open commodity price hedges is the amount that
Pennzoil would have to pay to terminate its hedge agreements, taking into
account the creditworthiness of the hedge counterparties.

The estimated value of amounts owed by Pennzoil under its foreign currency
exchange contracts was $3.4 million as of December 31, 1995. Pennzoil did not
have any open foreign currency exchange contracts as of December 31, 1994. The
estimated value of Pennzoil's foreign currency exchange contracts represents the
original contract amount adjusted using the year-end closing spot exchange rate.
Reference is made to Note 4 for further information regarding off-balance sheet
financial instruments.

(6) BENEFIT PLANS --

Retirement Plans --

Substantially all employees are covered by non-contributory retirement
plans which provide benefits based on the participants' years of service and
compensation or stated amounts for each year of service. Annual contributions to
the plans are made in accordance with the minimum funding provisions of ERISA
where applicable, but not in excess of the maximum amount that can be deducted
for federal income tax purposes.

Net periodic pension cost for 1995, 1994 and 1993 included the following
components:

1995 1994 1993
-------- -------- -------
(EXPRESSED IN THOUSANDS)

Service cost -- benefits earned during the
year.......................................... $ 8,190 $ 8,878 $ 7,892
Interest cost on projected benefit
obligations................................... 12,743 11,429 9,802
Expected return on plan assets.................. (11,846) (11,312) (9,753)
Net amortization and deferral................... 1,723 1,672 158
-------- -------- -------
Net periodic pension cost............. $ 10,810 $ 10,667 $ 8,099
======== ======== =======

Actual return on plans' assets was $47.6 million, $4.6 million and $2.6
million in 1995, 1994 and 1993, respectively.

Assumptions used were:

AS OF DECEMBER 31
--------------------------
1995 1994 1993
---- ---- ----

Discount rates........................................... 7.5% 8.5% 7.5%
Weighted average rates of increase in compensation
levels................................................. 4.6% 6.3% 6.4%
Expected long-term rate of return on assets.............. 9.0% 9.0% 8.0%

F-20
58

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table sets forth the plans' funded status and amounts
recognized in the consolidated balance sheet:

DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------------------- --------------------------------------
PLANS WHERE PLANS WHERE PLANS WHERE PLANS WHERE
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS TOTAL ACCUMULATED BENEFITS TOTAL
BENEFITS EXCEED ASSETS PLANS BENEFITS EXCEED ASSETS PLANS
------------- ------------- -------- ------------- ------------- --------
(EXPRESSED IN THOUSANDS)

Actuarial present value
of benefit
obligations:
Vested benefit
obligation........ $ 50,326 $ 95,496 $145,822 $41,419 $ 73,388 $114,807
========= ========= ======== ======= ========= ========
Accumulated benefit
obligation........ $ 53,913 $ 112,607 $166,520 $44,049 $ 87,520 $131,569
========= ========= ======== ======= ========= ========
Projected benefit
obligation........ $ 55,416 $ 129,407 $184,823 $44,060 $ 103,679 $147,739
Plan assets at fair
value................ 73,864 102,174 176,038 54,436 78,197 132,633
--------- --------- ------- ------- -------- --------
Projected benefit
obligation (in excess
of) less than plan
assets............... 18,448 (27,233) (8,785) 10,376 (25,482) (15,106)
Unrecognized net
gain................. (15,908) (10,961) (26,869) (7,436) (596) (8,032)
Prior service cost not
yet recognized in net
periodic pension
cost................. 5,762 15,131 20,893 5,458 13,270 18,728
Unrecognized net
obligation (asset)... (1,408) 124 (1,284) (1,637) 149 (1,488)
Minimum liability
adjustment........... -- (2,442) (2,442) -- (168) (168)
--------- --------- ------- ------- -------- --------
Pension (liability)
asset
recognized in the
consolidated
balance sheet........ $ 6,894 $ (25,381) $(18,487) $ 6,761 $ (12,827) $ (6,066)
========= ========= ======== ======= ========= ========

The plans' assets include equity securities, common trust funds and various
debt securities.

Unrecognized prior service cost is amortized on a straight-line basis over
a period equal to the average of the expected future service of active employees
expected to receive benefits under the respective plans.

F-21
59

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Postretirement Health Care and Life Insurance Benefits --

Pennzoil sponsors several unfunded defined benefit postretirement plans
covering most salaried and hourly employees. The plans provide medical and life
insurance benefits and are, depending on the type of plan, either contributory
or non-contributory. The accounting for the health care plans anticipates future
cost-sharing changes that are consistent with Pennzoil's expressed intent to
increase, where possible, contributions from future retirees to a minimum of 30%
of the total annual cost. Furthermore, Pennzoil's future contributions for both
current and future retirees have been limited, where possible, to 200% of the
average 1992 benefit cost.

Net periodic postretirement benefit cost for 1995, 1994 and 1993 included
the following components:

1995 1994 1993
------ ------ ------
(EXPRESSED IN THOUSANDS)

Service cost -- benefits attributed to service
during the period................................. $1,217 $1,096 $1,085
Interest cost on accumulated postretirement benefit
obligation........................................ 5,795 5,222 5,644
Amortization of unrecognized net losses............. 81 259 297
------ ------ ------
Net periodic postretirement benefit cost............ $7,093 $6,577 $7,026
====== ====== ======

The following table sets forth the plans' combined status reconciled with
the amount included in the consolidated balance sheet at December 31, 1995 and
1994:

1995 1994
------- -------
(EXPRESSED IN
THOUSANDS)

Accumulated postretirement benefit obligation:
Retirees............................................ $50,633 $49,991
Fully eligible active plan participants............. 9,251 6,039
Other active plan participants...................... 15,552 10,223
------- -------
Total accumulated postretirement benefit obligation... 75,436 66,253
Unrecognized net loss from changes in assumptions..... (9,976) (3,576)
------- -------
Accrued postretirement benefit cost................... $65,460 $62,677
======= =======

For measurement purposes, a 9% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996; the rate was assumed
to decrease gradually to 5% through the year 2002 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amount of the obligation and periodic cost reported. An increase in the
assumed health care cost trend rates by 1% in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1995 by $3.0
million and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year then ended by $0.3 million.

The weighted-average discount rates used in determining the accumulated
postretirement benefit obligation as of December 31, 1995 and 1994 were 7.5% and
8.5%, respectively.

Contribution Plans --

Pennzoil has defined contribution plans covering substantially all
employees who have completed one year of service. Employee contributions of not
less than 1% to not more than 6% of each covered employee's compensation are
matched between 50% and 100% by Pennzoil. The cost of such company contributions
totaled $10.7 million in 1995, $10.0 million in 1994 and $9.4 million in 1993.

F-22
60

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Postemployment Benefits --

Effective January 1, 1994, Pennzoil changed its method of accounting for
postemployment benefit costs by adopting the new requirements of SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." This standard requires
employers to recognize the obligation to provide postemployment benefits if the
obligation is attributable to employees' services already rendered, employees'
rights to those benefits accumulate or vest, payment of the benefits is probable
and the amounts can be reasonably estimated. If those four conditions are not
met, the employer should recognize the obligation to provide postemployment
benefits when it is probable that a liability has been incurred and the amount
can be reasonably estimated. Pennzoil recorded a charge of $4.9 million ($7.6
million before tax), or $.11 per share, as of January 1, 1994 to reflect the
cumulative effect of a change in accounting principle for periods prior to 1994.

(7) CAPITAL STOCK AND STOCK OPTIONS --

Pennzoil's Restated Certificate of Incorporation authorizes the issuance of
up to 9,747,720 shares of preferred stock. None of these shares were issued or
outstanding at December 31, 1995. Pursuant to its authority to divide the
preferred stock into a series, the Board of Directors in October 1994 designated
750,000 shares of preferred stock as a series of "Series A Junior Participating
Preferred Stock." The Series A Junior Participating Preferred Stock is issuable
upon the exercise of certain rights to purchase the Series A Junior
Participating Preferred Stock ("Rights"). One Right was distributed with respect
to each share of Pennzoil common stock outstanding at the close of business on
November 11, 1994, and Rights are issuable with all subsequently issued shares
of Pennzoil common stock prior to the date the Rights become exercisable or
expire. The Rights are not currently exercisable or transferable apart from the
Pennzoil common stock. Each Right entitles the holder to purchase from Pennzoil
a unit consisting of one one-hundredth of a share of Series A Junior
Participating Preferred Stock at $140 per share upon the occurrence of certain
specified events.

Pennzoil's Restated Certificate of Incorporation authorizes the issuance of
up to 27,862,924 shares of preference common stock. None of these shares were
issued or outstanding at December 31, 1995. Dividend rights on any preference
common stock are junior to the rights of any Pennzoil preferred stock and senior
to the rights of Pennzoil common stock.

In September 1993, Pennzoil completed the sale, pursuant to underwritten
public offerings, of 5,000,000 shares of its common stock at a price of $62.50
per share. The net proceeds from the sale of the shares of Pennzoil common stock
offered, prior to the payment of expenses, totaled approximately $303.3 million.
Primarily utilizing funds from such offerings, Pennzoil redeemed an aggregate of
$292.5 million principal amount of Pennzoil's debentures. Reference is made to
Note 3 for additional information. Pro forma earnings per share for the year
ended December 31, 1993, assuming the stock offering and redemption of
debentures had occurred at the beginning of 1993, were $3.43 per share.

At December 31, 1995, Pennzoil had 3,599,589 shares of common stock
reserved for issuance upon the grant and exercise of stock options and the grant
and maturity of conditional stock awards.

At December 31, 1995, Pennzoil had nonqualified and incentive stock option
plans covering a total of 3,440,017 shares of Pennzoil common stock (compared to
2,601,982 shares at December 31, 1994), of which 852,277 shares were available
for granting of options. Options granted under the plans have a maximum term of
ten years and are exercisable under the terms of the respective option
agreements at the market price of the common stock at the date of grant, subject
to antidilution adjustments in certain circumstances. At December 31, 1995,
expiration dates for the outstanding options ranged from December 1997 to
December 2005 and the average exercise price per share was $58.75. Payment of
the exercise price may be made in cash or in shares of Pennzoil common stock
previously owned by the optionee, valued at the then-current market value.

F-23
61

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Additional information with respect to the stock option plans is as
follows:

NUMBER OF SHARES OPTION PRICE
UNDER OPTION RANGE PER SHARE
---------------- --------------------

Outstanding at December 31, 1994....................... 1,980,349 $48.3750 to $80.8125
Granted.............................................. 745,272 $39.0625 to $49.4375
Exercised............................................ --
Lapsed............................................... 125,916 $45.6250 to $80.3750
Expired.............................................. 11,965 $74.8750 to $80.3750
---------
Outstanding at December 31, 1995....................... 2,587,740 $39.0625 to $80.8125
=========
Exercisable at December 31, 1995....................... 1,749,921 $45.6250 to $80.8125
=========

In 1995, there were 26,411 units of common stock granted to selected
employees under Pennzoil's conditional stock award programs. Awards under the
programs are made in the form of units which entitle the recipient to receive,
at the end of a specified period, subject to certain conditions of continued
employment, a number of shares of Pennzoil common stock equal to the number of
units granted. At December 31, 1995, units covering 82,675 shares of Pennzoil
common stock were outstanding (compared to 79,778 shares at December 31, 1994).
In 1995, 12,633 shares of Pennzoil common stock were distributed to selected
employees upon maturity of awards granted under Pennzoil's conditional stock
award programs. During 1995, units covering 10,881 shares of Pennzoil's common
stock lapsed. These units had been granted in previous years under Pennzoil's
conditional stock award programs.

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which established an elective
new standard on accounting for stock-based compensation. SFAS No. 123
establishes a fair value-based method of accounting for stock-based compensation
plans awarded after December 31, 1995 and encourages companies to adopt the
accounting method set forth in SFAS No. 123 in place of the existing accounting
method, which requires expense recognition only in situations where stock
compensation plans award intrinsic value to employees at the date of grant.
Companies that elect not to follow SFAS No. 123 for accounting purposes must
make annual pro forma disclosure of its effects. Adoption of the standard for
accounting purposes by Pennzoil would be required no later than the first
quarter of 1996, although earlier implementation is permitted. Pennzoil is
currently evaluating what effect, if any, SFAS No. 123 will have on its
financial position and results of operations.

(8) COMMITMENTS AND CONTINGENCIES --

Tax Settlement --

In 1988, Pennzoil received $3.0 billion from Texaco Inc. ("Texaco") in
settlement of all litigation between Pennzoil and Texaco arising out of Texaco's
tortious interference with Pennzoil's contractual rights to purchase a minority
interest in Getty Oil Company. From 1989 through 1991, Pennzoil acquired
32,944,100 shares of Chevron common stock with approximately $2.2 billion of the
net Texaco settlement proceeds. For financial reporting purposes, Pennzoil
reported an extraordinary gain of $1.656 billion (after expenses and estimated
current and deferred taxes), or $42.62 per share, associated with the $3.0
billion in cash received from Texaco in April 1988. For federal income tax
purposes, Pennzoil originally reported that it recognized no gain upon receipt
of the $3.0 billion and that $366 million in legal and other costs incurred in
the Texaco litigation was fully deductible. Pennzoil's reporting position was
based on its belief that, under Section 1033 of the Internal Revenue Code, the
$3.0 billion received from Texaco was an amount realized as a result of the
involuntary conversion of property and that the Chevron shares were similar or
related in service or use to the property converted by Texaco. A corollary of
this position is that Pennzoil would have no tax basis in the Chevron shares.
During 1990 and 1991, Pennzoil recalculated its 1988 federal income tax
liability to recognize

F-24
62

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

approximately $800 million of income, representing the excess of the $3.0
billion received from Texaco over the amount expended to acquire Chevron shares.
As a result of these adjustments, current taxes were increased, and deferred
taxes were decreased, by $120.4 million in 1990 and $13.2 million in 1991. In
addition, Pennzoil paid interest on such taxes of $17.6 million during 1990 and
$3.7 million in 1991.

In January 1994, Pennzoil received a letter and examination report from the
District Director of the IRS that proposed a tax deficiency based on an audit of
Pennzoil's 1988 federal income tax return. The examination report proposed two
principal adjustments with which Pennzoil disagreed.

The first adjustment challenged Pennzoil's position under Section 1033 of
the Internal Revenue Code that (i) at least $2.2 billion of the $3.0 billion
cash payment received from Texaco in 1988 in settlement of litigation was
realized as a result of the involuntary conversion of property and (ii) the
shares of Chevron common stock purchased with $2.2 billion of the net Texaco
settlement proceeds were similar or related in service or use to the property
converted by Texaco. The proposed tax deficiency relating to this proposed
adjustment was $550.9 million, net of available offsets. Pennzoil estimated that
the additional after-tax interest on this proposed deficiency was approximately
$234.3 million as of December 31, 1993.

The second adjustment proposed by the IRS would have permanently
capitalized, rather than allow Pennzoil to deduct, approximately $366 million
incurred by Pennzoil in 1988 and earlier years for litigation and related
expenses in connection with the Texaco settlement, even if it were determined
that the entire $3.0 billion was includable in Pennzoil's 1988 taxable income.
The proposed tax deficiency relating to the disallowance of deductions was
$124.6 million, and the estimated additional after-tax interest on this proposed
deficiency was approximately $46.7 million as of December 31, 1993.

In October 1994, Pennzoil entered into a settlement agreement with the IRS
to treat $618 million of the $2.2 billion as proceeds from an involuntary
conversion; to reduce such amount by $72 million of litigation costs; to
recognize the balance of the settlement proceeds as taxable income in 1988; and
to allow the balance of the litigation costs as deductions in 1988. As a result,
Pennzoil sustained a tax deficiency for 1988 of $261.7 million (net of available
offsets), plus interest, and its tax basis in each Chevron share was its cost
less $8.28 (after giving effect to a "two-for-one" stock split of Chevron common
stock which occurred in June 1994). Total interest charges on the tax deficiency
were $294.3 million, resulting in a total cash payment to the IRS of $556.0
million in October 1994.

In October 1992, Pennzoil completed a tax-free transaction with Chevron,
pursuant to which Pennzoil exchanged 15,750,000 shares of Chevron common stock
beneficially owned by Pennzoil for all the capital stock of Pennzoil Petroleum
Company ("Pennzoil Petroleum") (subsequently renamed Pennzoil Exploration and
Production Company ("PEPCO")), which owned Gulf of Mexico, Gulf Coast, Permian
Basin and other domestic oil and gas producing properties. Under the liability
method of accounting for income taxes adopted by Pennzoil in December 1992, the
excess of the amount of Pennzoil's investment in Pennzoil Petroleum capital
stock for financial reporting purposes over the tax basis of such investment was
not expected to result in future income tax liability. Accordingly, deferred
income taxes attributable to the Chevron common stock exchanged in 1992, which
taxes were originally provided when the Texaco settlement proceeds were received
in 1988, were reflected as a reduction of the cost of Pennzoil's investment in
Pennzoil Petroleum. As a result of the IRS settlement, Pennzoil increased the
balance of its investment in Pennzoil Petroleum capital stock for financial
reporting purposes and, therefore, the carrying value of Pennzoil Petroleum's
oil and gas properties by $390.3 million, and such increased investment resulted
in a $93.9 million increase in DD&A recognized in October 1994 relating to
Pennzoil Petroleum's oil and gas properties from the date of the acquisition of
Pennzoil Petroleum to the date of the IRS settlement. These adjustments resulted
in a net increase in property, plant and equipment of $296.4 million as of
September 30, 1994, while interest charges and DD&A adjustments related to the
IRS settlement reduced Pennzoil's 1994 pretax income by $388.2 million. After
consideration of available tax offsets, the IRS settlement resulted in a 1994
after-tax charge of $210.4 million, or $4.57 per share.

F-25
63

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Curtailment Litigation --

United Gas Pipe Line Company ("United"), a former subsidiary of Pennzoil,
curtailed deliveries of natural gas to its customers in accordance with
priorities contained in its tariffs during the 1970s and early 1980s. Several
lawsuits filed by industrial and power plant "direct sale" customers for damages
allegedly caused by curtailments were brought against United, and Pennzoil was
joined as a defendant in five of these suits. The only remaining suit against
United involving Pennzoil is an action filed in the United States District Court
for the Southern District of Mississippi on November 14, 1974 by Mississippi
Power Co. ("MPCo"), which alleges damages of approximately $44.7 million and
seeks to have such damages trebled pursuant to federal antitrust laws. In
related proceedings before the Federal Energy Regulatory Commission ("FERC"),
MPCo has introduced evidence indicating that its claimed damages (before
trebling) have increased to approximately $88.2 million. In 1977, the judge in
the MPCo case referred certain issues to the FERC and stayed all proceedings
pending action by the FERC. No action has been taken since 1977 to remove the
stay. Pennzoil believes that it has no liability for any action it has taken or
omitted to take, that it can successfully defend itself in the action and that
the final outcome of these matters will not have a material adverse effect on
its financial condition or results of operations.

Environmental Matters --

Pennzoil is subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), the Resource Conservation and Recovery Act and similar state
statutes. In response to liabilities associated with these activities, accruals
have been established when reasonable estimates are possible. Such accruals
primarily include estimated costs associated with remediation. Pennzoil has not
used discounting in determining its accrued liabilities for environmental
remediation, and no claims for possible recovery from third party insurers or
other parties related to environmental costs have been recognized in Pennzoil's
consolidated financial statements. Pennzoil adjusts the accruals when new
remediation responsibilities are discovered and probable costs become estimable,
or when current remediation estimates must be adjusted to reflect new
information.

In connection with Pennzoil's disposition of Purolator in 1992, Pennzoil
and Purolator entered into an indemnification agreement pursuant to which
Pennzoil agreed to reimburse Purolator for the costs and expenses of certain
environmental remediation activities at a plant operated by Purolator in Elmira
Heights, New York, and certain environmental remediation activities, if any,
required at one other site located near the Elmira facility and a landfill site
located in Metamora, Michigan. Pennzoil had a reserve of $15.7 million and $16.2
million recorded with respect to its obligations under its indemnification
agreement with Purolator as of December 31, 1995 and 1994, respectively.

Certain of Pennzoil's subsidiaries are involved in matters in which it has
been alleged that such subsidiaries are potentially responsible parties ("PRPs")
under CERCLA or similar state legislation with respect to various waste disposal
areas owned or operated by third parties. In addition, certain of Pennzoil's
subsidiaries are involved in other environmental remediation activities,
including the removal, inspection and replacement, as necessary, of underground
storage tanks. As of December 31, 1995 and 1994, Pennzoil's consolidated balance
sheet included accrued liabilities for environmental remediation of $38.1
million and $44.9 million, respectively, which amounts include reserves with
respect to Pennzoil's obligations under its indemnification agreement with
Purolator referred to in the previous paragraph. Of these reserves, $5.2 million
and $8.8 million are reflected on the consolidated balance sheet as current
liabilities as of December 31, 1995 and 1994, respectively, and $32.9 million
and $36.1 million are reflected as other liabilities as of December 31, 1995 and
1994, respectively. Pennzoil does not currently believe there is a reasonable
possibility of incurring additional material costs in excess of the current
accruals recognized for such environmental remediation activities. With respect
to the sites in which Pennzoil subsidiaries are PRPs, Pennzoil's conclusion is
based in

F-26
64

PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

large part on (i) the availability of defenses to liability, including the
availability of the "petroleum exclusion" under CERCLA and similar state laws,
and/or (ii) Pennzoil's current belief that its share of wastes at a particular
site is or will be viewed by the Environmental Protection Agency or other PRPs
as being de minimis. As a result, Pennzoil's monetary exposure is not expected
to be material.

Class Action --

In April 1994, a lawsuit styled Lazy Oil, Inc. vs. Witco Corporation;
Quaker State Corporation; and Pennzoil Company, was filed in the United States
District Court for the Western District of Pennsylvania. Three other suits,
Andreassi vs. Witco Corporation; Quaker State Corporation; and Pennzoil Company
and Thomas A. Miller Oil vs. Witco Corporation; Quaker State Corporation; and
Pennzoil Company, and Wynnewood Drilling Associates v. Witco Corporation; Quaker
State Corporation; Quaker State Oil Refining Corporation; Pennzoil Company; and
Pennzoil Products Company were also filed in 1994, containing allegations
substantially identical to those in the Lazy Oil case. All four suits have been
consolidated for discovery and trial. The consolidated case, styled Lazy Oil
Co., John B. Andreassi and Thomas A. Miller Oil Co. on behalf of themselves and
others similarly situated vs. Witco Corporation; Quaker State Corporation;
Quaker State Oil Refining Corp.; Pennzoil Company and Pennzoil Products Company
is currently pending in the United States District Court for the Western
District of Pennsylvania, Erie Division. This class action suit brought by
purchasers of "Penn Grade crude" alleges that, from 1981 to 1995, the defendants
engaged in a combination and conspiracy in unreasonable restraint of trade in
violation of Section 1 of the Sherman Act, by allegedly acting to fix, lower,
maintain and stabilize the purchase price of "Penn Grade crude" sold by the
plaintiffs and the other class members to the defendants. The plaintiffs also
allege that the defendants have fraudulently concealed their alleged combination
and conspiracy. The plaintiffs seek injunctive relief, alleged damages sustained
by the plaintiffs and the class members and recovery of attorneys' fees and
costs. Plaintiffs' motion for class certification was not opposed by defendants,
and the Court has certified a class of plaintiffs consisting of all persons who
sold "Penn Grade crude" to any of the defendants between 1981 and June 30, 1995.
Quaker State and the plaintiffs have agreed on a proposed settlement of $4.4
million payable by Quaker State, which is pending before the court for approval.
Pennzoil is contesting the case vigorously. Pennzoil believes that the final
outcome of these matters will not have a material adverse effect on its
consolidated financial condition or results of operations.

Ramco Dispute --

In October 1995, PEPCO, Pennzoil International, Inc., Pennzoil Caspian
Corporation and Pennzoil Caspian Development Corporation filed an action, styled
Pennzoil Exploration and Production Company, et al. v. Ramco Energy Limited and
Ramco Hazar Energy Limited, in the United States District Court for the Southern
District of Texas, Houston Division, against Ramco Hazar Energy Limited,
formerly known as Ramco Energy Limited (collectively "Ramco"). The federal suit
seeks to compel Ramco to arbitrate certain disputes that have arisen between it
and the Pennzoil plaintiffs pursuant to the Federal Arbitration Act and the
Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The
underlying dispute involves Ramco's asserted claim to an interest in the
Karabakh prospect, an oil and gas field located in the territorial waters of the
Azerbaijan Republic in the Caspian Sea and which Pennzoil Caspian Development
Corporation, the State Oil Company of the Azerbaijan Republic and other foreign
oil companies have agreed to explore and develop. After the filing of the
federal action, the Pennzoil plaintiffs filed an Original Petition for
Declaration Relief in the 281st Judicial District Court of Harris County, Texas.
The state suit, styled Pennzoil Exploration and Production Company, et al. v.
Ramco Energy Limited and Ramco Hazar Energy Limited, which is expressly
conditioned upon a determination in the federal suit that the disputes between
the Pennzoil plaintiffs and Ramco are not subject to arbitration, seeks a
declaration that the Pennzoil plaintiffs have not breached any agreements with
Ramco, and do not owe and/or have not breached any fiduciary or other legal duty
to Ramco including, without limitation, a duty of good faith and fair dealing.
In November 1995, Ramco

F-27
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PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

asserted a counterclaim in the state court action, asserting breach of contract
and breach of fiduciary duties. The counterclaim seeks a declaratory judgment
granting Ramco a participation interest in the Karabakh prospect, compensatory
damages, exemplary damages, attorneys fees, costs of court and other unspecified
relief. In January 1996, the judge in the federal suit granted in part the
Pennzoil plaintiffs' motion to compel arbitration and ordered arbitration to be
held in Stockholm, Sweden. The Pennzoil plaintiffs and the Ramco defendants have
each asked the judge to reconsider portions of his order. The court has not
ruled upon the motions for reconsideration. Pennzoil believes that the final
outcome of these matters will not have a material adverse effect on its
consolidated financial condition or results of operations.

Rouseville Refinery Fire --

In October 1995, an explosion and fire occurred at PPC's Rouseville
refinery. Two PPC employees and three contractor employees were killed. Several
other injuries were reported. Four lawsuits have been filed against PPC,
alleging that PPC's negligence caused serious injury or death. All suits seek
unspecified damages in excess of $25,000. The suits are pending in Allegheny
County, Pennsylvania state court. Pennzoil believes that the final outcome of
these matters will not have a material adverse effect on its consolidated
financial condition or results of operations.

Other --

Pennzoil and its subsidiaries are involved in various other claims,
lawsuits and other proceedings relating to a wide variety of matters. While
uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management currently believes that the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on Pennzoil's consolidated financial condition or results of
operations.

(9) LEASES --

As Lessee --

Pennzoil leases various assets and office space with lease periods of 1 to
20 years. Additionally, Jiffy Lube leases sites and equipment which are
subleased to franchisees or used in the operation of automotive fast lubrication
and fluid maintenance service centers operated by Jiffy Lube. The typical lease
period for the service centers is 20 years with escalation clauses generally
increasing the lease payments by 9% every third year, with some leases
containing renewal options generally for periods of five years. These leases,
excluding leases for land that are classified as operating leases, are accounted
for as capital leases and are capitalized using interest rates appropriate at
the inception of each lease.

Certain operating and capital lease payments are contingent upon such
factors as the consumer price index or the prime interest rate with any future
changes reflected in income as accruable. The effects of these changes are not
considered material.

Total operating lease rental expenses for Pennzoil (exclusive of oil and
gas lease rentals) were $70.0 million, $63.5 million and $59.6 million for 1995,
1994 and 1993, respectively. Non-current capital lease obligations are
classified as other liabilities in the accompanying consolidated balance sheet.

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PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Future minimum commitments under noncancellable leasing arrangements as of
December 31, 1995 are as follows:

AMOUNTS PAYABLE
AS LESSEE
-------------------------
CAPITAL OPERATING
LEASES LEASES
--------- ---------
(EXPRESSED IN THOUSANDS)

YEAR ENDING DECEMBER 31:
1996................................................................ $ 10,987 $ 61,705
1997................................................................ 11,217 49,634
1998................................................................ 11,462 39,148
1999................................................................ 11,525 34,567
2000................................................................ 11,657 29,288
Thereafter.......................................................... 90,599 148,650
-------- --------
Net minimum future lease payments................................... $ 147,447 $ 362,992
========
Less interest....................................................... 71,876
--------
Present value of net minimum lease payments at December 31, 1995.... $ 75,571
========

Assets recorded under capital lease obligations of $63.2 million and $18.4
million at December 31, 1995 are classified as property, plant and equipment and
other assets, respectively, in the accompanying consolidated balance sheet.

As Lessor --

Pennzoil, through Jiffy Lube, owns or leases numerous service center sites
which are leased or subleased to franchisees. Buildings owned or leased that
meet the criteria for direct financing leases are carried at the gross
investment in the lease less unearned income. Unearned income is recognized in
such a manner as to produce a constant periodic rate of return on the net
investment in the direct financing lease. Any buildings leased or subleased that
do not meet the criteria for a direct financing lease and any land leased or
subleased are accounted for as operating leases. The typical lease period is 20
years and some leases contain renewal options. The franchisee is responsible for
the payment of property taxes, insurance and maintenance costs related to the
leased property. The net investment in direct financing leases is classified as
other assets in the accompanying consolidated balance sheet.

F-29
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PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Future minimum lease payment receivables under noncancellable leasing
arrangements as of December 31, 1995 are as follows:

AMOUNTS RECEIVABLE
AS LESSOR
-----------------------
DIRECT
FINANCING OPERATING
LEASES LEASES
------- --------
(EXPRESSED IN THOUSANDS)

YEAR ENDING DECEMBER 31:
1996................................................................. $ 5,243 $ 12,291
1997................................................................. 5,348 11,565
1998................................................................. 5,508 10,496
1999................................................................. 5,571 10,378
2000................................................................. 5,656 10,187
Thereafter........................................................... 46,060 68,410
------- --------
Net minimum future lease receipts.................................... $73,386 $123,327
========
Less unearned income................................................. 36,698
-------
Net investment in direct financing leases at December 31, 1995....... $36,688
=======

(10) ACQUISITIONS AND DIVESTITURES --

Acquisition of Viscosity Oil --

In September 1995, PPC acquired the assets of the Viscosity Oil division
("Viscosity Oil") of Case Corporation for $33.6 million. The acquisition was
financed by a combination of cash on hand and borrowings under Pennzoil's
commercial paper facilities and short-term variable-rate credit arrangements.
The acquisition was accounted for using the purchase method of accounting, and
the results of operations of Viscosity Oil subsequent to September 1995 have
been included in Pennzoil's consolidated statement of income.

Acquisition of Co-enerco Resources Ltd. --

In June 1994, Pennzoil Canada, an indirect wholly owned subsidiary of
Pennzoil, acquired Co-enerco Resources Ltd. ("Co-enerco"), a Canadian oil and
gas exploration and production company operating in Alberta, northeastern
British Columbia and southeastern Saskatchewan. Pennzoil Canada paid $230.9
million in cash in connection with the acquisition of Co-enerco and the
repayment of Co-enerco's outstanding bank debt, which was financed primarily
through two credit facilities. Reference is made to Note 3 for additional
information. The acquisition of Co-enerco was accounted for using the purchase
method of accounting, and the results of operations of Co-enerco subsequent to
June 30, 1994 have been included in Pennzoil's consolidated statement of income.

Sale of Domestic Sulphur Assets --

F-30
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PENNZOIL COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

exercise of a put option providing for a $10 million payment to Pennzoil).
Neither the call option nor the put option may be exercised prior to January
1999. In connection with this transaction, Pennzoil's sulphur segment recorded a
charge to depreciation, depletion and amortization expense of $50.2 million
($32.6 million after tax, or $.71 per share) in September 1994. As of December
31, 1995, Pennzoil has received $3.7 million in installment payments.

(11) SEGMENT FINANCIAL INFORMATION --

Information with respect to revenues, operating income and other data by
industry segment is presented in Item 1, Business and Item 2, Properties of this
Annual Report on Form 10-K.

F-31
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PENNZOIL COMPANY AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED

QUARTERLY RESULTS(1) --

EARNINGS (LOSS)
PER SHARE
INCOME (LOSS) ----------------------
BEFORE BEFORE
CUMULATIVE CUMULATIVE
EFFECT EFFECT
OF CHANGE IN NET OF CHANGE IN NET
OPERATING ACCOUNTING INCOME ACCOUNTING INCOME
REVENUES INCOME (LOSS)(2) PRINCIPLE (LOSS) PRINCIPLE (LOSS)
1995 ----------- ---------------- -------------- --------- ------------- ------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

First Quarter.......... $ 635,340 $ 68,083 $ 2,743 $ 2,743 $ .06 $ .06
Second Quarter......... 646,613 57,771 (4,790) (4,790) (.10) (.10)
Third Quarter.......... 600,012 (352,500) (275,286) (275,286) (5.95) (5.95)
Fourth Quarter......... 608,021 18,039 (27,809) (27,809) (.60) (.60)
---------- --------- --------- --------- ------ ------
$ 2,489,986 $ (208,607) $ (305,142) $(305,142) $ (6.60) $(6.60)
========== ========= ========= ========= ====== ======
1994
First Quarter.......... $ 622,076 $ 75,819 $ 10,738 $ 5,790 $ .24 $ .13
Second Quarter......... 651,809 87,410 16,810 16,810 .37 .37
Third Quarter.......... 631,654 (167,844) (299,802) (299,802) (6.51) (6.51)
Fourth Quarter......... 657,404 42,486 (11,485) (11,485) (.25) (.25)
---------- --------- --------- --------- ------ ------
$ 2,562,943 $ 37,871 $ (283,739) $(288,687) $ (6.16) $(6.27)
========== ========= ========= ========= ====== ======

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

(1) Reference is made to Notes 1, 6, 8 and 10 of Notes to Consolidated Financial
Statements for information on items affecting quarterly results.

(2) Operating income (loss) is defined as net revenues less costs and operating
expenses.

OIL AND GAS INFORMATION

Estimated Quantities of Proved Oil and Gas Reserves

Presented on the following page are Pennzoil's estimated net proved oil and
gas reserves as of December 31, 1995, 1994 and 1993. Reserves in the United
States are located onshore in all the main producing states (except Alaska) and
offshore California, Louisiana and Texas. Foreign reserves are located in
Azerbaijan, Canada and Venezuela.

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PENNZOIL COMPANY AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)

OIL AND GAS INFORMATION (CONTINUED)

The estimates of proved oil and gas reserves have been prepared by Ryder
Scott Company Petroleum Engineers ("Ryder Scott") and Outtrim Szabo Associates,
Ltd. ("Outtrim Szabo") and are based on data supplied by Pennzoil. The reports
of Ryder Scott and Outtrim Szabo, which include a description of the basis used
in preparing the estimated reserves, are included as exhibits to Pennzoil's
Annual Reports on Form 10-K for the respective years. Oil includes crude oil,
condensate and natural gas liquids.

1995 1994 1993
----------------------- ----------------------- -----------------------
PROVED OIL RESERVES UNITED UNITED UNITED
(MILLIONS OF BARRELS) STATES FOREIGN TOTAL STATES FOREIGN TOTAL STATES FOREIGN TOTAL
----- --- ----- ----- --- ----- ----- --- -----

Proved developed and undeveloped
reserves
Beginning of year............. 205 15 220 199 2 201 218 2 220
Revisions of previous
estimates
-- economics.............. 4 -- 4 6 -- 6 (14) -- (14)
-- performance and
other.................. (18) (2) (20) 2 (2) -- 7 -- 7
Extensions and
discoveries(1)............ 21 3 24 19 1 20 15 -- 15
Estimated production........ (22) (2) (24) (24) (2) (26) (24) -- (24)
Purchases of minerals in
place(2)(3)............... 8 15 23 7 16 23 5 -- 5
Sales of minerals in
place(3).................. (23) (3) (26) (4) -- (4) (8) -- (8)
----- --- ----- ----- --- ----- ----- --- -----
End of year................... 175 26 201 205 15 220 199 2 201
===== ==== ===== ===== ==== ===== ===== === =====
Proved developed reserves
Beginning of year............. 176 15 191 162 2 164 181 2 183
End of year................... 151 11 162 176 15 191 162 2 164

1995 1994 1993
----------------------- ----------------------- -----------------------
PROVED NATURAL GAS RESERVES UNITED UNITED UNITED
(BILLIONS OF CUBIC FEET) STATES FOREIGN TOTAL STATES FOREIGN TOTAL STATES FOREIGN TOTAL
----- --- ----- ----- --- ----- ----- --- -----

Proved developed and undeveloped
reserves
Beginning of year............. 1,341 204 1,545 1,453 38 1,491 1,617 35 1,652
Revisions of previous
estimates
-- economics.............. 21 (3) 18 (5) (2) (7) (7) -- (7)
-- performance and
other.................. 33 8 41 20 (8) 12 6 1 7
Extensions and
discoveries(1)............ 212 30 242 200 27 227 117 5 122
Estimated production........ (218) (20) (238) (244) (12) (256) (220) (3) (223)
Purchases of minerals in
place(2)(3)............... 26 6 32 14 163 177 91 -- 91
Sales of minerals in
place(3).................. (160) (11) (171) (97) (2) (99) (151) -- (151)
----- --- ----- ----- --- ----- ----- --- -----
End of year..................... 1,255 214 1,469 1,341 204 1,545 1,453 38 1,491
===== ==== ===== ===== ==== ===== ===== === =====
Proved developed reserves(4)
Beginning of year............. 1,242 192 1,434 1,306 35 1,341 1,412 34 1,446
End of year................... 1,132 202 1,334 1,242 192 1,434 1,306 35 1,341

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

(1) Foreign proved undeveloped reserves for 1995 include 1 million barrels of
crude oil, condensate and natural gas liquids reserves and 5 billion cubic
feet ("Bcf") of natural gas reserves attributable to an operating service
agreement in Venezuela between Maraven, S.A., a Petroleos De Venezuela S.A.
affiliate, and a joint venture between Pennzoil Venezuela Corporation,
S.A., an indirect wholly owned subsidiary of Pennzoil, and Vinccler S.A.
Under this agreement, all mineral rights are owned by the government of
Venezuela. Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Oil and Gas" for
additional information.

(2) Purchases of minerals in place for 1994 include proved developed and
undeveloped reserves attributable to Co-enerco as of the date of
acquisition.

(3) Purchases and sales of minerals in place for 1995 include 2 million barrels
of oil and 16 Bcf of natural gas and 2 million barrels of oil and 54 Bcf of
natural gas, respectively, associated with asset exchanges. Purchases and
sales of minerals in place for 1994 include 8 million barrels of oil and 14
Bcf of natural gas and 2 million barrels of oil and 31 Bcf of natural gas,
respectively, associated with asset exchanges. Purchases and sales of
minerals in place for 1993 include 5 million barrels of oil and 91 Bcf of
natural gas and 4 million barrels of oil and 93 Bcf of natural gas,
respectively, associated with asset exchanges.

(4) United States natural gas reserves for 1995, 1994 and 1993 exclude 156 Bcf,
161 Bcf and 162 Bcf, respectively, of carbon dioxide gas for sale or use in
company operations.

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SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)

OIL AND GAS INFORMATION (CONTINUED)

Capitalized Costs and Costs Incurred Relating to Oil and Gas Producing
Activities

The following table shows the aggregate capitalized costs related to oil
and gas producing activities and related accumulated depreciation, depletion and
amortization and valuation allowances.

DECEMBER 31
-------------------
1995 1994
------- -------
(EXPRESSED IN
MILLIONS)

Capitalized costs
Proved properties..................................................... $ 4,512 $ 4,638
Unproved properties................................................... 213 169
------- -------
4,725 4,807
Accumulated depreciation, depletion, amortization and valuation
allowances......................................................... (2,918) (2,495)
------- -------
$ 1,807 $ 2,312
======= =======

The following table shows costs incurred in oil and gas producing
activities (whether charged to expense or capitalized).

YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- ------------------------
UNITED UNITED UNITED
STATES FOREIGN(1) TOTAL STATES FOREIGN(1) TOTAL STATES FOREIGN(1) TOTAL
------ ---------- ----- ------ ---------- ----- ------ ---------- -----
(EXPRESSED IN MILLIONS)

Costs incurred in oil and
gas producing activities
Property
acquisition(2)
Unproved............ $ 6 $ 6 $ 12 $ 6 $100 $106 $ 4 $110 $ 114
Proved.............. 66 4 70 13 189 202 2 -- 2
Exploration........... 86 41 127 149 12 161 97 7 104
Development........... 95 22 117 177 11 188 160 -- 160
---- ---- ---- ---- ---- ---- ------ ---- ------
$253 $ 73 $326 $345 $312 $657 $ 263 $117 $ 380
==== ==== ==== ==== ==== ==== ====== ==== ======

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

(1) Total costs incurred during 1995, 1994 and 1993 include $13 million, $50
million and $114 million, respectively, related to Pennzoil's Azerbaijan
activities. Costs incurred (reimbursed) for unproved property acquisition
during 1995, 1994 and 1993 include approximately ($36) million, $48 million
and $98 million, respectively, related to the gas utilization project in
Azerbaijan. Pennzoil's investment in the gas utilization project is being
recovered through partial credit toward Pennzoil's portion of the first
bonus payment made by members of the consortium of foreign oil companies to
the government of Azerbaijan, direct hard currency payments by the
Azerbaijan government during 1995 and an interest in another project. Any
remaining balance due from the government of Azerbaijan with respect to the
gas utilization project will be creditable against the remaining bonus
payments to be made to the Azerbaijan government by the consortium. Total
costs incurred for North America in 1995 were $303 million.

(2) Costs incurred for property acquisitions in 1994 include $231 million
attributable to the acquisition of Co-enerco. Reference is made to Note 10
of Notes to Consolidated Financial Statements for additional information.

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SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)

OIL AND GAS INFORMATION (CONTINUED)

Results of Operations From Oil and Gas Producing Activities

This information is similar to the disclosures set forth in the "Industry
Segment Financial Information" set forth on pages 1 and 2 herein but differs in
several respects as to the level of detail, geographic presentation and income
taxes. Income taxes were determined by applying the applicable statutory rates
to pretax income with adjustment for tax credits and other allowances. Income
tax provisions involved certain allocations among geographic areas based on
management's assessment of the principal factors giving rise to the tax
obligation.

YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------
1995 1994 1993
----------------------- -------------------- --------------------
UNITED UNITED UNITED
STATES FOREIGN TOTAL STATES FOREIGN TOTAL STATES FOREIGN TOTAL
----- ------- ----- ------ ------- ----- ------ ------- -----
(EXPRESSED IN MILLIONS)

Sales
Outside customers......... $ 543 $ 58 $ 601 $675 $ 13 $688 $731 $ 11 $742
Other segments, at
market................. 131 -- 131 146 -- 146 137 -- 137
----- ---- ------ ---- ---- ---- ---- ---- ----
674 58 732 821 13 834 868 11 879
----- ---- ------ ---- ---- ---- ---- ---- ----
Costs and expenses
Production costs
Operating expenses..... 168 20 188 213 11 224 218 3 221
Production, severance
and property taxes... 34 -- 34 38 -- 38 43 -- 43
Technical support and
other(1)............... 86 21 107 80 24 104 93 17 110
Exploration expenses,
including dry holes.... 20 20 40 48 13 61 69 2 71
Depreciation, depletion,
amortization and
valuation
provisions(2).......... 564 86 650 396 16 412 273 2 275
----- ---- ------ ---- ---- ---- ---- ---- ----
872 147 1,019 775 64 839 696 24 720
----- ---- ------ ---- ---- ---- ---- ---- ----
Pretax results of
operations................ (198) (89) (287) 46 (51) (5) 172 (13) 159
Income tax expense
(benefit)................. (73) (27) (100) 20 (15) 5 60 (4) 56
----- ---- ------ ---- ---- ---- ---- ---- ----
Results of operations....... $(125) $(62) $ (187) $ 26 $(36) $(10) $112 $ (9) $103
===== ==== ====== ==== ==== ==== ==== ==== ====

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

(1) Foreign technical support and other during 1995, 1994 and 1993 includes
approximately $4 million, $9 million and $7 million, respectively, related
to Pennzoil's Azerbaijan activities.

(2) Effective July 1, 1995, Pennzoil adopted the requirements of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." As a result, Pennzoil recorded a pretax charge of
$378.9 million as of July 1, 1995, to reflect the impairment of long-lived
oil and gas assets. Reference is made to "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Oil and Gas"
and Note 1 of Notes to Consolidated Financial Statements for additional
information. In October 1994, Pennzoil settled a dispute with the IRS
relating to a proposed tax deficiency based on an audit of Pennzoil's 1988
federal income tax return. As a result of the IRS settlement, Pennzoil
increased the balance of its investment in Pennzoil Petroleum (subsequently
renamed PEPCO) capital stock for financial reporting purposes and,
therefore, the carrying value of Pennzoil Petroleum's oil and gas properties
by $390.3 million, and such increased investment resulted in a $93.9 million
increase in DD&A recognized in October 1994 relating to Pennzoil Petroleum's
oil and gas properties from the date of the acquisition of Pennzoil
Petroleum to the date of the IRS settlement. Reference is made to Note 8 for
additional information.

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SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)

OIL AND GAS INFORMATION (CONTINUED)

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves (Standardized Measure)

The Standardized Measure is determined on a basis which presumes that
year-end economic and operating conditions will continue over the periods during
which year-end proved reserves would be produced. Neither the effects of future
inflation nor expected future changes in technology and operating practices have
been considered.

The Standardized Measure is determined as the excess of future cash inflows
from proved reserves less future costs of producing and developing the reserves,
future income taxes and a discount factor. Future cash inflows represent the
revenues that would be received from production of year-end proved reserve
quantities assuming the future production would be sold at year-end prices plus
any fixed and determinable future escalations (but not escalations based on
inflation) of natural gas prices provided by existing contracts. As a result of
the continued volatility in oil and natural gas markets, future prices received
from oil, condensate and natural gas sales may be higher or lower than current
levels.

Future production costs include the estimated expenditures related to
production of the proved reserves plus any production taxes without
consideration of inflation. Future development costs include the estimated costs
of drilling development wells and installation of production facilities, plus
the net costs associated with dismantlement and abandonment of wells and
production platforms, assuming year-end costs continue without inflation. Future
income taxes were determined by applying current legislated statutory rates to
the excess of (a) future cash inflows, less future production and development
costs, over (b) the tax basis in the properties involved plus existing net
operating loss carryforwards. Tax credits are considered in the computation of
future income tax expenses. The discount was determined by applying a discount
rate of 10% per year to the annual future net cash flows.

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SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)

OIL AND GAS INFORMATION (CONTINUED)

The Standardized Measure does not purport to be an estimate of the fair
market value of Pennzoil's proved reserves. An estimate of fair market value
would also take into account, among other things, the expected recovery of
reserves in excess of proved reserves, anticipated changes in future prices and
costs and a discount factor more representative of the time value of money and
the risks inherent in producing oil and gas. In the opinion of Pennzoil's
management, the estimated fair value of Pennzoil's oil and gas properties is in
excess of the amounts set forth below.

YEAR ENDED DECEMBER 31
-------------------------------------------------------------------
1995 1994
------------------------------- -------------------------------
UNITED UNITED
STATES FOREIGN TOTAL STATES FOREIGN TOTAL
------- ------- ------- ------- ------- -------
(EXPRESSED IN MILLIONS)

Future cash inflows.............. $ 6,286 $ 628 $ 6,914 $ 5,262 $ 459 $ 5,721
Future production costs.......... (1,849) (272) (2,121) (2,031) (183) (2,214)
Future development costs(1)...... (480) (66) (546) (493) (13) (506)
------- ------- ------- ------- ------- -------
Future net cash flows before
income taxes................... 3,957 290 4,247 2,738 263 3,001
10% annual discount for estimated
timing of net cash flows before
income taxes................... (1,370) (112) (1,482) (960) (83) (1,043)
------- ------- ------- ------- ------- -------
Present value of future net cash
flows before income taxes...... 2,587 178 2,765 1,778 180 1,958
Future income tax expense
discounted at 10%(2)........... (683) (17) (700) (389) (35) (424)
------- ------- ------- ------- ------- -------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves............... $ 1,904 $ 161 $ 2,065 $ 1,389 $ 145 $ 1,534
======= ===== ======= ======= ===== =======

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

(1) Includes future dismantlement and abandonment costs, net of salvage values.

(2) Future income taxes before discount were $1,081 million (U.S.) and $37
million (foreign) and $670 million (U.S.) and $53 million (foreign) for 1995
and 1994, respectively.

F-37
75

PENNZOIL COMPANY AND SUBSIDIARIES

SUPPLEMENTAL FINANCIAL AND STATISTICAL INFORMATION -- UNAUDITED (CONTINUED)

OIL AND GAS INFORMATION (CONTINUED)

Changes in the Standardized Measure

The following table sets forth the principal elements of the changes in the
Standardized Measure for the years presented. All amounts are reflected on a
discounted basis.

YEAR ENDED DECEMBER 31
------------------------------
1995 1994 1993
------ ------ ------
(EXPRESSED IN MILLIONS)

Standardized measure -- beginning of period.................... $1,534 $1,723 $1,955
Revisions --
Net changes in prices, net of production costs............... 740 (403) (179)
Revisions of quantity estimates.............................. (88) 24 (33)
Changes in estimated future development costs................ (46) (72) (12)
Accretion of discount........................................ 195 226 252
Changes in production rates (timing) and other............... (111) (92) (79)
------ ------ ------
Net Revisions........................................ 690 (317) (51)
------ ------ ------
Extensions, discoveries and improved recovery, net of future
production and development costs............................. 550 322 275
Sales and transfers, net of production costs................... (469) (539) (564)
Development costs incurred during the period that reduced
future development costs..................................... 117 149 147
Net change in estimated future income taxes.................... (276) 111 29
Purchases of reserves in place................................. 68 173 162
Sales of reserves in place..................................... (149) (88) (230)
------ ------ ------
Standardized measure -- end of period.......................... $2,065 $1,534 $1,723
====== ====== ======

F-38
76

EXHIBIT INDEX

3(b) -- By-laws of Pennzoil Company, as amended through December 7, 1995.
11 -- Computation of Ratio of Earnings to Fixed Charges for the years ended
December 31, 1995, 1994, 1993, 1992 and 1991.
21 -- List of Subsidiaries of Pennzoil Company.
23(a) -- Consent of Arthur Andersen LLP.
23(b) -- Consent of Ryder Scott Company Petroleum Engineers.
23(c) -- Consent of Outtrim Szabo Associates Ltd.
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
99(a) -- Summary of Reserve Report of Ryder Scott Company Petroleum Engineers
as of December 31, 1995 relating to oil and gas reserves.
99(b) -- Summary of Reserve Report of Outtrim Szabo Associates, Ltd. as of
December 31, 1995 relating to oil and gas reserves.