Edgar Filing: LyondellBasell Industries N.V.

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2012


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

For the transition period from to

Commission file number: 001-34726

LYONDELLBASELL INDUSTRIES N.V.

(Exact name of registrant as specified in its charter)


		The Netherlands		98-0646235
		(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Stationsplein 45

3013 AK Rotterdam

The Netherlands

(Address of principal executive offices)

31 10 275 5500

(Registrant’s telephone number, including area code)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ x ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ x] No [ ]

The registrant had 574,954,832 ordinary shares, €0.04 par value, outstanding at July 24, 2012 (excluding 3,375,353 treasury shares).

LYONDELLBASELL INDUSTRIES N.V.

TABLE OF CONTENTS


	Page
Part I – Financial Information		1

Item 1. Financial Statements		1
Consolidated Statements of Income		1
Consolidated Statements of Comprehensive Income		2
Consolidated Balance Sheets		3
Consolidated Statements of Cash Flows		5
Consolidated Statement of Stockholders’ Equity		6
Notes to the Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		34

Item 3. Quantitative and Qualitative Disclosures About Market Risk		52

Item 4. Controls and Procedures		52

Part II – Other Information		53

Item 1. Legal Proceedings		53

Item 1A. Risk Factors		53

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		53

Item 6. Exhibits		54

Signature		55

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended June 30,				Six Months Ended June 30,
Millions of dollars, except earnings per share	2012		2011		2012		2011
Sales and other operating revenues:
Trade	$	11,005	$	12,997	$	22,452	$	24,085
Related parties		243		309		530		601

		11,248		13,306		22,982		24,686
Operating costs and expenses:
Cost of sales		9,561		11,704		20,093		21,741
Selling, general and administrative expenses		201		236		424		451
Research and development expenses		37		56		76		89

		9,799		11,996		20,593		22,281
Operating income		1,449		1,310		2,389		2,405
Interest expense		(411)		(176)		(510)		(339)
Interest income		2		13		6		20
Other income (expense), net		8		47		7		(3)

Income from continuing operations before equity investments, reorganization items and income taxes		1,048		1,194		1,892		2,083
Income from equity investments		27		73		73		131
Reorganization items		(1)		(28)		4		(30)

Income from continuing operations before income taxes		1,074		1,239		1,969		2,184
Provision for income taxes		306		388		607		651

Income from continuing operations		768		851		1,362		1,533
Income (loss) from discontinued operations, net of tax		- -		(48)		5		(70)

Net income		768		803		1,367		1,463
Net loss attributable to non-controlling interests		2		1		3		4

Net income attributable to the Company	$	770	$	804	$	1,370	$	1,467

Earnings (loss) per share:
Net income (loss) —
Basic:
Continuing operations	$	1.34	$	1.49	$	2.37	$	2.70
Discontinued operations		- -		(0.08)		0.01		(0.12)

	$	1.34	$	1.41	$	2.38	$	2.58

Diluted:
Continuing operations	$	1.33	$	1.46	$	2.36	$	2.68
Discontinued operations		- -		(0.08)		0.01		(0.12)

	$	1.33	$	1.38	$	2.37	$	2.56

See Notes to the Consolidated Financial Statements.

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three months ended June 30,				Six Months Ended June 30,
Millions of dollars	2012		2011		2012		2011
Net income	$	768	$	803	$	1,367	$	1,463
Other comprehensive income, net of tax –
Defined benefit pension plan:
Prior service cost arising during the period		1		1		2		3
Amortization of prior service cost included in net income		6		- -		12		- -
Income taxes on defined benefit plans		(2)		- -		(4)		- -

Defined benefit pension plan, net		5		1		10		3

Foreign currency translations adjustment:
Unrealized net change arising during the period		(376)		126		(173)		502
Income taxes on foreign currency translation adjustments		- -		(1)		1		- -

Foreign currency translations, net of tax		(376)		125		(172)		502


Total other comprehensive income (loss)		(371)		126		(162)		505


Comprehensive income		397		929		1,205		1,968
Comprehensive loss attributable to non-controlling interest		2		1		3		4

Comprehensive income attributable to the Company	$	399	$	930	$	1,208	$	1,972

See Notes to the Consolidated Financial Statements.

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED BALANCE SHEETS


Millions, except shares and par value data	June 30, 2012		December 31, 2011
ASSETS
Current Assets:
Cash and cash equivalents	$	1,950	$	1,065
Restricted cash		14		53
Accounts receivable:
Trade, net		3,667		3,582
Related parties		221		196
Inventories		5,759		5,499
Prepaid expenses and other current assets		755		1,040

Total current assets		12,366		11,435
Property, plant and equipment, net		7,237		7,333
Investments and long-term receivables:
Investment in PO joint ventures		411		412
Equity investments		1,521		1,559
Other investments and long-term receivables		70		72
Goodwill		576		585
Intangible assets, net		1,103		1,177
Other assets		261		266

Total assets	$	23,545	$	22,839

See Notes to the Consolidated Financial Statements.

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED BALANCE SHEETS


Millions, except shares and par value data	June 30, 2012		December 31, 2011
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt	$	- -	$	4
Short-term debt		48		48
Accounts payable:
Trade		2,169		2,562
Related parties		835		852
Accrued liabilities		915		1,242
Deferred income taxes		277		310

Total current liabilities		4,244		5,018
Long-term debt		4,305		3,980
Other liabilities		2,208		2,277
Deferred income taxes		1,245		917
Commitments and contingencies
Stockholders’ equity:
Ordinary shares, €0.04 par value, 1,275 million shares authorized, 574,795,762 and 573,390,514 shares outstanding, respectively		31		31
Additional paid-in capital		10,323		10,272
Retained earnings		1,838		841
Accumulated other comprehensive loss		(589)		(427)
Treasury stock, at cost, 3,534,424 and 4,051,013 ordinary shares, respectively		(111)		(124)

Total Company share of stockholders’ equity		11,492		10,593
Non-controlling interests		51		54

Total equity		11,543		10,647

Total liabilities and equity	$	23,545	$	22,839

See Notes to the Consolidated Financial Statements.

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended June 30,
Millions of dollars	2012		2011
Cash flows from operating activities:
Net income	$	1,367	$	1,463
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		481		439
Asset impairments		22		18
Amortization of debt-related costs		46		20
Inventory valuation adjustment		71		- -
Equity investments -
Equity income		(73)		(131)
Distribution of earnings, net of tax		87		107
Deferred income taxes		351		316
Gain on sale of assets		(10)		(48)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(156)		(1,002)
Inventories		(379)		(619)
Accounts payable		(345)		1,140
Contributions to pension plans		(37)		(178)
Income tax refunds		288		- -
Prepaid expenses and other current assets		(77)		(96)
Other, net		(206)		(182)

Net cash provided by operating activities		1,430		1,247

Cash flows from investing activities:
Expenditures for property, plant and equipment		(461)		(482)
Proceeds from disposal of assets		10		70
Restricted cash		39		(239)
Other		(18)		- -

Net cash used in investing activities		(430)		(651)

Cash flows from financing activities:
Shares issued upon exercise of warrants		1		37
Dividends paid		(373)		(57)
Issuance of long-term debt		3,000		- -
Repayments of long-term debt		(2,679)		(260)
Payments of debt issuance costs		(50)		(15)
Other, net		3		(4)

Net cash used in financing activities		(98)		(299)

Effect of exchange rate changes on cash		(17)		168

Increase in cash and cash equivalents		885		465
Cash and cash equivalents at beginning of period		1,065		4,222

Cash and cash equivalents at end of period	$	1,950	$	4,687

See Notes to the Consolidated Financial Statements.

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


									Accumulated
					Additional				Other		Total		Non-
	Ordinary Shares				Paid-in		Retained		Comprehensive		Stockholders’		Controlling
Millions of dollars	Issued		Treasury		Capital		Earnings		Loss		Equity		Interests
Balance, January 1, 2012	$	31	$	(124)	$	10,272	$	841	$	(427)	$	10,593	$	54
Net income (loss)		- -		- -		- -		1,370		- -		1,370		(3)
Other comprehensive loss		- -		- -		- -		- -		(162)		(162)		- -
Warrants exercised		- -		- -		38		- -		- -		38		- -
Shares purchased		- -		(12)		- -		- -		- -		(12)		- -
Share-based compensation		- -		25		13		- -		- -		38		- -
Cash dividends ($0.65 per share)		- -		- -		- -		(373)		- -		(373)		- -

Balance, June 30, 2012	$	31	$	(111)	$	10,323	$	1,838	$	(589)	$	11,492	$	51

See Notes to the Consolidated Financial Statements.

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS


	Page

1. Basis of Presentation		8

2. Accounting and Reporting Changes		8

3. Discontinued Operations		9

4. Accounts Receivable		10

5. Inventories		11

6. Property, Plant and Equipment, Goodwill, Intangibles and Other Assets		11

7. Investment in PO Joint Ventures		12

8. Equity Investments		12

9. Debt		14

10. Derivative Financial Instruments		15

11. Fair Value Measurement		21

12. Pension and Other Post-retirement Benefits		23

13. Income Taxes		24

14. Commitments and Contingencies		24

15. Stockholders’ Equity and Non-Controlling Interests		27

16. Per Share Data		27

17. Segment and Related Information		30

18. Subsequent Events		33

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

1.	Basis of Presentation

LyondellBasell Industries N.V., together with its consolidated subsidiaries (collectively “LyondellBasell N.V.”), is a worldwide manufacturer of chemicals and polymers, a refiner of crude oil, a significant producer of gasoline blending components and a developer and licensor of technologies for production of polymers and other chemicals. When we use the terms “Company,” “we,” “us,” “our” or similar words, unless the context otherwise requires, we are referring to LyondellBasell N.V.

The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of LyondellBasell N.V. in accordance with the instructions to Form 10-Q and Rule 10-1 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results for the entire year. These consolidated financial statements should be read in conjunction with the LyondellBasell N.V. consolidated financial statements and notes thereto included in the LyondellBasell Industries N.V. Annual Report on Form 10-K for the year ended December 31, 2011.

2.	Accounting and Reporting Changes

Recently Adopted Guidance

Comprehensive Income—In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, related to ASC Topic 220, Comprehensive Income: Presentation of Comprehensive Income and in December 2011 the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. These standards eliminate the current option to report other comprehensive income and its components in the statement of changes in equity. We elected to present Statements of Comprehensive Income in two separate but consecutive statements beginning January 1, 2012, and the amendments have been applied retrospectively for all prior periods presented.

Fair Value Measurement—In May 2011, the FASB issued new guidance related to ASC Topic 820, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”) and changes some fair value measurement principles and disclosure requirements. This guidance aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities. As a result, entities are required to measure the fair value of their own equity instruments from the perspective of a market participant that holds the equity instruments as assets. This guidance also enhances disclosure requirements for recurring Level 3 fair value measurements to include quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. New disclosures on the use of a nonfinancial asset measured or disclosed at fair value are required if its use differs from its highest and best use. In addition, entities must report the level in the fair value hierarchy of assets and liabilities not recorded at fair value but where fair value is disclosed. The ASU was effective for interim and annual periods beginning on or after December 15, 2011. The adoption of this amendment in 2012 did not have a material effect on the presentation of our consolidated financial statements.

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accounting Guidance Issued But Not Adopted as of June 30, 2012

Disclosures about Offsetting Assets and Liabilities—In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The standard requires disclosures to provide information to help reconcile differences in the offsetting requirements under U.S. GAAP and IFRS. The differences in the offsetting requirements account for a difference in the amounts presented in statements of financial position prepared in accordance with U.S. GAAP and IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position (balance sheet), as well as instruments similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this amendment is not expected to have a material impact on the presentation of our Consolidated Balance Sheet.

3.	Discontinued Operations

In September 2011, we announced our intention to initiate consultations with relevant employee Works Councils regarding a contemplated closure of our Berre refinery after receiving no offers to purchase the refinery. In connection with the intended closure, we recorded pre-tax charges totaling $136 million in the fourth quarter of 2011, primarily related to the estimated cost of the social plan for the affected employees. We reduced the estimated cost of the social plan by $14 million in the second quarter of 2012.

On January 4, 2012, operations at the Berre refinery were suspended.

During the three-month period ending June 30, 2012, the operations of the Berre refinery were deemed to have met the criteria for discontinued operations classification. As a result, the operations have been classified as discontinued operations, net of income taxes, in the Consolidated Statements of Income for all periods presented. The amounts included in Income (loss) from discontinued operations are summarized as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
Millions of dollars	2012		2011		2012		2011

Sales and other operating revenues	$	42	$	736	$	187	$	1,608


Loss from discontinued operations before income taxes	$	(15)	$	(48)	$	(9)	$	(70)
Benefit from income taxes		(15)		- -		(14)		- -

Income (loss) from discontinued operations, net of tax	$	- -	$	(48)	$	5	$	(70)

Income (loss) from discontinued operations includes benefits related to the liquidation of LIFO valued inventory of $7 million and $49 million for the three and six months ended June 30, 2012, respectively.

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the assets and liabilities of the Berre refinery that are included in the Consolidated Balance Sheets. These amounts were derived from historical financial information and adjusted to exclude intercompany receivables and payables between the Berre refinery and other subsidiaries of the Company.


Millions of dollars	June 30, 2012		December 31, 2011
Current assets related to discontinued operations:
Accounts receivable trade, net	$	36	$	234
Inventories		75		222

Total current assets related to discontinued operations	$	111	$	456


Current liabilities related to discontinued operations:
Accounts payable trade	$	22	$	158
Accrued liabilities		39		30

Total current liabilities related to discontinued operations	$	61	$	188


Long-term liabilities related to discontinued operations:
Other liabilities	$	71	$	121

Total long-term liabilities related to discontinued operations	$	71	$	121

Future cash inflows will arise from the liquidation of on hand raw materials, intermediate and refined product inventories.

Future cash out flows will occur for activities associated with exit or disposal activities and for payments made to severed employees. Exit and disposal related costs are expected to be incurred for the next two years. Payments to the affected employees are expected to be substantially complete by 2019.

4.	Accounts Receivable

Our allowance for doubtful accounts receivable, which is reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, totaled $17 million and $16 million at June 30, 2012 and December 31, 2011, respectively.

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5.	Inventories

Inventories consisted of the following components:


Millions of dollars	June 30, 2012		December 31, 2011
Finished goods	$	3,552	$	3,544
Work-in-process		283		267
Raw materials and supplies		1,924		1,688

Total inventories	$	5,759	$	5,499

6.	Property, Plant and Equipment, Goodwill and Intangible Assets

The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows:


Millions of dollars	June 30, 2012		December 31, 2011
Land	$	296	$	301
Manufacturing facilities and equipment		7,686		7,358
Construction in progress		744		785

Total property, plant and equipment		8,726		8,444
Less accumulated depreciation		(1,489)		(1,111)

Property, plant and equipment, net	$	7,237	$	7,333

During the first six months of 2012, we recognized impairment charges of $22 million, primarily related to damage to our LDPE plant in Wesseling, Germany resulting from an explosion in a reactor bay.

Depreciation and amortization expense is summarized as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
Millions of dollars	2012		2011		2012		2011
Property, plant and equipment	$	200	$	184	$	393	$	351
Investment in PO joint ventures		7		8		15		15
Emission allowances		17		18		34		36
Various contracts		8		13		15		35
Technology, patent and license costs		7		- -		13		- -
Software costs		5		1		11		2

Total depreciation and amortization	$	244	$	224	$	481	$	439

Asset Retirement Obligations—The liabilities recognized for all asset retirement obligations were $105 million and $123 million at June 30, 2012 and December 31, 2011, respectively.

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Goodwill—Goodwill decreased from $585 million at December 31, 2011 to $576 million at June 30, 2012 as a result of foreign exchange translation.

7.	Investment in PO Joint Ventures

Changes in our investment in the U.S. and European PO joint ventures for 2012 and 2011 are summarized below:


Millions of dollars	U.S. PO Joint Venture		European PO Joint Venture		Total PO Joint Ventures
Investments in PO joint ventures - January 1, 2012	$	274	$	138	$	412
Cash contributions		5		13		18
Depreciation and amortization		(11)		(4)		(15)
Effect of exchange rate changes		- -		(4)		(4)

Investments in PO joint ventures - June 30, 2012	$	268	$	143	$	411


Investments in PO joint ventures - January 1, 2011	$	291	$	146	$	437
Cash contributions		- -		2		2
Depreciation and amortization		(11)		(4)		(15)
Effect of exchange rate changes		- -		12		12

Investments in PO joint ventures - June 30, 2011	$	280	$	156	$	436

8.	Equity Investments

The changes in equity investments were as follows:


	Six Months Ended June 30,
Millions of dollars	2012		2011
Beginning balance	$	1,559	$	1,587
Income from equity investments		73		131
Dividends received, gross		(87)		(114)
Currency exchange effects		(20)		50
Other		(4)		- -

Ending balance	$	1,521	$	1,654

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Summarized income statement information and our share for the periods for which the respective Equity investments were accounted for under the equity method is set forth below:


	Three months ended June 30,
	2012				2011
Millions of dollars	100%		Company Share		100%		Company Share
Revenues	$	3,175	$	980	$	3,113	$	894
Cost of sales		(2,906)		(900)		(2,659)		(767)

Gross profit		269		80		454		127
Net operating expenses		(65)		(31)		(59)		(17)

Operating income		204		49		395		110
Interest income		3		1		6		2
Interest expense		(70)		(16)		(63)		(18)
Foreign currency translation		16		2		17		5
Loss from equity investments		(3)		(1)		(41)		(8)

Income before income taxes		150		35		314		91
Provision for income taxes		18		8		69		18

Net income	$	132	$	27	$	245	$	73


	Six Months Ended June 30,
	2012				2011
Millions of dollars	100%		Company Share		100%		Company Share
Revenues	$	5,632	$	1,888	$	6,700	$	2,133
Cost of sales		(5,095)		(1,721)		(5,829)		(1,876)

Gross profit		537		167		871		257
Net operating expense		(139)		(52)		(157)		(49)

Operating income		398		115		714		208
Interest income		3		1		6		2
Interest expense		(127)		(32)		(121)		(34)
Foreign currency translation		21		6		(22)		(5)
Income (loss) from equity investments		4		1		(31)		(5)

Income before income taxes		299		91		546		166
Provision for income taxes		52		18		122		35

Net income	$	247	$	73	$	424	$	131

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Debt

Long-term loans, notes and other long-term debt due to unrelated parties consisted of the following:


Millions of dollars	June 30, 2012		December 31, 2011
Senior Notes due 2017, $2,250 million, 8.0%	$	- -	$	619
Senior Notes due 2017, € 375 million, 8.0%		- -		134
Senior Notes due 2018, $3,240 million, 11.0%		- -		1,922
Senior Notes due 2019, $2,000 million, 5.0%		2,000		- -
Senior Notes due 2021, $1,000 million, 6.0%		1,000		1,000
Senior Notes due 2024, $1,000 million, 5.75%		1,000		- -
Guaranteed Notes, due 2027, $300 million, 8.1%		300		300
Other		5		9

Total		4,305		3,984
Less current maturities		- -		(4)

Long-term debt	$	4,305	$	3,980

Short-term loans, notes and other short-term debt due to unrelated parties consisted of the following:


Millions of dollars	June 30, 2012		December 31, 2011
$2,000 million Senior Revolving Credit Facility	$	- -	$	- -
$2,000 million Senior Secured Asset-Based Revolving Credit Facility		- -		- -
€450 million European Receivables Securitization Facility		- -		- -
Financial payables to equity investees		8		10
Other		40		38

Total short-term debt	$	48	$	48

Long-Term Debt

5% and 5.75% Senior Notes—In April 2012, LyondellBasell N.V. issued $2,000 million aggregate principal amount of 5% senior notes due 2019 and $1,000 million aggregate principal amount of 5.75% senior notes due 2024, each at an issue price of 100%. When issued, the 5% and 5.75% senior notes were guaranteed on a senior basis by generally all of our U.S. subsidiaries. The subsidiary guarantees were released on June 15, 2012 as a result of the repayment of our 8% and 11% senior notes described below.

8% and 11% Senior Notes—In April 2012, we repaid a total of $2,606 million of our 8% and 11% senior notes, comprising $742 million of our 8% senior notes and $1,864 million of our 11% senior notes. In June 2012, we repaid the remaining outstanding amount of $70 million, comprising $13 million of our 8% senior notes and $57 million of our 11% senior notes. In connection with these repayments, we also paid premiums totaling $294 million. Capitalized debt issuance costs of $18 million related to the 8% and 11% senior notes were charged to interest expense in the second quarter of 2012. As a result of these repayments, the subsidiary guarantees of all of our senior debt, including the 5% and 5.75% senior notes discussed above and our 6% senior notes due 2021 were automatically released.

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other—Amortization of debt issuance costs in the six months ended June 30, 2012 and 2011 resulted in amortization expense of $46 million and $20 million, respectively, which is included in interest expense in the Consolidated Statements of Income. These costs include the write off of unamortized debt issuance costs associated with the repayment of the 8% and 11% senior notes and the termination of the U.S. ABL Facility described below.

Short-Term Debt

Senior Revolving Credit Facility—In May 2012, we entered into a five-year revolving credit facility (the “Senior Revolving Credit Facility”). The Senior Revolving Credit Facility may be used for dollar and euro denominated borrowings and to support up to $700 million of dollar and euro denominated letters of credit. The balance of outstanding borrowings and letters of credit under the facility may not exceed $2,000 million at any given time. We may, from time to time, request the total commitments available under the facility be increased to an aggregate amount not to exceed $2,500 million. We paid fees of $10 million related to the completion of this financing.

Borrowings under the facility bear interest at a Base Rate or LIBOR, plus an applicable margin. Additional fees are incurred for the average daily unused commitments.

At June 30, 2012, availability under this facility was $1,930 million. There were no borrowings outstanding under the facility and outstanding letters of credit totaled $57 million.

Obligations under the facility were guaranteed by our U.S. subsidiaries until those guarantees were released in June 2012 as a result of the repayment of our 8% and 11% senior notes, described above.

The facility contains customary covenants and warranties, including specified restrictions on indebtedness, liens, sale and leaseback transactions and a specified interest coverage ratio and consolidated leverage ratio.

U.S. ABL Facility—In connection with the execution of the new revolving credit facility, we terminated our U.S. asset-based revolving credit facility (“U.S. ABL Facility”). All amounts owed by the borrowers under the U.S. ABL Facility have been repaid and the commitments under the U.S. ABL Facility have been terminated. In connection with the termination of this facility, $17 million of unamortized debt issuance costs were charged to interest expense in the second quarter of 2012.

At December 31, 2011, there were no borrowings outstanding under the U.S. ABL Facility, and outstanding letters of credit totaled $262 million.

Other—At June 30, 2012 and 2011, our weighted average interest rates on outstanding short-term debt were 3.4% and 3.8%, respectively.

10.

Derivative Financial Instruments

Cash Concentration—Our cash equivalents are placed in high-quality commercial paper, money market funds and time deposits with major international banks and financial institutions.

Market Risks—We are exposed to market risks, such as changes in commodity pricing, currency exchange rates and interest rates. To manage the volatility related to these exposures, we selectively enter into derivative transactions pursuant to our policies. Designation of the derivatives as fair-value or cash-flow hedges is performed on a specific exposure basis. Hedge accounting may or may not be elected with respect to certain short-term exposures. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged.

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Commodity Prices—We are exposed to commodity price volatility related to anticipated purchases of natural gas, crude oil and other raw materials and sales of our products. We selectively use commodity swap, option, and futures contracts with various terms to manage the volatility related to these risks. Such contracts are generally limited to durations of one year or less. Cash-flow hedge accounting may be elected for these derivative transactions. When the duration of a derivative is short, hedge accounting generally would not be elected. When hedge accounting is not elected, the changes in fair value of these instruments are recorded in earnings. When hedge accounting is elected, gains and losses on these instruments are deferred in accumulated other comprehensive income (“AOCI”), to the extent that the hedge remains effective, until the underlying transaction is recognized in earnings.

The following table summarizes the pretax effect of settled commodity futures contracts charged directly to income:


	Settled Commodity Contracts
	Six Months Ended June 30, 2012
Millions of dollars	Gain (Loss) Recognized in Income		Volumes Settled		Volume Unit
Futures:
Gasoline	$	10		187	million gallons
Heating oil		(1)		293	million gallons
Butane		(1)		12	million gallons
Crude oil		(8)		233	million gallons

	$	- -


	Six Months Ended June 30, 2011
	Gain (Loss) Recognized in Income		Volumes Settled		Volume Unit
Futures:
Gasoline	$	1		280	million gallons
Heating oil		4		293	million gallons
Crude oil		(1)		- -	million gallons

	$	4

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The estimated fair value and notional amounts of our open commodity futures contracts are shown in the table below:


	Open Commodity Contracts
	June 30, 2012
			Notional Amounts
Millions of dollars	Fair Value		Value		Volumes		Volume Unit	Maturity Dates
Futures:
Gasoline	$	27	$	376		131	million gallons	August 2012
Heating oil		2		57		21	million gallons	August 2012
Butane		(39)		240		126	million gallons	October 2012 - February 2013
Crude oil		(5)		121		60	million gallons	August 2012 - September 2012

	$	(15)	$	794


	December 31, 2011
			Notional Amounts
	Fair Value		Value		Volumes		Volume Unit	Maturity Dates
Futures:
Gasoline	$	12	$	34		12	million gallons	January 2012 - February 2012
Heating oil		1		54		19	million gallons	January 2012
Butane		(1)		22		12	million gallons	January 2012 - February 2012

	$	12	$	110

Foreign Currency Rates—We have significant operations in several countries. The functional currencies of our wholly owned subsidiaries through which our operations are conducted are primarily the U.S. dollar and the Euro. We enter into transactions denominated in other than the functional currencies of the Company. As a result, we are exposed to foreign currency risk on receivables and payables. We maintain risk management control policies intended to monitor foreign currency risk attributable to both the outstanding foreign currency balances and future commitments. These control policies involve the centralization of foreign currency exposure management, the offsetting of exposures and the estimating of expected impacts of changes in foreign currency rates on our earnings. We enter into foreign currency spot, forward and swap contracts to reduce the effects of our net currency exchange exposures. At June 30, 2012, foreign currency spot, forward and swap contracts in the notional amount of $723 million, maturing in July and August 2012, were outstanding. The fair values, based on quoted market exchange rates, resulted in net payables of $3 million and $12 million at June 30, 2012 and December 31, 2011, respectively.

For forward contracts that economically hedge recognized monetary assets and liabilities in foreign currencies, no hedge accounting is applied. Changes in the fair value of foreign currency forward contracts are reported in the Consolidated Statements of Income and offset the currency exchange results recognized on the assets and liabilities.

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Foreign Currency Gain (Loss)—Other income, net, in the Consolidated Statements of Income reflected losses of $11 million and $9 million for the three and six months ended June 30, 2012, and a loss of $4 million and a gain of $6 million for the three and six months ended June 30, 2011, respectively.

Warrants—We had warrants outstanding to purchase 111,565 ordinary shares as of June 30, 2012 and 1,000,223 ordinary shares as of December 31, 2011 at exercise prices of $13.77 per share. The fair values of the warrants were determined to be $3 million and $19 million at June 30, 2012 and December 31, 2011, respectively.

Derivatives—The following table summarizes financial instruments outstanding as of June 30, 2012 and December 31, 2011 that are measured at fair value on a recurring basis. Refer to Note 11, Fair Value Measurements, for additional information regarding the fair value of derivative financial instruments.


		June 30, 2012				December 31, 2011
Millions of dollars	Balance Sheet Classification	Notional Amount		Fair Value		Notional Amount		Fair Value
Assets at fair value –
Derivatives:
Commodities	Prepaid expenses and other current assets	$	433	$	29	$	88	$	13

		$	433	$	29	$	88	$	13

Liabilities at fair value –
Derivatives:
Commodities	Accrued liabilities	$	361	$	44	$	22	$	1
Warrants	Accrued liabilities		2		3		14		19
Foreign currency	Accrued liabilities		723		3		726		12

		$	1,086	$	50	$	762	$	32

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the pretax effect of derivative instruments charged directly to income:


	Effect of Financial Instruments
	Three Months Ended June 30, 2012
Millions of dollars	Gain (Loss) Recognized in AOCI		Gain (Loss) Reclassified from AOCI to Income		Additional Gain (Loss) Recognized in Income		Income Statement Classification
Derivatives not designated as hedges:
Commodities	$	- -	$	- -	$	(25)	Cost of sales
							Other income
Foreign currency		- -		- -		2	(expense), net

	$	- -	$	- -	$	(23)


	Three Months Ended June 30, 2011
Millions of dollars	Gain (Loss) Recognized in AOCI		Gain (Loss) Reclassified from AOCI to Income		Additional Gain (Loss) Recognized in Income		Income Statement Classification
Derivatives not designated as hedges:							Other income
Warrants	$	- -	$	- -	$	6	(expense), net
Commodities		- -		- -		3	Cost of sales
							Other income
Foreign currency		- -		- -		1	(expense), net

	$	- -	$	- -	$	10

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Effect of Financial Instruments
	Six Months Ended June 30, 2012
Millions of dollars	Gain (Loss) Recognized in AOCI		Gain (Loss) Reclassified from AOCI to Income		Additional Gain (Loss) Recognized in Income		Income Statement Classification
Derivatives not designated as hedges:
							Other income
Warrants	$	- -	$	- -	$	(10)	(expense), net
Commodities		- -		- -		(16)	Cost of sales
							Other income
Foreign currency		- -		- -		25	(expense), net

	$	- -	$	- -	$	(1)


	Six Months Ended June 30, 2011
Millions of dollars	Gain (Loss) Recognized in AOCI		Gain (Loss) Reclassified from AOCI to Income		Additional Gain (Loss) Recognized in Income		Income Statement Classification
Derivatives not designated as hedges:
							Other income
Warrants	$	- -	$	- -	$	(53)	(expense), net
Commodities		- -		- -		9	Cost of sales
							Other income
Foreign currency		- -		- -		(1)	(expense), net

	$	- -	$	- -	$	(45)

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11.

Fair Value Measurement

The following table presents the derivative financial instruments outstanding as of June 30, 2012 and December 31, 2011 that are measured at fair value on a recurring basis.


Millions of dollars	Fair value		Level 1		Level 2		Level 3
June 30, 2012:
Assets at fair value –
Derivatives:
Commodities	$	29	$	- -	$	29	$	- -

	$	29	$	- -	$	29	$	- -

Liabilities at fair value –
Derivatives:
Commodities	$	44	$	- -	$	44	$	- -
Warrants		3		- -		3		- -
Foreign currency		3		- -		3		- -

	$	50	$	- -	$	50	$	- -


December 31, 2011:
Assets at fair value –
Derivatives:
Commodities	$	13	$	- -	$	13	$	- -

	$	13	$	- -	$	13	$	- -

Liabilities at fair value –
Derivatives:
Commodities	$	1	$	- -	$	1	$	- -
Warrants		19		- -		19		- -
Foreign currency		12		- -		12		- -

	$	32	$	- -	$	32	$	- -

The fair value of all non-derivative financial instruments included in current assets, including cash and cash equivalents, restricted cash and accounts receivable, short-term debt and accounts payable, approximated the applicable carrying value due to the short maturity of those instruments.

There were no financial instruments measured on a recurring basis using Level 3 inputs during the six months ended June 30, 2012 and 2011.

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The carrying value and the estimated fair value of our non-derivative financial instruments are shown in the table below:


	June 30, 2012				December 31, 2011
Millions of dollars	Carrying Value		Fair Value		Carrying Value		Fair Value
Short and long-term debt, including current maturities	$	4,348	$	4,660	$	4,026	$	4,294

The following table presents short and long-term debt at fair value which are recorded at historical cost or amortized cost in the Consolidated Balance Sheet. The carrying and fair value of long-term debt excludes capital leases.


	June 30, 2012
Millions of dollars	Carrying value		Fair value		Level 1		Level 2		Level 3
Short-term debt	$	48	$	48	$	- -	$	9	$	39
Long-term debt		4,300		4,612		- -		4,612		- -

Short term and long-term debt, including current maturities	$	4,348	$	4,660	$	- -	$	4,621	$	39


	December 31, 2011
Millions of dollars	Carrying value		Fair value		Level 1		Level 2		Level 3
Short-term debt	$	48	$	48	$	- -	$	10	$	38
Long-term debt		3,978		4,246		- -		4,243		3

Short term and long-term debt, including current maturities	$	4,026	$	4,294	$	- -	$	4,253	$	41

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12.

Pension and Other Post-retirement Benefits

Net periodic pension benefits included the following cost components:


	U.S. Plans
	Three Months Ended June 30,				Six Months Ended June 30,
Millions of dollars	2012		2011		2012		2011
Service cost	$	11	$	9	$	23	$	20
Interest cost		19		22		39		45
Expected return on plan assets		(29)		(26)		(59)		(52)
Amortization		5		- -		10		- -

Net periodic benefit costs	$	6	$	5	$	13	$	13


	Non-U.S. Plans
	Three Months Ended June 30,				Six Months Ended June 30,
Millions of dollars	2012		2011		2012		2011
Service cost	$	6	$	12	$	17	$	21
Interest cost		13		17		25		29
Expected return on plan assets		(7)		(16)		(13)		(23)
Settlement and curtailment loss		- -		4		- -		6
Amortization		- -		2		1		2

Net periodic benefit costs	$	12	$	19	$	30	$	35

Net periodic other post-retirement benefits included the following cost components:


	U.S. Plans
	Three Months Ended June 30,				Six Months Ended June 30,
Millions of dollars	2012		2011		2012		2011
Service cost	$	1	$	1	$	2	$	5
Interest cost		4		4		7		8
Amortization		- -		- -		1		- -

Net periodic benefit costs	$	5	$	5	$	10	$	13


	Non-U.S. Plans
	Three Months Ended June 30,				Six Months Ended June 30,
Millions of dollars	2012		2011		2012		2011
Service cost	$	(1)	$	3	$	- -	$	5

Net periodic benefit costs	$	(1)	$	3	$	- -	$	5

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company contributed $37 million to its pension plans during the six months ended June 30, 2012, which consisted of $34 million and $3 million to its U.S. and non-U.S. pension plans, respectively.

13.

Income Taxes

The effective tax rate for the second quarter of 2012 was 28.5% compared with 31.3% for the second quarter of 2011. For the first six months of 2012, the effective tax rate was 30.8% compared with 29.8% for the first six months of 2011. Our effective tax rate fluctuates based on, among other factors, pretax income in countries with lower statutory tax rates, nontaxable income related to joint venture equity earnings, notional royalties, the U.S. domestic production activity deduction, changes in valuation allowance and unrecognized tax benefits. Compared with the second quarter of 2011, the effective tax rate for the second quarter of 2012 was lower due to deductible foreign currency offset with increases in unrecognized tax benefits. The second quarter effective tax rate was also favorably affected by lower earnings in jurisdictions with higher tax rates. When comparing differences within the effective tax rates for the first six months of 2012 and 2011, increases to the effective tax rate related to unrecognized tax benefits offset by deductible foreign currency losses and a reduction in nondeductible charges.

14.

Commitments and Contingencies

Financial Assurance Instruments—We have obtained letters of credit, performance and surety bonds and have issued financial and performance guarantees to support trade payables, potential liabilities and other obligations. Management does not expect that any claims against or draws on these instruments would have a material adverse effect on our consolidated financial statements.

Environmental Remediation—Our accrued liability for future environmental remediation costs at current and former plant sites and other remediation sites totaled $124 million and $120 million as of June 30, 2012 and December 31, 2011, respectively. At June 30, 2012, the accrued liabilities for individual sites range from less than $1 million to $22 million. The remediation expenditures are expected to occur over a number of years, and not to be concentrated in any single year. In our opinion, it is reasonably possible that losses in excess of the liabilities recorded may have been incurred. However, we cannot estimate any amount or range of such possible additional losses. New information about sites, new technology or future developments such as involvement in investigations by regulatory agencies, could require us to reassess our potential exposure related to environmental matters.

The following table summarizes the activity in our accrued environmental liability included in “Accrued liabilities” and “Other liabilities:”


	Six Months Ended June 30,
Millions of dollars	2012		2011
Balance at beginning of period	$	120	$	107
Additional provisions		12		20
Amounts paid		(5)		(4)
Foreign exchange effects		(3)		6

Balance at end of period	$	124	$	129

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Litigation and Other Matters

Access Indemnity Demand—On December 20, 2010, one of our subsidiaries received demand letters from affiliates of Access Industries, (collectively, “Access”) a more than five percent shareholder of the Company. We conducted an initial investigation of the facts underlying the demand letters and engaged in discussions with Access. We requested that Access withdraw its demands with prejudice and on January 17, 2011, Access declined to withdraw the demands, with or without prejudice.

Specifically, Access affiliates Nell Limited (“Nell”) and BI S.á.r.l. (“BI”) have demanded that LyondellBasell Industries Holdings B.V. (“LBIH”), a wholly owned subsidiary of the Company, indemnify them and their shareholders, members, affiliates, officers, directors, employees and other related parties for all losses, including attorney’s fees and expenses, arising out of a pending lawsuit styled Edward S. Weisfelner, as Litigation Trustee of the LB Litigation Trust v. Leonard Blavatnik, et al., Adversary Proceeding No. 09-1375 (REG), in the United States Bankruptcy Court, Southern District of New York.

In the Weisfelner lawsuit, the plaintiffs seek to recover damages from numerous parties, including Nell, Access and their affiliates. The damages sought from Nell, Access and their affiliates include, among other things, the return of all amounts earned by them related to their acquisition of shares of Lyondell Chemical prior to its acquisition by Basell AF S.C.A. in December 2007, distributions by Basell AF S.C.A. to its shareholders before it acquired Lyondell Chemical, and management and transaction fees and expenses. The trial that was scheduled for October 2011 has been postponed.

Nell and BI have also demanded that LBIH pay $50 million in management fees for each of 2009 and 2010 and that LBIH pay other unspecified amounts relating to advice purportedly given, prior to the Predecessor company’s chapter 11 filing, in connection with financing and other strategic transactions.

Nell and BI assert that LBIH’s responsibility for indemnity and the claimed fees and expenses arise out of a management agreement entered into on December 11, 2007, between Nell and Basell AF S.C.A. They assert that LBIH, as a former subsidiary of Basell AF S.C.A., is jointly and severally liable for Basell AF S.C.A.’s obligations under the agreement, notwithstanding that LBIH was not a signatory to the agreement and the liabilities of Basell AF S.C.A., which was a signatory, were discharged in the LyondellBasell bankruptcy proceedings.

On June 26, 2009, Nell filed a proof of claim in Bankruptcy Court against LyondellBasell AF (successor to Basell AF S.C.A.) seeking “no less than” $723,000 for amounts allegedly owed under the 2007 management agreement. On April 27, 2011, Lyondell Chemical filed an objection to Nell’s claim and, together with LyondellBasell N.V. (successor to LyondellBasell AF) and LBIH, brought a declaratory judgment action in the Bankruptcy Court for a determination that Nell and BI’s demands are not valid. By a Joint Stipulated Order dated June 13, 2011, the declaratory judgment action is stayed pending the outcome of the Weisfelner lawsuit.

We do not believe that the management agreement is in effect or that the Company, LBIH, or any other Company-affiliated entity owes any obligations under the management agreement. We intend to defend vigorously our position in any proceedings and against any claims or demands that may be asserted.

We cannot at this time estimate the reasonably possible loss or range of loss that Nell, Access, or their affiliates may incur as a result of the lawsuit; therefore, we cannot at this time estimate the reasonably possible loss or range of loss that Nell, Access, or their affiliates may seek from LBIH by way of indemnity.

Indemnification—We are parties to various indemnification arrangements, including arrangements entered into in connection with acquisitions, divestitures and the formation of joint ventures. Pursuant to these arrangements, we provide indemnification to and/or receive indemnification from other parties in connection with liabilities that may

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

arise in connection with the transactions and in connection with activities prior to completion of the transactions. These indemnification arrangements typically include provisions pertaining to third party claims relating to environmental and tax matters and various types of litigation. As of June 30, 2012, we had not accrued any significant amounts for our indemnification obligations, and we are not aware of other circumstances that would likely lead to significant future indemnification obligations. We cannot determine with certainty the potential amount of future payments under the indemnification arrangements until events arise that would trigger a liability under the arrangements.

In addition, at the time of Basell’s formation in 2005, the Company entered into agreements with Shell and BASF whereby they agreed to indemnify Basell and its successors for a significant portion of the potential obligations that could arise with respect to costs relating to contamination at various sites. These indemnity obligations are currently in dispute. Also, the agreements involving the purchase of the Berre cracker and Berre refinery include similar indemnities from Shell to Basell and its successors. These indemnity obligations are also currently in dispute.

As part of certain of our technology licensing contracts, we give indemnifications to various licensees for liabilities arising from possible patent infringement claims with respect to certain proprietary licensedtechnologies. Such indemnifications have a stated maximum amount and generally cover a period of five to ten years.

Other—We previously identified an agreement related to a former project in Kazakhstan under which a payment was made that raises compliance concerns under the U.S. Foreign Corrupt Practices Act (the “FCPA”). We have engaged outside counsel to investigate these activities, under the oversight of the Audit Committee of the Supervisory Board, and to evaluate internal controls and compliance policies and procedures. In this respect, we may not have conducted business in compliance with the FCPA and may not have had policies and procedures in place adequate to ensure compliance. We made a voluntary disclosure of these matters to the U.S. Department of Justice and are cooperating fully with that agency. We cannot predict the ultimate outcome of these matters at this time since our investigations are ongoing. Therefore, we cannot reasonably estimate a range of liability for any potential penalty resulting from these matters. Violations of these laws could result in criminal and civil liabilities and other forms of relief that could be material to us.

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15.

Stockholders’ Equity and Non-Controlling Interests

Dividend distribution—In June 2012, we paid a dividend to all shareholders of record as of May 11, 2012 of $0.40 per share, for an aggregate of $230 million.

Ordinary shares—The changes in the outstanding amounts of ordinary shares issued were as follows:


	Six Months Ended June 30,
	2012		2011
Ordinary shares outstanding:
Balance at beginning of period		573,390,514		565,676,222
Share-based compensation		788,474		209,557
Warrants exercised		616,774		2,928,918

Balance at end of period		574,795,762		568,814,697

Ordinary shares held as treasury shares:
Balance at beginning of period		4,051,013		1,122,651
Warrants exercised		271,885		410,039
Share-based compensation		(788,474)		(209,013)

Balance at end of period		3,534,424		1,323,677

Ordinary shares issued at end of period		578,330,186		570,138,374

Non-controlling Interests—Losses attributable to non-controlling interests consisted of the following components:


	Six Months Ended June 30,
Millions of dollars	2012		2011
Non-controlling interests’ comprehensive income (loss):
Net income (loss) attributable to non-controlling interests	$	(3)	$	7
Fixed operating fees paid to Lyondell Chemical by the PO/SM II partners		- -		(11)

Comprehensive loss attributable to non-controlling interests	$	(3)	$	(4)

16.

Per Share Data

Basic earnings per share are based upon the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share includes the effect of certain stock option awards. We have unvested restricted stock and restricted stock units that are considered participating securities for earnings per share.

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Earnings per share data and dividends declared per share of common stock were as follows:


	Three Months Ended
	June 30, 2012				June 30, 2011
Millions of dollars	Continuing Operations		Discontinued Operations		Continuing Operations		Discontinued Operations
Basic:
Net income (loss)	$	768	$	- -	$	851	$	(48)
Net loss attributable to non-controlling interests		2		- -		1		- -

Net income (loss) attributable to the Company		770		- -		852		(48)
Net income attributable to participating securities		(3)		- -		(5)		- -

Net income (loss) attributable to ordinary shareholders	$	767	$	- -	$	847	$	(48)

Diluted:
Net income (loss)	$	768	$	- -	$	851	$	(48)
Net loss attributable to non-controlling interests		2		- -		1		- -

Net income (loss) attributable to the Company		770		- -		852		(48)
Net income attributable to participating securities		(3)		- -		(5)		- -
Effect of dilutive securities – warrants		- -		- -		(6)		- -

Net income (loss) attributable to ordinary shareholders	$	767	$	- -	$	841	$	(48)

Millions of shares
Basic weighted average common stock outstanding		573		- -		566		566
Effect of dilutive securities:
Warrants		- -		- -		6		6
Stock options		3		- -		3		3
MTI		1		- -		- -		- -

Potential dilutive shares		577		- -		575		575

Earnings (loss) per share:
Basic	$	1.34	$	- -	$	1.49	$	(0.08)

Diluted	$	1.33	$	- -	$	1.46	$	(0.08)

Millions of shares
Anti-dilutive stock options		0.1		- -		- -		- -

Participating securities		3.7		- -		3.6		3.6

Dividends declared per share of common stock	$	0.40	$	- -	$	0.10	$	- -

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


	Six Months Ended
	June 30, 2012				June 30, 2011
Millions of dollars	Continuing Operations		Discontinued Operations		Continuing Operations		Discontinued Operations
Basic:
Net income (loss)	$	1,362	$	5	$	1,533	$	(70)
Net loss attributable to non-controlling interests		3		- -		4		- -

Net income (loss) attributable to the Company		1,365		5		1,537		(70)
Net income attributable to participating securities		(6)		- -		(9)		- -

Net income (loss) attributable to ordinary shareholders	$	1,359	$	5	$	1,528	$	(70)

Diluted:
Net income (loss)	$	1,362	$	5	$	1,533	$	(70)
Net loss attributable to non-controlling interests		3		- -		4		- -

Net income (loss) attributable to the Company		1,365		5		1,537		(70)
Net income attributable to participating securities		(6)		- -		(9)		- -

Net income (loss) attributable to ordinary shareholders	$	1,359	$	5	$	1,528	$	(70)

Millions of shares
Basic weighted average common stock outstanding		572		572		566		566
Effect of dilutive securities:
MTI		1		1		- -		- -
Stock options		3		3		3		3

Potential dilutive shares		576		576		569		569

Earnings (loss) per share:
Basic	$	2.37	$	0.01	$	2.70	$	(0.12)

Diluted	$	2.36	$	0.01	$	2.68	$	(0.12)

Millions of shares
Anti-dilutive warrants		0.2		0.2		8.2		8.2

Participating securities		3.7		3.7		3.6		3.6

Dividends declared per share of common stock	$	0.65	$	- -	$	0.10	$	- -

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17.

Segment and Related Information

We operate in five business segments. The marketing of oxyfuels was aligned with the sale of products from the refining business, particularly related to the Berre refinery. However, with the closure of the Berre refinery, responsibility for business decisions relating to oxyfuels has been moved to our I&D business management function as the profits generated by oxyfuels products are related to sourcing decisions regarding certain co-products of propylene oxide production. As a result, the oxyfuels business is now reflected in our I&D segment. All comparable periods presented have been revised to reflect this change. Our five segments consist of the following:

•

Olefins and Polyolefins—Americas (“O&P-Americas”), primarily manufacturing and marketing of olefins, including ethylene and its co-products, primarily propylene, butadiene, and aromatics, which include benzene and toluene; polyolefins, including polyethylene, comprising high density polyethylene (“HDPE”), low density polyethylene (“LDPE”) and linear low density polyethylene, and polypropylene; and Catalloy process resins;

•

Olefins and Polyolefins—Europe, Asia, International (“O&P–EAI”), primarily manufacturing and marketing of olefins, including ethylene and its co-products, primarily propylene and butadiene; polyolefins, including polyethylene, comprising HDPE, LDPE, and polypropylene; polypropylene-based compounds, materials and alloys (“PP compounds”), Catalloy process resins and polybutene-1 polymers;

•

Intermediates and Derivatives (“I&D”), primarily manufacturing and marketing of propylene oxide (“PO”); PO co-products, including styrene and the TBA intermediates tertiary butyl alcohol (“TBA”), isobutylene and tertiary butyl hydroperoxide; PO derivatives, including propylene glycol, propylene glycol ethers and butanediol; ethylene derivatives, including ethylene glycol, ethylene oxide (“EO”), other EO derivatives; acetyls, including vinyl acetate monomer, acetic acid and methanol; and oxygenated fuels, or oxyfuels, such as methyl tertiary butyl ether (“MTBE”) and ethyl tertiary butyl ether (“ETBE”);

•

Refining, primarily manufacturing and marketing of refined petroleum products, including gasoline, ultra-low sulfur diesel, jet fuel, lubricants, and alkylate; and

•

Technology, primarily licensing of polyolefin process technologies and supply of polyolefin catalysts and advanced catalysts.

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Summarized financial information concerning reportable segments is shown in the following table for the periods presented:


Millions of dollars	Olefins and Polyolefins – Americas		Olefins and Polyolefins – Europe, Asia & International		Intermediates & Derivatives		Refining		Technology		Other		Total
Three Months Ended June 30, 2012
Sales and other operating revenues:
Customers	$	2,184	$	3,514	$	2,186	$	3,274	$	86	$	4	$	11,248
Intersegment		1,099		61		99		222		29		(1,510)		- -

		3,283		3,575		2,285		3,496		115		(1,506)		11,248

Operating income		700		203		390		124		30		2		1,449
Income (loss) from equity investments		4		29		(6)		- -		- -		- -		27

Millions of dollars	Olefins and Polyolefins – Americas		Olefins and Polyolefins – Europe, Asia & International		Intermediates & Derivatives		Refining		Technology		Other		Total
Three Months Ended June 30, 2011
Sales and other operating revenues:
Customers	$	2,825	$	4,150	$	2,516	$	3,706	$	103	$	6	$	13,306
Intersegment		1,185		142		20		290		23		(1,660)		- -

		4,010		4,292		2,536		3,996		126		(1,654)		13,306

Operating income		508		203		327		258		23		(9)		1,310
Income from equity investments		8		61		4		- -		- -		- -		73

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Millions of dollars	Olefins and Polyolefins – Americas		Olefins and Polyolefins – Europe, Asia & International		Intermediates & Derivatives		Refining		Technology		Other		Total
Six Months Ended June 30, 2012
Sales and other operating revenues:
Customers	$	4,587	$	7,300	$	4,587	$	6,322	$	175	$	11	$	22,982
Intersegment		2,045		173		183		377		59		(2,837)		- -

		6,632		7,473		4,770		6,699		234		(2,826)		22,982

Operating income		1,219		206		760		134		68		2		2,389
Income (loss) from equity investments		10		69		(6)		- -		- -		- -		73

Millions of dollars	Olefins and Polyolefins – Americas		Olefins and Polyolefins – Europe, Asia & International		Intermediates & Derivatives		Refining		Technology		Other		Total
Six Months Ended June 30, 2011
Sales and other operating revenues:
Customers	$	5,260	$	8,053	$	4,789	$	6,354	$	212	$	18	$	24,686
Intersegment		2,322		227		78		509		53		(3,189)		- -

		7,582		8,280		4,867		6,863		265		(3,171)		24,686

Operating income		929		378		603		416		89		(10)		2,405
Income from equity investments		11		112		8		- -		- -		- -		131

Sales and other operating revenues and operating income in the “Other” column above include elimination of intersegment transactions.

In the second quarter and first six months of 2012, operating results of the O&P–Americas segment include charges of $40 million and $81 million, respectively, related to the interim liquidation of LIFO inventory, which is expected to be sustained through the end of the year. Inventory levels, which were increased in the fourth quarter 2011 in preparation for a turnaround at our Channelview, Texas facility, decreased during the first six months of 2012 following the commencement of the turnaround. Operating results for O&P-Americas also include a lower of cost or market inventory valuation adjustment of $71 million in the second quarter 2012. Also in the first six months of

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2012, operating results for the O&P-EAI segment included a charge of $22 million for impairment of assets at our Wesseling, Germany site. Operating results for second quarter and first six months of 2012 include benefits of $29 million, $18 million, and $53 million associated with insurance settlements related to Hurricane Ike for the O&P–Americas, I&D, and Refining segments, respectively.

18.

Subsequent Events

LyondellBasell N.V. has evaluated subsequent events through the date the financial statements were issued. Subsequent events have been disclosed throughout the document.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

This discussion and analysis should be read in conjunction with the information contained in our Consolidated Financial Statements and the accompanying notes elsewhere in this report. When we use the terms “we,” “us,” “our” or similar words in this discussion, unless the context otherwise requires, we are referring to LyondellBasell Industries N.V. and its consolidated subsidiaries.

In addition to comparisons of current operating results with the same period in the prior year, we have included trailing quarter comparisons of our second quarter 2012 operating results to our results in the first quarter 2012. Because many of our businesses are highly cyclical and also subject to some less significant seasonal effects, trailing quarter comparisons may offer important insight into current business direction.

References to industry benchmark prices or costs, including the weighted average cost of ethylene production, are generally to industry prices and costs reported by CMAI. However, references to industry benchmarks for refining and oxyfuels market margins are to industry prices reported by Platts, a reporting service of The McGraw-Hill Companies, and crude oil and natural gas benchmark price references are to Bloomberg.

OVERVIEW

Our results of operation for the second quarter and first six months of 2012 reflect strong performance despite the continued uncertainties caused by the Eurozone crisis and the reduced growth outlook for China. We continue to focus on safe, reliable operations, cost reductions, particularly in Europe, and disciplined growth. We believe this strategy allows us to generate solid results even while facing challenges due to external factors. Significant items that affected our second quarter 2012 results include:

•

The continued benefit in the U.S. from an abundance of low cost, natural gas liquids (“NGLs”) supply

•

Falling raw materials costs in Europe, which declined faster than our sales prices, helping to at least temporarily improve olefins margins in that region

•

Depressed by-product spreads relative to the price of crude oil, which negatively affected our refining results, although the impact was mitigated somewhat by strong operational performance, with the Houston refinery operating at near capacity

Other noteworthy items during the first six months of 2012, include the following:

•

We ceased the under-performing operations at the Berre refinery in early January 2012.

•

We completed the refinancing of nearly $3 billion of our debt with new debt issuances of unsecured senior notes, significantly improving our debt structure and replaced our $2 billion U.S. ABL Facility with an unsecured revolving credit facility.

•

We increased our interim dividend during the second quarter by 60%.

We expect that through the rest of 2012, we may continue to face challenges related to uncertainties in Europe and the negative effects on global economic conditions. Our performance is driven by global economic conditions generally and their impact on demand for our products. Additionally, raw material and energy prices significantly impact our operating results. Finally, industry-specific issues, such as our own production capacity and capacity within the chemicals and refining industries, can have material effects on our results of operations.

Results of operations for the periods discussed are presented in the table below.


	Three Months Ended June 30,				Six Months Ended June 30,
Millions of dollars	2012		2011		2012		2011
Sales and other operating revenues	$	11,248	$	13,306	$	22,982	$	24,686
Cost of sales		9,561		11,704		20,093		21,741
Selling, general and administrative expenses		201		236		424		451
Research and development expenses		37		56		76		89

Operating income		1,449		1,310		2,389		2,405
Interest expense		(411)		(176)		(510)		(339)
Interest income		2		13		6		20
Other income (expense), net		8		47		7		(3)
Income from equity investments		27		73		73		131
Reorganization items		(1)		(28)		4		(30)
Provision for income taxes		306		388		607		651

Income from continuing operations		768		851		1,362		1,533
Income (loss) from discontinued operations, net of tax		- -		(48)		5		(70)

Net income	$	768	$	803	$	1,367	$	1,463

RESULTS OF OPERATIONS

Revenues—Revenues decreased by $2,058 million, or 15%, in the second quarter 2012 compared to the second quarter 2011 and by $1,704 million, or 7%, in the first six months of 2012 compared to the first six months of 2011. Lower average product prices were responsible for revenue decreases of 9% in the second quarter 2012 and 3% in the first six months of 2012 while lower average sales volumes contributed 6% and 4% to the revenue deceases in the second quarter and first six months of 2012, respectively. Sales volumes averaged lower in the second quarter and first six months of 2012 for most products except those in the refining segment, which remained relatively unchanged.

Cost of Sales—The decrease in cost of sales of $2,143 million in the second quarter 2012 and $1,648 million in the first six months of 2012 primarily reflects lower raw material costs, compared to the second quarter and first six months of 2011. The lower prices of NGL-based liquid raw materials, particularly ethane, and to a lesser extent, heavy liquids-based raw materials, used in North American olefins contributed to the decreases in cost of sales in the second quarter and first six months of 2012. At the Houston refinery, the lower prices of crude oil in the second quarter 2012 substantially offset the effect of the higher crude oil prices seen in the first quarter 2012. The benefit of falling raw material costs, including ethylene and propylene, benefited cost of sales in the I&D segment, while the falling cost of naphtha benefited the O&P EAI segment’s cost of sales.

Cost of sales in the second quarter and first six months of 2012 included a $100 million benefit associated with an insurance settlement related to Hurricane Ike, which affected the U.S. Gulf Coast in 2008. The benefit was partially offset by a $71 million lower of cost or market inventory valuation adjustment in our O&P-Americas segment. Cost of sales for the first six months of 2012 also included a $22 million charge for impairment of assets, primarily related to damage to our LDPE plant in Wesseling, Germany resulting from an explosion in a reactor bay in January 2012.

SG&A Expenses—Selling, general and administrative expenses in the second quarter and first six months of 2012 were lower by $35 million and $27 million, respectively, compared to the same periods in 2011, primarily as a result of charges in the 2011 periods related to employee compensation associated with the rationalization of certain functional organizations.

R&D Expenses—Research and development expenses in the second quarter and first six months of 2012 decreased $19 million and $13 million, respectively, compared to the second quarter and first six months of 2011. The higher R&D expenses in the 2011 periods were a result of charges totaling $16 million in the second quarter and first six months of 2011 related to employee severance and asset retirement obligations associated with the relocation of an R&D facility

Operating Income—Second quarter 2012 operating income reflects the effect of higher operating results in all of our segments except for the Refining segment, which had lower results compared to the second quarter 2011. The slight decrease in operating income for the first six months of 2012 reflects lower operating results for our O&P-EAI, Refining and Technology segments, partially offset by higher operating results for our O&P-Americas and I&D segments, compared to the first six months of 2011. Results for each of our business segments are reviewed further in the “Segment Analysis” section below.

Interest Expense—The $235 million and $171 million increases in interest expense in the second quarter and first six months of 2012, compared to the same periods in 2011, were primarily due to the payment of premiums and the write-off of unamortized debt issuance costs associated with the repayment of the 8% senior notes due 2017 and 11% senior notes due 2018 in the second quarter 2012. In connection with the redemption of these notes, we paid premiums totaling $294 million and wrote off $18 million in capitalized debt issuance costs. In addition, another $17 million of capitalized debt issuance costs were written off as a result of the termination of the ABL credit facility in May 2012. These increases were partially offset by the lower interest expense that resulted from refinancing notes bearing interest of 8% and 11% per annum with our 5% senior notes due 2019 and 5.75% senior notes due 2024, both issued in April 2012, and our 6% senior notes due 2021 issued in November 2011.

Income from Equity Investments—Income from equity investments decreased $46 million and $58 million in the second quarter and first six months of 2012, compared to the second quarter and first six months of 2011. These decreases are primarily due to lower operating results of our joint ventures in the Middle East and Asia, which were primarily driven by lower average sales prices and in the six months of 2012, by higher raw material costs and unplanned outages.

Income Tax—The effective tax rate for the second quarter of 2012 was 28.5% compared with 31.3% for the second quarter of 2011. For the first six months of 2012, the effective tax rate was 30.8% compared with 29.8% for the first six months of 2011. Our effective tax rate fluctuates based on, among other factors, pretax income in countries with lower statutory tax rates, nontaxable income related to joint venture equity earnings, notional royalties, the U.S. domestic production activity deduction, changes in valuation allowance and unrecognized tax benefits. Compared with the second quarter of 2011, the effective tax rate for the second quarter of 2012 was lower due to deductible foreign currency losses offset with increases in unrecognized tax benefits. When comparing differences within the effective tax rates for the first six months of 2012 and 2011, increases to the effective tax rate related to unrecognized tax benefits were offset by deductible foreign currency losses and a reduction in non-deductible charges.

Income from Continuing Operations—The following table summarizes the major components contributing to income from continuing operations:


	Three Months Ended June 30,				Six Months Ended June 30,
Millions of dollars	2012		2011		2012		2011
Operating income	$	1,449	$	1,310	$	2,389	$	2,405
Interest expense, net		(409)		(163)		(504)		(319)
Other income (expense), net		8		47		7		(3)
Income from equity investments		27		73		73		131
Reorganization items		(1)		(28)		4		(30)
Provision for income taxes		306		388		607		651

Income from continuing operations	$	768	$	851	$	1,362	$	1,533

Income (Loss) from Discontinued Operations, Net of Tax—The improvement in the results of our discontinued operations in the second quarter and first six months of 2012, compared to the corresponding periods in 2011, primarily reflects the liquidation of product inventory following the suspension of operations at the Berre refinery in early January 2012. Results for the second quarter and first six months of 2012 reflect pretax benefits of $7 million and $49 million, respectively, related to the liquidation of the Berre refinery’s product inventory following the suspension of operations.

Comprehensive Income—Comprehensive income for the second quarter and first six months of 2012 decreased by $531 million and $764 million, respectively, compared to the second quarter and first six months of 2011, primarily as a result of currency translation adjustments arising from the financial statements of our non-U.S. subsidiaries with functional currencies other than the U.S. dollar. The predominant local currency of our operations outside of the United States is the Euro. The value of the U.S. dollar relative to the Euro increased in the second quarter and first six months of 2012 but decreased in the corresponding periods of 2011 resulting in losses in 2012 and gains in 2011 as reflected in the Statements of Comprehensive Income.

Second Quarter 2012 versus First Quarter 2012—We had income from continuing operations of $768 million in the second quarter 2012 compared to $594 million in the first quarter 2012. Income from continuing operations in the second quarter included a $100 million pretax benefit related to an insurance settlement associated with Hurricane Ike and a $71 million pretax charge related to the lower of cost or market valuation adjustment for our O&P-Americas segment. First quarter income from continuing operations included pretax charges totaling $32 million related to the impairment of assets and the fair value adjustment of our outstanding warrants.

Apart from these items, income in the second quarter primarily reflected higher operating results in our business segments. The improvement in our second quarter operating results primarily reflected higher olefins margins in our O&P-Americas and O&P-EAI segments, higher margins for propylene oxide co-products in our I&D segment and higher refining margins. The improvements were partially offset by higher interest expense in the second quarter, primarily reflecting $294 million of pretax charges related to premiums and other fees related to the $2,676 million prepayment of debt in the second quarter. Interest expense in the second quarter also included a pretax charge of $35 million related to the write off of unamortized debt issuance costs.

Segment Analysis

Our continuing operations are divided into five reportable segments: O&P—Americas; O&P—EAI; I&D; Refining; and Technology. Beginning in the second quarter 2012, the operations of our Berre refinery in France are being reported as discontinued operations for all periods presented. In addition, beginning in the second quarter 2012, our oxyfuels business, which was previously managed in conjunction with our refining operations and included in our Refining segment, is included in our I&D segment. Accordingly, all comparable periods presented have been revised to reflect the results of our oxyfuels business in our I&D segment. For additional information related to the Berre refinery and the realignment of the oxyfuels business, see Footnotes 3 and 17 to the Consolidated Financial Statements.


	Three Months Ended June 30,				Six Months Ended June 30,
Millions of dollars	2012		2011		2012		2011
Sales and other operating revenues:
O&P – Americas segment	$	3,283	$	4,010	$	6,632	$	7,582
O&P – EAI segment		3,575		4,292		7,473		8,280
I&D segment		2,285		2,536		4,770		4,867
Refining segment		3,496		3,996		6,699		6,863
Technology segment		115		126		234		265
Other, including intersegment eliminations		(1,506)		(1,654)		(2,826)		(3,171)

Total	$	11,248	$	13,306	$	22,982	$	24,686


Operating income:
O&P – Americas segment	$	700	$	508	$	1,219	$	929
O&P – EAI segment		203		203		206		378
I&D segment		390		327		760		603
Refining segment		124		258		134		416
Technology segment		30		23		68		89
Other, including intersegment eliminations		2		(9)		2		(10)

Total	$	1,449	$	1,310	$	2,389	$	2,405


Income (loss) from equity investments:
O&P – Americas segment	$	4	$	8	$	10	$	11
O&P – EAI segment		29		61		69		112
I&D segment		(6)		4		(6)		8

Total	$	27	$	73	$	73	$	131

Olefins and Polyolefins—Americas Segment

Overview—The U.S. ethylene industry continues to benefit from processing NGLs. Ethylene produced from NGLs in North America is currently lower in cost compared to that produced from crude oil-based liquids, which is the predominant feedstock used in the rest of the world.

Ethylene margins were stronger in the second quarter and first six months of 2012 compared to the second quarter and first six months of 2011 primarily due to lower prices for ethane raw materials. While polypropylene (“PP”) results in the second quarter 2012 were stronger due to higher margins, results in the first six months of 2012 were relatively unchanged compared to the same period in 2011. Polyethylene results were higher in the second quarter 2012 primarily due to higher product margins compared to the second quarter 2011, while results in the first six months of 2012 were lower than the prior year period primarily due to lower margins driven by lower average sales prices.

Ethylene Raw Materials—Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of the movement of raw material and energy costs for ethylene and its co-products in the O&P—Americas segment. Ethylene and its co-products are produced from two major raw material groups:

•

crude oil-based liquids (“liquids” or “heavy liquids”), including naphtha, condensates, and gas oils, the prices of which are generally related to crude oil prices; and

•

NGLs, principally ethane and propane, the prices of which are generally affected by natural gas prices.

Although the prices of these raw materials are generally related to crude oil and natural gas prices, during specific periods the relationships among these materials and benchmarks may vary significantly.

In the U.S., we have significant capability to shift the ratio of raw materials used in the production of ethylene and its co-products to take advantage of the relative costs of heavy liquids and NGLs.

Production economics for the U.S. industry have continued to favor NGLs throughout 2012. As a result, we have maintained our focus on maximizing the use of NGLs at our U.S. plants. Approximately 85% of our ethylene production was from NGLs during the second quarter and first six months of 2012.

During the second quarter 2011, approximately 80% of our ethylene production was from NGLs. A temporary disruption of NGLs deliveries by one of our suppliers in the first quarter 2011 modestly reduced the rate of utilization for the first six months of 2011 to approximately 75%. Based on current trends and assuming the price of crude oil remains at a high level relative to natural gas, we would expect production economics in the U.S. to continue to favor NGLs for the near and mid-term.

The following table shows the average U.S. benchmark prices for crude oil and natural gas for the applicable periods, as well as benchmark U.S. sales prices for ethylene and propylene, which we produce and sell or consume internally, and certain polyethylene and polypropylene products. The benchmark weighted average cost of ethylene production, which reflects credits for co-product sales, is based on CMAI’s estimated ratio of heavy liquid raw materials and NGLs used in U.S. ethylene production. Benchmark prices for polyethylene and polypropylene reflect discounted prices.


	Average Benchmark Price and Percent Change Versus Prior Year Period Average
	Three Months Ended June 30,						Six Months Ended June 30,
	2012		2011		Change		2012		2011		Change
Crude oil - dollars per barrel:
WTI		93.4		102.3		(9)%		98.2		98.5		(0)%
LLS		108.2		118.3		(9)%		114.0		113.2		1%
Natural gas (Henry Hub) dollars per million BTUs		2.3		4.4		(47)%		2.5		4.3		(42)%
Weighted average U.S. cost of ethylene production - cents per pound		18.4		33.8		(46)%		23.4		33.2		(29)%
United States - cents per pound:
Ethylene		46.9		57.5		(18)%		50.9		53.4		(5)%
Polyethylene (HD)		63.0		68.7		(8)%		65.0		65.2		(0)%
Propylene - polymer grade		64.2		87.3		(27)%		65.7		79.5		(17)%
Polypropylene		76.7		99.7		(23)%		78.9		94.5		(16)%

The following table sets forth the O&P—Americas segment’s sales and other operating revenues, operating income, income from equity investments and selected product sales volumes.


	Three Months Ended June 30,				Six Months Ended June 30,
Millions of dollars	2012		2011		2012		2011
Sales and other operating revenues	$	3,283	$	4,010	$	6,632	$	7,582
Operating income		700		508		1,219		929
Income from equity investments		4		8		10		11

Production Volumes, in millions of pounds
Ethylene		2,134		1,929		4,122		4,018
Propylene		615		556		1,148		1,325
Sales Volumes, in millions of pounds
Polyethylene		1,316		1,377		2,764		2,782
Polypropylene		634		611		1,284		1,196

Revenues—O&P—Americas revenues decreased by $727 million, or 18%, in the second quarter 2012 compared to the second quarter 2011, and $950 million, or 13%, in the first six months of 2012 compared to the first six months of 2011. Lower average sales prices across most products in the second quarter 2012 were responsible for a revenue decrease of 12% and lower sales volumes, primarily in olefins, resulted in a 6% decline in revenues compared to the prior year period. In the first six months of 2012, lower olefins sales volumes decreased revenue by 8% while lower sales prices resulted in a 5% decrease in revenue compared to the first six months of 2011. Sales volumes for polyolefins (polyethylene and polypropylene) in the second quarter and first six months of 2012 were comparable to those in the same periods in 2011.

Operating Income—Operating income for the O&P—Americas segment in the second quarter and first six months of 2012 increased by $192 million and $290 million, respectively, compared to the second quarter and first six months of 2011. Operating results for the second quarter 2012 included a $71 million lower of cost or market inventory valuation adjustment. This charge and the negative impact resulting from reduced production during a turnaround at our Channelview, Texas facility, were partially offset by a $29 million benefit associated with an insurance settlement related to Hurricane Ike.

The increase in results of the underlying operations of the O&P-Americas segment in the second quarter and first six months of 2012 was primarily the result of higher margins for ethylene. The higher ethylene margins reflect the price decreases for ethane and propane, which outpaced decreases in the price of ethylene. Second quarter 2012 polyethylene results were higher compared to the second quarter 2011 as the decreases in the prices of raw material, ethylene, outpaced sales price decreases. Polyethylene results in the first six months of 2012 were lower than the same period in 2011 as the volatility in pricing and raw material costs resulted in a shift of profitability from polyethylene to olefins, primarily in the first quarter 2012. Results for polypropylene were relatively unchanged in the first six months of 2012 compared to the same period in 2011.