2008 vs 2007 — Higher realized prices increased net income $1,614 million

In 2008, commodity prices reached record highs but declined significantly in the fourth quarter. WTI averaged US$99.65/bbl for the year, 38% higher than 2007, while Dated Brent increased 34% over the same period. Our average realized crude oil price increased 32% from $73.43/bbl to $96.92/bbl. During the year, NYMEX gas price increased 25% and AECO increased 23%, averaging US$8.90/mmbtu and $7.71/mcf, respectively. During the same period, our corporate average realized gas price increased 24% to $8.44/mcf, as our gas sales are primarily based off of NYMEX and AECO prices. Compared to 2007, the US dollar weakened relative to the Canadian dollar. As a result, our realized crude oil and natural gas price decreased by approximately $0.80/bbl and $0.07/mcf, respectively and our net sales were lower by approximately $56 million.

Commodity prices fell dramatically during the fourth quarter as the global economic crisis reduced demand for oil and gas. WTI averaged US$58.73/bbl for the quarter, down 50% from the previous quarter and 35% from the same period last year. Our realized average oil price was $59.90/bbl in the fourth quarter compared to $115.56/bbl in the third quarter. NYMEX gas prices also fell during the fourth quarter to average US$6.41/mcf.

Crude Oil Reference Prices

Crude oil prices were volatile in 2008, reaching an all-time high of US$147.27/bbl in mid-July, before declining to close the year at US$44.60/bbl. The increase during the first half of the year was driven by the weakened US dollar and global political tensions as well as by traditional supply and demand fundamentals. The main driver of falling prices in the second half of the year was a weak global economy following the worldwide financial crisis, which dramatically reduced demand for all commodities.

The US dollar weakened during the first half of 2008 and fell to an all-time low against the Euro as the financial markets reacted to the threat of a US recession and the global credit crisis. Investors re-directed their investments into commodity markets to hedge against the weak dollar and inflation, which contributed to the increase in oil prices.

In the second half of the year, the market’s focus moved from concerns about adequate future supply to fears of declining demand. Geopolitical events impacting global supply had minimal impact on prices as these events were overshadowed by the weak global economy and declining oil demand. Near-term oil market fundamentals weakened and year-end crude oil inventories were high relative to the last five years.

Crude Oil Differentials

In Canada, heavy crude oil differentials averaged US$20.27/bbl (20% of WTI) for the year, compared to US$23.44/bbl (32% of WTI) in 2007. Demand for heavy oil increased when BP’s Whiting refinery came back online in the first quarter of 2008. Declining Venezuelan and Mexican heavy oil production, a slower ramp up of industry oil sands production, higher demand in the summer asphalt season and the desire to run heavier crude in a low refinery margin environment all contributed to narrower differentials earlier in the year. As WTI prices declined in the fall, the heavy differential widened relative to WTI. The onset of winter and seasonally lower demand contributed to the widening differential.

The Brent/WTI differential weakened during 2008, with Brent trading at a discount of US$2.66/bbl compared to a premium of US$0.21/bbl in 2007. The WTI/Brent price differential was volatile in 2008, but WTI traded at a premium to Brent for most of the year. Higher than expected freight costs and storm displacements during the hurricane season increased the WTI premium over Brent, which peaked in November at over US$5.00/bbl. Since then, weak demand and higher Cushing inventories have depressed WTI prices and the differential narrowed late in the year.

The US Gulf Coast Mars differential widened slightly, averaging US$6.21/bbl in 2008 compared to US$5.67/bbl last year. Overall, the differential remained historically high during the year. Higher WTI inventories at Cushing in December caused the WTI/Mars differential to narrow towards the end of the year.

The Yemen Masila differential widened substantially relative to WTI during 2008, averaging US$4.31/bbl compared to US$0.50/ bbl last year. Yemen Masila traded at a discount to WTI in 2008, reflecting the impact of stronger WTI versus Brent pricing as Masila crude is typically priced off Brent.

Natural Gas Reference Prices

NYMEX natural gas prices averaged US$8.90/mmbtu in 2008, 25% higher than 2007. Higher crude oil prices, low LNG imports and lower storage levels at the end of the 2007/2008 winter withdrawal season provided support for prices in the first half of the year. Since mid-year, a weak US economy and significant supply increases in unconventional production increased inventory levels and reduced prices. Declining crude oil prices and continuing weakness in the global economy could lead to more LNG cargoes coming to North America during 2009, adding downward pressure on natural gas prices. A colder than expected 2008/2009 winter weather provided some offset to the bearish factors impacting gas prices.

2007 vs 2006 — Higher realized prices increased net income $284 million

Average WTI and Dated Brent in US dollars were 9% and 11% higher, respectively, from the prior year, and our average realized crude oil price increased 9% to $73.43/bbl. Our higher average realized price reflects the change in production mix with the addition of new high-quality Buzzard production. This change helped to offset the impact of the weaker US dollar on our Canadian dollar realized prices. Our realized natural gas price fell 5% from 2006 as a result of the stronger Canadian dollar, despite NYMEX increasing 2% in the same period. The weaker US dollar reduced net sales by approximately $225 million, and reduced our realized crude oil and natural gas prices by approximately $3.20/bbl and $0.30/mcf, respectively, as compared to 2006.