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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

Commission File No. 1-10145

LYONDELL CHEMICAL COMPANY

(Exact name of Registrant as specified in its charter)

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

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

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 the 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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

There were 161,867,168 shares of the Registrant’s common stock issued and outstanding on June 30, 2003, the last business day of the Registrant’s most recently completed second fiscal quarter. The aggregate market value of the voting stock held by non-affiliates of the Registrant on June 30, 2003, based on the closing price of the Registrant’s common stock on the New York Stock Exchange composite tape on that date, was $2,181,577,349.

        An aggregate of 177,359,466 shares of the Registrant’s common stock were issued and outstanding as of March 1, 2004, including 140,536,045 shares of common stock, $1.00 par value, and 36,823,421 shares of Series B common stock, $1.00 par value.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant’s definitive proxy statement for its 2004 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2003, is incorporated by reference to the extent specified under Part III.

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PART I

Items 1 and 2. Business and Properties

Lyondell Chemical Company (“Lyondell” or the “Company”) is a global chemical company. Lyondell manufactures and markets a variety of intermediate and performance chemicals, primarily propylene oxide (“PO”) and its derivatives, including propylene glycol (“PG”), propylene glycol ethers (“PGE”) and butanediol (“BDO”), co-products styrene monomer (“styrene” or “SM”) and tertiary butyl alcohol (“TBA”) and its derivative, methyl tertiary butyl ether (“MTBE”), as well as toluene diisocyanate (“TDI”), which are collectively known as the Company’s intermediate chemicals and derivatives business.

The Company owns 70.5% of Equistar Chemicals, LP, a Delaware limited partnership (“Equistar”), which operates petrochemicals and polymers businesses. Millennium Chemicals Inc. (“Millennium”) owns the remaining 29.5% of Equistar. Equistar’s petrochemicals business manufactures and markets olefins, oxygenated products, aromatics and specialty products. Equistar’s olefins include ethylene, propylene and butadiene and its oxygenated products include ethylene oxide (“EO”) and its derivatives, ethylene glycol (“EG”), ethanol and MTBE. Equistar’s aromatics include benzene and toluene. Equistar’s polymers business manufactures and markets polyolefins, including high density polyethylene (“HDPE”), low density polyethylene (“LDPE”), linear low density polyethylene (“LLDPE”), polypropylene and performance polymers. Equistar’s performance polymers include enhanced grades of polyethylene such as wire and cable insulating resins, and polymeric powders.

The Company also owns 58.75% of LYONDELL-CITGO Refining LP, a Delaware limited partnership (“LCR”), which produces refined petroleum products, including gasoline, low sulfur diesel, jet fuel, aromatics and lubricants (“lube oils”). LCR sells its principal refined products primarily to CITGO Petroleum Corporation (“CITGO”), which owns the remaining 41.25% of LCR.

Additional Information Available

Lyondell was incorporated under the laws of Delaware in 1985. Its principal executive offices are located at 1221 McKinney Street, Suite 700, Houston, Texas 77010 (Telephone: (713) 652-7200). Lyondell’s website address is www.lyondell.com. Lyondell’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available free of charge through Lyondell’s website as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission. In addition, to ensure access to Lyondell’s governing documents, Lyondell provides copies of its Certificate of Incorporation, By-Laws, Business Ethics and Conduct Policy, Principles of Corporate Governance and the charters of each of the committees of its Board of Directors on its website, free of charge. Shareholders also may obtain a printed copy of any of these documents (excluding exhibits), free of charge, by writing to Lyondell’s Investor Relations Department at the address provided above. Information contained on Lyondell’s website or any other website is not incorporated into this Annual Report and does not constitute a part of this Annual Report.

Strategy

Guiding Principles

Lyondell’s products are basic chemicals and their derivatives that become building blocks for broadly used goods that are integrally linked to the global economy. These goods include clothing, packaging, construction and home building materials, household furnishings and automobile parts. Lyondell has built its enterprise around fundamental beliefs that, to be a successful competitor in the global chemical industry, the Company must have:

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Portfolio

Driven by these basic beliefs, Lyondell has assembled a balanced portfolio comprising three businesses that are integrated both operationally and financially. Each plays a strategic role in creating stakeholder value:

Spun-off from Atlantic Richfield Company (“ARCO”) in 1989, Lyondell remained relatively stable in size until the mid-1990s, when the Company began to focus on the strategic formation of the enterprise. Through a series of initiatives, Lyondell has grown into a global enterprise with more than $12 billion in assets under management, has acquired considerable intellectual capital and has built a talented, diverse employee base. These initiatives included:

From 1999 to present, Lyondell’s focus has been on solidifying the enterprise’s foundation through:

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Operational Excellence

Through intense focus on Operational Excellence – the enterprise’s approach to continuous improvement in all aspects of its operations – Lyondell continually seeks to maximize the value of each of the businesses in its portfolio. The actions of the enterprise’s employees have led to:

Business Focus

The Company’s businesses each focus on having low cost, reliable operations, with an underlying goal to take advantage of their areas of differentiation. In the intermediate chemicals and derivatives business segment, that differentiation takes the form of global presence and a leadership position in technology. At Equistar, the major emphasis is on maintaining low production costs. Equistar remains different from the industry based on Equistar’s ability to process crude oil-based liquid raw materials for a much greater percentage of its raw material requirements versus the industry. These crude oil-based raw materials historically have been cost-advantaged in comparison to natural gas liquids-based raw materials. LCR’s major advantage lies with its ability to process very heavy crude oil and its contractual supply relationship with Petróleos de Venezuela, S.A. (“PDVSA”), the national oil company of the Republic of Venezuela.

Financial Strategy

Lyondell’s financial strategy is designed to maximize value for all its key financial stakeholders as it seeks to:

During industry trough conditions, liquidity has been a priority for Lyondell and has been achieved through a combination of Operational Excellence and a focus on sound financial management. During 2003, in addition to reducing costs and improving operating efficiency and capital utilization, Lyondell took important steps to enhance liquidity and manage debt maturities. Lyondell enhanced its liquidity by issuing 13.8 million shares of Lyondell’s common stock and issuing $325 million of senior secured notes, a portion of whose proceeds were used to pay down Lyondell’s bank term loans. Longer term, as industry conditions improve, the Lyondell business portfolio is designed to generate significant amounts of cash, which will be directed toward the repayment of debt. The Company’s goal is to improve its financial flexibility by achieving an investment grade credit rating, which the Company believes can be achieved following debt reduction and strengthening of the Company’s financial position.

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Business Segments

The Company reports its results of operations in four segments: intermediate chemicals and derivatives; petrochemicals; polymers; and refining. The Company’s petrochemicals and polymers businesses are conducted through Equistar, and the Company’s refining business is conducted through LCR.

The following chart shows the organization of Lyondell, as well as 2003 sales revenues and primary products for Lyondell, Equistar and LCR.

Sales revenues shown above include sales to related parties. Sales revenues shown above for Equistar and LCR represent 100% of their sales revenues. For additional segment information for each of the years in the three-year period ended December 31, 2003, see Note 20 of Notes to Consolidated Financial Statements.

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INTERMEDIATE CHEMICALS AND DERIVATIVES SEGMENT

Overview

Lyondell is a leading global manufacturer and marketer of intermediate chemicals and performance chemical products used in a broad range of consumer goods. The segment’s core product is PO, which is produced through two distinct technologies based on indirect oxidation processes that yield co-products. One process yields TBA as the co-product; the other yields SM as the co-product. The two technologies are mutually exclusive, necessitating that a manufacturing facility be dedicated either to PO/TBA or to PO/SM. The intermediate chemicals and derivatives business segment also includes numerous derivatives of PO and TBA. PG, PGE and BDO are among the derivatives of PO manufactured by Lyondell. MTBE is the principal derivative of TBA. Lyondell also manufactures and markets TDI.

In North America, the Company produces PO, TBA, PG and PGE at its Bayport (Pasadena), Texas plants and PO, SM, MTBE and BDO at its Channelview, Texas plants. The Bayport PO/TBA plants and the Channelview PO/SM I plant are owned by the U.S. PO manufacturing joint venture (the “U.S. PO Joint Venture”) between the Company and Bayer. The Channelview PO/SM II plant is owned by the Company together with unrelated equity investors. The Company produces TDI at its Lake Charles, Louisiana plant. In Europe, the Company produces PO, TBA, PG, PGE, BDO and MTBE at plants near Rotterdam, The Netherlands, and produces PO, TBA, PG and MTBE at a plant in Fos-sur-Mer, France. In Europe, Rhodia Intermédiaires (“Rhodia”) operates a TDI facility located in Pont de Claix, France on behalf of the Company. Additionally, a world-scale PO/SM plant located at Maasvlakte, near Rotterdam, The Netherlands, formerly referred to as the PO-11 project, began production late in the fourth quarter of 2003. Lyondell operates the Maasvlakte PO/SM plant, that is owned by a joint venture in which Lyondell has a 50% interest. In the Asia Pacific region, the Company has a 40% interest in Nihon Oxirane Co., Ltd. (“Nihon Oxirane”), a joint venture that operates a PO/SM plant in Chiba, Japan. See “Joint Ventures and Other Agreements.”

The Company estimates, based in part on published data, that worldwide demand for PO was approximately 11.2 billion pounds in 2003. Approximately 90% of that volume was consumed in the manufacture of three families of PO derivative products: polyols, glycols and ethers. The remainder was consumed in the manufacture of a growing segment of performance products, including BDO and its derivatives. The Company sells approximately 1.0 billion pounds of its annual capacity of PO in the merchant market and consumes the rest in the production of derivatives. PO sold in the merchant market accounted for approximately 14% of Lyondell’s total revenues in 2003, 13% in 2002 and 11% in 2001. PG principally is used to produce unsaturated polyester resins and also is used in certain food, cosmetic and pharmaceutical applications and in automotive coolants and aircraft deicers. PGE are used as lower toxicity solvents for paints, coatings and cleaners. BDO and its derivatives are utilized in the production of fibers, engineering plastics, pharmaceuticals, personal care products and high performance coatings.

TDI is used in the production of polyurethanes for flexible foam applications ranging from furniture, bedding and carpet underlay to transportation and packaging. TDI also is used in the manufacture of coatings, sealants, adhesives and elastomers. TDI accounted for less than 10% of Lyondell’s total revenues in 2003 and 2002 and approximately 11% of Lyondell’s total revenues in 2001.

SM is produced and traded worldwide for commodity and specialty polymer applications, such as polystyrene and unsaturated polyester resins, as well as various uses in the rubber industry. Based on published data, worldwide demand for SM in 2003 was approximately 50 billion pounds. SM accounted for approximately 18% of Lyondell’s total revenues in 2003, 15% in 2002 and 14% in 2001.

Lyondell converts most of its TBA to isobutylene, which is reacted with methanol to produce MTBE, an oxygenated gasoline blending component that increases octane and reduces automotive emissions. MTBE accounted for approximately 26% of Lyondell’s total revenues in 2003, 35% in 2002 and 38% in 2001.

Worldwide demand for MTBE in 2003 is estimated to have been approximately 415,000 to 455,000 barrels per day, based on published data. In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards, which increased demand for MTBE. However, the presence of MTBE in some water supplies in California and other states due to

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gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain U.S. states have banned the use of MTBE, while other U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or also ban the use of MTBE. California, Connecticut and New York banned the use of MTBE, effective January 1, 2004. Lyondell’s North American MTBE sales represented approximately 17% of its total 2003 revenues. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters” for additional discussion regarding these U.S. federal and state initiatives and their potential impact on Lyondell.

The following table outlines the intermediate chemicals and derivatives business segment’s primary products, annual processing capacities as of January 1, 2004, and the primary uses for such products. Unless otherwise specified, annual processing capacities were calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output based on the design raw material mix. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than capacities set forth below. Capacities shown include 100% of the capacity of joint venture facilities.

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Raw Materials

The principal hydrocarbon raw materials purchased by the intermediate chemicals and derivatives business segment are propylene, butane, ethylene, benzene and methanol. The market prices of these raw materials historically have been related to the price of: crude oil and its principal refinery derivatives; natural gas liquids; and natural gas. These materials are received in bulk quantities via pipeline or marine vessels. Generally, the segment’s raw materials requirements are purchased at market-based prices from numerous suppliers in the United States and Europe with which the Company has established contractual relationships, as well as in the spot market.

The Company’s raw material suppliers include Equistar, which is a leading producer of propylene, ethylene and benzene and is expected to be the major supplier of these raw materials to Lyondell’s U.S. business in 2004. See Note 5 of Notes to Consolidated Financial Statements.

In December 2002, the Company entered into an agreement with Methanex Corporation (“Methanex”) for Methanex to become the exclusive supplier of the Company’s worldwide methanol raw material requirements. The agreement provides supplies of methanol at cost-based prices and is being phased-in over time beginning in 2003 and extending through 2009. Methanex has an option to extend the agreement for an additional three-year period.

The intermediate chemicals and derivatives business segment is a large volume consumer of isobutane for chemical production. The Company has invested in facilities, or entered into processing agreements with unrelated parties, to convert the widely available commodity, normal butane, to isobutane. The segment also is a large consumer of oxygen for its PO/TBA plants at Bayport, Texas; Botlek (Rotterdam), The Netherlands; and Fos-sur-Mer, France.

The cost of raw materials generally is the largest component of total production cost for the intermediate chemicals and derivatives business. The segment’s raw materials are, in general, commodity chemicals with numerous bulk suppliers and ready availability at competitive prices. Historically, raw material availability has not been an issue for the intermediate chemicals and derivatives business segment. However, in order to enhance reliability and competitiveness of prices and rates for supplies of raw materials, industrial gas and other utilities, the Company is a party to long-term agreements and other arrangements with suppliers, including Equistar, for a substantial portion of its production requirements. For additional discussion regarding the effects of raw material pricing on recent operating performance, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Marketing and Sales

In 2003, most of the segment’s revenues were derived from sales to, or processing agreements with, unrelated parties. In 2003, no single customer accounted for 10% or more of Lyondell’s total revenues.

The intermediate chemicals and derivatives business segment produces and delivers products through sales agreements, processing agreements and spot sales as well as product exchanges. Production levels at Lyondell’s PO/SM and PO/TBA co-product production facilities are determined by the demand for PO and PO derivatives. The resulting production levels of co-products SM and MTBE thus depend primarily on the demand for PO and PO derivatives and secondarily on the relative market demand for SM and MTBE and the operational flexibility of Lyondell’s multiple production facilities in meeting this demand.

Lyondell purchases SM and MTBE for resale, when necessary, to satisfy customer demand for these co-products above co-product production levels. Lyondell also purchased SM for resale to satisfy its contract customer requirements prior to commissioning its new PO/SM plant in The Netherlands in the fourth quarter of 2003. Volumes of SM and MTBE purchases made for resale can vary significantly from period to period. However, purchased volumes have not historically had a significant impact on profitability. Conversely, when co-product production levels exceed contract customer demand, Lyondell sells such SM or MTBE in the spot market.

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The segment has a number of multi-year PO processing (or tolling) and sales agreements in an effort to mitigate the adverse impact of competitive factors and economic business cycles on demand for the segment’s PO. In addition, Bayer’s ownership interest in the U.S. PO Joint Venture represents ownership of an in-kind portion of the PO production of the U.S. PO Joint Venture. Bayer also has the right to 50% of the production of the Maasvlakte PO/SM plant. See “Joint Ventures and Other Agreements.”

The majority of the segment’s PO derivatives are sold through market-based sales contracts under annual or multi-year arrangements.

Lyondell sells most of its SM production into the North American and European merchant markets and to Asian and South American export markets through long-term sales contracts and processing agreements. See “Joint Ventures and Other Agreements.”

The Company sells its MTBE production under market-based sales agreements and in the spot market. During 2002 and prior years, the Company sold MTBE pursuant to a take-or-pay MTBE sales contract with ARCO, now wholly owned by BP p.l.c. (“BP”). Sales pursuant to this contract represented approximately 14% of Lyondell’s 2002 worldwide MTBE sales volumes. The contract, which provided for formula-based prices that were significantly higher than market prices, expired December 31, 2002. For additional discussion regarding the effects of the expiration of the MTBE sales contract with BP, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Pursuant to agreements with Methanex, all of Lyondell’s methanol sales agreements with third parties were terminated on December 31, 2003. Subject to product availability and market conditions, the Company intends to shutdown its methanol production during 2004. Methanex will purchase 100% of any methanol produced by Lyondell during 2004.

The segment’s sales are made by Company marketing and sales personnel and through distributors and independent agents located in the Americas, Europe, the Middle East, Africa and the Asia Pacific region. The Company has centralized certain sales and order fulfillment functions in regional customer service centers located in Houston, Texas; Rotterdam, The Netherlands; Hong Kong, China and Sao Paolo, Brazil. Lyondell also has long-term contracts for distribution and logistics to ensure reliable and efficient supply to its customers.

For geographic data, see Note 20 of Notes to Consolidated Financial Statements.

Joint Ventures and Other Agreements

On March 31, 2000, Lyondell contributed its Channelview, Texas PO/SM I plant and its Bayport, Texas PO/TBA plants to the U.S. PO Joint Venture. Bayer’s ownership interest in the U.S. PO Joint Venture represents ownership of an in-kind portion of the PO production. Bayer’s share of PO production from the U.S. PO Joint Venture increases from approximately 1.5 billion pounds in 2003 to approximately 1.6 billion pounds annually in 2004 and thereafter. Lyondell takes in-kind the remaining PO production and all co-product (SM and TBA) production from the U.S. PO Joint Venture. As part of the transaction, Lyondell and Bayer also formed a separate joint venture (the “PO Technology Joint Venture”) through which Bayer was granted a non-exclusive and non-transferable right to use certain PO technology in the U.S. PO Joint Venture. Under the terms of the operating and logistics agreements, Lyondell operates the U.S. PO Joint Venture plants and arranges and coordinates the logistics of PO delivery from the plants. Lyondell and Bayer also formed a separate joint venture (the “European PO Joint Venture”) for the construction and ownership of the Maasvlakte PO/SM plant near Rotterdam, The Netherlands, which began production late in the fourth quarter of 2003. Lyondell and Bayer each have a 50% share in the European PO Joint Venture, pursuant to which they each will take in-kind 50% of the PO and SM production of the European PO Joint Venture. Lyondell and Bayer do not share marketing or product sales under either the U.S. PO Joint Venture or the European PO Joint Venture.

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Lyondell’s PO/SM II plant at the Channelview, Texas complex is owned by the Company together with unrelated equity investors. The Company retains a majority interest in the PO/SM II plant and is the operator of the plant. A portion of the SM output of the PO/SM II plant is committed to the unrelated equity investors under long-term processing agreements. As of December 31, 2003, the Company had 1.1 billion pounds of SM capacity, or 22% of its worldwide capacity, committed to unrelated equity investors under long-term processing arrangements.

Lyondell has a 40% equity interest in Nihon Oxirane, a joint venture in Japan with Sumitomo Chemical Co., Ltd. (“Sumitomo”). Since 1976, Nihon Oxirane has operated a PO/SM plant in Chiba, Japan. In March 2003, Lyondell and Sumitomo completed a restructuring of their Nihon Oxirane joint venture, including the sale by Lyondell to Sumitomo of a 10% interest in the joint venture, reducing Lyondell’s interest in Nihon Oxirane from 50% to 40%. The governance of the joint venture remains substantially unchanged. The agreements also include provisions for the cross licensing of certain technology rights, construction of a new PG plant by Nihon Oxirane, and changes in operations agreed to by the partners to expand Nihon Oxirane’s market position in Asia for PO and PG and to improve Nihon Oxirane’s cost structure. In addition, under the new agreements, a PO plant in Chiba, Japan constructed by Sumitomo and which began production in the second quarter of 2003 is expected to be transferred to Nihon Oxirane by 2006.

In June 2000, Lyondell entered into agreements with Rhodia for the design and construction of an expansion to Rhodia’s TDI facility at Pont de Claix, France, to be operated by Rhodia on behalf of Lyondell. The facility was completed in 2002 and is designed to have an average annual production capacity of 274 million pounds of TDI. The facility is operated by Rhodia under an operating agreement, which extends through March 31, 2016. Rhodia is responsible for providing all raw materials required for the TDI production, except toluene, toluene diamine (“TDA”) and carbon monoxide. The TDI produced at the Pont de Claix facility is marketed principally in Europe, the Middle East, Africa and Asia. Lyondell purchases TDA from Rhodia’s plant in Lille, France pursuant to an agreement that expires December 31, 2005. Under the agreement, Lyondell can purchase up to a maximum of approximately 70 million pounds of TDA per year. The TDA that Lyondell purchases from the Lille plant is used in the production of the TDI at the Pont de Claix plant.

Competition and Industry Conditions

Competition within the intermediate chemicals and derivatives business is significant and is based on a variety of factors, including product quality and price, reliability of supply, technical support, customer service and potential substitute materials. Profitability in this segment is affected by the worldwide level of demand along with vigorous price competition, which may intensify due to, among other things, new industry capacity. Demand is a function of economic growth in the United States and elsewhere in the world, which fluctuates. It is not possible to predict accurately the changes in raw material costs, market conditions and other factors that will affect industry profitability in the future. Capacity share figures for this segment and its competitors, discussed below, are based on completed production facilities and, where appropriate, include the full capacity of joint venture facilities and certain long-term supply agreements.

The Company’s major worldwide PO competitors are The Dow Chemical Company (“Dow”) and Shell Chemical Company (“Shell”). Based on published data regarding PO capacity, including the total capacity of Nihon Oxirane, the U.S. PO Joint Venture and the European PO Joint Venture, the Company believes it is the largest producer of PO worldwide, with approximately 32% of the total worldwide capacity for PO.

Approximately 2.5 billion pounds of new industry PO capacity, or approximately 22%, has been added from 1999 to 2003, primarily in Europe and Singapore. Shell and BASF AG (“BASF”), as 50/50 partners, began production in the third quarter of 1999 at a PO/SM plant in The Netherlands with a PO capacity of 550 million pounds and began production in the third quarter of 2002 at a PO/SM plant in Singapore with a PO capacity of 550 million pounds. Repsol YPF, S.A. started up its second PO/SM plant in Spain, with a capacity of 330 million pounds of PO, in the first quarter of 2000. In addition, the Maasvlakte PO/SM plant, near Rotterdam, The Netherlands, began production late in the fourth quarter of 2003. Its 625 million pounds of PO capacity represents approximately 5% of worldwide capacity. The Company also is cooperating with Sumitomo on the commercialization of new PO technology, including Sumitomo’s new plant in Chiba, Japan, which has a PO capacity of 440 million pounds and began production in the second quarter of 2003.

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From 2004 to 2006, PO capacity expansion is expected to be limited to the start up by Shell of a new PO/SM plant at its Nanhai, China complex in 2006, with a PO capacity of 550 million pounds. PO and derivatives markets continue to be adversely affected by excess capacity as a result of capacity additions, which have not yet been fully absorbed by demand growth.

The Company both manufactures and has long-term tolling agreements for TDI. The Company competes with several TDI producers worldwide, including BASF, Bayer and Dow. Based on published data regarding TDI capacity and including the TDI capacity operated by Rhodia on behalf of the Company, the Company believes it is the third largest producer of TDI worldwide and has approximately 15% of total worldwide capacity.

The Company competes with many MTBE producers worldwide, the most significant of which is Saudi Arabia Basic Industries Corp. (“SABIC”). Based on published data regarding MTBE capacity, the Company believes that it is one of the largest producers of MTBE worldwide. MTBE also faces competition from substitute products such as ethanol as well as other octane components. See “Risk Factors That May Affect Lyondell and Its Joint Ventures—Environmental Matters” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters.”

The Company competes with many SM producers worldwide, among which are BASF, BP, Dow, NOVA Chemicals Corporation, Shell and TotalFinaElf. Based on published data regarding SM capacity, the Company believes that it is one of the largest producers of SM worldwide.

Properties

The Company leases its corporate offices located in Houston, Texas. Lyondell also maintains a leased research facility in Newtown Square, Pennsylvania. The Company’s European headquarters and regional customer service center for Europe, the Middle East and Africa are located in leased facilities in Rotterdam, The Netherlands, and its Asia Pacific headquarters are located in leased facilities in Hong Kong.

Depending on location and market needs, the Company’s production facilities can receive primary raw materials by pipeline, railcar, truck, barge or ship and can deliver finished products by pipeline, railcar, truck, barge, isotank, ship or in drums. The Company charters ships, owns and charters barges and leases isotanks and railcars for the dedicated movement of products between plants, products to customers or terminals, or raw materials to plants, as necessary. The Company leases liquid and bulk storage and warehouse facilities at terminals in the Americas, Europe and the Asia Pacific region. In the Rotterdam outer harbor area, the Company owns and operates a butane storage tank, propylene spheres, pipeline connections and a jetty that accommodates deep-draft vessels.

The principal manufacturing facilities of the segment are set forth below. These facilities are wholly owned by Lyondell unless otherwise noted.

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Research and Technology; Patents and Trademarks

Lyondell conducts research and development principally at its Newtown Square, Pennsylvania technical center. The Company’s research and development expenditures were $37 million in 2003, $30 million in 2002 and $32 million in 2001, all of which were expensed as incurred. The increased expenditures from 2002 to 2003 primarily related to the 2003 construction of a pilot plant that is designed to demonstrate one-step, direct oxidation PO production.

The Company maintains an extensive patent portfolio related to its intermediate chemicals and derivatives business, and continues to file new patent applications in the United States and other countries. As of December 31, 2003, Lyondell owned approximately 335 United States patents and approximately 895 worldwide patents. Lyondell has numerous trademark and trademark registrations in the United States and other countries, including the Lyondell logo. The Company does not regard its business as being materially dependent upon any single patent or trademark.

Employee Relations

On January 1, 2004, Lyondell had approximately 3,350 full-time employees, approximately 2,285 of whom were located in the United States, approximately 1,000 of whom were located in Europe, approximately 50 of whom were located in Asia and approximately 15 of whom were located in Latin America. As of January 1, 2004, approximately 18% of the U.S. employees were represented by labor unions. Lyondell also uses the services of independent contractors in the routine conduct of its business. The Company believes its relations with its employees are good.

Equistar, the operations of which are managed by Lyondell, employed approximately 3,165 full-time employees as of January 1, 2004. LCR employed approximately 920 full-time employees as of January 1, 2004. See “Equistar Employee Relations” and “LYONDELL-CITGO Refining LP—Employee Relations.”

EQUISTAR CHEMICALS, LP

Management of Equistar

Equistar is a limited partnership organized under the laws of the State of Delaware. Each owner holds its interest in Equistar through wholly owned subsidiaries, one of which serves as a general partner of Equistar and one or more of which serves as a limited partner. From May 1998 until August 2002, Equistar’s owners were subsidiaries of each of Lyondell, Millennium and Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”), with Lyondell owning a 41% interest in Equistar, and each of Millennium and Occidental owning a 29.5% interest in Equistar. On August 22, 2002, Lyondell purchased Occidental’s 29.5% interest in Equistar. As a result, Lyondell owns a 70.5% interest in Equistar, and Millennium owns the remaining 29.5% interest in Equistar. Lyondell and Equistar have an agreement (the “Shared Services Agreement”) to share office space and utilize shared services over a broad range of services. See “Agreements Between Lyondell and Equistar” for more information regarding transactions between Lyondell and Equistar.

The Amended and Restated Partnership Agreement of Equistar (the “Equistar Partnership Agreement”) governs, among other things, ownership, cash distributions, capital contributions and management of Equistar. The Equistar Partnership Agreement provides that Equistar is governed by a Partnership Governance Committee, consisting of six representatives, three appointed by each general partner. Matters requiring approval by at least two of the three representatives of each of Lyondell and Millennium include changes in the scope of Equistar’s business, the five-year strategic plan (and annual updates thereof), the sale or purchase of assets or capital expenditures of

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more than $30 million not contemplated by the strategic plan, capital contributions to Equistar by Equistar’s owners over certain amounts, merging or combining with another business and certain other matters. All decisions of the Partnership Governance Committee that do not require at least two of the three representatives of each of Lyondell and Millennium may be made by Lyondell’s representatives alone, except in situations where Lyondell has a conflict. In situations where Lyondell has a conflict, decisions are made by the representatives of Millennium. The day-to-day operations of Equistar are managed by the officers of Equistar. Dan F. Smith, the President and Chief Executive Officer of Lyondell, also serves as Chief Executive Officer of Equistar.

EQUISTAR PETROCHEMICALS SEGMENT

Overview

Petrochemicals are fundamental to many segments of the economy, including the production of consumer products, housing and automotive components and other durable and nondurable goods. Equistar produces a variety of petrochemicals, including olefins, oxygenated products, aromatics and specialty products, at eleven facilities located in five states. Olefins include ethylene, propylene and butadiene. Oxygenated products include EO and derivatives, EG, ethanol and MTBE. Aromatics produced include benzene and toluene. Equistar’s petrochemical products are used to manufacture polymers and intermediate chemicals, which are used in a variety of consumer and industrial products. Ethylene is the most significant petrochemical in terms of worldwide production volume and is the key building block for polyethylene and a large number of other chemicals, plastics and synthetics.

The Chocolate Bayou, Corpus Christi and two Channelview, Texas olefins plants use crude oil-based liquid raw materials, including naphtha, condensates and gas oils, to produce ethylene. The use of crude oil-based liquid raw materials results in the production of a significant amount of co-products such as propylene, butadiene, benzene and toluene, and specialty products, such as dicyclopentadiene (“DCPD”), isoprene, resin oil and piperylenes. Based upon independent surveys, management believes that its Channelview facility is one of the lowest cash production cost olefins facilities in the United States. Equistar’s Morris, Illinois; Clinton, Iowa; Lake Charles, Louisiana; and LaPorte (Deer Park), Texas plants are designed to consume primarily natural gas liquids, including ethane, propane and butane (collectively “NGLs”), to produce ethylene with some co-products such as propylene. The Corpus Christi and Channelview plants also may consume NGL’s to produce ethylene, depending upon the relative economic advantage of the alternative raw materials. A comprehensive pipeline system connects the Gulf Coast plants with major olefins customers. Raw materials are sourced both internationally and domestically and are shipped via vessel and pipeline. Equistar’s Lake Charles, Louisiana facility has been idled since the first quarter of 2001, pending sustained improvement in market conditions. Olefins accounted for approximately 56% of Equistar’s total revenues in 2003, 59% in 2002 and 60% in 2001.

Equistar produces EO and its primary derivative, EG, at its Bayport facilities located in Pasadena, Texas and through a 50/50 joint venture with DuPont in Beaumont, Texas. The Bayport facility also produces other derivatives of EO, principally ethylene glycol ethers and ethanolamines. EG is used in antifreeze, polyester fibers, resins and films. EO and its derivatives are used in many consumer and industrial end uses, such as detergents and surfactants, brake fluids and polyurethane seating and bedding foams.

Equistar produces synthetic ethanol at its Tuscola, Illinois plant by a direct hydration process that combines water and ethylene. Equistar also owns and operates a facility in Newark, New Jersey for denaturing ethanol by the addition of certain chemicals. In addition, Equistar produces small volumes of diethyl ether, a by-product of its ethanol production, at its Tuscola facility. These ethanol products are ingredients in various consumer and industrial products, as described more fully in the table below.

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The following table outlines Equistar’s primary petrochemical products, annual processing capacity as of January 1, 2004, and the primary uses for such products. Unless otherwise specified, annual processing capacity was calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output based on the design raw material mix. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than the capacities set forth below. Capacities shown represent 100% of the capacity of Equistar, of which Lyondell owns 70.5%.

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Raw Materials

The raw materials cost for olefins production is the largest component of total cost for the petrochemicals business. The primary raw materials used in the production of olefins are crude oil-based liquids (also referred to as “heavy raw materials”) and NGLs (also referred to as “light raw materials”). Crude oil-based liquids generally are delivered by ship or barge. NGLs are delivered to Equistar’s facilities primarily via pipeline.

Olefins plants with the flexibility to consume a wide range of raw materials historically have had lower variable costs than olefins plants that are restricted in their raw material processing capability to NGLs. Crude oil-based liquids have had an historical cost advantage over NGLs such as ethane and propane, assuming the co-products were recovered and sold. Facilities using crude oil-based liquids historically have generated, on average, approximately four cents of additional variable margin per pound of ethylene produced compared to facilities restricted to using ethane. This margin advantage is based on an average of historical data over a period of years and is subject to short-term fluctuations, which can be significant. For example, during the first quarter of 2003, when crude oil prices rose sharply in anticipation of the war in Iraq, the advantage was significantly reduced. However, the advantage rebounded strongly in the second quarter of 2003, bringing the 2003 yearly average back to historical levels. Equistar has the capability to realize this margin advantage due to its ability to process crude oil-based liquids at the Channelview, Corpus Christi and Chocolate Bayou facilities. Equistar temporarily idled its LaPorte ethylene facility from June 2003 to August 2003 to lower its average cost of U.S. ethylene production by taking advantage of unused production capacity at its Channelview, Corpus Christi and Chocolate Bayou facilities, which can process crude oil-based liquids.

The Channelview facility is particularly flexible because it can range from processing all crude oil-based liquids to processing a majority of NGLs. The Corpus Christi plant can range from processing predominantly crude oil-based liquids to processing predominantly NGLs. The Chocolate Bayou facility processes 100% crude oil-based liquids. Equistar’s LaPorte facility can process natural gasoline and NGLs, including heavier NGLs such as butane. Equistar’s three other olefins facilities process only NGLs.

As described above, Equistar believes that its raw material flexibility is a key advantage in the production of olefins. As a result, although the majority of Equistar’s crude oil-based liquids requirements are purchased via contractual arrangements from a variety of domestic and international sources, Equistar also purchases crude oil-based liquids on the spot market from domestic and international sources in order to maintain its raw material flexibility and to take advantage of raw material pricing opportunities. Similarly, Equistar purchases a majority of its NGLs requirements via contractual arrangements from a variety of sources, but also purchases NGLs on the spot market. Equistar also obtains a portion of its crude oil-based liquids requirements from LCR at market-related prices. Equistar purchases all of its methanol requirements from Lyondell at cost-based prices. Also, Equistar purchases large amounts of natural gas to be used as energy for consumption in its business via market-based contractual arrangements with a variety of sources.

The raw materials for Equistar’s petrochemicals segment are, in general, commodity crude oil-based liquids and NGLs with numerous bulk suppliers and ready availability at competitive prices. Historically, raw material availability has not been an issue for Equistar’s petrochemicals business segment. For additional discussion regarding the effects of raw material pricing on recent operating performance, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Marketing and Sales

Ethylene produced by the Clinton and Morris facilities generally is consumed as a raw material by the polymers operations at those sites, or is transferred to Tuscola from Morris by pipeline for the production of ethanol. Ethylene produced by Equistar’s LaPorte facility is consumed as a raw material by Equistar’s polymers operations and Millennium’s vinyl acetate operations in LaPorte and also is distributed by pipeline for other internal uses and to third parties. Ethylene and propylene produced at the Channelview, Chocolate Bayou, Corpus Christi and Lake Charles olefins plants generally are distributed by pipeline or via exchange agreements to Equistar’s Gulf Coast polymer and EO/EG facilities as well as to Equistar’s affiliates and unrelated parties. Equistar’s Lake Charles facility has been idled since the first quarter of 2001, pending sustained improvement in market conditions. For the year ended December 31, 2003, approximately 70% of Equistar’s ethylene, based on sales dollars, was sold to Equistar’s polymers or oxygenated products businesses or sold to Equistar’s owners and their affiliates at market-related prices. In addition, Equistar also had significant ethylene sales to Occidental Chemical Corporation (a subsidiary of Occidental, which is the beneficial owner of approximately 25% of Lyondell) during 2003 pursuant to a long-term ethylene supply agreement.

Equistar sells a majority of its olefins products to customers with whom it has had long-standing relationships. These sales generally are made under written agreements that typically provide for monthly negotiation of price; customer purchases of a specified minimum quantity; and three- to six-year terms with automatic one- or two-year term extension provisions. Some contracts may be terminated early if deliveries have been suspended for several months. No single petrochemicals customer accounted for 10% or more of Equistar’s total revenues in 2003.

EO and EG typically are sold under three- to five-year contracts, with monthly pricing based on market conditions. Lyondell provides sales services for Equistar outside of North America for EO derivatives. Glycol ethers are sold primarily into the solvent and distributor markets at market prices, as are ethanolamines and brake fluids. Ethanol and ethers primarily are sold under one-year contracts at market prices.

Equistar licenses MTBE technology under a license from a subsidiary of Lyondell and sells a significant portion of MTBE produced at one of its two Channelview units to Lyondell at market-related prices. The production from the second unit is processed by Equistar and returned to LCR for gasoline blending. MTBE produced at Chocolate Bayou is sold at market-related prices to Lyondell for resale.

Equistar sells most of its aromatics production under contracts that have initial terms ranging from one to three years and that typically contain automatic one-year term extension provisions. These contracts provide for monthly price adjustments based upon market prices. Benzene produced by LCR is sold directly to Equistar at market-related prices. Equistar serves as LCR’s sole agent to market toluene produced by LCR and receives a marketing fee for such services.

Equistar at times purchases ethylene, propylene, benzene and butadiene for resale, when necessary, to satisfy customer demand for these products above production levels. Volumes of ethylene, propylene, benzene and butadiene purchased for resale can vary significantly from period to period. However, purchased volumes do not have a significant impact on profitability.

Most of the ethylene and propylene production of the Channelview, Chocolate Bayou, Corpus Christi, La Porte and Lake Charles facilities is shipped via a 1,430-mile pipeline system which has connections to numerous Gulf Coast ethylene and propylene consumers. This pipeline system, some of which is owned and some of which is leased by Equistar, extends from Corpus Christi to Mont Belvieu to Port Arthur, Texas as well as around the Lake Charles, Louisiana area. In addition, exchange agreements with other olefins producers allow access to customers who are not directly connected to Equistar’s pipeline system. Some ethylene is shipped by railcar from Clinton, Iowa to Morris, Illinois. A pipeline owned and operated by an unrelated party is used to transport ethylene from Morris, Illinois to Tuscola, Illinois. Some propylene is shipped by ocean-going vessel. Ethylene oxide is shipped by railcar, and its derivatives are shipped by railcar, truck, isotank or ocean-going vessel. Butadiene, aromatics and other petrochemicals are distributed by pipeline, railcar, truck, barge or ocean-going vessel.

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In 2003, Equistar entered into a long-term propylene supply arrangement with a subsidiary of Sunoco, Inc. Beginning in April 2003, Equistar supplies 700 million pounds of propylene annually to Sunoco, with a majority of the propylene to be supplied under a cost-based formula and the balance to be supplied on a market-related basis. This 15-year supply arrangement replaces a previous contract under which Equistar supplied 400 million pounds of propylene annually to Sunoco at market-related prices. For additional discussion regarding the transactions with Sunoco, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Competition and Industry Conditions

The bases for competition in Equistar’s petrochemicals products are price, product quality, product deliverability, reliability of supply and customer service. Equistar competes with other large domestic producers of petrochemicals, including BP, Chevron Phillips Chemical Company LP (“ChevronPhillips”), Dow, Enterprise Products Partners L.P., Exxon Mobil Corporation (“ExxonMobil”), Huntsman Chemical Company (“Huntsman”) and Shell. Industry consolidation, including the combinations of British Petroleum and Amoco, Exxon and Mobil, and Dow and Union Carbide and the formation of ChevronPhillips, has brought North American production capacity under the control of fewer, although larger and stronger, competitors.

Equistar’s combined rated ethylene capacity at January 1, 2004 was approximately 11.6 billion pounds per year, or approximately 15% of total North American production capacity. Based on published rated production capacities, Equistar believes it is the second largest producer of ethylene in North America. North American ethylene rated capacity at January 1, 2004 was approximately 78 billion pounds per year. Approximately 77% of the total ethylene production capacity in North America is located along the Gulf Coast.

Petrochemicals profitability is affected by raw materials costs and the level of demand for petrochemicals and their derivatives, along with vigorous price competition among producers which may intensify due to, among other things, the addition of new capacity. Ethylene markets continue to be affected by excess capacity as a result of previous capacity additions, which have not yet been fully absorbed due to weak demand growth over the last three years. However, with the shut down of two of Dow’s Gulf Coast olefins plants in 2003 and improving demand as worldwide economic growth recovers, operating rates have begun to improve. In general, demand is a function of economic growth in the United States and elsewhere in the world, which fluctuates. It is not possible to accurately predict the changes in raw material costs, market conditions and other factors that will affect petrochemical industry profitability in the future. The petrochemicals industry historically has experienced significant volatility in profitability due to fluctuations in capacity utilization. Equistar’s other major commodity chemical products also experience cyclical market conditions similar to, although not necessarily coincident with, those of olefins.

EQUISTAR POLYMERS SEGMENT

Overview

Through facilities located at nine plant sites in four states, Equistar’s polymers segment manufactures a wide variety of polyolefins, including polyethylene, polypropylene and various performance polymers. Polyolefins are used in a variety of consumer and industrial products, including packaging film, trash bags, automotive parts, plastic bottles and caps and compounds for wire and cable insulation.

Equistar manufactures polyethylene using a variety of technologies at five facilities in Texas and at its Morris, Illinois and Clinton, Iowa facilities. The Morris and Clinton facilities enjoy a freight cost advantage over Gulf Coast producers in delivering products to customers in the U.S. Midwest and on the East Coast of the United States. Polyethylene accounted for approximately 28% of Equistar’s total revenues in 2003, 27% in 2002 and 27% in 2001. Equistar produces performance polymer products, which include enhanced grades of polyethylene and polypropylene, at several of its polymers facilities. Equistar believes that, over a business cycle, average selling prices and profit margins for performance polymers tend to be higher than average selling prices and profit margins for higher-volume commodity polyethylenes. Equistar also produces wire and cable insulating resins and compounds at its LaPorte, Texas facility, and wire and cable insulating compounds at its Fairport Harbor, Ohio facility. Wire and cable insulating resins and compounds are used to insulate copper and fiber optic wiring in power, telecommunication, computer and automobile applications. Equistar intends to temporarily consolidate its automotive compound production at the Fairport Harbor, Ohio facility and temporarily idle the automotive

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compound production unit at the LaPorte, Texas facility at the end of the first quarter of 2004. Equistar’s Morris, Illinois facility manufactures polypropylene using propylene produced as a co-product of Equistar’s ethylene production as well as propylene purchased from unrelated parties. Polypropylene is sold for various applications in the automotive, housewares and appliance industries. On March 31, 2003, Equistar sold its Bayport polypropylene manufacturing unit in Pasadena, Texas to a subsidiary of Sunoco. For additional discussion regarding the transactions with Sunoco, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The following table outlines Equistar’s polymers and performance polymers products, annual processing capacity at January 1, 2004, and the primary uses for such products. Unless otherwise specified, annual processing capacity was calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output based on the design raw material mix. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than the capacities set forth below. Capacities shown represent 100% of the capacity of Equistar, of which Lyondell owns 70.5%.

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Raw Materials

The primary raw material for Equistar’s polymers segment is ethylene. With the exception of the Chocolate Bayou polyethylene plant, Equistar’s polyethylene production facilities can receive their ethylene directly from Equistar’s petrochemical facilities via Equistar’s olefins pipeline system, by third-party pipelines or from on-site production. All of the ethylene used in Equistar’s polyethylene production is produced internally by Equistar’s petrochemicals segment. However, the polyethylene plants at Chocolate Bayou, LaPorte and Bayport, Texas are connected by pipeline to unrelated parties and could receive ethylene via exchanges or purchases. The polypropylene facility at Morris, Illinois receives propylene from Equistar’s petrochemicals segment and from unrelated parties.

The raw materials for Equistar’s polymers segment are, in general, commodity chemicals with numerous bulk suppliers and ready availability at competitive prices. Historically, raw material availability has not been an issue for Equistar’s polymers business segment. For additional discussion regarding the effects of raw material pricing on recent operating results, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Marketing and Sales

Equistar’s polymers products primarily are sold to an extensive base of established customers. Approximately 65% of Equistar’s polymers products volumes are sold to customers under term contracts, typically having a duration of one to three years. The remainder generally is sold without contractual term commitments. In either case, in most of the continuous supply relationships, prices are subject to change upon mutual agreement between Equistar and the customer. No single polymers customer accounted for 10% or more of Equistar’s total revenues in 2003.

Polymers are primarily distributed via railcar. Equistar owns or leases, pursuant to long-term lease arrangements, approximately 7,850 railcars for use in its polymers business. Equistar sells the vast majority of its polymers products in North America, and such sales primarily are through its own sales organization. It generally engages sales agents to market its polymers in the rest of the world.

Competition and Industry Conditions

The bases for competition in Equistar’s polymers products are price, product performance, product quality, product deliverability, reliability of supply and customer service. Equistar competes with other large producers of polymers, including Atofina, BP Solvay Polyethylene, ChevronPhillips, Dow, Eastman Chemical Company, ExxonMobil, Formosa Plastics, Huntsman, NOVA Chemicals Corporation and Westlake Polymers. Industry consolidation, including the combinations of British Petroleum and Amoco, Exxon and Mobil, and Dow and Union Carbide, the formation of ChevronPhillips, and the polymers business combinations between BP and Solvay, has brought North American production capacity under the control of fewer, although larger and stronger, competitors.

Based on published rated industry capacities, Equistar is the third largest producer of polyethylene in North America. The combined rated capacity of Equistar’s polyethylene units as of January 1, 2004 was approximately 5.7 billion pounds per year, or approximately 15% of total industry capacity in North America. There are 19 other North American producers of polyethylene, the most significant of which are ChevronPhillips, Dow and ExxonMobil.

Polymers profitability is affected by raw material costs and the worldwide level of demand for polymers, along with vigorous price competition among producers which may intensify due to, among other things, the addition of new capacity. In general, demand is a function of economic growth in the United States and elsewhere in the world, which fluctuates. It is not possible to accurately predict the changes in raw material costs, market conditions and other factors, which will affect polymers industry profitability in the future.

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EQUISTAR PROPERTIES

Equistar’s principal manufacturing facilities and principal products as of January 1, 2004 are set forth below. All of these facilities are wholly owned by Equistar unless otherwise noted.

Storage capacity for up to approximately 13 million barrels of NGLs, ethylene, propylene and other hydrocarbons is provided in caverns within the salt dome at the Mont Belvieu facility. There are an additional 3 million barrels of ethylene and propylene storage and four brine ponds operated by Equistar on leased property in Markham, Texas.

Equistar uses an extensive olefins pipeline system, some of which it owns and some of which it leases, extending from Corpus Christi to Mont Belvieu to Port Arthur and around the Lake Charles area. Equistar owns other pipelines in connection with its Chocolate Bayou, Corpus Christi, LaPorte, Matagorda and Victoria facilities. Equistar uses a pipeline owned and operated by an unaffiliated party to transport ethylene from its Morris facility to

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its Tuscola facility. Equistar owns and leases several pipelines connecting the Channelview facility, the LCR refinery and the Mont Belvieu storage facility, which are used to transport raw materials, butylenes, hydrogen, butane, MTBE and unfinished gasolines. Equistar also owns a barge docking facility near the Channelview facility capable of berthing eight barges and related terminal equipment for loading and unloading raw materials and products. Equistar owns or leases pursuant to long-term lease arrangements approximately 9,400 railcars for use in its petrochemicals and polymers businesses.

Lyondell provides office space to Equistar for its executive offices and headquarters in downtown Houston, Texas as part of the Shared Services Agreement. See “Agreements Between Lyondell and Equistar” below. In addition, Equistar owns facilities that house the Chocolate Bayou, Cincinnati and Morris research operations. Equistar also leases sales facilities and leases storage facilities, primarily in the Gulf Coast area, from various parties for the handling of products.

AGREEMENTS BETWEEN LYONDELL AND EQUISTAR

Lyondell and Equistar entered into an asset contribution agreement on December 1, 1997 providing for the transfer of assets to Equistar. Among other things, the agreement sets forth representations and warranties by Lyondell with respect to the transferred assets and requires indemnification by Lyondell with respect thereto. The asset contribution agreement with Lyondell also provides for the assumption by Equistar of, among other things, third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are filed prior to December 1, 2004, as to Lyondell, to the extent the aggregate thereof does not exceed $7 million, subject to certain terms of the asset contribution agreement. Millennium Petrochemicals Inc. (“Millennium Petrochemicals”) and Occidental entered into similar asset contribution agreements with Equistar with respect to the transfer of their respective assets and Equistar’s assumption of liabilities. Lyondell, Millennium, Occidental and Equistar remain liable under these indemnification or guarantee arrangements to the same extent as they were before Lyondell’s August 2002 acquisition of Occidental’s interest in Equistar.

If Lyondell or Millennium or any of their affiliates desires to initiate or pursue any opportunity to undertake, engage in, acquire or invest in a business or activity or operation within the scope of the business of Equistar, the opportunity must first be offered to Equistar as provided in the Equistar Partnership Agreement. Equistar has certain options to participate in the opportunity, but if it determines not to participate, the party offering the opportunity is free to pursue the opportunity on its own. If the opportunity within Equistar’s scope of business constitutes less than 25% of an acquisition or investment that is otherwise not within the scope of its business, Lyondell or Millennium, as the case may be, may make the acquisition or investment, provided that the portion within the scope of Equistar’s business is offered to Equistar pursuant to the foregoing provisions as provided in the Equistar Partnership Agreement.

Lyondell and Equistar have implemented the Shared Services Agreement to share office space and utilize shared services over a broad range, including information technology, human resources, sales and marketing, raw material supply, supply chain, health, safety and environmental, engineering and research and development, facility services, legal, accounting, treasury, internal audit, and tax. Employee-related and indirect costs are allocated between the two companies in the manner prescribed in the Shared Services Agreement while direct third party costs, incurred exclusively for either Lyondell or Equistar, are charged directly to that entity. In addition, Lyondell and Equistar have an agreement for Lyondell to provide sales services for Equistar outside of North America for EO derivatives. Equistar and Millennium Petrochemicals also are parties to a number of agreements for the provision of services, utilities and materials from one party to the other at common locations, principally LaPorte, Texas and Cincinnati, Ohio.

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Lyondell, Millennium Petrochemicals and Occidental Chemical Corporation, a subsidiary of Occidental (“Occidental Chemical”), each entered into a Master Intellectual Property Agreement and other related agreements with respect to intellectual property with Equistar. These agreements provide for (1) the transfer of certain intellectual property of Lyondell, Millennium Petrochemicals and Occidental Chemical related to the businesses each contributed to Equistar, (2) the grant of irrevocable, non-exclusive, royalty-free licenses to Equistar (without the right to sublicense) with respect to intellectual property retained by Lyondell, Millennium Petrochemicals or Occidental Chemical that is related to Equistar’s business and (3) the grant of irrevocable, non-exclusive, royalty-free licenses (without the right to sublicense) from Equistar to Lyondell, Millennium Petrochemicals and Occidental Chemical, respectively, with respect to intellectual property each contributed to Equistar. The Master Intellectual Property Agreements were not materially affected by Lyondell’s acquisition of Occidental’s interest in Equistar.

Lyondell, Millennium and Equistar are parties to an Amended and Restated Parent Agreement, which provides that, among other things, each of Lyondell and Millennium guarantees the performance by their respective subsidiaries under various agreements entered into in connection with the formation of Equistar, including the Equistar Partnership Agreement and the asset contribution agreements providing for the transfer of assets by Lyondell and Millennium Petrochemicals, respectively, to Equistar.

The Equistar Partnership Agreement and the Parent Agreement also provide each owner a right of first option if the other owner wishes to sell its partnership interest or the stock of its partner subsidiaries. These agreements also set forth other limitations on the right to transfer the interests or stock. The Equistar Partnership Agreement and the Parent Agreement were amended and restated to reflect that Occidental no longer owns an interest in Equistar and to set forth certain rights and continuing obligations of Occidental with respect to Equistar.

EQUISTAR EMPLOYEE RELATIONS

As of December 31, 2003, Equistar employed approximately 3,165 full-time employees. In addition to its own employees, Equistar uses the services of Lyondell employees pursuant to the Shared Services Agreement and also uses the services of independent contractors in the routine conduct of its business. Approximately 5% of Equistar’s employees are covered by collective bargaining agreements. Equistar believes that its relations with its employees are good. See “Agreements Between Lyondell and Equistar” above.

EQUISTAR RESEARCH AND TECHNOLOGY; PATENTS AND TRADEMARKS

Equistar conducts research and development principally at its Cincinnati, Ohio technical center, with an additional technical center located at the Chocolate Bayou, Texas facility. Equistar’s research and development expenditures were $38 million in 2003, $38 million in 2002 and $39 million in 2001, all of which were expensed as incurred.

Equistar maintains a patent portfolio that is continuously supplemented by new patent applications related to its petrochemicals and polymers businesses. As of December 31, 2003, Equistar owned approximately 215 United States patents and approximately 335 worldwide patents. Equistar has numerous trademarks and trademark registrations in the United States and other countries, including the Equistar logo. Equistar does not regard its business as being materially dependent upon any single patent or trademark.

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LYONDELL-CITGO REFINING LP

(REFINING SEGMENT)

Overview

Lyondell participates in petroleum refining through an equity interest in LCR. Lyondell holds a 58.75% interest in LCR and CITGO holds a 41.25% interest in LCR. LCR owns and operates a refinery (the “Refinery”), which is located on the Houston Ship Channel in Houston, Texas. LCR was formed in 1993 to upgrade the Refinery’s ability to process substantial additional volumes of lower cost, extra heavy, higher sulfur crude oil. As of January 1, 2004, the Refinery’s extra heavy crude oil processing capacity was approximately 268,000 barrels per day.

The Refinery is a full conversion refinery designed to run extra heavy (17 degree API), high sulfur crude oil. The 17 degree API gravity crude oil is more viscous and dense than traditional crude oil and contains higher concentrations of sulfur and heavy metals, making it more difficult to refine into gasoline and other high value fuel products, but less costly to purchase. Processing extra heavy, high sulfur crude oil in significant quantities requires a refinery with extensive coking, catalytic cracking, hydrotreating and desulfurization capabilities, i.e., a “complex refinery.” The Refinery’s complexity enables it to operate in full conversion mode, producing a slate of products that consists primarily of high value, clean products (due to a lack of conversion equipment, many refineries produce significant quantities of lower value products such as conventional gasoline, high sulfur diesel and heavy fuel oil). The Refinery’s clean products include premium grades such as reformulated gasoline, jet fuel, low sulfur diesel and aromatics. The Refinery’s products also include conventional gasoline, lubricants (industrial lubricants, white oils and process oils), carbon black oil, refinery-grade propylene, sulfur, residual fuel and petroleum coke. Gasoline accounted for approximately 39% of LCR’s total revenues in 2003 and 2002 and 37% in 2001. Diesel accounted for approximately 26% of LCR’s total revenues in 2003 and 2002 and 23% in 2001. The aromatics produced by the Refinery are benzene, toluene, orthoxylene and paraxylene. These products are sold to manufacturers of intermediate chemicals and polyester intermediates and are ultimately used in clothing, soft drink bottles and drinking cups, audio and video tapes, and resins.

The following table outlines LCR’s primary products, annual rated capacity as of January 1, 2004, and the primary uses for such products. The term “rated capacity,” as used in this table, is calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output based on the design raw material mix. Because the rated capacity of a production unit is an estimated amount, the actual production volumes may be more or less than the rated capacity. Capacities shown represent 100% of the capacity of LCR, of which Lyondell owns 58.75%.

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Management of LCR

LCR is a limited partnership organized under the laws of the state of Delaware. Lyondell owns its interest in LCR through wholly owned subsidiaries, which serve as general partner and limited partner. Similarly, CITGO, which is an indirect wholly owned subsidiary of Petróleos de Venezuela, S.A. (“PDVSA”), the national oil company of the Republic of Venezuela, owns its interest in LCR through wholly owned subsidiaries, which serve as general partner and limited partner.

LCR is governed by a Limited Partnership Agreement (the “LCR Partnership Agreement”), which provides for, among other things, the ownership and cash distribution rights of the partners. The LCR Partnership Agreement also provides that LCR is managed by a Partnership Governance Committee, which is composed of six representatives, three appointed by each general partner. Actions requiring unanimous consent of the representatives include amendment of the LCR Partnership Agreement, borrowing money, delegations of authority to committees, certain purchase commitments and capital expenditures. The day-to-day operations of the Refinery are managed by a general manager, who is a loaned employee of Lyondell.

Agreements between Lyondell or CITGO and LCR

LCR is a party to a number of agreements with Lyondell and CITGO. Under the terms of a long-term product sales agreement (“Products Agreement”), CITGO purchases from LCR substantially all of the refined products produced at the Refinery. Lyondell and CITGO perform administrative services for LCR pursuant to an Administrative Services Agreement, which is renegotiated annually. Under the terms of lubricant sales agreements, CITGO purchases all of the lubricant products manufactured by LCR. During 2003, LCR permanently shut down its lubricants facility located in Birmingport, Alabama, which previously had been operated by CITGO. In addition, CITGO serves as LCR’s sole agent to market paraxylene and orthoxylene produced by LCR.

Agreements between Equistar and LCR

Prior to the formation of Equistar, Lyondell was a party with LCR to multiple agreements designed to preserve many of the synergies between the Refinery and the Channelview petrochemicals facility. Most of these agreements were assumed by Equistar from Lyondell effective December 1, 1997. Economic evaluations at the Channelview facility and the Refinery are made to maximize product utilization, which may be local use, use at the other site, or third party sales. Certain Refinery products (propane, butane, low-octane naphthas, heating oils and gas oils) can be used as raw materials for olefins production, and certain Channelview facility olefins by-products can be processed by the Refinery into gasoline. Butylenes from the Refinery are processed by the Channelview facility and returned to LCR as alkylate and MTBE, which primarily are used as components for gasoline blending. Hydrogen from the Channelview facility is used at the Refinery for sulfur removal and product quality improvement. Benzene produced by LCR is sold directly to Equistar at market-related prices. In addition, Equistar serves as LCR’s sole agent to market toluene produced by LCR. See Notes 5 and 6 of Notes to Consolidated Financial Statements.

Raw Materials

In 1993, LCR entered into a long-term crude supply agreement (“Crude Supply Agreement”) with Lagoven, S.A., now known as PDVSA Petróleo, S.A. (“PDVSA Oil”), an affiliate of CITGO and of PDVSA. Most of the crude oil used by LCR as a raw material for the Refinery is purchased under the Crude Supply Agreement. Both PDVSA Oil and CITGO are direct or indirect wholly owned subsidiaries of PDVSA.

The Crude Supply Agreement, which expires on December 31, 2017, incorporates formula prices to be paid by LCR for the crude oil supplied based on the market value of a slate of refined products deemed to be produced from each particular crude oil or raw material, less: (1) certain deemed refining costs, adjustable for inflation and energy costs; (2) certain actual costs; and (3) a deemed margin, which varies according to the grade of crude oil or other raw material delivered. The actual refining margin earned by LCR may vary from the formula amount depending on, among other things, timing differences in incorporating changes in refined product market values and energy costs into the Crude Supply Agreement’s deemed margin calculations and the efficiency with which LCR conducts its operations. Although LCR believes that the Crude Supply Agreement reduces the volatility of LCR’s earnings

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and cash flows over the long-term, the Crude Supply Agreement also limits LCR’s ability to enjoy higher margins during periods when the market price of crude oil is low relative to then-current market prices for refined products. In addition, if the actual yields, costs or volumes of the LCR refinery differ substantially from those contemplated by the Crude Supply Agreement, the benefits of this agreement to LCR could be substantially diminished, and could result in lower earnings and cash flow for LCR. Furthermore, there may be periods during which LCR’s costs for crude oil under the Crude Supply Agreement may be higher than might otherwise be available to LCR from other sources. A disparate increase in the market price of heavy crude oil relative to the prices of heavy crude oil under the Crude Supply Agreement has the tendency to make continued performance of its obligations under the Crude Supply Agreement less attractive to PDVSA Oil.

The Crude Supply Agreement provides that Lyondell controls all of LCR’s decisions and enforcement rights in connection with the Crude Supply Agreement so long as PDVSA has a direct or indirect ownership interest in LCR. However, there are risks associated with reliance on PDVSA Oil for supplies of crude oil and with enforcing the provisions of contracts with companies such as PDVSA Oil that are non-United States affiliates of a sovereign nation. All of the crude oil supplied by PDVSA Oil under the Crude Supply Agreement is produced in the Republic of Venezuela, which has experienced economic difficulties and attendant social and political changes and unrest in recent years, including a national strike during the fourth quarter of 2002 and the first quarter of 2003 that disrupted crude oil deliveries to LCR. The Republic of Venezuela may continue to experience these difficulties and changes. It is impossible to predict how governmental policies may change under the current or any subsequent Venezuelan government. In addition, there are risks associated with enforcing judgments of United States courts against entities whose assets are located outside of the United States and whose management does not reside in the United States. Although the parties have negotiated certain alternative arrangements in the event of specified force majeure conditions, including Venezuelan governmental or other actions restricting or otherwise limiting PDVSA Oil’s ability to perform its obligations, any such alternative arrangements may not be as beneficial to LCR as the Crude Supply Agreement. From time to time, the Company and PDVSA have had discussions covering both a restructuring of the Crude Supply Agreement and a broader restructuring of the LCR partnership. The Company is unable to predict whether changes in either arrangement will occur.

If the Crude Supply Agreement is modified or terminated or this source of crude oil is otherwise interrupted, due to production difficulties, political or economic events in Venezuela or other factors, LCR could experience significantly lower earnings and cash flows. Subject to the consent of the other partner and rights of first offer and first refusal, the partners each have a right to transfer their interests in LCR to unaffiliated third parties in certain circumstances. If neither CITGO, PDVSA Oil or their affiliates were a partner in LCR, PDVSA Oil would have an option to terminate the Crude Supply Agreement. If PDVSA Oil were to terminate the Crude Supply Agreement, CITGO would have the option to terminate the Products Agreement. Depending on then-current market conditions, any breach or termination of the Crude Supply Agreement, or reduction in supply thereunder, would require LCR to purchase all or a portion of its crude oil in the merchant market, could subject LCR to significant volatility and price fluctuations and could adversely affect LCR and, therefore, Lyondell. There can be no assurance that alternative crude oil supplies with similar margins would be available for purchase by LCR.

Under the Crude Supply Agreement, PDVSA Oil is required to sell, and LCR is required to purchase, 230,000 barrels per day of extra heavy crude oil, which constitutes approximately 86% of the Refinery’s refining capacity of 268,000 barrels per day of crude oil. Since April 1998, PDVSA Oil has, from time to time, declared itself in a force majeure situation and subsequently reduced deliveries of crude oil. Such reductions in deliveries were purportedly based on announced OPEC production cuts. At such times, PDVSA Oil informed LCR that the Venezuelan government, through the Ministry of Energy and Mines, had instructed that production of certain grades of crude oil be reduced. In certain circumstances, PDVSA Oil made payments to LCR under a different provision of the Crude Supply Agreement in partial compensation for such reductions.

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In January 2002, PDVSA Oil again declared itself in a force majeure situation and, beginning in March 2002, reduced deliveries of crude oil to LCR. Although deliveries increased to contract levels of 230,000 barrels per day during the third quarter 2002, PDVSA Oil did not revoke its January 2002 force majeure declaration during 2002. A national strike in Venezuela began in early December 2002 and disrupted deliveries of crude oil to LCR under the Crude Supply Agreement. PDVSA Oil again declared a force majeure and reduced deliveries of crude oil to LCR. In March 2003, PDVSA Oil notified LCR that the force majeure had been lifted with respect to crude oil under the Crude Supply Agreement. For additional discussion regarding the effects of the political unrest in Venezuela on operating performance, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

LCR has consistently contested the validity of PDVSA Oil’s and PDVSA’s reductions in deliveries under the Crude Supply Agreement. The parties have different interpretations of the provisions of the contracts concerning the delivery of crude oil. The contracts do not contain dispute resolution procedures, and the parties have been unable to resolve their commercial dispute. As a result, on February 1, 2002, LCR filed a lawsuit against PDVSA and PDVSA Oil in connection with the force majeure declarations, which LCR is continuing to litigate. See “Item 3. Legal Proceedings—Litigation Matters.”

Marketing and Sales

The Refinery produces gasoline, low sulfur diesel, jet fuel, aromatics, lubricants and certain industrial products. On a weekly basis, LCR evaluates and determines the optimal product output mix for the Refinery, based on spot market prices and conditions. Under the Products Agreement, CITGO is obligated to purchase and LCR is required to sell 100% of the finished gasoline, jet fuel, heating oil, diesel fuel, coke and sulfur produced by the Refinery. CITGO purchases these products at market-related prices based on regional industry benchmark indexes. For example, the price for gasoline is based on prices published by Platts Oilgram, an industry trade publication. The Products Agreement provides that Lyondell controls all of LCR’s material decisions and enforcement rights in connection with the Products Agreement so long as CITGO has a direct or indirect ownership interest in LCR. The Products Agreement expires on December 31, 2017.

Competition and Industry Conditions

The refining business tends to be volatile as well as cyclical. Crude oil prices, which are impacted by worldwide political events and the economics of exploration and production in addition to refined products demand, are the largest source of the volatility. Demand for refined products is influenced by seasonal and short-term factors such as weather and driving patterns, as well as by longer term issues such as the economy, energy conservation and alternative fuels. Industry refined products supply is also dependent on industry operating capabilities and on long-term refining capacity trends. Management believes that the combination of the Crude Supply Agreement and the Products Agreement generally has the effect of stabilizing earnings and cash flows and reducing the market-driven aspects of the business’ volatility over the long-term.

With a capacity of approximately 268,000 barrels per day, the Company believes that the Refinery is one of North America’s largest full conversion (i.e., not producing asphalt or high sulfur heavy fuel) refinery capable of processing 100% 17 API crude oil.

Among LCR’s refining competitors are major integrated oil companies and domestic refiners that are owned by or affiliated with major integrated oil companies. Based on published industry data, as of January 1, 2004, there were 132 crude oil refineries in operation in the United States, and total domestic refinery capacity was approximately 16.7 million barrels per day. During 2003, LCR processed an average of 264,000 barrels per day of crude oil or approximately 1.6% of all U.S. crude runs.

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Properties

LCR owns the real property, plant and equipment, which make up the Refinery, located on approximately 700 acres in Houston, Texas. Units include a fluid catalytic cracking unit, cokers, reformers, crude distillation units, sulfur recovery plants, and hydrodesulfurization units, as well as a lube oil manufacturing plant and an aromatics recovery unit. LCR owns a pipeline used to transport gasoline, kerosene and heating oil from the Refinery to the GATX Terminal located in Pasadena, Texas to interconnect with common carrier pipelines. LCR’s Refinery and pipeline are mortgaged as collateral for LCR’s bank term loan and revolving credit facilities. During 2003, LCR permanently shut down its Birmingport, Alabama lube oil blending and packaging facility.

Employee Relations

At December 31, 2003, LCR employed approximately 920 full-time employees. LCR also uses the services of independent contractors in the routine conduct of its business. Approximately 57% of LCR’s employees are covered by a collective bargaining agreement between LCR and the Paper, Allied-Industrial, Chemical and Energy Workers International Union, which expires in January 2006. Although LCR is experiencing increased union activity, LCR believes that overall relations with its employees are good.

RISK FACTORS THAT MAY AFFECT LYONDELL AND ITS JOINT VENTURES

There are many factors that may affect the businesses and results of operations of Lyondell and its joint ventures. Some of these factors are discussed below. For additional discussion regarding factors that may affect the businesses and operating results of Lyondell and its joint ventures, see “Items 1 and 2. Business and Properties,” “Forward-Looking Statements,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. Disclosure of Market and Regulatory Risk.”

Industry Cyclicality and Overcapacity

The historical operating results of Lyondell and its joint ventures reflect the cyclical and volatile nature of the supply-demand balance in both the chemical and refining industries. These industries historically have experienced alternating periods of capacity shortages leading to tight supply, causing prices and profit margins to increase, followed by periods when substantial capacity is added, resulting in oversupply, declining capacity utilization rates and declining prices and profit margins. The cyclicality of these industries results in volatile profits and cash flow over the business cycle.

There is ongoing overcapacity in the chemical industry, as a number of participants in the chemical industry, including Lyondell, have added capacity and demand growth has lagged behind rates experienced historically. There can be no assurance that future growth in product demand will be sufficient to utilize current or additional capacity. Excess industry capacity has depressed and may continue to depress Lyondell’s and its joint ventures’ volumes and margins. The global economic and political environment continues to be uncertain. This environment and uncertainty contributed to low industry operating rates, added to the volatility of raw material and energy costs, and forestalled the industry’s recovery from trough conditions, which has and may continue to place pressure on Lyondell’s and its joint ventures’ results of operations. As a result of excess industry capacity and weak demand for products, as well as rising energy costs and raw material prices, Lyondell’s operating income has declined and may remain volatile.

Raw Materials and Energy Costs

Lyondell and its joint ventures purchase large amounts of raw materials and energy for their businesses. The cost of these raw materials and energy, in the aggregate, represents a substantial portion of Lyondell’s and its joint ventures’ operating expenses. The prices of raw materials and energy generally follow price trends of, and vary with the market conditions for, crude oil and natural gas, which may be highly volatile and cyclical. Results of operations for Lyondell and its joint ventures have been and could be in the future significantly affected by increases and volatility in these costs. Price increases increase working capital needs for Lyondell and its joint ventures, and can therefore also adversely affect liquidity and cash flow for Lyondell and its joint ventures.

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In addition, higher North American natural gas prices relative to natural gas cost-advantaged regions, such as the Middle East, have adversely affected the ability of many domestic chemical producers to compete internationally since natural gas prices affect a significant portion of the industry’s raw materials and energy sources. This environment has had a negative impact on Equistar’s exports, and has reduced the competitiveness of U.S. producers. It also has increased the competition for sales of chemicals in North America, as U.S. production that would otherwise have been sold overseas was instead offered for sale domestically, resulting in excess supply and lower margins in North America.

General Economic Conditions and Other External Factors

External factors beyond Lyondell’s and its joint ventures’ control, such as general economic conditions, international events and circumstances, competitor actions, and governmental regulation in the United States and abroad, can cause volatility in the price of raw materials and other operating costs, as well as significant fluctuations in demand for Lyondell’s and its joint ventures’ products, and can magnify the impact of economic cycles on Lyondell’s and its joint ventures’ businesses. Lyondell believes that events in the Middle East had a particular influence in 2003 and may continue to do so. In addition, a number of Lyondell’s and its joint ventures’ products are highly dependent on durable goods markets, such as the housing and automotive markets, that are themselves particularly cyclical. Many of Lyondell’s and its joint ventures’ products are components of other chemical products that, in turn, are subject to the supply-demand balance of both the chemical and refining industries and general economic conditions. If the global economy does not improve, demand for Lyondell’s and its joint ventures’ products and their income and cash flows would continue to be adversely affected. In addition, these risks have and may continue to increase volatility in prices for crude oil and natural gas and could result in increased raw material costs. Further, these risks could cause increased instability in the financial markets and adversely affect Lyondell’s and its joint ventures’ ability to access capital. With respect to Lyondell’s refining joint venture, management believes that the combination of the Crude Supply Agreement and the Products Agreement generally tends to stabilize earnings and to reduce market driven volatility over the long-term. However, there are risks associated with these agreements. See “International Operations and Country Risks” below.

Lyondell and its joint ventures may reduce production at or idle a facility for an extended period of time or exit a business because of high raw material prices, an oversupply of a particular product and/or a lack of demand for that particular product, which makes production uneconomical. Any decision to permanently close facilities or exit a business would result in writing off the remaining book value of the assets involved. Temporary outages sometimes last for several quarters or, in certain cases, longer and cause Lyondell or its joint ventures to incur costs, including the expenses of maintaining and restarting these facilities. It is possible that factors like increases in raw material costs or lower demand in the future will cause Lyondell or its joint ventures to further reduce operating rates, idle facilities or exit uncompetitive businesses.

International Operations and Country Risks

International operations and exports are subject to a number of risks, including currency exchange rate fluctuations, trade barriers, exchange controls, national and regional labor strikes, political risks and risks of increases in duties and taxes, as well as changes in laws and policies governing operations of companies in other countries.

As discussed earlier, LCR is party to a long-term crude supply agreement with PDVSA Oil, a wholly owned subsidiary of PDVSA. There are risks associated with enforcing the provisions of contracts with companies such as PDVSA Oil that are non-U.S. affiliates of a sovereign nation. Additionally, all of the crude oil supplied by PDVSA Oil under the Crude Supply Agreement is produced in the Republic of Venezuela, which has experienced economic difficulties and attendant social and political changes and unrest in recent years, including a national strike which disrupted crude oil deliveries to LCR. See “LYONDELL-CITGO Refining LP—Raw Materials,” “Item 3. Legal Proceedings—Litigation Matters” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Commodity Products

Lyondell and Equistar sell their products in highly competitive markets. Due to the commodity nature of certain of the products of Lyondell and Equistar, competition in these markets is based primarily on price and to a lesser extent on product performance, product quality, product deliverability, reliability of supply and customer service. As a result, Lyondell and Equistar generally are not able to protect their market position for these products by product differentiation and may not be able to pass on cost increases to their customers. Accordingly, increases in raw material and other costs may not necessarily correlate with changes in prices for these products, either in the direction of the price change or in magnitude. In addition, Lyondell’s and Equistar’s ability to increase product sales prices, and the timing of those increases, are affected by the supply-demand balances for their products, as well as the capacity utilization rates for those products. Timing differences in pricing between rising raw material costs, which may change daily, and contract product prices, which in many cases are negotiated only monthly or less often, sometimes with an additional lag in effective dates for increases, have had and may continue to have a negative effect on profitability.

Environmental and Other Regulatory Matters

The Company cannot predict with certainty the extent of its or its joint ventures’ future liabilities and costs under environmental, health and safety laws and regulations and the Company cannot guarantee that they will not be material. In addition, the Company and its joint ventures may face liability for alleged personal injury or property damage due to exposure to chemicals and other hazardous substances at their facilities or chemicals that they otherwise manufacture, handle or own. Although these types of claims have not historically had a material impact on the Company’s or its joint ventures’ operations, a significant increase in the success of these types of claims could materially adversely affect the Company’s or its joint ventures’ business, financial condition, operating results or cash flow.

The policy of each of Lyondell, Equistar and LCR is to be in compliance with all applicable environmental laws. Lyondell and Equistar also are each committed to the principles of Responsible Care^®, an international chemical industry initiative to enhance the industry’s responsible management of chemicals. The Company and its joint ventures (together with the industries in which they operate) are subject to extensive national, state and local environmental laws and regulations concerning, and are required to have permits and licenses regulating, emissions to the air, discharges onto land or waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Many of these laws and regulations provide for substantial fines and potential criminal sanctions for violations. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, some of these laws and regulations require Lyondell and its joint ventures to meet specific financial responsibility requirements. The Company cannot accurately predict future developments, such as increasingly strict environmental laws, and inspection and enforcement policies, as well as higher compliance costs, which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. Some risk of environmental costs and liabilities is inherent in particular operations and products of the Company and its joint ventures, as it is with other companies engaged in similar businesses, and there is no assurance that material costs and liabilities will not be incurred. In general, however, with respect to the costs and risks described above, the Company does not expect that it or its joint ventures will be affected differently than the rest of the chemicals and refining industry where the Company’s or its joint ventures’ facilities are located.

Environmental laws may have a significant effect on the nature and scope of cleanup of contamination at current and former operating facilities, the costs of transportation and storage of raw materials and finished products and the costs of the storage and disposal of wastewater. Also, U.S. “Superfund” statutes may impose joint and several liability for the costs of remedial investigations and actions on the entities that generated waste, arranged for disposal of the wastes, transported to or selected the disposal sites and the past and present owners and operators of such sites. All such responsible parties (or any one of them, including the Company) may be required to bear all of such costs regardless of fault, legality of the original disposal or ownership of the disposal site. In addition, similar environmental laws and regulations that have been or may be enacted in countries outside of the U.S. may impose similar liabilities and costs upon the Company. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters.”

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The Company and its joint ventures have on-site solid-waste management units at several of their facilities, which were used in the past to dispose of waste generated at the facilities. It is anticipated that corrective measures will be necessary to comply with federal and state requirements with respect to these facilities. The Company also has liabilities under the Resource Conservation and Recovery Act and various state and non-U.S. government regulations related to several current and former plant sites. The Company also is responsible for a portion of the remediation of certain off-site waste disposal facilities. The Company is contributing funds to the cleanup of several waste sites throughout the U.S. under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and the Superfund Amendments and Reauthorization Act of 1986. The Company also has been named as a potentially responsible party at several other sites. The Company’s policy is to accrue remediation expenses when it is probable that such efforts will be required and the related expenses can be reasonably estimated. Estimated costs for future environmental compliance and remediation are necessarily imprecise due to such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of presently unknown remediation sites and the allocation of costs among the potentially responsible parties under applicable statutes. The Company and its joint ventures, to the extent appropriate, have accrued amounts (without regard to potential insurance recoveries or other third party reimbursements) believed to be sufficient to cover current estimates of the cost for remedial measures at manufacturing facilities and off-site waste disposal facilities based upon their interpretation of current environmental standards. In the opinion of management, there is currently no material range of loss in excess of the amount recorded. Based on the establishment of such accruals, and the status of discussions with regulatory agencies described in this paragraph, the Company does not anticipate any material adverse effect upon its financial statements or competitive position as a result of compliance with the laws and regulations described in this or the preceding paragraphs. See also “Item 3. Legal Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Environmental Matters.”

In some cases, compliance with environmental, health and safety laws and regulations can only be achieved by capital expenditures. In the years ended December 31, 2003, 2002 and 2001, the Company and its joint ventures (on a 100% basis) spent, in the aggregate, approximately $65 million, $65 million and $34 million, respectively, for environmentally related capital expenditures at existing facilities. The increased 2003 and 2002 capital expenditures resulted from new emission reduction rules, as discussed below. The Company currently estimates that environmentally related capital expenditures at Company facilities and existing joint venture facilities (on a 100% basis) will be approximately $159 million for 2004 and $189 million for 2005, including preliminary estimated expenditures for engineering studies related to emission control standards for highly reactive, volatile organic compounds (“HRVOCs”), as discussed below.

The eight-county Houston/Galveston region has been designated a severe non-attainment area under the one-hour ozone standard by the EPA. As a result, in December 2000, the Texas Commission on Environmental Quality (“TCEQ”) submitted a plan to the EPA to reach and demonstrate compliance with the ozone standard by November 2007. Ozone is a product of the reaction between volatile organic compounds and nitrogen oxides (“NOx”) in the presence of sunlight, and is a principal component of smog. Emission reduction controls for NOx must be installed at the Refinery and each of Lyondell’s two facilities and Equistar’s six facilities in the Houston/Galveston region during the next several years. Revised rules adopted by the TCEQ in December 2002 changed the required NOx emission reduction levels from 90% to 80% while requiring new controls on emissions of HRVOCs, such as ethylene, propylene, butadiene and butylenes. The TCEQ plans to make a final review of these rules, with final rule revisions to be adopted by October 2004. These rules also still require approval by the EPA. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Environmental Matters” for a summary of the estimated capital expenditures required for Lyondell and its joint ventures to comply with the 80% NOx emission reduction requirements. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. Lyondell, Equistar and LCR are still assessing the impact of the new HRVOC control requirements. There can be no guarantee as to the ultimate cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations–Environmental Matters.”

In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain U.S. states

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have banned the use of MTBE, while other U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or also ban the use of MTBE. See “Item 7. Management’s Discussion and Analysis of Financial Condition and the Results of Operations – Environmental Matters” for further discussion regarding these U.S. federal and state initiatives and their potential impact on Lyondell, including potential capital expenditures required for Lyondell to produce alternative gasoline blending components.

The Clean Air Act also specified certain emissions standards for vehicles and, in 1998, the EPA concluded that additional controls on gasoline and diesel fuel were necessary. New standards for gasoline were finalized in 1999 and will require refiners to produce a low sulfur gasoline by 2004, with final compliance by 2006. A new “on-road” diesel standard was adopted in January 2001 and will require refiners of on-road diesel to produce 80% as ultra low sulfur diesel by June 2006, and 100% by the end of 2009, with less stringent standards for “off-road” diesel fuel. These gasoline and diesel fuel standards will result in increased capital investment for LCR. See “Item 7. Management’s Discussion and Analysis of Financial Condition and the Results of Operations – Environmental Matters” for a summary of the estimated capital expenditures required for LCR to comply with these standards.

In addition to the environmental matters described above, Lyondell and its joint ventures are subject to other material regulatory requirements, including those relating to the shipment or exportation of their products. Although Lyondell and its joint ventures have compliance programs and other processes intended to ensure compliance with all such regulations, Lyondell and its joint ventures are subject to the risk that their compliance with such regulations could be challenged. Non-compliance with certain of these regulations could result in the incurrence of additional costs, penalties or assessments that could have a material adverse effect on the financial position of Lyondell and its joint ventures.

Operating Hazards

The occurrence of material operating problems at Lyondell’s or its joint ventures’ facilities, including, but not limited to, the events described below, may have a material adverse effect on the productivity and profitability of a particular manufacturing facility, or on the Company as a whole, during and after the period of such operational difficulties. The Company’s income and cash flow are dependent on the continued operation of the Company’s and its joint ventures’ various production facilities and the ability to complete construction projects on schedule.

Although the Company and its joint ventures take precautions to enhance the safety of their operations and minimize the risk of disruptions, the Company’s and its joint ventures’ operations, along with the operations of other members of the chemical and refining industries, are subject to hazards inherent in chemical manufacturing and refining and the related storage and transportation of raw materials, products and wastes. These hazards include: pipeline leaks and ruptures; explosions; fires; severe weather and natural disasters; mechanical failures; unscheduled downtimes; labor difficulties; transportation interruptions; remediation complications; chemical spills; discharges or releases of toxic or hazardous substances or gases; storage tank leaks; other environmental risks; and potential terrorist acts. Some of these hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties.

Furthermore, the Company and its joint ventures are also subject to present and future claims with respect to workplace exposure, workers’ compensation and other matters. The Company and its joint ventures maintain property, business interruption and casualty insurance which they believe are in accordance with customary industry practices, but they are not fully insured against all potential hazards incident to their businesses, including losses resulting from war risks or terrorist acts. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. If the Company or its joint ventures were to incur a significant liability for which they were not fully insured, it could have a material adverse effect on the Company’s or its joint ventures’ financial position.

Joint Venture Risks

A substantial portion of the Company’s operations is conducted through joint ventures. The Company shares control of these joint ventures with third parties.

The Company’s forecasts and plans with respect to these joint ventures assume that its joint venture partners will observe their joint venture obligations. In the event that any of the Company’s joint venture partners do not observe their joint venture obligations, it is possible that the affected joint venture would not be able to operate in accordance with its business plans or that the Company would be required to increase its level of commitment in order to give effect to such plans.

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As with any such joint venture arrangements, differences in views among the joint venture participants may result in delayed decisions or in failures to agree on major matters, potentially adversely affecting the business and operations of the joint ventures and in turn the business and operations of the Company.

Lyondell or any of the other owners of the joint ventures may transfer control of their joint venture interests or engage in mergers or other business combination transactions with a third party or the other owner that could result in a change in control of Lyondell or the joint venture or the other owner. In many instances, such a transfer would be subject to an obligation to first offer the other owner an opportunity to purchase the interest. Lyondell and the other joint venture owners have discussed, and from time to time may continue to discuss, in connection with their ordinary course dialog regarding the joint ventures or otherwise, transactions that could result in a transfer or modification, directly or indirectly, of their ownership in a joint venture. For example, in August 2002, Lyondell purchased Occidental’s 29.5% ownership interest in Equistar.

Lyondell cannot be certain that any of the joint venture owners will not sell, transfer or otherwise modify their ownership interest in a joint venture, whether in a transaction involving third parties and/or the other owner. Upon a transfer of an interest in Equistar, the partnership agreement and key agreements between Equistar and its owners would remain in place, and may not be modified without the consent of all of the owners, but the transfer could affect the governance of Equistar, particularly because Equistar’s partnership agreement requires unanimous approval for some decisions.

Equistar’s credit facility provides that an event of default occurs if Lyondell, Millennium and/or Occidental or their successors (collectively, the “Original Owners”) cease to collectively hold more than 50% of the interests and voting power in Equistar. In addition, an event of default occurs under Equistar’s credit facility if a party other than an Original Owner (1) acquires a substantial portion of Lyondell’s partnership governance committee powers, (2) acquires the right to exercise powers of the partnership governance committee that require unanimous consent or (3) owns more than 25% of the interests and voting power in Equistar and has a debt rating below a specified level. An event of default under Equistar’s credit facility would permit the lenders to declare amounts outstanding under the credit facility immediately due and payable, terminate future commitments and proceed against the collateral granted to them to secure the indebtedness under the credit facility, which consists of substantially all of Equistar’s personal property, including inventory. If the lenders under the credit facility accelerated their loans, it could result in a default under Equistar’s outstanding notes, which then could be accelerated. These events of default under Equistar’s credit facility also are events of termination under Equistar’s accounts receivable sales facility. An event of termination under Equistar’s accounts receivable sales facility terminates the accounts receivable sales program such that additional accounts receivable may not be sold under the facility and the then-existing purchasers of accounts receivable would receive all collections from Equistar’s sold accounts receivable until they have collected on their interests in the purchased accounts receivable. LCR’s credit facility provides that an event of default occurs if Lyondell and CITGO cease to individually or collectively hold at least a 35% interest. In addition, LCR’s credit facility provides that an event of default occurs if (1) Lyondell transfers its interest as a member of LCR to a person other than an affiliate or (2) neither CITGO nor any of its affiliates is a member of LCR.

Potential Acquisitions, Divestitures and Joint Ventures

Lyondell and its joint ventures continuously seek opportunities to generate value through business combinations, purchases and sales of assets and contractual arrangements or joint ventures. These transactions are intended to result in the realization of synergies, the creation of efficiencies or the generation of cash to reduce debt. To the extent permitted under Lyondell’s and its joint ventures’ credit facilities and other debt agreements, some of these transactions may be financed with additional borrowings by Lyondell or its joint ventures or by the issuance of equity securities. Although these transactions are expected to yield longer-term benefits if the expected efficiencies and synergies of the transactions are realized, they could adversely affect the results of operations of Lyondell or its joint ventures in the short term because of the costs associated with such transactions. Other transactions may advance future cash flows from some of Lyondell’s or its joint ventures’ businesses, thereby yielding increased short-term liquidity, but consequently resulting in lower cash flows from these operations over the longer term.

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FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this report are “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements can be identified by words such as “estimate,” “believe,” “expect,” “anticipate,” “plan,” “budget” or other words that convey the uncertainty of future events or outcomes. Many of these forward-looking statements have been based on expectations and assumptions about future events that may prove to be inaccurate. While management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond Lyondell’s control. Lyondell’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to:

Any of these factors, or a combination of these factors, could materially affect Lyondell’s or its joint ventures’ future results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of Lyondell’s or its joint ventures’ future performance, and Lyondell’s or its joint ventures’ actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.

All forward-looking statements in this Form 10-K are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report. See “Items 1 and 2. Business and Properties,” “Risk Factors That May Affect Lyondell and Its Joint Ventures,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. Disclosure of Market and Regulatory Risk” for additional information about factors that may affect the businesses and operating results of Lyondell and its joint ventures. These factors are not necessarily all of the important factors that could affect Lyondell and its joint ventures. Use caution and common sense when considering these forward-looking statements. Lyondell does not intend to update these statements unless securities laws require it to do so.

In addition, this report contains summaries of contracts and other documents. These summaries may not contain all of the information that is important to an investor, and reference is made to the actual contract or document for a more complete understanding of the contract or document involved.

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NON-GAAP FINANCIAL MEASURES

The body of generally accepted accounting principles is commonly referred to as “GAAP.” For this purpose, a non-GAAP financial measure is generally defined by the Securities and Exchange Commission as one that purports to measure historical or future financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable U.S. GAAP measure. From time to time Lyondell discloses so-called non-GAAP financial measures, primarily EBITDA, or earnings before interest, taxes depreciation and amortization of long-lived assets, as well as proportionate share data for Lyondell and its joint ventures. The non-GAAP financial measures described herein are not a substitute for the GAAP measures of earnings, for which management has responsibility.

Lyondell sometimes uses EBITDA in its communications with investors, financial analysts and the public. Management believes that disclosure of EBITDA can provide useful information to investors, financial analysts and the public in their review of Lyondell’s operating performance and liquidity and their comparison of Lyondell’s operating performance and liquidity to the operating performance and liquidity of other companies in the same industry and other industries. This is because EBITDA is perceived as a more objective and comparable measure of operating performance and liquidity. For example, interest expense is dependent on the capital structure and credit rating of a company. However, debt levels, credit ratings and, therefore, the impact of interest expense on earnings vary in significance between companies. Similarly, the tax positions of individual companies can vary because of their differing abilities to take advantage of tax benefits, with the result that their effective tax rates and tax expense can vary considerably. Finally, companies differ in the age and method of acquisition of productive assets, and thus the relative costs of those assets, as well as in the depreciation (straight-line, accelerated, units of production) method, which can result in considerable variability in depreciation and amortization expense between companies. Thus, for comparison purposes, management believes that EBITDA can be useful as an objective and comparable measure of operating profitability and the contribution of operations to liquidity because it excludes these elements of earnings that do not provide information about the current operations of existing assets. Accordingly, management believes that disclosure of EBITDA can provide useful information to investors, financial analysts and the public in their evaluation of companies’ operating performance and the contribution of operations to liquidity.

Lyondell also reports certain proportionate share data for Lyondell and its joint ventures. The joint ventures are not consolidated, but are accounted for by the equity method of accounting. Accordingly, in Lyondell’s financial statements investors only see a single line item – investments – for the joint ventures in the balance sheet and one line item – equity income from joint venture investments – in the income statement. Therefore, investors may not get a complete appreciation of the magnitude of certain operating and financial measures for Lyondell and its joint ventures and the scope of their business activities. Management believes that reporting certain proportionate share data may give investors a more complete picture of the size and scope of the operating activities of Lyondell and its joint ventures.

Lyondell also periodically reports adjusted net income (loss) or adjusted EBITDA, excluding specified items that are unusual in nature or not comparable from period to period and that are included in GAAP measures of earnings. Management believes that excluding these items generally helps investors compare operating performance between two periods. Such adjusted data is always reported with an explanation of the items that are excluded.

Item 3. Legal Proceedings

Litigation Matters

On February 1, 2002, LCR filed a lawsuit against PDVSA and PDVSA Oil in the United States District Court, Southern District of New York in connection with various force majeure declarations since April 1998. In the lawsuit, LCR alleges that the force majeure declarations by PDVSA and PDVSA Oil are invalid and that PDVSA and PDVSA Oil have breached the contracts related to the delivery of crude oil by PDVSA and PDVSA Oil to LCR. LCR is seeking monetary damages of at least $90 million resulting from PDVSA Oil’s failure to pay LCR the amounts required by contract relating to past crude oil deliveries of less than the contractual amount. LCR also is seeking declaratory relief relating to the force majeure declarations, and is seeking a declaratory interpretation of the disputed contract provisions in order to clarify the rights and obligations of the parties for the remaining duration of

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the contracts, which expire in December 2017. On May 31, 2002, the defendants filed a motion to dismiss LCR’s complaint on the ground that the “act of state” doctrine prevented the court from deciding LCR’s breach of contract claims. On August 6, 2003, the court denied the defendants’ motion to dismiss LCR’s claims based on the “act of state” doctrine.

The Company and its joint ventures are, from time to time, defendants in lawsuits, some of which are not covered by insurance. Many of these suits make no specific claim for relief. Although final determination of legal liability and the resulting financial impact with respect to any such litigation cannot be ascertained with any degree of certainty, the Company does not believe that any ultimate uninsured liability resulting from the legal proceedings in which it or its joint ventures currently are involved (directly or indirectly) will individually, or in the aggregate, have a material adverse effect on the business or financial condition of the Company. However, the adverse resolution in any reporting period of one or more of these suits could have a material impact on Lyondell’s results of operations for that period, which may be mitigated by contribution or indemnification obligations of co-defendants or others, or by any insurance coverage that may be available.

Although Lyondell and its joint ventures are involved in numerous and varied legal proceedings, a significant portion of their outstanding litigation arose in four contexts: (1) claims for personal injury or death allegedly arising out of exposure to the products produced by or located on the premises of the respective entities; (2) claims for personal injury or death, and/or property damage allegedly arising out of the generation and disposal of chemical wastes at Superfund and other waste disposal sites; (3) claims for personal injury and/or property damage allegedly arising out of operations and air, noise and water pollution allegedly arising out of operations; and (4) employment related claims.

Environmental Proceedings

From time to time the Company and its joint ventures receive notices from federal, state or local governmental entities of alleged violations of environmental laws and regulations pertaining to, among other things, the disposal, emission and storage of chemical and petroleum substances, including hazardous wastes. Although the Company and its joint ventures have not been the subject of significant penalties to date, such alleged violations may become the subject of enforcement actions or other legal proceedings and may (individually or in the aggregate) involve monetary sanctions of $100,000 or more (exclusive of interest and costs).

In April 1997, the Illinois Attorney General’s Office filed a complaint in Grundy County, Illinois Circuit Court seeking monetary sanctions for releases into the environment at Millennium’s Morris, Illinois plant in alleged violation of state regulations. The Morris, Illinois plant was contributed to Equistar on December 1, 1997 in connection with the formation of Equistar. Equistar has reached a tentative settlement with the State of Illinois, which includes a civil penalty in the amount of $175,000, and is finalizing the settlement consent decree with the State of Illinois. Equistar does not believe that the ultimate resolution of this complaint will have a material adverse effect on the business or financial condition of Equistar.

In May 2003, the EPA filed an administrative complaint against LCR seeking civil penalties of $220,000 arising from a 1998 inspection relating to alleged exceedances of permitted emissions at LCR’s refinery. In December 2003, LCR reached a settlement with the EPA regarding this matter, which included a civil penalty of $133,000.

In May 2003, the TCEQ notified Equistar that it is seeking a civil penalty of $167,000 in connection with alleged exceedances of permitted emissions at certain cooling towers at Equistar’s Channelview plant. Equistar does not believe that the ultimate resolution of this matter will have a material adverse effect on the business or financial condition of Equistar.

In August 2003, the EPA notified Equistar that it is seeking a civil penalty arising from a 1999 inspection relating to alleged violations of Clean Air Act regulations at Equistar’s Lake Charles plant. Equistar has reached a tentative settlement with the EPA, which includes a civil penalty in the amount of $195,000, and is finalizing the settlement consent decree with the EPA. Equistar does not believe that the ultimate resolution of this matter will have a material adverse effect on the business or financial condition of Equistar.

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In connection with the transfer of assets and liabilities from ARCO to the Company prior to its initial public offering in 1988, the Company agreed to assume certain liabilities arising out of the operation of the Company’s integrated petrochemicals and refining business prior to July 1, 1988. The Company and ARCO entered into an agreement, updated in 1997 (the “Revised Cross-Indemnity Agreement”), whereby the Company agreed to defend and indemnify ARCO against certain uninsured claims and liabilities which ARCO may incur relating to the operation of the business of the Company prior to July 1, 1988, including certain liabilities that may arise out of pending and future lawsuits. For current and future cases related to Company products and Company operations, ARCO and the Company bear a proportionate share of judgment and settlement costs according to a formula that allocates responsibility based on years of ownership during the relevant time period. Under the Revised Cross-Indemnity Agreement, the Company assumed responsibility for its proportionate share of future costs for waste site matters not covered by ARCO insurance. In connection with the Company’s July 1998 acquisition of all of the outstanding shares of ARCO Chemical Company (“ARCO Chemical”), the Company is successor to a cross-indemnity agreement between ARCO and ARCO Chemical relating to claims or liabilities that ARCO may incur relating to its former ownership and operation of the oxygenates and polystyrenics businesses of ARCO Chemical for periods after July 1, 1987. On April 18, 2000, ARCO was acquired by BP. Subject to the uncertainty inherent in all litigation, management believes the resolution of the matters pursuant to these indemnity agreements will not have a material adverse effect upon the Consolidated Financial Statements of the Company.

Lyondell’s environmental liability totaled $16 million at December 31, 2003 based on the Company’s latest assessment of potential future remediation costs. This amount comprises liability for remediation responsibility relating to current and former plant sites, and a limited number of Superfund sites. Lyondell also is involved in administrative proceedings or lawsuits relating to a minimal number of Superfund sites. The Company estimates, based on currently available information, that potential loss contingencies associated with its sites, individually and in the aggregate, are not significant. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in investigations by regulatory agencies, could require the Company to reassess its potential exposure related to environmental matters. Substantially all amounts accrued are expected to be incurred over the next ten years. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters.”

In connection with the formation of Equistar, Lyondell, Millennium Petrochemicals and Occidental each agreed to provide certain indemnifications or guarantees thereof to Equistar with respect to the petrochemicals and polymers businesses they each contributed to Equistar. In addition, Equistar agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are filed prior to December 1, 2004 as to Lyondell and Millennium Petrochemicals, and May 15, 2005 as to Occidental, to the extent the aggregate thereof does not exceed $7 million for each entity, subject to certain terms of the respective asset contribution agreements. As of December 31, 2003, Equistar had incurred approximately $7 million with respect to the indemnification baskets for the businesses contributed by each of Lyondell and Millennium Petrochemicals and approximately $6 million for the business contributed by Occidental. Pursuant to these indemnification arrangements, Equistar will assume all third party claims relating to the contributed businesses that are filed on or after December 1, 2004 as to Lyondell and Millennium Petrochemicals and May 15, 2005 as to Occidental. Lyondell, Millennium, Occidental and Equistar remain liable under these indemnification or guarantee arrangements to the same extent as they were before Lyondell’s August 2002 acquisition of Occidental’s interest in Equistar.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are the executive officers of the Company as of March 1, 2004. The By-Laws of the Company provide that each officer shall hold office until the officer’s successor is elected or appointed and qualified or until the officer’s death, resignation or removal by the Board of Directors. Certain of the executive officers of Lyondell also are officers of Equistar, as described below. In addition, others perform their functions for Equistar as part of the Lyondell enterprise. For example, Mr. Bayer oversees manufacturing, health, safety, environmental and engineering services for Equistar, Mr. DeNicola provides financial management services to Equistar, and Ms. Galvin oversees legal and governmental affairs services for Equistar.

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Item 4. Submission of Matters to a Vote of Security Holders

None.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information and Holders

Since August 22, 2002, the Company has had two series of common stock outstanding: (1) common stock, $1.00 par value per share, which is referred to as “original common stock,” and (2) Series B common stock, $1.00 par value per share, which is referred to as “Series B common stock.” The shares of Series B common stock have the same rights as the original common stock, with the exception of the dividend. The Series B common stock pays a dividend at the same rate as the original common stock but, at the Company’s option, the dividend may be paid in additional shares of Series B common stock or in cash. Under the Company’s Certificate of Incorporation and the agreement relating to the issuance of the Series B common stock, the holder of the Series B common stock may elect to convert the shares of Series B common stock into shares of original common stock at any time (1) after August 21, 2004, if the Company would be permitted under its debt agreements at that time, as it is today, to pay cash dividends on the converted shares without a reduction in the dividend then being paid on its then outstanding shares of original common stock, (2) after August 21, 2005, whether or not there would be such a restriction, (3) following an acquisition of a majority of the Company’s outstanding voting securities in a transaction not approved by the Company’s Board of Directors or (4) with the consent of the Company. As of December 31, 2003, there were 176,792,587 shares of the Company’s common stock issued and outstanding, which represented: (1) 139,969,166 shares of the Company’s original common stock and (2) 36,823,421 shares of the Company’s Series B common stock issued and outstanding as of that date.

The shares of the Company’s original common stock are listed on the New York Stock Exchange under the symbol “LYO” and may be freely transferred and resold. The shares of the Company’s Series B common stock are not listed on the New York Stock Exchange and are subject to restrictions on transferability and resale. The Series B common stock may not be transferred or resold except as permitted (1) under the Securities Act of 1933, as amended, and applicable state securities laws, pursuant to a registration or exemption therefrom, and (2) by the stockholders agreement between the Company and the holders of the Series B common stock.

The reported high and low sale prices of the original common stock on the New York Stock Exchange (New York Stock Exchange Composite Tape) for each quarter from January 1, 2002 through December 31, 2003, inclusive, were as set forth below.

On March 1, 2004, the closing sale price of the Company’s original common stock on the New York Stock Exchange was $18.01 per share, and there were approximately 1,693 holders of record of the original common stock.

There is no established public trading market for the Company’s Series B common stock, and all of the shares of Series B common stock outstanding on March 1, 2004 were held by Occidental Chemical Holding Corporation, a subsidiary of Occidental.

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Dividend Policy

Holders of Lyondell’s original common stock and Series B common stock are entitled to receive such dividends as may from time to time be declared by Lyondell’s Board of Directors. Lyondell’s Certificate of Incorporation provides that the Board of Directors may not declare a dividend on shares of original common stock without also declaring a dividend in the same amount and form on shares of Series B common stock. However, as described above under “Market Information and Holders,” if the Board of Directors declares a cash dividend on shares of original common stock, it may in its sole discretion declare and pay a dividend on shares of Series B common stock by issuing additional shares of Series B common stock to the holders thereof in lieu of cash.

During the last two years, Lyondell has declared $0.225 per share quarterly cash dividends (which were paid after the end of the quarter to which they related). During 2002, Lyondell paid $109 million in cash dividends on its original common stock. The first quarterly dividend on the Series B common stock was paid on December 31, 2002, and Lyondell elected to pay the dividend on the Series B common stock in kind, in the form of 568,224 shares of Series B common stock. During 2003, Lyondell paid $116 million in cash dividends on its original common stock. During 2003, Lyondell elected to pay the quarterly dividends on the Series B common stock in kind, in the form of a total of 2,255,197 shares of Series B common stock. As described above, the declaration and payment of dividends is at the discretion of the Board of Directors. The future declaration and payout of dividends and the amount thereof will be dependent upon Lyondell’s results of operations, financial condition, cash position and requirements, investment opportunities, future prospects, contractual restrictions and other factors deemed relevant by the Board of Directors. Subject to these considerations, the provisions of Lyondell’s Certificate of Incorporation and the legal considerations discussed below, Lyondell currently intends to distribute dividends to its shareholders at a quarterly rate of $0.225 per share.

Except for the March 17, 2003 dividend paid in cash, all of the 2003 dividends paid by Lyondell represented a return of capital to shareholders for U.S. federal income tax purposes. It is possible that all or a portion of the dividends paid by Lyondell during 2004 could represent a return of capital distribution to recipients for U.S. federal income tax purposes. However, the determination of the actual characterization of distributions made during 2004 cannot be determined until after the close of the year, and will be reflected in the 2004 Form 1099-DIV to be sent in early 2005.

Lyondell’s credit agreement and the indentures for its senior secured and senior subordinated notes contain restrictions that provide that Lyondell may not pay dividends on its common stock at an annual rate exceeding $0.90 per share. In addition, Lyondell may not pay dividends if it is in default under its credit agreement. Furthermore, pursuant to a settlement agreement entered into with the Pension Benefit Guaranty Corporation in 1998, Lyondell may not pay extraordinary dividends (as defined by regulations under the Employee Retirement Income Security Act of 1974, as amended) without providing a letter of credit meeting certain specified requirements. In February 2002, Lyondell provided a letter of credit meeting these requirements.

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Purchases of Equity Securities

During the fourth quarter of 2003, the Company purchased the following shares of its common stock:

Item 6. Selected Financial Data

The following selected financial data should be read in conjunction with the Consolidated Financial Statements and the notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the information contained in the Consolidated Financial Statements and the notes thereto.

In addition to comparisons of annual operating results, Lyondell Chemical Company (“Lyondell”) has included certain “trailing quarter” comparisons of fourth quarter 2003 operating results to third quarter 2003 operating results. Lyondell’s and its joint ventures’ businesses are highly cyclical in addition to experiencing some less significant seasonal effects. Trailing quarter comparisons may offer important insight into the current business direction of Lyondell and its joint ventures.

References to industry benchmark prices or costs, including the weighted average cost of ethylene production, are generally to industry prices and costs reported by Chemical Marketing Associates, Incorporated (“CMAI”), except that crude oil and natural gas benchmark price references are to industry prices reported by Platts, a reporting service of The McGraw-Hill Companies.

Overview

In 2003, the chemical industry experienced high and volatile raw material and energy costs, continuing weak demand and ongoing excess industry capacity. These factors combined to put downward pressure on industry product margins and sales volumes during 2003. In addition, Lyondell was negatively impacted by the phase out, in several U.S. states, of methyl tertiary butyl ether (“MTBE”) as an oxygenate in reformulated gasoline and the expiration of a favorable MTBE sales contract.

Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of movement of raw material and energy costs for Lyondell and its joint venture, Equistar Chemicals, LP (“Equistar”). The following table shows the average benchmark prices for crude oil and natural gas for the applicable three-year period, as well as benchmark sales prices for ethylene and propylene, which Equistar produces and sells. Propylene is also a key raw material for Lyondell’s intermediate chemicals and derivatives (“IC&D”) business segment. The benchmark weighted average cost of ethylene production is based on the estimated ratio of crude oil-based liquid raw materials and natural gas liquids (“NGLs”) used in U.S. ethylene production and is subject to revision by CMAI. See discussion of Lyondell and Equistar operating results below for additional details.

As indicated above, crude oil and natural gas prices averaged significantly higher in 2003 than in 2002, putting upward pressure on raw material and energy costs for the chemical industry including Lyondell and Equistar. In response to the higher raw material and energy costs, Lyondell and Equistar implemented significant sales price increases in 2003 for substantially all of their products. Raw material and energy cost increases of nearly $1.2 billion were recovered through sales price increases in 2003 by Lyondell and Equistar combined. The magnitude of these price increases had a negative effect on product demand. While Lyondell, nonetheless, experienced growth in 2003 sales volumes, Equistar experienced lower sales volumes, particularly in the second quarter 2003. Although demand for Equistar’s products recovered during the second half of 2003, Equistar’s 2003 sales volumes were lower in total compared to 2002.

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In 2003, Lyondell and Equistar took several significant actions to maintain liquidity, to minimize capital outlays, and to position themselves to take advantage of an expected upturn in the economy in 2004. A summary of such actions, including actions by LYONDELL-CITGO Refining LP (“LCR”), and their impact on Lyondell’s 2003 operating results follows:

In 2002, compared to 2001, the chemical industry experienced weaker demand growth and ongoing excess capacity. The excess capacity put downward pressure on prices and, as a result, on margins. Lyondell and Equistar generally experienced some increased demand for most products during 2002 compared to 2001; however, 2002 product margins were generally lower than in 2001.

Significant events in 2002 included the August 2002 acquisition by Lyondell of the 29.5% interest in Equistar held by subsidiaries of Occidental Petroleum Corporation (together with its subsidiaries and affiliates, collectively “Occidental”). Lyondell financed this acquisition by issuing Series B common stock, warrants and a right to a contingent payment to Occidental Chemical Holding Corporation, a subsidiary of Occidental. See Notes 5 and 17 to the Consolidated Financial Statements. As a result of the transactions, Lyondell has a 70.5% interest in Equistar, while Occidental Chemical Holding Corporation owns approximately 22% of Lyondell’s common stock.

During 2001, Lyondell exited the aliphatic diisocyanates (“ADI”) business and shut down its ADI operations at its Lake Charles, Louisiana facility. The decision resulted in a pretax charge of $63 million in 2001.

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RESULTS OF OPERATIONS

Lyondell’s operating income relates to the intermediate chemicals & derivatives business segment. Lyondell’s activities in the petrochemicals, polymers and refining business segments are conducted through its interests in Equistar and LCR. Lyondell accounts for its investments in Equistar and LCR using the equity method of accounting, as discussed under “Critical Accounting Policies,” below.

Lyondell Chemical Company

Revenues and Operating Income—Lyondell’s operating results are reviewed in the discussion of the Intermediate Chemicals and Derivatives (“IC&D”) segment below.

Loss from Equity Investment in Equistar—Lyondell’s equity investment in Equistar resulted in a loss of $228 million in 2003 compared to losses of $117 million in 2002 and $77 million in 2001. The increases in Lyondell’s equity losses from Equistar in 2003 and 2002 were due to Equistar’s increased 2003 loss coupled with the effect of the August 2002 increase in Lyondell’s ownership percentage from 41% to 70.5%. On a 100% basis, Equistar’s losses were $339 million in 2003, $246 million before cumulative effect of accounting change in 2002 and $283 million in 2001. See discussion of Equistar operating results below.

Income from Equity Investment in LCR—Lyondell’s income from its equity investment in LCR was $144 million in 2003, $135 million in 2002 and $129 million in 2001. See discussion of LCR operating results below.

Interest Expense—Interest expense was $415 million in 2003, $384 million in 2002 and $386 million in 2001. Interest expense in 2003 increased compared to 2002 as a result of the issuance of fixed rate debt, including $325 million of 10.5% senior secured notes in May 2003, $337 million of 9.5% senior secured notes in December 2002 and $278 million of 11.125% senior secured notes in July 2002. The fixed rate debt had higher rates of interest than the variable-rate term loans it replaced, resulting in higher interest expense in 2003 compared to 2002. Debt levels were also higher in 2003 than in 2002, primarily due to the purchase of the previously-leased Botlek BDO plant in Europe (formerly referred to as BDO-2). The increase in interest expense in 2003 was partly offset by a $9 million increase in capitalized interest. During 2003 and 2002, Lyondell capitalized $19 million and $10 million of interest, respectively, related to the construction of the Maasvlakte PO/SM plant.

Interest Income—Interest income was $23 million in 2003, $11 million in 2002 and $17 million in 2001. In 2003, interest income included $15 million of interest income related to a settlement of income tax issues. The decrease in 2002 compared to 2001 reflected lower interest rates in 2002.

Other Income (Expense), Net—Lyondell had net other income of $15 million in 2003 compared to net other expense of $29 million in 2002 and $11 million in 2001. Lyondell’s net other income in 2003 included an $18 million gain on the sale of a 10% interest in the Nihon Oxirane joint venture to Lyondell’s partner in the venture and a $5 million refinancing charge related to prepayment of $103 million of term loans. Net other expense included refinancing charges of $23 million in 2002 and $7 million in 2001 related to prepayment of term loans under Lyondell’s credit facility.

Income Tax—The 2003 effective tax rate was 37% compared to 31% in 2002 and 34% in 2001. The effective rates for all periods presented reflected a tax benefit from operating losses incurred during the year. The 2003 tax benefit exceeded the statutory federal rate due to benefits that reduced taxes on non-U.S. income, including benefits associated with the internal financing of the Maasvlakte PO/SM plant construction. The lower 2002 rate reflected the effect of taxes on non-U.S. earnings. The 2001 effective tax rate also reflected the effect of non-U.S. earnings taxed at higher rates, as well as other items, but these were offset by a benefit from a change in estimate of prior year items. The change in estimate of prior year items primarily represented certain tax effects related to the sale of assets in 2000.

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Net Loss—Lyondell had a net loss of $302 million in 2003, $148 million in 2002 and $150 million in 2001. The increased net loss in 2003 compared to 2002 was primarily due to weaker operating results in Lyondell’s IC&D segment and at Equistar. Lyondell’s IC&D segment was negatively impacted by lower MTBE margins and volumes, including the expiration, at the end of 2002, of a favorable MTBE sales contract. Equistar’s operating results were affected by lower sales volumes in 2003 compared to 2002.

Lyondell’s net losses in 2002 and 2001 of $148 million and $150 million, respectively, were comparable. The net loss in 2001 included: annual goodwill amortization of $17 million after tax, which ceased effective January 1, 2002; a pretax non-cash charge of $63 million, or $41 million after-tax, related to the shut down of Lyondell’s ADI operations at its Lake Charles, Louisiana facility; and Lyondell’s 41% share, or $6 million after tax, of Equistar’s Port Arthur plant shutdown costs. The 2002 net loss reflected lower product margins at Lyondell and Equistar in 2002 as a result of ongoing industry overcapacity.

Fourth Quarter 2003 versus Third Quarter 2003

Lyondell’s fourth quarter 2003 net loss of $77 million compares to a net loss for the third quarter 2003 of $44 million. The decrease in profitability in the fourth quarter 2003 was due to Lyondell’s share of lower Equistar results, including refinancing charges incurred by Equistar during the fourth quarter 2003, as well as lower operating results in Lyondell’s IC&D segment. Equistar’s operating results were affected by higher raw material costs, while the IC&D segment was affected by lower MTBE margins and volumes in the fourth quarter 2003 compared to the third quarter 2003.

Intermediate Chemicals and Derivatives Segment

Overview—The IC&D segment produces and markets PO; PO derivatives, such as propylene glycol (“PG”), propylene glycol ethers (“PGE”), and butanediol (“BDO”); toluene diisocyanate (“TDI”); styrene monomer (“SM” or “styrene”) and methyl tertiary butyl ether (“MTBE”), the principal derivative of tertiary butyl alcohol (“TBA”). SM and TBA are co-products of Lyondell’s two major PO production processes, referred to as PO/SM and PO/TBA.

In 2003, IC&D operating results were negatively impacted by the phase out, in several U.S. states, of MTBE and the expiration of a favorable MTBE sales contract, as well as experiencing high and volatile raw material and energy costs and ongoing excess industry capacity. Lyondell also started production at its Maasvlakte PO/SM plant and restructured its joint venture in Japan.

During 2003, several major oil companies substantially reduced or discontinued the use of MTBE in gasoline produced for California markets. In addition, New York, Connecticut, and California banned the use of MTBE effective January 1, 2004. Lyondell believes that these actions created a supply/demand imbalance with the result that market MTBE margins were significantly lower in 2003 compared to 2002. In addition, a favorable MTBE sales contract expired at the end of 2002, contributing to lower MTBE margins in 2003 compared to 2002. MTBE industry capacity was reduced during 2003 as a result of the shutdown of some higher-cost MTBE production facilities by other producers, which relieved some of the oversupply.

The cost of propylene, consistent with other raw material costs, escalated during the first half of 2003. The benchmark price of propylene averaged 19% higher in the U.S. and 8% higher in Europe in 2003 than in 2002. The IC&D segment also experienced higher energy costs due to significant increases in natural gas prices compared to 2002. Lyondell implemented sales price increases for products in the IC&D segment in 2003 in response to the higher raw material and energy costs.

Lyondell began production at the Maasvlakte PO/SM plant in the fourth quarter 2003. The Maasvlakte PO/SM plant has annual capacity of 625 million pounds of PO and 1.4 billion pounds of SM, or approximately 5% and 3% of worldwide PO and SM capacity, respectively, of which Lyondell’s share is 50%. The Maasvlakte PO/SM plant incurred prestart-up expenses during 2003 of approximately $40 million, of which Lyondell’s 50% share was $20 million.

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In 2003, Lyondell completed a restructuring of its Nihon Oxirane joint venture in Japan, including the sale of a 10% interest in the joint venture to Lyondell’s partner for $28 million, resulting in an $18 million gain and reducing Lyondell’s remaining interest from 50% to 40%. The governance of the joint venture remains substantially unchanged. The agreements also include provisions for the cross licensing of certain technology rights, construction of a new propylene glycol (“PG”) plant by Nihon Oxirane, and changes in operations agreed to by the partners to expand Nihon Oxirane’s market position in Asia for PO and PG and to improve Nihon Oxirane’s cost structure. In addition, under the new agreements, a PO plant in Chiba, Japan constructed by Lyondell’s joint venture partner, which began production in the second quarter 2003, is expected to be transferred to Nihon Oxirane by 2006.

In 2002, compared to 2001, the IC&D segment benefited from stronger demand, including increased demand in end-use markets for PO and derivatives, such as automotive, housing and home furnishings. This resulted in generally higher sales volumes in 2002 compared to 2001. However, the increased demand did not benefit industry margins for PO derivatives, which continued to be negatively affected by industry overcapacity.

During June 2002, construction of the Botlek BDO plant was completed and leased by Lyondell under an operating lease. Production of BDO commenced in July 2002. In May 2003, Lyondell exercised its option under the operating lease to purchase this plant. See Note 9 to the Consolidated Financial Statements.

PO and derivatives markets continue to be adversely affected by excess capacity as a result of recent capacity additions, which have not yet been fully absorbed by demand growth. Approximately 2.5 billion pounds of new industry PO capacity, or approximately 22%, has been added from 1999 to 2003, primarily in Europe and Asia.

The following table sets forth average benchmark market prices for propylene and Lyondell’s product sales volumes, sales and other operating revenues and operating income (loss) for the IC&D segment.

The above sales volumes include processing volumes and purchases for resale. The purchases for resale, principally styrene, will be substantially replaced by production volumes with the startup of the new Maasvlakte PO/SM plant in the Netherlands, in the fourth quarter 2003.

Revenues—Revenues of $3.8 billion in 2003 increased 17% from revenues of $3.3 billion in 2002 due primarily to higher average sales prices and the foreign exchange effect of a weaker U.S. dollar. Sales volumes for PO and derivatives and styrene increased but were partly offset by lower MTBE volumes. Average sales prices in 2003 for most products were higher in response to the higher raw material and natural gas costs in 2003. Sales volumes for PO and derivatives increased 9%, including BDO, deicers and PG, reflecting increased demand, a full year of production from the Botlek BDO plant and more severe weather, which increased deicer demand. These higher volumes were partly offset by lower TDI sales volumes. Sales volumes increased 4% for styrene in 2003 compared to 2002, as a result of increased U.S. spot sales. Sales volumes for MTBE and other TBA derivatives decreased 5% on lower MTBE demand.

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Revenues of $3.3 billion in 2002 increased 2% from $3.2 billion in 2001 as higher sales volumes were substantially offset by lower sales prices. Sales volumes for PO and derivatives increased 8% primarily due to higher demand for PO in urethanes markets and higher BDO volumes due to the Botlek BDO plant startup in 2002. These higher volumes were partly offset by lower TDI sales volumes, due to TDI maintenance turnarounds, and the shut down of Lyondell’s ADI operations in the third quarter 2001. Sales volumes also increased 7% for SM and 4% for TBA and derivatives, primarily MTBE, in 2002 compared to 2001. Higher SM sales volumes in 2002 reflected the expected startup of the Maasvlakte PO/SM plant in The Netherlands and higher export sales, primarily to Asia. The lower 2002 average sales prices were primarily due to lower sales prices for PO and derivatives and MTBE. The lower 2002 PO and derivatives average sales prices, to a large extent, reflected weaker demand for PO derivatives and industry overcapacity. The lower 2002 MTBE average sales prices primarily reflected lower gasoline prices in 2002 compared to 2001.

Operating Income (Loss)—The operating loss in 2003 of $1 million compares to operating income in 2002 of $174 million. The $175 million decrease in operating results was primarily due to lower 2003 MTBE margins and volumes and, to a lesser extent, lower volumes and margins for TDI. These effects were partly offset by improved results for PO and derivatives. The lower MTBE margins and volumes reflected decreased MTBE demand, the expiration of the favorable MTBE sales contract and higher raw material and energy costs related to high natural gas costs in the U.S. MTBE demand decreased as use of MTBE was phased out in certain key states. Higher 2003 PO and derivatives sales volumes and prices more than offset the effect of higher operating costs, which were primarily due to higher U.S. natural gas costs and the new Botlek BDO plant.

Operating income of $174 million in 2002 increased $62 million from $112 million in 2001, primarily reflecting a $63 million restructuring charge and $30 million of goodwill amortization in 2001. Operating results in 2002 reflected lower product margins for PO derivatives and higher fixed costs, due to the startup of the new Botlek BDO plant. These negative effects in 2002 were partly offset by the benefits of higher SM and TDI margins, higher sales volumes and the exit from the unprofitable ADI business in the third quarter 2001. Lower PO derivatives margins reflected a weaker pricing environment in 2002 as noted above. Higher SM margins reflected a stronger SM market in most of 2002 compared to 2001. TDI margins improved on lower raw materials costs and supply shortages that led to higher sales prices in 2002.

Fourth Quarter 2003 versus Third Quarter 2003

Fourth quarter 2003 operating income of $3 million decreased $17 million from third quarter 2003 operating income of $20 million. The decrease in operating income was primarily the result of lower sales margins and volumes for MTBE. PO and derivatives and TDI operating results improved primarily due to higher product margins. Third quarter 2003 MTBE margins were unusually strong around the Labor Day holiday but experienced a typical fourth quarter seasonal slowdown and margin pressure. The MTBE market was also impacted by the final steps of the California MTBE phase-out and the initial effects of the pending phase-outs in New York and Connecticut, effective January 1, 2004. Fourth quarter 2003 PO and derivatives prices increased, while raw material costs were relatively unchanged. Volumes increased 10%, reflecting seasonal deicer sales. A key event during the fourth quarter 2003 was the startup of the Maasvlakte PO/SM plant in Europe late in the quarter.

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Equistar Chemicals, LP

Overview

Equistar produces and markets olefins, including ethylene, propylene, and butadiene; aromatics, including benzene and toluene; and oxygenated products, including ethylene oxide and derivatives, ethylene glycol, ethanol and MTBE in its petrochemicals segment. Additionally, Equistar produces and markets polyolefins, including high density polyethylene (“HDPE”), low density polyethylene (“LDPE”), linear-low density polyethylene (“LLDPE”) and polypropylene; and performance polymers products, including wire and cable insulating resins, and polymeric powders in its polymers segment.

In 2003, the chemical industry experienced high and volatile raw material and energy costs, continuing weak demand and ongoing excess industry capacity. Preliminary estimates by CMAI indicate that U.S. industry ethylene demand in 2003 decreased slightly compared to 2002.

Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of movement of raw material and energy costs for Equistar. Olefins are produced from two major raw material groups:

Equistar has the ability to shift its ratio of raw materials used in production of olefins to take advantage of the relative costs of liquids and NGLs.

Raw material and energy costs averaged significantly higher in 2003 than in 2002, putting upward pressure on raw material costs for the chemical industry, including Equistar. In response to the higher raw material and energy costs, Equistar implemented significant sales price increases in 2003 for substantially all of its petrochemicals and polymers products. Raw material and energy cost increases of nearly $1 billion were recovered through sales price increases in 2003. The magnitude of these price increases had a negative effect on product demand, and contributed to Equistar experiencing lower sales volumes, particularly in the second quarter 2003. Although demand recovered during the second half of 2003, sales volumes were lower for the year 2003 compared to 2002.

In 2003, Equistar issued $700 million of new senior unsecured notes, deferring debt maturities, restructured its credit facility and entered into a new receivables sales facility to maintain its liquidity. These actions resulted in $37 million of financing fees and related expenses in 2003.

In March 2003, Equistar completed transactions involving a 15-year propylene supply arrangement and the sale of its Bayport polypropylene production facility in Pasadena, Texas. Equistar received total cash proceeds of $194 million, including the value of the polypropylene inventory sold. Cash proceeds of $159 million of the total represented a partial prepayment under the long-term propylene supply arrangement. Equistar also took steps in 2003 to refocus its research and development (“R&D”) activities, resulting in the write off of an R&D facility and incurrence of employee severance costs.

Equistar also completed scheduled maintenance turnarounds at its two largest ethylene plants in 2003. While negatively impacting raw material flexibility in 2003, conclusion of these turnarounds increases Equistar’s future production flexibility.

In 2002, compared to 2001, the chemical industry experienced weak demand growth and ongoing excess capacity. For the year 2002, U.S. industry ethylene demand grew 2.8%, compared to 2001, which failed to absorb excess ethylene industry capacity. This continued to put downward pressure on industry prices and as a result, on product margins. Overall, Equistar experienced lower product margins in 2002 than in 2001.

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RESULTS OF OPERATIONS

Net Loss—Equistar had a 2003 net loss of $339 million compared to a 2002 net loss of $246 million, before the cumulative effect of an accounting change in 2002. The $93 million higher loss in 2003 included $37 million of refinancing costs, a $12 million loss on the sale of the polypropylene plant, an $11 million charge for the write-off of a polymer R&D facility and $6 million of employee severance costs. The 2002 loss included the negative impact of certain fixed price natural gas and NGL purchase contracts. Equistar’s costs under these contracts were approximately $33 million higher than market-based costs would have been. The remaining $60 million decrease in operating results was primarily due to lower sales volumes, which were only partly offset by higher average product margins in 2003. In addition, selling, general and administrative expenses in 2003 were $27 million higher than in 2002, reflecting higher pension and medical benefit costs and a higher provision for doubtful accounts.

Equistar had a 2002 net loss of $246 million, before the cumulative effect of an accounting change, compared to a 2001 net loss of $283 million. The 2002 loss included the $33 million negative impact of the fixed price natural gas and NGL purchase contracts. The 2001 period included $33 million of goodwill amortization, $22 million of shutdown costs for Equistar’s Port Arthur, Texas polyethylene facility and a $35 million negative impact from the fixed price natural gas and NGL contracts. Apart from these items, the increase in the net loss primarily reflected a $129 million decrease in petrochemicals segment operating income, partly offset by a $112 million improvement in the polymers segment operating loss. Petrochemicals segment operating income decreased as sales prices decreased more than raw material costs, resulting in lower petrochemicals product margins in 2002 compared to 2001. The polymers segment operating loss was reduced as raw material costs, primarily ethylene and propylene, decreased more than the decreases in average polymers product sales prices, resulting in higher polymers product margins in 2002 compared to 2001.

Fourth Quarter 2003 versus Third Quarter 2003

Equistar had a net loss of $104 million in the fourth quarter 2003 compared to a net loss of $40 million in the third quarter 2003. Equistar’s fourth-quarter operations were negatively impacted by an increase in the cost of ethylene production driven by higher prices for raw materials and energy. Equistar responded with price increases, but the timing of the price increases was such that they were insufficient to fully offset the cost increases. The benchmark cost of ethylene production was over 2 cents per pound higher in the fourth quarter 2003 compared to the third quarter 2003, while benchmark ethylene sales prices increased by less than 1 cent per pound. Additionally, a scheduled maintenance turnaround at an ethylene plant during the fourth quarter 2003 had a modest negative impact on operations by affecting Equistar’s ability to optimize its raw material utilization. The fourth quarter 2003 included $18 million of finance charges and $6 million of severance costs, while the third quarter 2003 included the $11 million charge for the write-off of the polymer R&D facility.

Sales volumes continued to improve during the fourth quarter 2003 versus the third quarter 2003. Sales of ethylene and ethylene derivatives increased by approximately 2 percent. Sales volumes typically decrease in the fourth quarter versus the third quarter.

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Segment Data

The following tables reflect selected sales volume data, including intersegment sales volumes, and summarized financial information for Equistar’s business segments.

Petrochemicals Segment

Revenues—Revenues of $6.0 billion in 2003 increased 22% compared to revenues of $5.0 billion in 2002 due to higher sales prices partly offset by lower segment sales volumes. Benchmark ethylene prices averaged 28% higher in 2003 compared to 2002 in response to significant increases in the cost of ethylene production, while benchmark propylene sales prices averaged 19% higher. Segment sales volumes decreased 3% in 2003 compared to 2002 due to lower sales to the polymers segment and lower co-product production in 2003. Lower co-product production reflected the scheduled maintenance turnarounds at two major ethylene plants in 2003.

Revenues of $5.0 billion in 2002 decreased 8% compared to revenues of $5.4 billion in 2001 as lower 2002 average sales prices were only partly offset by a 4% increase in sales volumes. Equistar’s sales prices in 2002 averaged 11% lower than in 2001, reflecting lower raw material costs and low demand growth coupled with excess industry capacity. Benchmark ethylene sales prices averaged 22.2 cents per pound in 2002, a 16% decrease compared to 2001. These lower ethylene sales prices were slightly offset by higher 2002 propylene sales prices. Benchmark propylene sales prices averaged 3% higher in 2002 than in 2001.

Operating Income—The operating income for the segment of $124 million in 2003 decreased $22 million compared to operating income of $146 million in 2002. Operating income for 2002 included the $33 million negative effect of the fixed price natural gas and NGL purchase contracts entered into in early 2001. The decrease in 2003 operating income was due to the negative effect of two scheduled maintenance turnarounds and 3% lower sales volumes.

Operating income of $146 million in 2002 decreased $129 million from $275 million in 2001 as sales prices decreased more than raw material costs, resulting in lower product margins. The effect of the lower 2002 product margins was only partly offset by the benefit of a 4% increase in sales volumes, which was in line with industry demand growth.

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Polymers Segment

Revenues—Revenues of $2,023 million in 2003 increased 8% compared to revenues of $1,868 million in 2002. The increase was due to a 23% increase in average sales prices partly offset by a 12% decrease in sales volumes. Average sales prices increased in response to higher raw material costs, primarily ethylene, compared to 2002. The average benchmark price of ethylene increased 28% in 2003 compared to 2002. The lower polymers sales volumes reflected the negative effect of the higher sales prices on demand and, to a lesser extent, the sale of the Bayport polypropylene production facility in 2003.

Revenues of $1,868 million in 2002 decreased 6% compared to revenues of $1,980 million in 2001 due to a 9% decrease in average sales prices offset by a 4% increase in sales volumes. Lower sales prices in 2002 reflected generally lower raw material costs compared to 2001. Sales volumes increased due to stronger demand in 2002 compared to 2001.

Operating Loss—The polymers segment had an operating loss of $78 million in 2003 compared to an operating loss of $74 million in 2002. The combined effects of the $11 million write-off and the $12 million loss on sale noted above, as well as the negative effect of the 12% decrease in sales volumes, was substantially offset by higher polymer product margins. Margins increased in 2003 compared to 2002 as higher average sales prices more than offset higher raw material costs.

The operating loss of $74 million in 2002 decreased $112 million compared to the operating loss of $186 million in 2001. The $112 million improvement was due to higher polymers product margins and, to a lesser extent, higher sales volumes. Margins improved in 2002 compared to 2001, as decreases in sales prices were less than the decreases in polymers raw material costs.

Unallocated Items

The following discusses costs and expenses that were not allocated to the petrochemicals or polymers segments.

Other Operating Costs and Expenses—These include unallocated general and administrative expenses and, in 2001, goodwill amortization. Unallocated expenses were $135 million in 2003, $116 million in 2002 and $188 million in 2001. The increase from 2002 to 2003 was primarily due to an increase in general and administrative expenses due to higher pension and medical benefit costs and a higher provision for doubtful accounts. The decrease from 2001 to 2002 was primarily due to goodwill amortization of $33 million that ceased in 2002 and the $22 million of shutdown costs in 2001.

Equistar discontinued production at its higher-cost Port Arthur, Texas polyethylene facility in February 2001 and shut down the facility. During 2001, Equistar recorded a $22 million charge, which included environmental remediation liabilities of $7 million, other exit costs of $3 million and severance and pension benefits of $7 million for approximately 125 people employed at the Port Arthur facility. The remaining $5 million balance primarily related to the write down of certain assets.

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LYONDELL-CITGO Refining LP

Lyondell’s activities in the refining segment are conducted through its interest in LCR.

Refining Segment

Overview—LCR produces refined petroleum products, including gasoline, low sulfur diesel, jet fuel, aromatics and lubricants. PDVSA Petróleo, S.A. (“PDVSA Oil”) supplies extra heavy Venezuelan crude oil to LCR under a long-term crude supply agreement (“Crude Supply Agreement” or “CSA”)—see “Crude Supply Agreement” section of Note 16 to the Consolidated Financial Statements. Under the CSA, LCR purchases 230,000 barrels per day of extra heavy crude oil, which constitutes approximately 86% of its refining capacity of 268,000 barrels per day. LCR purchases the balance of its crude oil requirements on the spot market. Profit margins on spot market crude oil tend to be more volatile than margins on CSA crude oil.

In 2003, CSA crude oil deliveries for the year were nearly at the contract rate, despite a disruption of CSA crude oil deliveries to LCR during January 2003 due to the effects of a national strike in Venezuela that began in December 2002. In 2002, CSA crude oil deliveries were below the contract rate as PDVSA Oil declared itself in a force majeure situation in January 2002 and, beginning in March 2002, reduced 2002 deliveries under the CSA. CSA deliveries were restored to contract levels in the third quarter 2002. During 2002, LCR made increased use of crude oil purchased in the spot market to compensate for the lower CSA deliveries. LCR’s CSA crude oil processing rates averaged 224,000 barrels per day in 2003 compared to 213,000 barrels per day in 2002. During 2001, processing of extra heavy Venezuelan crude oil under the CSA averaged 229,000 barrels per day, despite a major maintenance turnaround at LCR in the fourth quarter 2001 as volumes were accelerated into the first nine months of 2001. This resulted in higher than contract level CSA crude oil processing rates during the first nine months of 2001, allowing LCR to attain the near-contract processing rate of 229,000 barrels per day for the full year 2001. A strong gasoline market continued through the third quarter 2001, benefiting LCR’s margins on spot purchases of crude oil.

During 2003, LCR developed an alternative approach to complying with a mandated low sulfur gasoline standard, which will lead to a reduction in overall capital expenditures for the project. As a result, in 2003, LCR recognized impairment of value of $25 million of costs related to the project. See “Clean Air Act” section of Note 16 to the Consolidated Financial Statements.

The following table sets forth, in thousands of barrels per day, sales volumes for LCR’s refined products and processing rates at the refinery for the periods indicated:

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Revenues—Revenues for LCR, including intersegment sales, were $4.2 billion in 2003, $3.4 billion in 2002 and $3.3 billion in 2001. Revenues for 2003 increased 23% compared to 2002. The increase was primarily due to higher sales prices for refined products. Average sales prices for refined products during 2003 were 22% higher than in 2002. While total crude processing rates increased by only 2% from 2002 to 2003, this represented an increase in CSA crude processing rates of 11,000 barrels per day offset by a 6,000 barrel per day decrease in spot market crude processing rates.

Revenues for 2002 increased 3% compared to 2001. The increase was primarily due to a 5% increase in sales volumes, partly offset by lower sales prices. Total crude processing rates averaged 259,000 barrels per day in 2002, a 4% increase compared to 248,000 barrels per day in 2001. However, processing rates of spot market crude, which was less profitable than CSA crude oil, averaged 46,000 barrels per day in 2002 compared to 19,000 barrels per day in 2001 as a result of lower CSA crude oil deliveries in 2002.

Interest Expense—LCR’s net interest expense was $36 million in 2003, $32 million in 2002 and $51 million in 2001. Interest expense included interest on loans payable to partners of $6 million in 2003, $6 million in 2002 and $12 million in 2001. Interest expense increased in 2003 compared to 2002 primarily as a result of higher debt issuance cost amortization, which reflects the higher debt issuance costs associated with the current credit facility. Interest expense decreased in 2002 compared to 2001 due to lower interest rates under LCR’s variable-rate debt, and lower amortization expense related to debt issuance costs. LCR’s debt was refinanced in July 2001 and December 2002.

Net Income—LCR’s net income was $228 million in 2003, $213 million in 2002 and $203 million in 2001. The $15 million increase in net income in 2003 compared to 2002 was due to the benefit from processing higher volumes of higher margin CSA crude oil and higher product margins for aromatics and lubricants in 2003. These benefits were partially offset by the negative effect in 2003 of higher natural gas costs, the $25 million charge related to the previously capitalized costs for the low sulfur gasoline project, and a $6 million charge related to personnel reductions.

While LCR’s 2002 net income of $213 million was comparable to net income of $203 million in 2001, there were significant offsetting factors. In 2002, as noted in the “Overview” above, LCR’s net income was negatively impacted by lower CSA crude oil deliveries compared to 2001. LCR maintained 2002 crude oil processing levels through increased purchases of spot market crude oil, which had significantly lower margins in 2002 compared to 2001 and compared to CSA crude oil margins. The negative effects of lower CSA volumes and lower spot margins in 2002 were partly offset by lower energy costs and lower interest costs compared to 2001. In addition, a major planned maintenance turnaround in the fourth quarter 2001 and an outage related to Tropical Storm Allison in the second quarter 2001 negatively affected 2001 operating results.

Fourth Quarter 2003 versus Third Quarter 2003

LCR’s fourth quarter 2003 net income of $73 million was comparable to net income of $69 million in the third quarter 2003 as CSA crude oil volumes and total crude oil volumes were relatively unchanged. LCR operated at nearly full capacity during the fourth quarter 2003. Total crude oil processing rates in fourth quarter 2003 averaged 271,000 barrels per day, while CSA crude oil processing rates averaged 227,000 barrels per day.

FINANCIAL CONDITION

Operating Activities—Lyondell’s operating activities in 2003 provided cash of $103 million compared to $289 million in 2002 and $199 million in 2001. The $186 million decrease in 2003 primarily reflected lower 2003 operating results and income tax refunds in 2003 compared to 2002 partly offset by a net reduction in the controllable components of working capital – receivables, inventory and payables.

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The IC&D business segment operating loss of $1 million in 2003 compared to operating income of $174 million in 2002 was a decrease of $175 million. Also, income tax refunds and settlements of $64 million received in 2003 were less than the $97 million received in 2002. Lyondell has now recovered all refundable prior year U.S. income taxes, and does not expect to receive a refund in 2004 for the tax benefit of the 2003 loss, but will expect to utilize this loss to reduce the taxes otherwise payable related to future taxable income.

The controllable components of working capital decreased a net $21 million during 2003, primarily due to an increase in related party payables in 2003 compared to a net $8 million increase during 2002. In December 2003, Lyondell entered into a new $100 million, four-year, accounts receivable sales facility to replace its previous $85 million accounts receivable sales agreement. The balance of Lyondell’s accounts receivable sold under the new facility at December 31, 2003 was $75 million compared to $65 million at December 31, 2002 under the previous facility.

The increase in cash provided in 2002 compared to 2001 was primarily due to the 2002 federal income tax refund of $97 million and $83 million of lower 2002 cash expenditures for maintenance turnarounds, systems implementation, interest and employee benefits, partly offset by a $136 million lower benefit from net reductions in the controllable components of working capital – receivables, inventory and payables.

Investing Activities—Investing activities used cash of $222 million in 2003, $623 million in 2002 and $191 million in 2001. The increased use of cash in 2002 primarily reflected the purchase of an additional equity interest in Equistar.

The following table summarizes the 2003, 2002 and 2001 capital expenditures of Lyondell and its principal joint ventures, including Lyondell’s contributions to the U.S. PO Joint Venture and European PO Joint Venture, as well as their 2004 capital budgets:

Lyondell’s 2003, 2002 and 2001 capital expenditures consist primarily of spending for regulatory compliance and cost reduction projects. Lyondell’s 2003 capital expenditures included the purchase of the Botlek BDO plant for $218 million, which Lyondell previously leased. See “Financing Activities” below. Cash contributions to the European PO Joint Venture and U.S. PO Joint Venture of $88 million included $20 million to fund Lyondell’s 50% share of the Maasvlakte PO/SM plant prestart-up expenses. In addition to the cash contributions shown above, contributions to joint ventures also included $19 million of capitalized interest related to the Maasvlakte PO/SM plant – see table below. The Maasvlakte PO/SM plant began production in December 2003.

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Equistar’s 2003 and 2002 capital expenditures included $18 million and $47 million, respectively, for railcar purchases related to the early termination and expiration of certain railcar leases. LCR’s capital expenditures were higher in 2001 as projects were scheduled to take advantage of the major planned maintenance turnaround during the fourth quarter 2001. Increases in Equistar’s and LCR’s 2004 capital budgets result from anticipated spending to ensure compliance with new environmental regulations.

The following table summarizes Lyondell’s cash distributions from and cash contributions to its principal joint venture affiliates: