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General and Administrative (G&A) |
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(Cdn$ millions) |
2008 |
2007 |
2006 | ||
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General and Administrative Expense |
417 |
336 |
345 | ||
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Stock-Based Compensation1 |
(160) |
38 |
210 | ||
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Total |
257 |
374 |
555 | ||
2008 vs 2007 — Lower costs increased net income by $117 million
Changes in our share price create volatility in our net income as we account for stock-based compensation using the intrinsic-value method. This method uses our share price at the end of the reporting period to determine our stock-based compensation expense and related obligations. During the year, we recovered non-cash stock-based compensation costs of $272 million as our stock price closed at $21.45/share at the end of 2008, compared to $32.10/share the previous year. This recovery was partially offset by cash payments for stock-based compensation programs of $112 million, 24% lower than 2007.
G&A expense before stock-based compensation increased $81 million, primarily as a result of higher employee costs and cost inflation. An integral part of our strategy to expand our oil and gas operations has been to actively recruit experienced employees, positioning us for success in our core areas. We have been actively recruiting skilled individuals to strengthen our teams in Norway and the US.
2007 vs 2006 — Lower costs increased net income by $181 million
G&A expense dropped 33% from 2006 with lower stock-based compensation expense. At the end of 2007, our stock price closed unchanged from the end of 2006. As a result, most of our 2007 stock-based compensation expense is related to vesting of stock-based compensation plans. Cash payments to employees for stock-based compensation programs increased 24% from 2006 to $147 million.
During the year, we incurred additional employee costs as we continue to expand oil and gas operations internationally and marketing operations in Europe and North America. This was offset by lower variable compensation on oil and gas and marketing operations.
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Interest |
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(Cdn$ millions) |
2008 |
2007 |
2006 |
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Interest |
334 |
341 |
294 |
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Less: Capitalized |
(240) |
(173) |
(241) |
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Net Interest Expense |
94 |
168 |
53 |
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Effective Interest Rate |
5.9% |
6.2% |
6.3% |
2008 vs 2007 — Lower net interest expense increased net income by $74 million
Our financing costs are $7 million lower than the previous year as our strong cash flow reduced our debt needs. Lower interest rates on our variable rate debt also reduced interest costs. In the third quarter, we completed an internal reorganization and financing of our assets in the UK. This required us to draw down approximately US$1 billion under our term credit facilities. As a consequence, our financing costs increased in the fourth quarter of 2008.
Interest capitalized on our major development projects increased $67 million in 2008 compared to 2007. Our Long Lake capital costs include $207 million of capitalized interest, $49 million higher than last year. We also capitalized interest of $25 million on our Ettrick development. We continue to capitalize interest on our development project at Usan and the construction of the fourth platform at Buzzard. We expect net interest expense to increase in 2009 by approximately $150 million when we cease capitalizing interest at Long Lake and Ettrick.
2007 vs 2006 — Higher net interest expense decreased net income by $115 million
Financing costs increased $47 million from 2006. Additional borrowings to finance our 2007 capital program increased interest costs by approximately $69 million. This was partially offset by the stronger Canadian dollar which reduced our US-dollar denominated interest by $22 million.
Interest capitalized on our major development projects was lower by $68 million from 2006 as we stopped capitalizing interest on the Syncrude Stage 3 expansion and Buzzard when these projects were brought on stream.
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Income Taxes |
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(Cdn$ millions) |
2008 |
2007 |
2006 |
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Current |
859 |
434 |
368 |
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Future |
598 |
358 |
315 |
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Total Provision for Income Taxes |
1,457 |
792 |
683 |
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Effective Tax Rate |
46% |
42% |
53% |
2008 vs 2007 — Effective tax rate increases from 42% to 46%
Our provision for income taxes increased $665 million or 84% from the prior year, while our effective tax rate increased 4%. This increase was primarily due to record commodity prices and strong production at Buzzard in the UK, which has a corporate tax rate on oil and gas activities of 50%. Current income taxes include cash taxes in Yemen, the UK, Colombia, Norway and the US.
2007 vs 2006 — Effective tax rate decreases from 53% to 42%
Our 2007 effective tax rate was lower than 2006, as we recorded additional tax expense in 2006 due to a UK tax rate increase. Excluding the impact of this rate increase, our effective tax rate in 2006 would have been 33%. The 2007 increase is due to a higher proportion of earnings from the UK where the corporate income tax rate on oil and gas activities is 50%. Current income taxes include cash taxes in Yemen, the UK, Colombia and the US.
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Other |
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(Cdn$ millions) |
2008 |
2007 |
2006 |
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Increase (Decrease) in Fair Value of |
203 |
(43) |
(11) |
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Block 51 Settlement |
– |
– |
(151) |
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Business Interruption Insurance Proceeds |
– |
– |
154 |
In early 2008, we purchased put options on approximately 70,000 bbls/d of our 2009 crude oil production. These options establish a Dated Brent floor price of US$60/bbl on these volumes, are settled annually and provide a base level of price protection without limiting our upside to higher prices. Accounting rules require that these options be recorded at fair value throughout their term. As a result, changes in forward crude oil prices create gains or losses on these options at each period end. The put options were purchased for $14 million and are carried at fair value. During the third quarter of 2008, Lehman Brothers, one of the put option counterparties filed for bankruptcy protection, which impacts 25,000 bbls/d of our 2009 put options. The carrying value of these put options has been reduced to nil. At December 31, 2008, the remaining options had a fair value of $233 million, creating an unrealized gain of $203 million.
During 2007, we purchased put options on 36 million barrels of our 2008 crude oil production. These options establish a Dated Brent floor price of US$50/bbl on these volumes. The put options were purchased for $24 million; however, strong crude oil prices reduced the fair value of these options to nil, and we recorded a loss of $24 million during 2007.
During 2006, we purchased put options on approximately 105,000 bbls/d of our 2007 crude oil production for $26 million, establishing a WTI floor price of US$50/bbl on these volumes. We recognized a loss of $7 million for the year ended December 31, 2006 as an increase in the forward WTI prices lowered the fair value of the options. In 2007, strengthening WTI reduced the market value of the options to nil, creating a loss of $19 million.
Following our North Sea acquisition in late 2004, we purchased put options on 60,000 bbls/d of oil production for 2006 creating an average floor price for this production of US$38/bbl. Strong WTI prices in 2006 caused us to expense $4 million as the market value of the remaining options was reduced to nil.
In 2006, a court of arbitration concluded that we breached an Area of Mutual Interest agreement with Occidental Petroleum Corporation (Occidental). As a result, Occidental was entitled to monetary damages. In late 2006, we settled the arbitration by agreeing to pay Occidental US$135 million ($151 million) as monetary damages.
In 2006, we received $154 million of business interruption insurance proceeds related to 2005 production losses caused by Gulf of Mexico hurricanes and by generator failures in our UK operations.
