Exploration & Production in 1997 achieved a
major discovery in joint-venture operations in
south Louisiana. This business unit, which is
active in the San Juan Basin and other areas,
increased operating profit by approximately
1,000 percent during the year.

1997 Operating Profit — $30.3 million

1998 Capital Expenditures — $97 million

Exploration &Production’s operating profit improved tenfold, primarily because of increased natural gas prices and a 21 percent increase in production volumes. Production for 1997 was 36.6 TBtu, up from 30.3 in 1996. We replaced 289 percent of our 1997 production. Estimated, proved reserves were 600 Bcf, up from 531 Bcf in 1996.

Key Points
During 1997 we:
*Established large lease blocks in East Texas, where we have a 35 percent working interest in 145,000 acres in the Haynesville Pinnacle Reef play. We expect to have a working interest in seven wells, adding about 20 MMcfd of gas production in 1998 from this play.

*Made significant progress in our exploratory joint venture within the Houma Embayment in South Louisiana where we have a 50 percent interest in 27,000 acres. Seven exploratory wells drilled there in 1997 resulted in two small discoveries, two moderate discoveries and one major discovery. Production from two Wylie wells is approximately 10 MMcfd of gas, 600 barrels per day of oil, plus 6 MMcfd of gas from a different zone in the initial discovery well.

*Established positions within the expanded Wilcox and emerging Sligo plays in South Texas. We also have entered into a significant 3-D seismic project in the Louisiana Transition Zone. In total, we control more than 270,000 acres through joint ventures in the Gulf Coast, with 1,400 square miles of 3-D seismic either completed or in progress. We plan to participate in more than 30 exploratory wells in East and South Texas and the Gulf Coast, significantly increasing our production base by the end of 1998.

*Continued our San Juan Basin drilling program, completing 19 wells. Compression and enhancement projects at Williams’ owned and operated Rosa unit there have tripled production to 16 MMcfd. We expect to double our drilling efforts in this basin in 1998.

Outlook
*Capital expenditures for 1998 will grow to $97 million — from $63 million in  1997 — primarily for increased drilling in the San Juan Basin, East and South Texas, and the Gulf Coast.

* Despite anticipated greater exploratory well spending, we expect 1998 operating profit to benefit substantially from anticipated increases in natural gas production.

* We plan to become a top 25 independent gas producer by 2000. To do so, we must increase production to 250 MMcfd, from 103 MMcfd, and increase reserves to 1 trillion cubic feet.