==============================================================================

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549


                                   FORM 10-Q


|X|    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
       EXCHANGE ACT OF 1934 For
       the quarterly period ended March 31, 2006

|_|    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 1-6702

                              [GRAPHIC OMITTED]

                              [LOGO - NEXEN INC.]


                     Incorporated under the Laws of Canada
                                   98-6000202
                      (I.R.S. Employer Identification No.)

                             801 - 7th Avenue S.W.
                        Calgary, Alberta, Canada T2P 3P7
                            Telephone (403) 699-4000
                          Web site - www.nexeninc.com


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,  and (2) has been subject to such filing
requirements for the past 90 days.

                   Yes  [X]                 No   [_]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.

Large accelerated filer [X]   Accelerated filer  [_]  Non-Accelerated filer [_]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

                   Yes  [_]                 No   [X]

On March 31, 2006, there were 261,674,080 common shares issued and outstanding.

===============================================================================
<PAGE>

                                   NEXEN INC.
                                     INDEX

<TABLE>
<CAPTION>
PART I            FINANCIAL INFORMATION                                                 PAGE
<S>               <C>                                                                   <C>
       Item 1.    Unaudited Consolidated Financial Statements ............................3

       Item 2.    Management's Discussion and Analysis of Financial Condition
                  and Results of Operation...............................................26

       Item 3.    Quantitative and Qualitative Disclosures about Market Risk.............45

       Item 4.    Controls and Procedures................................................45

PART II           OTHER INFORMATION

       Item 4.    Submission of Matters to a Vote of Security Holders....................46

       Item 6.    Exhibits...............................................................46
</TABLE>

This report should be read in  conjunction  with our 2005 Annual Report on Form
10-K and with our current reports on Form 8-K filed or furnished on February 17
and March 22, 2006.


SPECIAL NOTE TO CANADIAN INVESTORS

Nexen is a US Securities and Exchange  Commission  (SEC)  registrant and a Form
10-K and related forms filer. Therefore,  our reserves estimates and securities
regulatory  disclosures  generally follow SEC  requirements.  In 2004,  certain
Canadian regulatory  authorities adopted NATIONAL INSTRUMENT 51-101 - STANDARDS
OF  DISCLOSURE  FOR OIL AND GAS  ACTIVITIES  (NI 51-101) which  prescribe  that
Canadian  companies follow certain standards for the preparation and disclosure
of reserves and related  information.  We have been granted certain  exemptions
from NI 51-101.  Please refer to the SPECIAL NOTE TO CANADIAN INVESTORS on page
80 of our 2005 Annual Report on Form 10-K.


UNLESS WE INDICATE  OTHERWISE,  ALL DOLLAR AMOUNTS ($) ARE IN CANADIAN DOLLARS,
AND OIL  AND  GAS  VOLUMES,  RESERVES  AND  RELATED  PERFORMANCE  MEASURES  ARE
PRESENTED ON A  WORKING-INTEREST,  BEFORE-ROYALTIES  BASIS.  WHERE APPROPRIATE,
INFORMATION ON AN AFTER-ROYALTIES BASIS IS PRESENTED IN TABULAR FORMAT. VOLUMES
AND RESERVES INCLUDE SYNCRUDE OPERATIONS UNLESS OTHERWISE STATED.

Below is a list of terms specific to the oil and gas industry. They are used
throughout the Form 10-Q.

<TABLE>
<S>                                                <C>
/d        =   per day                              mboe    =   thousand barrels of oil equivalent
bbl       =   barrel                               mmboe   =   million barrels of oil equivalent
mbbls     =   thousand barrels                     mcf     =   thousand cubic feet
mmbbls    =   million barrels                      mmcf    =   million cubic feet
mmbtu     =   million British thermal units        bcf     =   billion cubic feet
boe       =   barrels of oil equivalent            NGL     =   natural gas liquid
                                                   WTI     =   West Texas Intermediate
</TABLE>

In this  10-Q,  we refer to oil and gas in common  units  called  barrel of oil
equivalent (boe). A boe is derived by converting six thousand cubic feet of gas
to  one  barrel  of oil (6  mcf/1  bbl).  This  conversion  may be  misleading,
particularly  if used in  isolation,  as the 6 mcf/1  bbl  ratio is based on an
energy equivalency at the burner tip and does not represent a value equivalency
at the well head.

Electronic  copies  of our  filings  with  the SEC and the  Ontario  Securities
Commission (OSC) (from November 8, 2002 onward) are available,  free of charge,
on our web site  (www.nexeninc.com).  Filings  prior to  November  8,  2002 are
available free of charge,  upon request,  by contacting our investor  relations
department at (403) 699-5931.  As soon as reasonably  practicable,  our filings
are made available on our website once they are  electronically  filed with the
SEC or the OSC.  Alternatively,  the SEC and the OSC each  maintain  a  website
(www.sec.gov  and   www.sedar.com)   that  contains  our  reports,   proxy  and
information  statements and other published information that have been filed or
furnished with the SEC and the OSC.

On March 31, 2006,  the noon-day  exchange rate was US$0.8568 for Cdn$1.00,  as
reported by the Bank of Canada.


                                       2
<PAGE>

                                     PART I


ITEM 1.  UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


                                TABLE OF CONTENTS

                                                                           Page
                                                                           ----
Unaudited Consolidated Statement of Income (Loss)
for the Three Months Ended March 31, 2006 and 2005...........................4

Unaudited Consolidated Balance Sheet
as at March 31, 2006 and December 31, 2005...................................5

Unaudited Consolidated Statement of Cash Flows
for the Three Months Ended March 31, 2006 and 2005...........................6

Unaudited Consolidated Statement of Shareholders' Equity
for the Three Months Ended March 31, 2006 and 2005...........................7

Notes to Unaudited Consolidated Financial Statements.........................8




                                       3
<PAGE>

<PAGE>
<TABLE>
<CAPTION>
NEXEN INC.
UNAUDITED CONSOLIDATED STATEMENT OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31
Cdn$ millions, except per share amounts

                                                                                                     2006          2005
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                               <C>           <C>
REVENUES AND OTHER INCOME
    Net Sales                                                                                         980           856
    Marketing and Other (Note 14)                                                                     426            67
                                                                                             ---------------------------
                                                                                                    1,406           923
                                                                                             ---------------------------
EXPENSES
    Operating                                                                                         250           213
    Depreciation, Depletion, Amortization and Impairment                                              266           239
    Transportation and Other                                                                          260           203
    General and Administrative                                                                        214           181
    Exploration                                                                                       103            27
    Interest (Note 7)                                                                                   9            34
                                                                                             ---------------------------
                                                                                                    1,102           897
                                                                                             ---------------------------

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                                 304            26
                                                                                             ---------------------------

PROVISION FOR INCOME TAXES
    Current                                                                                           109            79
    Future (Note 18)                                                                                  271           (72)
                                                                                             ---------------------------
                                                                                                      380             7
                                                                                             ---------------------------

NET INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE NON-CONTROLLING INTERESTS                         (76)           19
    Net Income Attributable to Non-Controlling Interests                                                3             -
                                                                                             ---------------------------

NET INCOME (LOSS) FROM CONTINUING OPERATIONS                                                          (79)           19
    Net Income from Discontinued Operations (Note 15)                                                   -            18

                                                                                             ---------------------------

NET INCOME (LOSS)                                                                                     (79)           37
                                                                                             ===========================

EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS ($/share)
    Basic (Note 12)                                                                                 (0.30)         0.07
                                                                                             ===========================

    Diluted (Note 12)                                                                               (0.30)         0.07
                                                                                             ===========================

EARNINGS (LOSS) PER COMMON SHARE ($/share)
    Basic (Note 12)                                                                                 (0.30)         0.14
                                                                                             ===========================

    Diluted (Note 12)                                                                               (0.30)         0.14
                                                                                             ===========================
</TABLE>


SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

                                       4
<PAGE>

<TABLE>
<CAPTION>
NEXEN INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
Cdn$ millions, except share amounts

                                                                                 March 31     December 31
                                                                                     2006            2005
-----------------------------------------------------------------------------------------------------------
<S>                                                                            <C>             <C>
ASSETS
    CURRENT ASSETS
      Cash and Cash Equivalents                                                       30              48
      Restricted Cash                                                                124              70
      Accounts Receivable (Note 3)                                                 2,374           3,151
      Inventories and Supplies (Note 4)                                              651             504
      Other                                                                           42              51
                                                                          ----------------------------------
         Total Current Assets                                                      3,221           3,824
                                                                          ----------------------------------

    PROPERTY, PLANT AND EQUIPMENT
      Net of Accumulated Depreciation, Depletion, Amortization and
         Impairment of $5,705 (December 31, 2005 - $5,468)                        10,011           9,594
    FUTURE INCOME TAX ASSETS                                                         562             410
    DEFERRED CHARGES AND OTHER ASSETS (Note 5)                                       325             398
    GOODWILL                                                                         379             364
                                                                          ----------------------------------

                                                                                  14,498          14,590
                                                                          ==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
    CURRENT LIABILITIES
      Short-Term Borrowings (Note 7)                                                  36               -
      Accounts Payable and Accrued Liabilities                                     3,274           3,710
      Accrued Interest Payable                                                        39              55
      Dividends Payable                                                               13              13
                                                                          ----------------------------------
         Total Current Liabilities                                                 3,362           3,778
                                                                          ----------------------------------

    LONG-TERM DEBT (Note 7)                                                        3,691           3,687
    FUTURE INCOME TAX LIABILITIES                                                  2,385           1,960
    ASSET RETIREMENT OBLIGATIONS (Note 8)                                            605             590
    DEFERRED CREDITS AND OTHER LIABILITIES (Note 9)                                  429             479
    NON-CONTROLLING INTERESTS (Note 2)                                                85              88

    SHAREHOLDERS' EQUITY (Note 11)
      Common Shares, no par value
        Authorized:        Unlimited
        Outstanding:       2006 - 261,674,080 shares
                           2005 - 261,140,571 shares                                 763             732
      Contributed Surplus                                                              2               2
      Retained Earnings                                                            3,343           3,435
      Cumulative Foreign Currency Translation Adjustment                            (167)           (161)
                                                                          ----------------------------------
         Total Shareholders' Equity                                                3,941           4,008
                                                                          ----------------------------------

COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 16)
                                                                                  14,498          14,590
                                                                          ==================================
</TABLE>


SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

                                       5
<PAGE>

<TABLE>
<CAPTION>
NEXEN INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31
Cdn$ millions

                                                                                                     2006          2005
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>             <C>
 OPERATING ACTIVITIES
    Net Income (Loss) from Continuing Operations                                                     (79)            19
    Net Income from Discontinued Operations                                                            -             18
    Charges and Credits to Income not Involving Cash (Note 13)                                       668            473
    Exploration Expense                                                                              103             27
    Changes in Non-Cash Working Capital (Note 13)                                                     73            (53)
    Other                                                                                            (31)           (42)
                                                                                            ----------------------------
                                                                                                     734            442

FINANCING ACTIVITIES
    Proceeds from (Repayment of) Term Credit Facilities, Net                                          (4)           138
    Proceeds from Long-Term Debt                                                                       -          1,253
    Repayment of Long-Term Debt                                                                        -         (1,241)
    Proceeds from (Repayment of) Short-Term Borrowings, Net                                           35            (10)
    Dividends on Common Shares                                                                       (13)           (13)
    Issue of Common Shares                                                                            13             32
    Other                                                                                             (7)           (16)
                                                                                            ----------------------------
                                                                                                      24            143

INVESTING ACTIVITIES
    Capital Expenditures
      Exploration and Development                                                                   (719)          (594)
      Proved Property Acquisitions                                                                    (3)            (1)
      Chemicals, Corporate and Other                                                                 (31)            (4)
    Proceeds on Disposition of Assets                                                                  -              2
    Changes in Restricted Cash                                                                       (54)             -
    Changes in Non-Cash Working Capital (Note 13)                                                     23            (14)
    Other                                                                                              7             16
                                                                                            ----------------------------
                                                                                                    (777)          (595)


EFFECT OF EXCHANGE RATE CHANGES ON CASH
    AND CASH EQUIVALENTS                                                                               1              7
                                                                                            ----------------------------

DECREASE IN CASH AND CASH EQUIVALENTS                                                                (18)            (3)

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                                                       48             73
                                                                                            ----------------------------

CASH AND CASH EQUIVALENTS - END OF PERIOD                                                             30             70
                                                                                            ============================
</TABLE>


SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

                                       6
<PAGE>

<TABLE>
<CAPTION>
NEXEN INC.
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31
Cdn$ millions

                                                                                          2006         2005
-------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>          <C>
COMMON SHARES
    Balance at January 1                                                                   732          637
    Issue of Common Shares                                                                   5           15
    Exercise of Stock Options                                                                8           17
    Previously Recognized Liability Relating to Stock Options Exercised                     18           15
                                                                                   -------------------------
    Balance at March 31                                                                    763          684
                                                                                   =========================

CONTRIBUTED SURPLUS
    Balance at January 1                                                                     2            -
    Stock-Based Compensation Expense                                                         -            1
                                                                                   -------------------------
    Balance at March 31                                                                      2            1
                                                                                   =========================

RETAINED EARNINGS
    Balance at January 1                                                                 3,435        2,335
    Net Income (Loss)                                                                      (79)          37
    Dividends on Common Shares                                                             (13)         (13)
                                                                                   -------------------------
    Balance at March 31                                                                  3,343        2,359
                                                                                   =========================

CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT
    Balance at January 1                                                                  (161)        (105)
    Translation Adjustment, Net of Income Taxes                                             (6)          10
                                                                                   -------------------------
    Balance at March 31                                                                   (167)         (95)
                                                                                   =========================
</TABLE>




SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

                                       7
<PAGE>

NEXEN INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Cdn$ millions except as noted


1.   ACCOUNTING POLICIES

Our Unaudited  Consolidated  Financial  Statements  are prepared in accordance
with Canadian Generally Accepted  Accounting  Principles (GAAP). The impact of
significant  differences  between  Canadian and United States (US) GAAP on the
Unaudited  Consolidated  Financial  Statements is disclosed in Note 20. In the
opinion of management, the Unaudited Consolidated Financial Statements contain
all adjustments of a normal and recurring  nature  necessary to present fairly
Nexen Inc.'s (Nexen,  we or our) financial  position at March 31, 2006 and the
results of our  operations and our cash flows for the three months ended March
31, 2006 and 2005.

We make estimates and assumptions  that affect the reported  amounts of assets
and  liabilities  and disclosure of contingent  assets and  liabilities at the
date of the  Unaudited  Consolidated  Financial  Statements,  and revenues and
expenses during the reporting period.  Our management reviews these estimates,
including  those  related to  accruals,  litigation,  environmental  and asset
retirement obligations,  income taxes and determination of proved reserves, on
an ongoing  basis.  Changes in facts and  circumstances  may result in revised
estimates and actual results may differ from these  estimates.  The results of
operations  and cash flows for the three  months  ended March 31, 2006 are not
necessarily  indicative  of the  results  of  operations  or cash  flows to be
expected for the year ending December 31, 2006.

The note disclosure  requirements for annual consolidated financial statements
provide  additional  disclosure  to that  required  for  interim  consolidated
financial  statements.  Accordingly,  these Unaudited  Consolidated  Financial
Statements  should  be read  in  conjunction  with  our  Audited  Consolidated
Financial  Statements  included  in our 2005 Annual  Report on Form 10-K.  The
accounting  policies  we  follow  are  described  in  Note  1 of  the  Audited
Consolidated  Financial  Statements included in our 2005 Annual Report on Form
10-K.

RECLASSIFICATION
Certain  comparative figures have been reclassified to ensure consistency with
current period presentation.


2.   CANEXUS INCOME FUND

In June 2005, our board of directors approved a plan to monetize our chemicals
operations  through the  creation of an income trust and the issuance of trust
units in an initial public  offering.  This initial public  offering closed on
August 18, 2005,  with Canexus Income Fund (Canexus)  issuing 30 million units
at a price of $10 per unit for gross  proceeds of $300 million ($284  million,
net of underwriters' commissions).

Concurrent with the closing of the offering, Canexus acquired a 36.5% interest
in Canexus  Limited  Partnership  (Canexus LP) using the net proceeds from the
initial public offering.  Canexus LP acquired Nexen's  chemicals  business for
approximately $1 billion,  comprised of the net proceeds from Canexus' initial
public  offering  and $200  million  (US$167  million) of bank debt,  plus the
issuance of 52.3 million  exchangeable limited partnership units (Exchangeable
LP Units) of Canexus LP. At that time, the Exchangeable LP Units held by Nexen
represented a 63.5% interest in Canexus LP.

The  Exchangeable  LP Units held by Nexen are  exchangeable  on a  one-for-one
basis for trust units of Canexus. As a result, the Exchangeable LP Units owned
by Nexen were  exchangeable  into 52.3 million  trust units which  represented
63.5% of the  outstanding  trust  units of Canexus  assuming  exchange  of the
Exchangeable LP Units.

On September 16, 2005, the underwriters of the initial public offering exercised
a portion of their over-allotment option to purchase 1.75 million trust units at
$10 per unit for gross proceeds of $18 million ($17 million, net of
underwriters' commissions). As a result, Nexen exchanged 1.75 million of its
Exchangeable LP Units for $17 million in net proceeds. After this exchange,
Nexen has a 61.4% interest in Canexus LP represented by 50.5 million
Exchangeable LP Units. The initial public offering, together with the exercise
of the over-allotment, resulted in total net proceeds to Nexen of $301 million.

These  transactions  diluted our interest in our  chemicals  operations.  As a
result of this  dilution,  we recorded a gain of $193 million during the third
quarter of 2005.


                                       8
<PAGE>

We have the  right to  nominate  a  majority  of the  members  of the board of
Canexus  Limited,  the  corporation  with  responsibility  for  the  strategic
management  and  operational  decisions  of Canexus and Canexus LP.  Nexen has
nominated two representatives to the 10-member board of Canexus Limited. Since
we have retained  effective  control of our chemicals  business,  the results,
assets and  liabilities of this business have been included in these financial
statements.  The non-Nexen  ownership  interests in our chemicals business are
shown as non-controlling interests.

During  the  quarter,  $7  million  of  distributions  were paid to  non-Nexen
ownership interests.

3.   ACCOUNTS RECEIVABLE

<TABLE>
<CAPTION>
                                                                                                    March 31      December 31
(Cdn$ millions)                                                                                         2006             2005
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>           <C>
Trade
    Marketing                                                                                           1,652          2,400
    Oil and Gas                                                                                           565            614
    Chemicals and Other                                                                                    72             48
                                                                                               -------------------------------
                                                                                                        2,289          3,062
Non-Trade                                                                                                  92             96
                                                                                               -------------------------------
                                                                                                        2,381          3,158
Allowance for Doubtful Accounts                                                                            (7)            (7)
                                                                                               -------------------------------
Total                                                                                                   2,374          3,151
                                                                                               ===============================
</TABLE>

4.   INVENTORIES AND SUPPLIES

<TABLE>
<CAPTION>
                                                                                                    March 31      December 31
(Cdn$ millions)                                                                                         2006             2005
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>           <C>
Finished Products
    Marketing                                                                                             468            320
    Oil and Gas                                                                                             1             11
    Chemicals and Other                                                                                    11             15
                                                                                               -------------------------------
                                                                                                          480            346
Work in Process                                                                                             6              6
Field Supplies                                                                                            165            152
                                                                                               -------------------------------
Total                                                                                                     651            504
                                                                                               ===============================
</TABLE>

5.   DEFERRED CHARGES AND OTHER ASSETS

<TABLE>
<CAPTION>
                                                                                                    March 31      December 31
(Cdn$ millions)                                                                                         2006             2005
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>           <C>
Long-Term Marketing Derivative Contracts (Note 10)                                                        181            232
Deferred Financing Costs                                                                                   62             63
Asset Retirement Remediation Fund                                                                          14             14
Crude Oil Put Options                                                                                       -              4
Other                                                                                                      68             85
                                                                                               -------------------------------
Total                                                                                                     325            398
                                                                                               ===============================
</TABLE>

6.   SUSPENDED WELL COSTS

The following  table shows the changes in capitalized  exploratory  well costs
included in property,  plant and equipment during the three month period ended
March 31,  2006 and the year ended  December  31,  2005,  and does not include
amounts that were initially  capitalized and subsequently expensed in the same
period.

<TABLE>
<CAPTION>
                                                                                                    March 31      December 31
(Cdn$ millions)                                                                                         2006             2005
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>           <C>
Balance at Beginning of Period                                                                          252               116
    Additions to Capitalized Exploratory Well Costs Pending the
      Determination of Proved Reserves                                                                   64               174
    Capitalized Exploratory Well Costs Charged to Expense                                               (33)              (27)
    Transfers to Wells, Facilities and Equipment Based on
      Determination of Proved Reserves                                                                    -                (3)
    Effects of Foreign Exchange                                                                           -                (8)
                                                                                               -------------------------------
Balance at End of Period                                                                                283               252
                                                                                               ===============================
</TABLE>

                                       9
<PAGE>

The  following  table shows the aging of  capitalized  exploratory  well costs
based on the date  drilling was completed and the number of projects for which
exploratory  well costs have been  capitalized  for a period  greater than one
year since the completion of drilling.

<TABLE>
<CAPTION>
                                                                                                    March 31      December 31
(Cdn$ millions)                                                                                         2006             2005
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>           <C>
    Capitalized for a Period of One Year or Less                                                          182            165
    Capitalized for a Period of Greater than One Year                                                     101             87
                                                                                               -------------------------------
Balance at End of Period                                                                                  283            252
                                                                                               ===============================
Number of Projects that have Exploratory Well Costs Capitalized for a Period
    Greater than One Year                                                                                   4              3
                                                                                               -------------------------------
</TABLE>

As at March 31, 2006, we have exploratory costs that have been capitalized for
more than one year relating to our interest in an exploratory block,  offshore
Nigeria ($68 million),  our interest in two exploratory  blocks in the Gulf of
Mexico ($17  million) and coal bed methane  exploratory  activities  in Canada
($16 million).  Exploratory  costs offshore Nigeria were first  capitalized in
1998 and we have subsequently  drilled a further seven successful wells on the
block.  The joint  venture  partners  have  finalized  pre-development  design
studies and have submitted a field  development plan for government  approval.
Drilling  activity has resumed and an  appraisal  and  exploration  program is
currently in progress.  When final regulatory approvals have been received and
the  project  has been  sanctioned,  we will  book  proved  reserves.  We have
capitalized  costs related to successful  wells drilled in 2004, 2005 and 2006
in the Gulf of Mexico,  and in Canada,  we have capitalized  exploratory costs
relating to our coal bed methane projects.  We are currently  assessing all of
these  wells and  projects,  and we are working  with our  partners to prepare
development plans.

7.   LONG-TERM DEBT AND SHORT-TERM BORROWINGS

<TABLE>
<CAPTION>
                                                                                                    March 31      December 31
(Cdn$ millions)                                                                                         2006             2005
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>           <C>
Canexus LP Term Credit Facilities (US$147 million drawn)                                                   172            171
Term Credit Facilities                                                                                       -              -
Debentures, due 2006 (1)                                                                                    92             93
Medium-Term Notes, due 2007                                                                                150            150
Medium-Term Notes, due 2008                                                                                125            125
Notes, due 2013 (US$500 million)                                                                           584            583
Notes, due 2015 (US$250 million)                                                                           292            292
Notes, due 2028 (US$200 million)                                                                           233            233
Notes, due 2032 (US$500 million)                                                                           584            583
Notes, due 2035 (US$790 million)                                                                           922            921
Subordinated Debentures, due 2043 (US$460 million)                                                         537            536
                                                                                               -------------------------------
                                                                                                         3,691          3,687
                                                                                               ===============================
</TABLE>

Note:
(1)  Includes $50 million of principal that was effectively  converted through
     a currency exchange contract to US$37 million.

(a)  INTEREST EXPENSE

<TABLE>
<CAPTION>
                                                                                                            Three Months
                                                                                                           Ended March 31
(Cdn$ millions)                                                                                         2006             2005
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>           <C>
Long-Term Debt                                                                                             62             62
Other                                                                                                       4              5
                                                                                               -------------------------------
                                                                                                           66             67
   Less: Capitalized                                                                                      (57)           (33)
                                                                                               -------------------------------
Total                                                                                                       9             34
                                                                                               ===============================
</TABLE>

Capitalized interest relates to and is included as part of the cost of our oil
and gas and Syncrude  properties.  The  capitalization  rates are based on our
weighted-average cost of borrowings.

(b)  SHORT-TERM BORROWINGS

Nexen has  uncommitted,  unsecured  credit  facilities of  approximately  $732
million, of which $36 million was drawn at March 31, 2006 (December 31, 2005 -
nil). We have utilized $173 million of these facilities to support outstanding

                                      10
<PAGE>

letters  of  credit at March  31,  2006  (December  31,  2005 - $468  million)
principally  relating  to our  marketing  business.  Interest  is  payable  at
floating  rates.  During the first three months of 2006, the weighted  average
interest rate on our short-term borrowings was 4.8% (2005 - 3.6%).

(c)  TERM CREDIT FACILITIES

We have committed unsecured, term credit facilities of $2.4 billion, which are
available to 2010.  The lenders  have the option to extend the term  annually.
Borrowings are available as Canadian bankers' acceptances,  LIBOR-based loans,
Canadian  prime loans,  US-dollar  base rate loans or British pound  call-rate
loans.  Interest is payable monthly at floating rates.  During the first three
months  of  2006,  the  weighted  average  interest  rate on our  term  credit
facilities  was 5.2% (2005 - 4.4%).  At March 31, 2006,  $142 million of these
facilities were utilized to support  outstanding  letters of credit  (December
31, 2005 - $250 million) principally relating to our marketing business.

8.   ASSET RETIREMENT OBLIGATIONS

Changes in carrying  amounts of the asset  retirement  obligations  associated
with our  property,  plant and  equipment for the three months ended March 31,
2006 and the year ended December 31, 2005, are as follows:

<TABLE>
<CAPTION>
                                                                   March 31      December 31
(Cdn$ millions)                                                        2006             2005
---------------------------------------------------------------------------------------------
<S>                                                                <C>           <C>
Balance at Beginning of Period                                         611             468
    Obligations Assumed with Development Activities                      9              72
    Obligations Discharged with Disposed Properties                      -             (37)
    Expenditures Made on Asset Retirements                              (3)            (34)
    Accretion                                                            9              26
    Revisions to Estimates                                              (3)            138
    Effects of Foreign Exchange                                          3             (22)
                                                              -------------------------------
Balance at End of Period (1,2)                                         626             611
                                                              ===============================
</TABLE>

Notes:
(1)  Obligations due within 12 months of $21 million  (December 31, 2005 - $21
     million) have been included in accounts payable and accrued liabilities.
(2)  Obligations relating to our oil and gas activities amount to $579 million
     (December  31,  2005 - $564  million)  and  obligations  relating  to our
     chemicals  business  amount  to  $47  million  (December  31,  2005 - $47
     million).


Our total estimated undiscounted asset retirement obligations amount to $1,497
million  (December 31, 2005 - $1,471  million).  We have  discounted the total
estimated   asset   retirement    obligations   using   a    weighted-average,
credit-adjusted  risk-free rate of 5.7%. Approximately $85 million included in
our asset retirement obligations will be settled over the next five years. The
remaining  obligations  settle  beyond five years and will be funded by future
cash flows from our operations.

In connection  with the sale of our chemicals  business to Canexus LP, we have
contributed $14 million to a remediation  fund to be used for asset retirement
obligations associated with the assets sold. This is included on our Unaudited
Consolidated Balance Sheet as part of deferred charges and other assets.

We own  interests  in assets for which the fair value of the asset  retirement
obligations cannot be reasonably  determined because the assets currently have
an  indeterminate  life and we cannot  determine when  remediation  activities
would take place. These assets include our interest in Syncrude's upgrader and
sulphur  pile.  The  estimated  future  recoverable  reserves at Syncrude  are
significant  and given the long life of this asset, we are unable to determine
when asset retirement activities would take place.  Furthermore,  the Syncrude
plant can continue to run indefinitely  with ongoing  maintenance  activities.
The retirement obligations for these assets will be recorded in the first year
in which the lives of the assets are determinable.

9.   DEFERRED CREDITS AND OTHER LIABILITIES

<TABLE>
<CAPTION>
                                                                   March 31      December 31
(Cdn$ millions)                                                        2006             2005
---------------------------------------------------------------------------------------------
<S>                                                                <C>           <C>
Fixed Price Natural Gas Contracts (Note 10)                             107              128
Long Term Marketing Derivative Contracts (Note 10)                      101              124
Deferred Transportation                                                  89               87
Stock-Based Compensation Liability                                       34               53
Defined Benefit Pension Obligation                                       41               39
Other                                                                    57               48
                                                              -------------------------------
Total                                                                   429              479
                                                              ===============================
</TABLE>

                                      11
<PAGE>

10.  DERIVATIVE INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

(a)  CARRYING VALUE AND ESTIMATED FAIR VALUE OF DERIVATIVE AND FINANCIAL
     INSTRUMENTS

The  carrying  value,  fair  value,  and  unrecognized  gains or losses on our
outstanding derivatives and long-term financial assets and liabilities are:

<TABLE>
<CAPTION>
(Cdn$ millions)                                                MARCH 31, 2006                        DECEMBER 31, 2005
--------------------------------------------------------------------------------------     -----------------------------------
                                                  Carrying       Fair    Unrecognized      Carrying     Fair     Unrecognized
                                                     Value      Value     Gain/(Loss)         Value    Value      Gain/(Loss)
                                                 ---------- ---------- ---------------     --------- -------- ----------------
<S>                                               <C>         <C>        <C>               <C>         <C>       <C>

Commodity Price Risk
    Non-Trading Activities
      Crude Oil Put Options                              -         -               -              4        4              -
      Fixed Price Natural Gas Contracts               (138)     (138)              -           (175)    (175)             -
      Natural Gas Swaps                                  5         5               -             29       29              -

    Trading Activities
      Crude Oil and Natural Gas                        209       209                -           161      161              -
      Future Sale of Gas Inventory                       -        (4)              (4)            -      (35)            (35)

Foreign Currency Risk
    Non-Trading Activities                              11        11                -            14       14              -
    Trading Activities                                   4         4                -             8        8              -
                                                 -------------------------------------     -----------------------------------
Total Derivatives                                       91        87               (4)           41        6            (35)
                                                 =====================================     ===================================

Financial Assets and Liabilities
      Long-Term Debt                                (3,691)   (3,773)             (82)       (3,687)   (3,863)         (176)
                                                 =====================================     ===================================
</TABLE>

The  estimated  fair value of all  derivative  instruments  is based on quoted
market prices and, if not available,  on estimates from third-party brokers or
dealers.  The carrying value of cash and cash  equivalents,  restricted  cash,
amounts  receivable and short-term  obligations  approximates their fair value
because the instruments are near maturity.

(b)  COMMODITY PRICE RISK MANAGEMENT

NON-TRADING ACTIVITIES

We generally sell our crude oil and natural gas under short-term  market based
contracts.

CRUDE OIL PUT OPTIONS
We  purchased  WTI crude oil put  options to manage the  commodity  price risk
exposure of a portion of our oil  production  in 2005 and 2006.  These options
establish an annual average WTI floor price of US$43/bbl in 2005 and US$38/bbl
in 2006 at a cost of $144 million. The 2005 WTI crude oil put options were not
used and have  expired.  The 2006 WTI crude oil put options are stated at fair
value on our balance sheet.  Any change in fair value is included in marketing
and other on the Unaudited Consolidated Statement of Income (Loss).

<TABLE>
<CAPTION>
                                                Notional                                        Average                  Fair
                                                 Volumes                    Term                  Price                 Value
------------------------------------------------------------------------------------------------------------------------------
                                                (bbls/d)                                       (US$/bbl)       (Cdn$ millions)

<S>                                             <C>                        <C>                 <C>             <C>
WTI Crude Oil Put Options                         30,000                    2006                     39                     -
                                                  20,000                    2006                     38                     -
                                                  10,000                    2006                     36                     -
                                                                                                               ---------------
                                                                                                                            -
                                                                                                               ===============
</TABLE>

                                      12
<PAGE>

FIXED-PRICE NATURAL GAS CONTRACTS AND NATURAL GAS SWAPS
In July and August 2005, we sold certain  Canadian oil and gas  properties and
we retained  fixed-price  natural  gas sales  contracts  that were  previously
associated with those properties.  Since these contracts are no longer used in
the   normal   course  of  our  oil  and  gas   operations,   they  have  been
marked-to-market and are included in the Unaudited Consolidated Balance Sheet.
Any change in fair value is included in Marketing  and Other in the  Unaudited
Consolidated Statement of Income (Loss).

<TABLE>
<CAPTION>
                                                Notional                                        Average                  Fair
                                                 Volumes                    Term                  Price                 Value
------------------------------------------------------------------------------------------------------------------------------
                                                   (Gj/d)                                         ($/Gj)       (Cdn$ millions)

<S>                                             <C>                  <C>                    <C>                 <C>
Fixed-Price Natural Gas Contracts                 22,034                    2006            2.28 - 3.72                   (31)
                                                  15,514             2007 - 2010            2.47 - 2.77                  (107)
                                                                                                               ---------------
                                                                                                                         (138)
                                                                                                               ===============
</TABLE>

Following the sale of the Canadian oil and gas properties, we entered into
natural gas swaps to economically hedge our exposure to the fixed-price natural
gas sales contracts. Any change in fair value is included in Marketing and Other
in the Unaudited Consolidated Statement of Income (Loss).

<TABLE>
<CAPTION>
                                                Notional                                        Average                  Fair
                                                 Volumes                    Term                  Price                 Value
------------------------------------------------------------------------------------------------------------------------------
                                                   (Gj/d)                                         ($/Gj)       (Cdn$ millions)

<S>                                             <C>                <C>                     <C>                 <C>
Natural Gas Swaps                                 22,034                    2006           9.02 - 11.81                   (12)
                                                  15,514             2007 - 2010                   7.45                    17
                                                                                                               ---------------
                                                                                                                            5
                                                                                                               ===============
</TABLE>

TRADING ACTIVITIES

CRUDE OIL AND NATURAL GAS
We enter into  physical  purchase  and sales  contracts  as well as  financial
commodity contracts to enhance our price realizations and lock in our margins.
The physical and financial  commodity  contracts  (derivative  contracts)  are
stated  at  market  value.  The $209  million  fair  value  of the  derivative
contracts at March 31, 2006 is included in the Unaudited  Consolidated Balance
Sheet and any  change is  included  in  Marketing  and Other in the  Unaudited
Consolidated Statement of Income (Loss).

FUTURE SALE OF GAS INVENTORY
We have certain NYMEX futures contracts and swaps in place,  which effectively
lock in our  margins  on the  future  sale of our  natural  gas  inventory  in
storage. We have designated, in writing, some of these derivative contracts as
cash flow  hedges of the future sale of our  storage  inventory.  As a result,
gains  and  losses  on  these  designated  futures  contracts  and  swaps  are
recognized in net income when the inventory in storage is sold.  The principal
terms of these outstanding  contracts and the unrecognized losses at March 31,
2006 are:

<TABLE>
<CAPTION>
                                                                   Hedged                            Average     Unrecognized
                                                                  Volumes              Month           Price             Loss
------------------------------------------------------------------------------------------------------------------------------
                                                                   (mmcf)                           (US$/mcf)  (Cdn$ millions)

<S>                                                               <C>           <C>                 <C>         <C>
NYMEX Natural Gas Futures                                          11,000       January 2007           10.42               (4)
                                                                                                              ----------------
                                                                                                                           (4)
                                                                                                              ================
</TABLE>

(c)  FOREIGN CURRENCY EXCHANGE RATE RISK MANAGEMENT

NON-TRADING ACTIVITIES

<TABLE>
<CAPTION>
                                                                                                                         Fair
                                                                     Amount             Term            Rate            Value
------------------------------------------------------------------------------------------------------------------------------
                                                                                               (for US$1.00)   (Cdn$ millions)

<S>                                                 <C>                               <C>          <C>                  <C>
Foreign Currency Call Options - Buzzard (i)              (pound)102 million             2006            2.00                -
US Dollar Call Options - Canexus (ii)                US$9.5 million monthly             2006           0.813                3
Foreign Currency Swap (iii)                                   US$37 million             2006           0.736                8
                                                                                                              ----------------
                                                                                                                           11
                                                                                                              ================
</TABLE>

(i)  FOREIGN CURRENCY CALL OPTIONS - BUZZARD
Our  Buzzard  development  project in the North Sea creates  foreign  currency
exposure as a portion of the capital costs are  denominated  in British pounds
and Euros. To reduce our exposure to fluctuations in these currencies relative

                                      13
<PAGE>

to the US dollar,  we purchased  foreign  currency call options in early 2005,
which effectively set a ceiling on most of our British pound and Euro spending
exposure from March 2005 through to the end of 2006.  Any change in fair value
is included in marketing and other in the Unaudited  Consolidated Statement of
Income (Loss).

(ii) US DOLLAR CALL OPTIONS - CANEXUS
The  operations  of Canexus are exposed to changes in the  US-dollar  exchange
rate as a portion of its sales are  denominated  in US dollars.  In connection
with the initial  public  offering of Canexus,  we  purchased  US-dollar  call
options to reduce this  exposure to  fluctuations  in the  Canadian-US  dollar
exchange  rate.  Canexus  has the right to sell  US$9.5  million  monthly  and
purchase  Canadian  dollars at an exchange rate of US$0.813 until August 2006.
Any change in fair value is included in marketing  and other in the  Unaudited
Consolidated Statement of Income (Loss).

On April 3, 2006,  Canexus  purchased  additional  US-dollar  foreign exchange
options.  Under the new options contract,  Canexus has the right to sell US $5
million monthly and purchase  Canadian  dollars at an exchange rate of US$0.85
for the period August 16, 2006 to January 10, 2007.

(iii) FOREIGN CURRENCY SWAP
We occasionally use derivative  instruments to effectively  convert cash flows
from  Canadian  to US dollars  and vice versa.  At March 31,  2006,  we held a
foreign currency derivative  instrument that obligates us and the counterparty
to exchange  principal  and interest  amounts.  In November  2006, we will pay
US$37 million and receive Cdn$50 million. Any change in fair value is included
in  marketing  and other in the  Unaudited  Consolidated  Statement  of Income
(Loss).


TRADING ACTIVITIES

Our sales and purchases of crude oil and natural gas are generally  transacted
in or  referenced  to the US dollar,  as are most of the  financial  commodity
contracts used by our marketing group. We enter into forward contracts to sell
US dollars.  When  combined with certain  commodity  sales  contracts,  either
physical or financial, these forward contracts allow us to lock in our margins
on the future sale of crude oil and natural  gas. The $4 million fair value of
our US dollar forward contracts at March 31, 2006 is included in the Unaudited
Consolidated  Balance Sheet. Any change in fair value is included in marketing
and other in the Unaudited Consolidated Statement of Income (Loss).

(d) TOTAL CARRYING VALUE OF DERIVATIVE CONTRACTS RELATED TO TRADING ACTIVITIES

Amounts  related to derivative  contracts held by our marketing  operation are
equal to fair value as we use  mark-to-market  accounting.  The amounts are as
follows:

                                                       March 31   December 31
(Cdn$ millions)                                            2006          2005
------------------------------------------------------------------------------
Accounts Receivable                                         348           382
Deferred Charges and Other Assets (1)                       181           232
                                                    --------------------------
    Total Derivative Contract Assets                        529           614
                                                    ==========================

Accounts Payable and Accrued Liabilities                    215           321
Deferred Credits and Other Liabilities (1)                  101           124
                                                    --------------------------
    Total Derivative Contract Liabilities                   316           445
                                                    ==========================

    Total Derivative Contract Net Assets (2)                213           169
                                                    ==========================

Note:
(1)  These  derivative  contracts  settle beyond 12 months and are  considered
     non-current.
(2)  Comprised  of $209  million  (2005 - $161  million)  related to commodity
     contracts and $4 million (2005 - $8 million) related to US-dollar forward
     contracts and swaps.

Our  exchange-traded  derivative  contracts  are  subject  to  margin  deposit
requirements.  We are required to advance cash to  counterparties  in order to
satisfy  these  requirements.  We have margin  deposits of US$63  million ($73
million) at March 31, 2006 (December 31, 2005 - nil), which have been included
with restricted cash on our Unaudited Consolidated Balance Sheet.


11.  SHAREHOLDERS' EQUITY

DIVIDENDS
Dividends  per common  share for the three  months  ended  March 31, 2006 were
$0.05 (2005 - $0.05).

                                      14
<PAGE>

12.  EARNINGS PER COMMON SHARE

Our shareholders  approved a split of our issued and outstanding common shares
on a  two-for-one  basis at our annual and special  meeting on April 27, 2005.
All  common  share  and  per  common  share  amounts  have  been  restated  to
retroactively reflect this share split.

We calculate basic earnings per common share from continuing  operations using
net income from continuing  operations divided by the weighted-average  number
of common shares  outstanding.  We calculate  basic  earnings per common share
using net income and the weighted-average number of common shares outstanding.
We calculate diluted earnings per common share from continuing  operations and
diluted  earnings per common share in the same manner as basic,  except we use
the  weighted-average  number of  diluted  common  shares  outstanding  in the
denominator.

<TABLE>
<CAPTION>
                                                                                                 Three Months
                                                                                                Ended March 31
(millions of shares)                                                                         2006             2005
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>              <C>
Weighted-Average Number of Common Shares Outstanding                                        261.6            259.4
Shares Issuable Pursuant to Stock Options                                                       -             14.8
Notional Shares to be Purchased from Proceeds of Stock Options                                  -            (10.7)
                                                                                     ------------------------------
Weighted-Average Number of Diluted Common Shares Outstanding                                261.6            263.5
                                                                                     ==============================
</TABLE>

In  calculating   the   weighted-average   number  of  diluted  common  shares
outstanding  for the three  months  ended March 31,  2006,  all  options  were
excluded  because  they  have an  anti-dilutive  impact  on the loss per share
amounts. In calculating the  weighted-average  number of diluted common shares
outstanding  for the three  months  ended March 31,  2005,  all  options  were
included  because their  exercise  price was less than the  quarterly  average
common  share  market  price in the  period.  During  the  periods  presented,
outstanding  stock options were the only potential  dilutive or  anti-dilutive
instruments.


13.  CASH FLOWS

(a)  CHARGES AND CREDITS TO INCOME NOT INVOLVING CASH

<TABLE>
<CAPTION>
                                                                                                Three Months
                                                                                               Ended March 31
(Cdn$ millions)                                                                              2006          2005
-----------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>           <C>
Depreciation, Depletion, Amortization and Impairment                                          266           239
Stock-Based Compensation                                                                      102           100
Future Income Taxes                                                                           271           (72)
Change in Fair Value of Crude Oil Put Options                                                   4           173
Non-Cash Items included in Discontinued Operations                                              -            30
Net Income Attributable to Non-Controlling Interests                                            3             -
Other                                                                                          22             3
                                                                                     ----------------------------
Total                                                                                         668           473
                                                                                     ============================
</TABLE>

(b)  CHANGES IN NON-CASH WORKING CAPITAL

<TABLE>
<CAPTION>
                                                                                                  Three Months
                                                                                                Ended March 31
(Cdn$ millions)                                                                              2006            2005
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>              <C>
   Accounts Receivable                                                                        829              67
   Inventories and Supplies                                                                  (150)            (99)
   Other Current Assets                                                                         5               4
   Accounts Payable and Accrued Liabilities                                                  (571)            (45)
   Accrued Interest Payable                                                                   (17)              6
                                                                                     ------------------------------
Total                                                                                          96             (67)
                                                                                     ==============================

Relating to:
   Operating Activities                                                                        73             (53)
   Investing Activities                                                                        23             (14)
                                                                                     ------------------------------
Total                                                                                          96             (67)
                                                                                     ==============================
</TABLE>

                                      15
<PAGE>

(c)  OTHER CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                        Three Months
                                                                       Ended March 31
(Cdn$ millions)                                                     2006            2005
------------------------------------------------------------------------------------------
<S>                                                               <C>             <C>
Interest Paid                                                         80              56
Income Taxes Paid                                                     70              62
                                                             -----------------------------
</TABLE>

14.   MARKETING AND OTHER

<TABLE>
<CAPTION>
                                                                         Three Months
                                                                       Ended March 31
(Cdn$ millions)                                                     2006             2005
------------------------------------------------------------------------------------------
<S>                                                              <C>              <C>
Marketing Revenue, Net                                               437              224
Change in Fair Value of Crude Oil Put Options                         (4)            (173)
Interest                                                               9                3
Foreign Exchange Gains (Losses)                                      (21)              10
Other                                                                  5                3
                                                             -----------------------------
Total                                                                426               67
                                                             =============================
</TABLE>

15.   DISCONTINUED OPERATIONS

In the third quarter of 2005, we sold certain  Canadian  conventional  oil and
gas properties in southeast Saskatchewan,  northwest  Saskatchewan,  northeast
British Columbia and the Alberta foothills. The results of operations of these
properties have been presented as discontinued operations. The sales closed in
the third  quarter of 2005 with net  proceeds of $900  million  after  closing
adjustments,  and we realized  gains of $225  million.  These gains are net of
losses  attributable to pipeline contracts and fixed price gas sales contracts
associated with these  properties that we have retained,  but no longer use in
connection with our oil and gas business.

<TABLE>
<CAPTION>
                                                                          Three Months
                                                                        Ended March 31
(Cdn$ millions, except per share amounts)                            2006             2005
-------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>
Revenues and Other Income
    Net Sales                                                         -                60
Expenses
    Operating                                                         -                12
    Depreciation, Depletion, Amortization and Impairment              -                17
    Exploration Expense                                               -                 1
                                                             ------------------------------
Income before Income Taxes                                            -                30
    Future Income Taxes                                               -                12
                                                             ------------------------------
Net Income from Discontinued Operations                               -                18
                                                             ==============================

Earnings Per Common Share ($/share)
   Basic (Note 12)                                                    -               0.07
                                                             ==============================
   Diluted (Note 12)                                                  -               0.07
                                                             ==============================
</TABLE>

16.  COMMITMENTS, CONTINGENCIES AND GUARANTEES

As  described  in Note 15 to the  Audited  Consolidated  Financial  Statements
included in our 2005 Annual Report on Form 10-K and described below, there are
a number of lawsuits and claims pending,  the ultimate results of which cannot
be  ascertained  at this time.  We record costs as they are incurred or become
determinable.  We believe the  resolution  of these  matters  would not have a
material adverse effect on our liquidity,  consolidated  financial position or
results of operations.

In June 2003, a subsidiary of Occidental  Petroleum  Corporation  (Occidental)
initiated an arbitration  against us at the International Court of Arbitration
of the  International  Chamber of Commerce  (ICC Court)  regarding  an Area of
Mutual  Interest  agreement  relating  to two small  areas (the  Heijah/Tawila
Extension  Lands) of Block 51 in the Republic of Yemen. In April 2006, the ICC
Court  released  its partial  award  which held that we were  obliged to offer
Occidental  the right to  acquire  50% of our  interest  in the  Heijah/Tawila
Extension Lands and that we breached that obligation. The result of this award
is that  Occidental  is entitled to  monetary  damages.  The ICC Court did not

                                      16
<PAGE>

determine the amount of damages due to Occidental in this partial award. These
damages will be determined at the  conclusion of the second and final phase of
the arbitration  which will likely occur in 2007. The amount of damages cannot
be  reasonably  estimated  at this  time.  Resolution  of this  matter  is not
expected  to have a material  adverse  effect on our  liquidity,  consolidated
financial position or results of operations.


17.  PENSION AND OTHER POST RETIREMENT BENEFITS

(a)  NET PENSION EXPENSE RECOGNIZED UNDER OUR DEFINED BENEFIT PENSION PLANS

<TABLE>
<CAPTION>
                                                                           Three Months
                                                                         Ended March 31
(Cdn$ millions)                                                       2006             2005
--------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>
Nexen
    Cost of Benefits Earned by Employees                                 4               2
    Interest Cost on Benefits Earned                                     3               3
    Expected Return on Plan Assets                                      (3)             (2)
    Net Amortization and Deferral                                        1               1
                                                               -----------------------------
    Net Pension Expense                                                  5               4
                                                               -----------------------------

Canexus
    Cost of Benefits Earned by Employees                                 1               -
    Interest Cost on Benefits Earned                                     1               -
    Expected Return on Plan Assets                                      (1)              -
    Net Amortization and Deferral                                        -               -
                                                               -----------------------------
    Net Pension Expense                                                  1               -
                                                               -----------------------------

Syncrude
    Cost of Benefits Earned by Employees                                 1               1
    Interest Cost on Benefits Earned                                     1               2
    Expected Return on Plan Assets                                      (1)             (1)
    Net Amortization and Deferral                                        1               -
                                                               -----------------------------
    Net Pension Expense                                                  2               2
                                                               -----------------------------
Total                                                                    8               6
                                                               =============================
</TABLE>

(b)  EMPLOYER FUNDING CONTRIBUTIONS

Our expected total funding  contributions for 2006 disclosed in Note 16 to the
Audited  Consolidated  Financial  Statements in our 2005 Annual Report on Form
10-K have not changed for the Nexen and Canexus  defined benefit pension plans
and our share of Syncrude's defined benefit pension plan.


18.  PROVISION FOR FUTURE INCOME TAXES

During the three months ended March 31, 2006,  we recorded a future income tax
expense of $277  million  related to an  increase  in tax rates on oil and gas
activities in the United  Kingdom.  Legislation  was  introduced to the United
Kingdom  parliament  during the quarter to increase the  supplemental tax rate
from 10% to 20%, effective January 1, 2006.

                                      17
<PAGE>

19.  OPERATING SEGMENTS AND RELATED INFORMATION

Nexen  is  involved  in  activities  relating  to Oil and  Gas,  Syncrude  and
Chemicals  in various  geographic  locations  as  described  in Note 20 to the
Audited  Consolidated  Financial Statements included in our 2005 Annual Report
on Form 10-K.

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2006

                                                                                                                Corporate
                                                                                                                      and
(Cdn$ millions)                                      Oil and Gas                        Syncrude(1)  Chemicals      Other   Total
----------------------------------------------------------------------------------------------------------------------------------
                                                                      Other
                                                 United    United Countries
                                  Yemen   Canada States   Kingdom        (2) Marketing
                                 -------------------------------------------------------
<S>                                 <C>    <C>    <C>     <C>          <C>      <C>          <C>         <C>       <C>       <C>
 Net Sales                          328      111    181       134        28          7          84         107         -       980
 Marketing and Other                  3        1      -         2         -        437           -           -       (17)(3)   426
                                 ---------------------- --------------------------------------------------------------------------
                                    331      112    181       136        28        444          84         107       (17)    1,406
 Less: Expenses
  Operating                          36       34     30        22         2          7          53          66         -       250
  Depreciation, Depletion,
    Amortization and
     Impairment                      77       37     55        71         2          3           5          10         6       266
  Transportation and Other            2       10      -         -         -        232           6          10         -       260
  General and Administrative(4)      14       41     34         4        15         36           -           7        63       214
  Exploration                         -        6     62        20        15 (5)      -           -           -         -       103
  Interest                            -        -      -         -         -          -           -           2         7         9
                                 ---------------------- --------------------------------------------------------------------------
 Income (Loss) from
    Continuing Operations
     before Income Taxes            202      (16)     -        19        (6)       166          20          12       (93)      304
                                 ========================================================================================
 Less: Provision for Income
  Taxes (6), (7)                                                                                                               380
 Less: Non-Controlling
  Interests                                                                                                                      3
                                                                                                                            ------
 Net Loss                                                                                                                      (79)
                                                                                                                            ======

 Identifiable Assets                630    2,789  1,414     4,966       188      2,743 (8)   1,146         470        152   14,498
                                 =================================================================================================

 Capital Expenditures
  Development and Other              47      325     64       120         9         22          37           2         7       633
  Exploration                         5       46     40        19         7          -           -           -         -       117
  Proved Property Acquisitions        -        2      -         1         -          -           -           -         -         3
                                 -------------------------------------------------------------------------------------------------
                                     52      373    104       140        16         22          37           2         7       753
                                 =================================================================================================

 Property, Plant and Equipment
  Cost                            2,299    3,991  2,491     4,139       256        185       1,275         829       251    15,716
  Less: Accumulated DD&A          1,921    1,334  1,213       275       120         74         173         466       129     5,705
                                 -------------------------------------------------------------------------------------------------
 Net Book Value                     378    2,657  1,278     3,864       136        111       1,102         363       122    10,011
                                 =================================================================================================
</TABLE>

Notes:
(1)  Syncrude is  considered a mining  operation  for US  reporting  purposes.
     Property, plant and equipment at March 31, 2006 include mineral rights of
     $6 million.
(2)  Includes results of operations from producing activities in Colombia.
(3)  Includes  interest income of $8 million,  foreign  exchange losses of $21
     million  and  decrease  in the fair value of crude oil put  options of $4
     million.
(4)  Includes stock-based compensation expense of $139 million.
(5)  Includes exploration activities primarily in Nigeria and Colombia.
(6)  Includes Yemen cash taxes of $67 million.
(7)  Includes future income tax expense of $277 million related to an increase
     in the  supplemental  tax rate on oil and gas  activities  in the  United
     Kingdom (see Note 18).
(8)  Approximately  77%  of  Marketing's   identifiable  assets  are  accounts
     receivable and inventories.

                                      18
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2005

                                                                                                                 Corporate
                                                                                                                       and
(Cdn$ millions)                                       Oil and Gas                        Syncrude(1)  Chemicals      Other   Total
---------------------------------------------------------------------------------------------------------------------------------
                                                                       Other
                                                  United    United Countries
                               Yemen   Canada     States   Kingdom        (2) Marketing
                              -------------------------------------------------------
<S>                              <C>    <C>      <C>      <C>          <C>      <C>        <C>         <C>       <C>       <C>

 Net Sales                       283       86        197       102        22          4        66          96         -       856
 Marketing and Other               1        1          -         -         -        224         -           1       (160) (3)  67
                              ----------------------------------------------------------------------------------------------------
                                 284       87        197       102        22        228        66          97      (160)      923
 Less: Expenses
  Operating                       35       29         22        25         1          6        40          55         -       213
  Depreciation, Depletion,
    Amortization and
     Impairment                   65       35         66        46         4          3         4          10         6       239
  Transportation and Other         1        5          -         -         -        172         3          10        12       203
  General and Administrative (4)  10       32         18         1        18         17         -          15        70       181
  Exploration                      1        5         10         3         8 (5)      -         -           -         -        27
  Interest                         -        -          -         -         -          -         -           -        34        34
                              ----------------------------------------------------------------------------------------------------
 Income (Loss) from
    Continuing Operations
     before Income Taxes         172      (19)        81        27        (9)        30        19           7      (282)       26
                              ==========================================================================================
 Less: Provision for Income
  Taxes (6)                                                                                                                     7
 Add: Net Income from
  Discontinued Operations                                                                                                      18
                                                                                                                           ------
 Net Income                                                                                                                    37
                                                                                                                           ======

 Identifiable Assets             758    2,172      1,387     4,538       202      2,020 (7)   954         494        111   12,636
                              ====================================================================================================

 Capital Expenditures
  Development and Other           63      214         19       140         4          1        44           1         2       488
  Exploration                      8       20         72         3         7          -         -           -         -       110
  Proved Property Acquisitions     -        1          -         -         -          -         -           -         -         1
                              ----------------------------------------------------------------------------------------------------
                                  71      235         91       143        11          1        44           1         2       599
                              ====================================================================================================

 Property, Plant and Equipment
  Cost                         2,123    2,807      2,299     3,655       542        158     1,074         829       203    13,690
  Less: Accumulated DD&A       1,623    1,227      1,064        65       412         67       158         425        97     5,138
                              ----------------------------------------------------------------------------------------------------
 Net Book Value                  500    1,580(8)   1,235     3,590       130         91       916         404       106     8,552
                              ====================================================================================================
</TABLE>

Notes:
(1)  Syncrude is  considered a mining  operation  for US  reporting  purposes.
     Property, plant and equipment at March 31, 2005 include mineral rights of
     $6 million.
(2)  Includes  results of operations from producing  activities in Nigeria and
     Colombia.
(3)  Includes  interest  income of $3 million,  foreign  exchange gains of $10
     million  and  decrease in the fair value of crude oil put options of $173
     million.
(4)  Includes  stock-based  compensation expense of $125 million.
(5)  Includes exploration activities primarily in Nigeria and Colombia.
(6)  Includes Yemen cash taxes of $59 million.
(7)  Approximately  77%  of  Marketing's   identifiable  assets  are  accounts
     receivable and inventories.
(8)  Excludes  PP&E  costs  of  $889  million  and  accumulated  depreciation,
     depletion  and  amortization  of $440  million  relating to the  Canadian
     properties disposed of during 2005 (see Note 15).


                                      19
<PAGE>

20.  DIFFERENCES BETWEEN CANADIAN AND US GENERALLY ACCEPTED
     ACCOUNTING PRINCIPLES

The  Unaudited   Consolidated  Financial  Statements  have  been  prepared  in
accordance with Canadian GAAP. The US GAAP Unaudited Consolidated Statement of
Income and Balance Sheet and summaries of  differences  from Canadian GAAP are
as follows:

(a)  UNAUDITED CONSOLIDATED STATEMENT OF INCOME - US GAAP
     FOR THE THREE MONTHS ENDED MARCH 31

<TABLE>
<CAPTION>
(Cdn$ millions, except per share amounts)                                                                  2006          2005
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                     <C>          <C>
REVENUES AND OTHER INCOME
    Net Sales                                                                                               980          856
    Marketing and Other (ii)                                                                                436           67
                                                                                                    ------------ -------------
                                                                                                          1,416          923
                                                                                                    ------------ -------------
EXPENSES
    Operating (iv)                                                                                          252          215
    Depreciation, Depletion, Amortization and Impairment (i)                                                266          249
    Transportation and Other                                                                                260          203
    General and Administrative (viii)                                                                       221          181
    Exploration                                                                                             103           27
    Interest                                                                                                  9           34
                                                                                                    ------------ -------------
                                                                                                          1,111          909
                                                                                                    ------------ -------------

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                                       305           14
                                                                                                    ------------ -------------

PROVISION FOR INCOME TAXES
    Current                                                                                                 109           79
    Deferred (ii); (iv); (viii); (ix)                                                                        (6)         (73)
                                                                                                    ------------ -------------
                                                                                                            103            6
                                                                                                    ------------ -------------

NET INCOME FROM CONTINUING OPERATIONS BEFORE NON-CONTROLLING INTERESTS                                      202            8
    Net Income Attributable to Non-Controlling Interests                                                      3            -
                                                                                                    ------------ -------------

NET INCOME FROM CONTINUING OPERATIONS                                                                       199            8
    Net Income from Discontinued Operations                                                                   -           18
                                                                                                    ------------ -------------

NET INCOME - US GAAP (1)                                                                                    199           26
                                                                                                    ============ =============

EARNINGS PER COMMON SHARE ($/share)
    Basic (Note 12)
      Net Income from Continuing Operations                                                                0.76          0.03
      Net Income from Discontinued Operations                                                                 -          0.07
                                                                                                    ------------ -------------
                                                                                                           0.76          0.10
                                                                                                    ============ =============
    Diluted (Note 12); (x)
      Net Income from Continuing Operations                                                                0.74          0.03
      Net Income from Discontinued Operations                                                                 -          0.07
                                                                                                    ------------ -------------
                                                                                                           0.74          0.10
                                                                                                    ============ =============
</TABLE>

Note:
(1)  RECONCILIATION OF CANADIAN AND US GAAP NET INCOME

<TABLE>
<CAPTION>
                                                                                                              Three Months
                                                                                                             Ended March 31
      (Cdn$ millions)                                                                                      2006          2005
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                     <C>           <C>
      Net Income/(Loss) - Canadian GAAP                                                                     (79)          37
      Impact of US Principles, Net of Income Taxes:
        Depreciation, Depletion, Amortization and Impairment (i)                                              -          (10)
        Liability-Based Stock Compensation Plans (viii)                                                      (4)           -
        Deferred Income Taxes (ix)                                                                          277            -
        Other (ii); (iv)                                                                                      5           (1)
                                                                                                    ------------ -------------
      Net Income - US GAAP                                                                                  199           26
                                                                                                    ============ =============
</TABLE>

                                      20
<PAGE>

(b)  UNAUDITED CONSOLIDATED BALANCE SHEET - US GAAP

<TABLE>
<CAPTION>
                                                                                                     March 31     December 31
(Cdn$ millions, except share amounts)                                                                    2006            2005
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>           <C>
ASSETS
    CURRENT ASSETS
      Cash and Cash Equivalents                                                                              30             48
      Restricted Cash                                                                                       124             70
      Accounts Receivable                                                                                 2,374          3,151
      Inventories and Supplies                                                                              651            504
      Other                                                                                                  42             51
                                                                                                 -----------------------------
        Total Current Assets                                                                              3,221          3,824
                                                                                                 -----------------------------

    PROPERTY, PLANT AND EQUIPMENT
      Net of Accumulated Depreciation, Depletion, Amortization and
         Impairment of $6,098 (December 31, 2005 - $5,861) (iv); (vii)                                    9,965          9,550
    DEFERRED INCOME TAX ASSETS (ix)                                                                         472            410
    DEFERRED CHARGES AND OTHER ASSETS (v); (vi)                                                             272            345
    GOODWILL                                                                                                379            364
                                                                                                 -----------------------------
                                                                                                         14,309         14,493
                                                                                                 =============================

LIABILITIES AND SHAREHOLDERS' EQUITY
    CURRENT LIABILITIES
      Short-Term Borrowings                                                                                  36              -
      Accounts Payable and Accrued Liabilities (ii); (viii)                                               3,285          3,745
      Accrued Interest Payable                                                                               39             55
      Dividends Payable                                                                                      13             13
                                                                                                 -----------------------------
        Total Current Liabilities                                                                         3,373          3,813
                                                                                                 -----------------------------

    LONG-TERM DEBT (v)                                                                                    3,634          3,630
    DEFERRED INCOME TAX LIABILITIES (i) - (ix)                                                            1,967          1,906
    ASSET RETIREMENT OBLIGATIONS                                                                            605            590
    DEFERRED CREDITS AND LIABILITIES (vi)                                                                   455            505
    NON-CONTROLLING INTERESTS                                                                                85             88
    SHAREHOLDERS' EQUITY
      Common Shares, no par value
        Authorized:   Unlimited
        Outstanding:  2006   - 261,674,080 shares
                      2005   - 261,140,571 shares                                                           763            732
      Contributed Surplus                                                                                     2              2
      Retained Earnings (i); (ii); (iv); (viii); (ix)                                                     3,604          3,418
      Accumulated Other Comprehensive Income (AOCI) (ii); (iii); (vi)                                      (179)          (191)
                                                                                                 -----------------------------
          Total Shareholders' Equity                                                                      4,190          3,961
                                                                                                 -----------------------------

    COMMITMENTS, CONTINGENCIES AND GUARANTEES                                                            14,309         14,493
                                                                                                 =============================
</TABLE>

(c)  UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - US GAAP
     FOR THE THREE MONTHS ENDED MARCH 31

<TABLE>
<CAPTION>
(Cdn$ millions)                                                                                        2006              2005
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                 <C>               <C>
Net Income - US GAAP                                                                                    199               26
Other Comprehensive Income, Net of Income Taxes:
    Translation Adjustment (iii)                                                                         (2)              10
    Unrealized Mark-to-Market Gains/(Losses) (ii)                                                        14               (5)
                                                                                             ---------------------------------
Comprehensive Income                                                                                    211               31
                                                                                             =================================
</TABLE>

                                      21
<PAGE>

(d)  UNAUDITED CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE
     INCOME - US GAAP

<TABLE>
<CAPTION>
                                                                  March 31     December 31
(Cdn$ millions)                                                       2006            2005
-------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>
Translation Adjustment (iii)                                            (163)          (161)
Unrealized Mark-to-Market Losses - Cash Flow Hedges (ii)                  (2)           (16)
Minimum Pension Liability Adjustment (vi)                                (14)           (14)
                                                                 --------------------------
Accumulated Other Comprehensive Income (AOCI)                           (179)          (191)
                                                                 ==========================
</TABLE>

NOTES:
i.      Under US GAAP, the liability method of accounting for income taxes was
        adopted in 1993. In Canada,  the liability method was adopted in 2000.
        In 1997,  we  acquired  certain oil and gas assets and the amount paid
        for  these  assets  differed  from the tax  basis  acquired.  Under US
        principles,  this  difference was recorded as a deferred tax liability
        with an increase to property, plant and equipment rather than a charge
        to retained earnings. As a result, additional depreciation, depletion,
        amortization and impairment expense of $10 million was included in net
        income for the three months ended March 31, 2005.  The  difference was
        fully amortized during 2005.

ii.     Under  US GAAP,  all  derivative  instruments  are  recognized  on the
        balance  sheet as  either  an asset or a  liability  measured  at fair
        value.  Changes in the fair value of  derivatives  are  recognized  in
        earnings unless specific hedge criteria are met.

        CASH FLOW HEDGES
        Changes in the fair value of  derivatives  that are designated as cash
        flow  hedges are  recognized  in  earnings  in the same  period as the
        hedged item. Any fair value change in a derivative  before that period
        is recognized  on the balance  sheet.  The  effective  portion of that
        change  is   recognized  in  other   comprehensive   income  with  any
        ineffectiveness recognized in net income during the period of change.

        FUTURE SALE OF GAS  INVENTORY:  At December  31,  2005,  losses of $35
        million  were  included in accounts  payable  with  respect to futures
        contracts  and  swaps we used to  hedge  commodity  price  risk on the
        future sale of our gas  inventory as  described in Note 10.  Losses of
        $24  million  ($16  million,  net  of  income  taxes)  related  to the
        effective  portion  were  deferred  in AOCI until the  underlying  gas
        inventory was sold.  These losses were  reclassified  to marketing and
        other when the  contracts  were settled in the first  quarter of 2006.
        The ineffective portion of the losses of $11 million ($7 million,  net
        of income taxes) was recognized in net income during 2005.

        At March 31,  2006,  losses of $4 million  were  included  in accounts
        payable with respect to futures  contracts  and swaps we used to hedge
        commodity  price  risk on the  future  sale of our  gas  inventory  as
        described in Note 10. Losses of $3 million ($2 million,  net of income
        taxes)  related to the  effective  portion have been  deferred in AOCI
        until the  underlying  gas  inventory  is sold.  These  losses will be
        reclassified  to marketing and other as the contracts  settle over the
        next 12 months.  The  ineffective  portion of the losses of $1 million
        ($1 million,  net of income taxes) was recognized in net income during
        the quarter.

        FAIR VALUE HEDGES
        Both the  derivative  instrument  and the  underlying  commitment  are
        recognized  on the balance  sheet at their fair  value.  The change in
        fair value of both is reflected in earnings.  At March 31, 2006 and at
        December 31, 2005, we had no fair value hedges in place.

iii.    Under US GAAP,  exchange gains and losses arising from the translation
        of our  net  investment  in  self-sustaining  foreign  operations  are
        included in  comprehensive  income.  Additionally,  exchange gains and
        losses,  net of income taxes,  from the  translation  of our US-dollar
        long-term debt designated as a hedge of our foreign net investment are
        included in comprehensive  income.  Cumulative amounts are included in
        AOCI in the Unaudited Consolidated Balance Sheet - US GAAP.

iv.     Under  Canadian  GAAP,  we defer  certain  development  costs  and all
        pre-operating  revenues  and costs to property,  plant and  equipment.
        Under US  principles,  these  costs have been  included  in  operating
        expenses. As a result:

        o    operating expenses include  pre-operating costs of $2 million ($1
             million, net of income taxes) (2005 - $2 million ($1 million, net
             of taxes)); and

        o    property,  plant  and  equipment  is  lower  under US GAAP by $27
             million (December 31, 2005 - $25 million).

v.      Under  US GAAP,  discounts  on  long-term  debt  are  classified  as a
        reduction of long-term debt rather than as deferred  charges and other
        assets.  Discounts  of $57 million  (December  31, 2005 - $57 million)
        were re-classed and included in long-term debt.

                                      22
<PAGE>

vi.     Under US GAAP,  the amount by which our accrued  pension  cost is less
        than the unfunded  accumulated  benefit obligation is included in AOCI
        and accrued pension  liabilities.  As a result,  deferred  credits and
        other  liabilities are higher by $26 million  (December 31, 2005 - $26
        million),  deferred  charges and other assets are higher by $4 million
        (December 31, 2005 - $4 million) and $22 million ($14 million,  net of
        income  taxes) was included in AOCI  (December  31, 2005 - $22 million
        ($14 million, net of income taxes)).

vii.    On January 1, 2003,  we adopted FASB  Statement  143,  ACCOUNTING  FOR
        ASSET RETIREMENT OBLIGATIONS (FAS 143) for US GAAP reporting purposes.
        We adopted  the  equivalent  Canadian  standard  for asset  retirement
        obligations on January 1, 2004. These standards are consistent  except
        for the  adoption  date  which  resulted  in our  property,  plant and
        equipment under US GAAP being lower by $19 million.

viii.   Under Canadian  principles,  we record obligations for liability-based
        stock   compensation  plans  using  the   intrinsic-value   method  of
        accounting. Under US principles, obligations for liability-based stock
        compensation  plans  are  recorded  using  the fair  value  method  of
        accounting.  As a  result,  general  and  administrative  expense  and
        accounts  payable and accrued  liabilities are higher under US GAAP by
        $7 million ($4 million, net of income taxes).

ix.     Under US GAAP, enacted tax rates are used to calculate deferred income
        taxes,  whereas under Canadian GAAP,  substantively  enacted rates are
        used.  During the quarter,  the UK  government  substantively  enacted
        increases to the  supplementary tax on oil and gas activities from 10%
        to 20%,  effective January 1, 2006. This created a $277 million future
        income tax  expense  during the first  quarter of 2006 under  Canadian
        GAAP.

x.      Under  Canadian  GAAP,  we  excluded  all options in  calculating  the
        weighted-average  number of diluted common shares outstanding at March
        31, 2006,  because they have an  anti-dilutive  impact on the loss per
        share amounts.  Under US GAAP the  weighted-average  number of diluted
        common  shares  outstanding  for the three months ended March 31, 2006
        was 268.5 million shares.


(e)     STOCK-BASED COMPENSATION

CHANGE IN ACCOUNTING POLICY - US GAAP
On January 1, 2006,  we adopted  FASB  Statement  123  (revised),  SHARE-BASED
PAYMENT (Statement 123(R)) using the modified  prospective approach and graded
vesting  amortization.  Under  Statement  123(R) our tandem  options and stock
appreciation rights (StARS) are considered  liability-based stock compensation
plans.  Under the modified  prospective  approach,  no amounts are restated in
prior  periods.  Upon adoption of Statement  123(R),  we recorded a cumulative
effect of a change in  accounting  principle  of $2  million.  This amount was
recorded in general and  administrative  expenses in our US GAAP  Consolidated
Statement of Income.

Prior to the adoption of Statement 123(R) we accounted for our liability-based
stock compensation plans in accordance with FASB Interpretation 28, ACCOUNTING
FOR STOCK  APPRECIATION  RIGHTS AND OTHER VARIABLE STOCK OPTION OR AWARD PLANS
(the  intrinsic  value  method).  Accordingly,  obligations  were accrued on a
graded vesting basis and represented  the difference  between the market value
of our common shares and the exercise price of underlying  options and rights.
Under Statement 123(R),  obligations for  liability-based  stock  compensation
plans are measured at their fair value,  and are  re-measured at fair value in
each subsequent reporting period.

Consistent with Statement 123(R), we account for any stock options that do not
include a cash feature  (equity-based  stock  compensation  plans),  using the
fair-value method.

The impact of adopting  Statement  123(R) on our results for the three  months
ended March 31, 2006 is as follows:

<TABLE>
<CAPTION>
(Cdn$ millions)                                                          Prior to adoption    After adoption    Increase /
                                                                           of FAS 123(R)      of FAS 123(R)     (Decrease)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                  <C>                <C>
Income from Continuing Operations before Income Taxes - US GAAP                        312               305            (7)
Net Income - US GAAP                                                                   203               199            (4)
Basic Earnings per Common Share - US GAAP ($/share)                                   0.78              0.76         (0.02)
Diluted Earnings per Common Share - US GAAP ($/share)                                 0.76              0.74         (0.02)
                                                                        -----------------------------------------------------
</TABLE>

DESCRIPTION OF STOCK-BASED COMPENSATION PLANS
We have granted options to purchase  common shares to directors,  officers and
employees.  Each option  permits the holder to purchase one Nexen common share
at the stated exercise price. Options granted prior to February 2001 vest over
four years and are  exercisable on a cumulative  basis over 10 years.  Options
granted  after  February 2001 vest over three years and are  exercisable  on a
cumulative  basis over five years.  At the time of grant,  the exercise  price
equals the market  price.  We have common shares  reserved for issuance  under
this plan.

                                      23
<PAGE>

In May 2004,  we modified  our stock  option  plan to a tandem  option plan by
including  a cash  feature.  The tandem  options  give the  holders a right to
either  purchase  common  shares  at the  exercise  price or to  receive  cash
payments equal to the excess of the market value of the common shares over the
exercise price.  Stock options awarded to our US employees between December 1,
2004 and December 1, 2005 do not include a cash feature.

Under our StARs plan  established  in 2001,  employees  are  entitled  to cash
payments equal to the excess of the market price of the common shares over the
exercise  price of the rights.  The vesting period and other terms of the plan
are similar to the stock option plan. At the time of grant, the exercise price
equals the market price.

The total  number of options and StARS  granted and shares  reserved for issue
under all of our stock-based compensation plans will not exceed 10% of Nexen's
total outstanding common shares.

We have not made any modifications to our stock-based compensation plans since
May 2004.

ASSUMPTIONS
We use the Generalized Black-Scholes option pricing model to estimate the fair
value of our stock-based compensation, with the following assumptions:

Expected Annual Dividends per Common Share ($/share)    0.20
Expected Volatility                                     42%
Risk-Free Interest Rate                                 4.3% - 4.7%
Weighted-Average Expected Life of
  Compensation Instruments (years)                      2.8  - 3.0

The basis for our assumptions, among other things, is as follows:

    o   Annual dividend  expectations  take into account  historical  dividend
        payments and reflect our expectation for future payments

    o   Volatility  expectations  are  based  on our  historical  share  price
        volatility.

    o   Our risk-free  interest rate assumption is derived from interest rates
        applicable  to Government of Canada bonds taking into account the term
        of our compensation instruments.

    o   The weighted-average  expected life of our compensation instruments is
        based on our expectation of future  exercise  patterns of employees in
        relatively homogenous groups. These future exercise patterns take into
        account  historical  exercise  experience  for  each  employee  group,
        historical  post-vesting  employment  termination  behaviors,  and the
        contractual terms of our stock-based  compensation  awards and related
        vesting schedules.

    o   We assume forfeiture rates based on historical experience.

Our valuation methodology and assumptions are consistent with those previously
used under FAS 123.

<TABLE>
<CAPTION>
STOCK OPTIONS

                                                           Weighted       Weighted Average                        Weighted
                                                           Average       Remaining Term to      Aggregate       Average Fair
                                            Number      Exercise Price         Expiry        Intrinsic Value        Value
------------------------------------------------------------------------------------------------------------------------------
                                         (thousands)      ($/option)          (years)        (Cdn $ millions)     ($/option)

<S>                                        <C>                 <C>             <C>                <C>               <C>
Balance at December 31, 2005                 15,315                 28
   Granted                                       18                 56
   Exercised                                   (892)                17
   Forfeited                                    (26)                24
                                         -------------------------------
Balance at March 31, 2006                    14,415                 28                 3.5               517             37
                                         =====================================================================================
Outstanding at March 31, 2006 and
   Expected to Vest                          14,200                 28                 3.5               507             37
                                         -------------------------------------------------------------------------------------
Exercisable at March 31, 2006                 7,270                 18                 3.0               331             45
                                         -------------------------------------------------------------------------------------
</TABLE>

The total intrinsic value of stock options  exercised  during the three months
ended March 31, 2006 was $36 million (2005 - $28 million).

At March 31, 2006, we had $103 million of  unrecognized  compensation  expense
related to stock options which we expect to recognize over a  weighted-average
period of 1.4 years.

At March 31, 2006,  there were  16,743,113  common shares  reserved for future
issuance under existing stock option plans.

                                      24
<PAGE>

<TABLE>
<CAPTION>
STOCK APPRECIATION RIGHTS

                                                           Weighted       Weighted Average                        Weighted
                                                           Average       Remaining Term to      Aggregate       Average Fair
                                            Number      Exercise Price         Expiry        Intrinsic Value        Value
------------------------------------------------------------------------------------------------------------------------------
                                         (thousands)      ($/right)           (years)        (Cdn $ millions)     ($/right)

<S>                                        <C>                 <C>             <C>                <C>               <C>
Balance at December 31, 2005                  5,964                  30
   Granted                                       30                  60
   Exercised for Cash                          (499)                 21
   Forfeited                                    (27)                 37
                                         -------------------------------
Balance at March 31, 2006                     5,468                  31                 3.5               182              36
                                         =====================================================================================
Outstanding at March 31, 2006 and
   Expected to Vest                           5,187                  31                 3.5               175              37
                                         -------------------------------------------------------------------------------------
Exercisable at March 31, 2006                 1,939                  21                 2.6                85              44
                                         -------------------------------------------------------------------------------------
</TABLE>

The total intrinsic value of stock  appreciation  rights  exercised during the
three months ended March 31, 2006 was $21 million (2005 - $9 million).

At March 31, 2006,  we had $52 million of  unrecognized  compensation  expense
related  to stock  appreciation  rights  which we expect to  recognize  over a
weighted-average period of 1.3 years.


STOCK-BASED COMPENSATION EXPENSE AND PAYMENTS
For the three  months  ended March 31, 2006,  total  stock-based  compensation
expense of $146 million ($98 million, net of taxes) (2005 - $125 million, ($84
million, net of taxes)) was included in general and administrative  expense in
the Consolidated Statement of Income - US GAAP.

For the three months ended March 31,  2006,  cash  proceeds of $8 million were
received related to the exercise of stock options (2005 - $17 million).

For the three  months ended March 31,  2006,  cash of $37 million  (2005 - $25
million)  was paid upon the exercise of stock  options and stock  appreciation
rights. The income tax benefit recorded from the exercise of stock options and
stock appreciation rights was $12 million (2005 - $8 million) for the period.


NEW ACCOUNTING PRONOUNCEMENTS

In September  2005, the Emerging  Issues Task Force (EITF) reached a consensus
on Issue No. 04-13,  ACCOUNTING  FOR PURCHASES AND SALES OF INVENTORY WITH THE
SAME COUNTERPARTY. This issue addresses the question of when it is appropriate
to measure  purchases  and sales of inventory at fair value and record them in
cost of sales and  revenues  and when they  should be  recorded  as  exchanges
measured at the book value of the item sold. The EITF concluded that purchases
and sales of  inventory  with the same  counterparty  that are entered into in
contemplation  of one another  should be combined  and  recorded as  exchanges
measured at the book value of the item sold.  The consensus  should be applied
to new  arrangements  entered into and  modifications  or renewals of existing
agreements,  beginning  with the second  quarter of 2006. We do not expect the
adoption  of this  statement  will have a  material  impact on our  results of
operations or financial position.

In February  2006,  the  Financial  Accounting  Standards  Board (FASB) issued
Statement  155,  ACCOUNTING  FOR  CERTAIN  HYBRID  INSTRUMENTS,  which  amends
Statement 133,  ACCOUNTING FOR DERIVATIVE  INSTRUMENTS AND HEDGING ACTIVITIES,
and Statement 140,  ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
AND   EXTINGUISHMENTS  OF  LIABILITIES.   Statement  155  permits  fair  value
remeasurement  for any hybrid  financial  instrument that contains an embedded
derivative that otherwise would require  bifurcation from its host contract in
accordance with Statement 133. Statement 155 also clarifies and amends certain
other  provisions  of  Statement  133 and  Statement  140.  This  statement is
effective  for all  financial  instruments  acquired or issued in fiscal years
beginning  after  September  15,  2006.  We do not expect the adoption of this
statement  will  have a  material  impact  on our  results  of  operations  or
financial position.


                                      25
<PAGE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

THE FOLLOWING  SHOULD BE READ IN CONJUNCTION  WITH THE UNAUDITED  CONSOLIDATED
FINANCIAL  STATEMENTS  INCLUDED IN THIS  REPORT.  THE  UNAUDITED  CONSOLIDATED
FINANCIAL  STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING  PRINCIPLES  (GAAP)  IN  CANADA.  THE  IMPACT  OF  THE  SIGNIFICANT
DIFFERENCES  BETWEEN CANADIAN AND UNITED STATES (US) ACCOUNTING  PRINCIPLES ON
THE FINANCIAL STATEMENTS IS DISCLOSED IN NOTE 20 TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS. THE DATE OF THIS DISCUSSION IS APRIL 26, 2006.

UNLESS OTHERWISE NOTED,  TABULAR AMOUNTS ARE IN MILLIONS OF CANADIAN  DOLLARS.
THE DISCUSSION AND ANALYSIS OF OUR OIL AND GAS ACTIVITIES  WITH RESPECT TO OIL
AND GAS VOLUMES,  RESERVES AND RELATED PERFORMANCE  MEASURES IS PRESENTED ON A
WORKING-INTEREST,  BEFORE-ROYALTIES  BASIS. WE MEASURE OUR PERFORMANCE IN THIS
MANNER   CONSISTENT   WITH  OTHER  CANADIAN  OIL  AND  GAS  COMPANIES.   WHERE
APPROPRIATE,  WE HAVE PROVIDED INFORMATION ON A NET,  AFTER-ROYALTIES BASIS IN
TABULAR FORMAT.

NOTE: CANADIAN INVESTORS SHOULD READ THE SPECIAL NOTE TO CANADIAN INVESTORS ON
PAGE 80 OF OUR 2005 ANNUAL  REPORT ON FORM 10-K WHICH  HIGHLIGHTS  DIFFERENCES
BETWEEN  OUR RESERVE  ESTIMATES  AND RELATED  DISCLOSURES  THAT ARE  OTHERWISE
REQUIRED BY CANADIAN REGULATORY AUTHORITIES.

WE MAKE  ESTIMATES  AND  ASSUMPTIONS  THAT AFFECT THE REPORTED  AMOUNTS OF OUR
ASSETS AND LIABILITIES AND THE DISCLOSURE OF CONTINGENT ASSETS AND LIABILITIES
AT THE  DATE  OF THE  UNAUDITED  CONSOLIDATED  FINANCIAL  STATEMENTS  AND  OUR
REVENUES AND EXPENSES DURING THE REPORTED PERIOD. OUR MANAGEMENT REVIEWS THESE
ESTIMATES, INCLUDING THOSE RELATED TO ACCRUALS, LITIGATION,  ENVIRONMENTAL AND
ASSET  RETIREMENT  OBLIGATIONS,  INCOME TAXES AND THE  DETERMINATION OF PROVED
RESERVES ON AN ONGOING BASIS. CHANGES IN FACTS AND CIRCUMSTANCES MAY RESULT IN
REVISED  ESTIMATES  AND  ACTUAL  RESULTS  MAY  DIFFER  FROM  THESE  ESTIMATES.

EXECUTIVE SUMMARY OF FIRST QUARTER RESULTS

                                                              Three Months
                                                             Ended March 31
(Cdn$ millions)                                             2006         2005
------------------------------------------------------------------------------
Net Income (Loss)                                            (79)          37
Earnings (Loss) per Common Share ($/share)                 (0.30)        0.14
Cash Flow from Operating Activities                          734          442

Production, before Royalties (mboe/d)                        222          260
Production, after Royalties (mboe/d)                         159          183
Nexen's Average Realized Oil and Gas Price (Cdn$/boe)      61.11        49.55

Capital Expenditures                                         753          599
Net Debt (1)                                               3,832        4,348
                                                          --------------------

Note:
(1)  Net debt is defined as long-term debt less net working capital.

Continued  strength  in  commodity  prices and  outstanding  results  from our
marketing group generated  solid quarterly  results.  Quarterly cash flow from
operating  activities of $734 million reflects the strong oil and gas price of
$61.11/boe  we realized for our  production  despite the impact of a weaker US
dollar. Our net loss includes $139 million of stock-based compensation expense
as a result of our  increasing  stock price and $277 million of future  income
tax expense related to a 10% increase in supplemental  tax rates applicable to
our North Sea  operations  in the  United  Kingdom.  In 2005,  our net  income
included $125 million of stock-based  compensation expense and $173 million of
mark-to-market losses on crude oil put options.

The  stronger  Canadian  dollar  reduced our  results as our sales  revenue is
denominated  in or referenced to US dollars.  This is mitigated to some extent
as our US-dollar  capital  expenditures  and operating  costs are reduced when
translated to Canadian  dollars.  Overall,  the higher Canadian dollar reduced
our cash flow from  operating  activities by $43 million and increased our net
loss by $17 million.

Our  marketing   division   generated   strong  results  during  the  quarter,
recognizing $166 million of net income before tax. We generated this income in
a number of ways.  We used our storage and  transportation  infrastructure  to
move gas to markets. In addition, we utilized our infrastructure  positions to
take advantage of location and time spreads.  Volatile  natural gas markets in
North America also presented  excellent  trading  opportunities as weather and
the  impact  of  last  season's  hurricanes  in  the  Gulf  of  Mexico  caused
significant  fluctuations  in natural gas prices,  especially  between various
producing and consuming regions.

Compared  to the  first  quarter  of 2005,  our  production  before  royalties
decreased by 38 mboe/d.  Of this  decrease,  18 mboe/d relates to Canadian oil
and gas  properties we sold in the third quarter of 2005. The remainder of the

                                      26
<PAGE>

decrease  mainly relates to lower  production  volumes in Yemen and the United
States.  These  lower  volumes  result  from  natural  declines  and also from
hurricane-related production downtime in the Gulf of Mexico.

Our major development projects at Syncrude Stage 3, Long Lake and in the North
Sea are  progressing on schedule and are nearing  completion.  The start-up of
Syncrude Stage 3 is  anticipated to increase our share of production  capacity
by 8,000  bbls/d in the  second  half of the year.  Our Long Lake  project  is
expected to begin steam injection in late 2006, with the upgrader scheduled to
start up in the second half of 2007. We expect our share of premium  synthetic
crude  production  from Phase 1 of this project to be 30,000  bbls/d.  We also
expect Buzzard in the North Sea to begin first production in late 2006, adding
approximately 85,000 boe/d to our volumes when peak rates are achieved.

We continue to develop our coal bed methane  project and production  rates are
increasing.  We approved the development of the Ettrick field in the North Sea
during the quarter. Production from this field is expected to commence in 2008
at a rate of  16,000  boe/d,  net to us.  Exploration  spending  included  the
successful  drilling of a sidetrack well  approximately  one mile south of our
previously  announced Knotty Head discovery in the Gulf of Mexico.  We believe
that  our  Knotty  Head  discovery  is a  world  class  discovery  and  we are
continuing  field  appraisal  in  order to  determine  ultimate  reserves  and
formulate an optimal development plan.

Unsuccessful  exploration  costs related to the Pathfinder well in the Gulf of
Mexico,  the Black Cat and Zanzibar wells in the North Sea, and the Ukot South
well, offshore Nigeria, were expensed during the quarter.

CAPITAL INVESTMENT

A large portion of our capital  investment through 2007 is focused on bringing
our major development projects on-stream.  To date, we have invested over $4.7
billion in the Buzzard,  Long Lake and Syncrude Stage 3 development  projects.
These  projects  will  start  to come  on-stream  in 2006  and we  expect  our
before-royalties  production  to grow to between  300,000 and 350,000 boe/d in
2007.

In  addition  to  developing  these  projects,   we  are  also  targeting  new
opportunities   through  on-going  exploration  and  the  application  of  new
technologies. Details of our capital programs are set out below.

<TABLE>
<CAPTION>
                                                          Major      Early Stage      New Growth       Core Asset
(Cdn$ millions)                                     Development      Development     Exploration      Development       Total
------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>              <C>             <C>              <C>               <C>
Oil and Gas
   Synthetic (mainly Long Lake)                             247               38              16                -         301
   United Kingdom                                           105                9              19                7         140
   Yemen                                                      -                -               5               47          52
   United States                                              2                -              40               62         104
   Canada                                                    19                7              30               16          72
   Other Countries                                            -                6               7                3          16
Syncrude                                                     31                -               -                6          37
                                                 -----------------------------------------------------------------------------
                                                            404               60             117              141         722

Chemicals, Marketing, Corporate and Other                     -                -               -               31          31
                                                 -----------------------------------------------------------------------------
Total Capital                                               404               60             117              172         753
                                                 =============================================================================
As a % of Total Capital                                     54%               8%             15%              23%        100%
                                                 -----------------------------------------------------------------------------
</TABLE>

MAJOR AND EARLY STAGE DEVELOPMENT PROJECTS

SYNTHETIC
At Long Lake, we have  completed  engineering,  procurement,  and  development
drilling. We are nearing completion of module fabrication and assembly and are
well advanced in field construction.  Approximately 78% of total project costs
have been committed and they are in-line with our original cost estimates.

All  steam-assisted  gravity  drainage  (SAGD) wells have been drilled and 82%
have been  completed.  SAGD module  fabrication is almost complete with 85% of
modules on site. Upgrader module fabrication is advancing with over 75% of our
modules completed and approximately 27% of modules on site.

Our SAGD  construction  is over 55% complete  while the upgrader is just under
40%  complete.  To date, we have been  successful in attracting  labour to our
site allowing the project to remain on time.  Although labour  productivity to
date has been 20% below expectation, a large portion of our workforce has just
been  mobilized  on our site and we  expect  to  improve  productivity  as the
workforce  is  familiarized  with the site and their scope of work.  If labour
productivity remains unchanged for the remainder of the project, we believe it
can be largely managed within our contingency. Given the advanced state of the
overall project, we believe the risk of a material cost overrun is low.

                                      27
<PAGE>

We are on track to begin steam  injection in late 2006 and to begin  operating
the upgrader in the second half of 2007. Production capacity for this phase of
Long Lake is  approximately  60,000 bbls/d  (30,000  bbls/d,  net to Nexen) of
premium synthetic crude.

Our plan is to expand oil sands  production to approximately to 240,000 bbls/d
(120,000  bbls/d,  net to  Nexen)  over the next 10 years in  phases of 60,000
bbls/d (30,000  bbls/d,  net to Nexen) using the same technology and design as
Long Lake. We are currently  progressing Phase 2 development.  We have ordered
several  major  vessels,  completed our largest core hole drilling and seismic
program and are finalizing regulatory applications.  With sanctioning in 2008,
Phase 2 is expected to commence synthetic crude oil production in 2011.

UNITED KINGDOM - BUZZARD
Our Buzzard development in the North Sea remains on schedule and on budget. It
is over 90% complete and first oil is scheduled for late this year. During the
quarter,  we began drilling the water injection wells,  continued drilling the
development wells and substantially completed fabrication of the utilities and
production  decks.  These decks are scheduled to be installed this summer.  At
its  peak,  we  expect  Buzzard  to  add  approximately  85,000  boe/d  to our
production  and generate  between $1.6 and $1.7 billion of annual pre-tax cash
flow,  assuming US $50/bbl WTI. We have a 43.2% operated  working  interest in
Buzzard.

UNITED KINGDOM - ETTRICK
During the quarter, we commenced development of the Ettrick field in the North
Sea where we have an 80% operated working interest.  The development  consists
of three  production  wells and three  water  injectors  tied back to a leased
floating production,  storage and offloading (FPSO) vessel.  Design capacities
of the FPSO are 30,000 bbls/d of oil processing,  35 mmcf/d of gas compression
and  55,000  bbls/d  of  water  injection.  We  plan  to  begin  drilling  the
development  wells  in 2007  and  install  and  commission  the  FPSO in 2008.
Production  from the field is expected to begin in early 2008,  with our share
reaching approximately 16,000 boe/d.

CANADA - COAL BED METHANE (CBM)
In  Canada,  we  continue  to  develop  the first  commercial  CBM  project in
Mannville  coals.  We currently have eight rigs drilling and are  constructing
gas processing facilities. Two of these facilities have been completed and two
more  are  expected  to  be  finalized  in  the  third  quarter.   When  fully
operational,  these four plants will have processing capacity of approximately
94 mmcf/d (38 mmcf/d net to Nexen).

Our CBM  production  is currently  at 4 mmcf/d.  We expect this to increase to
over 30 mmcf/d by year-end and  continue to grow as we add further  processing
capacity.  We are  targeting to add at least 150 mmcf/d of production by 2011,
generating  attractive  full-cycle rates of return at gas prices significantly
lower than the current market.

Our longer-term production target is based on developing less than half of our
CBM lands giving us significant  opportunity to further accelerate development
and sustain our growth in CBM.

SYNCRUDE - STAGE 3 EXPANSION
The Syncrude Stage 3 expansion is nearing  completion with  commissioning well
underway.  The  expansion  is  expected  to be on stream by  mid-year,  adding
approximately 8,000 bbls/d of production capacity, net to Nexen.

NEW GROWTH EXPLORATION
In the Gulf of Mexico,  the drilling of the  exploration  well Alaminos Canyon
Block  856 No.  1 has  been  successfully  completed.  The  block  is  located
approximately  140 miles east of the southern  Texas coast and is  immediately
adjacent to the Great White  discovery.  The well was drilled by the operator,
Total E&P USA, Inc. in 7,600 feet of water to a total depth of 14,600 feet and
encountered  two  oil-bearing  zones.  An  appraisal  well will be  drilled to
further  assess the  extent of the  accumulation.  We have a 30%  non-operated
interest in the block and a 10% non-operated interest in the Tobago discovery,
located approximately seven miles east.

In the Gulf, we also  completed a sidetrack  well to delineate the Knotty Head
discovery.   The  well  was  drilled  downdip  with  a  bottom-hole   location
approximately  one mile to the  south  of the  original  wellbore.  Additional
appraisal work is planned to further define the prospect,  determine  ultimate
reserves and  formulate an optimal  development  plan.  We have a 25% operated
interest in Knotty Head.

For the remainder of the year, we expect to drill 15 to 17  exploration  wells
and have rigs lined up for all but one of these wells. In the Gulf, we plan to
drill seven or eight additional  exploration  wells. In the North Sea, we have
two exploration wells planned for the second half of this year. On Block 51 in
Yemen,  we are  appraising  a discovery  at BAK-K,  located  approximately  65
kilometres  northwest of our processing  facilities.  We are encouraged by the
presence  of oil on this  part of the  block  and plan to  drill  two or three
additional  wells  during  the  year to  further  evaluate  and  explore  this
prospect.

                                      28
<PAGE>

FINANCIAL RESULTS

CHANGE IN NET INCOME

(Cdn$ millions)                                                 2006 vs. 2005
------------------------------------------------------------------------------
NET INCOME AT MARCH 31, 2005 (1)                                           37
                                                                  ============
Favourable (Unfavourable) Variances:

Cash Items:
  Production Volumes, after Royalties:
    Crude Oil                                                             (88)
    Natural Gas                                                           (21)
    Change in Crude Oil Inventory                                          (5)
                                                                  ------------
      Total Volume Variance                                              (114)

  Realized Commodity Prices:
    Crude Oil                                                             130
    Natural Gas                                                            34
                                                                  ------------
      Total Price Variance                                                164

  Oil and Gas Operating Expense:
    Conventional                                                            -
    Syncrude                                                              (13)
                                                                  ------------
      Total Operating Expense Variance                                    (13)

  Marketing                                                               155
  Chemicals                                                                (1)
  General and Administrative                                              (19)
  General and Administrative - Stock-Based Compensation Paid              (12)
  Interest Expense                                                         25
  Current Income Taxes                                                    (30)
                                                                  ------------
Total Cash Variance                                                       155

Non-Cash Items:
  Depreciation, Depletion, Amortization and Impairment
      Oil and Gas                                                         (10)
      Other                                                                 -
  Exploration Expense                                                     (75)
  General and Administrative - Stock-Based Compensation Accrual            (2)
  Future Income Taxes                                                    (331)
  Change in Fair Value of Crude Oil Put Options                           169
  Other                                                                   (22)
                                                                  ------------
Total Non-Cash Variance                                                  (271)
                                                                  ------------

NET LOSS AT MARCH 31, 2006                                                (79)
                                                                  ============

Note:
(1)  Includes results of discontinued operations (see Note 15 to our Unaudited
     Consolidated Financial Statements).

Significant variances in net income are explained further in the following
sections.

                                      29
<PAGE>

<TABLE>
<CAPTION>
OIL & GAS AND SYNCRUDE

PRODUCTION

                                                        Three Months Ended March 31
                                                          2006                    2005
-------------------------------------------------------------------------------------------------
                                                 Before        After        Before         After
                                           Royalties (1)   Royalties   Royalties(1)    Royalties
                                           ------------------------------------------------------
<S>                                        <C>             <C>         <C>             <C>
Crude Oil and NGLs (mbbls/d)
    Yemen                                         102.4        53.7          114.3          57.7
    Canada (2)                                     22.2        17.8           34.7          27.5
    United States                                  19.3        17.0           28.5          25.2
    United Kingdom                                 15.7        15.7           14.9          14.9
    Other Countries                                 5.8         5.3            5.9           5.4
Syncrude (3)                                       14.8        13.4           11.4          11.3
                                           ------------------------------------------------------
                                                  180.2       122.9          209.7         142.0
                                           ------------------------------------------------------
Natural Gas (mmcf/d)
    Canada (2)                                      106          89            143           111
    United States                                   120         102            127           108
    United Kingdom                                   23          23             29            29
                                           ------------------------------------------------------
                                                    249         214            299           248
                                           ------------------------------------------------------
Total Production (mboe/d)                           222         159            260           183
                                           ======================================================
</TABLE>

Notes:
(1)  We have presented  production  volumes before royalties as we measure our
     performance  on this basis  consistent  with other  Canadian  oil and gas
     companies.
(2)  Includes the following production from discontinued operations.  See Note
     15 to our Unaudited Consolidated Financial Statements.

<TABLE>
<CAPTION>
                                                                               Three Months
                                                                              Ended March 31
                                                                            2006         2005
----------------------------------------------------------------------------------------------
<S>                                                                         <C>          <C>
Before Royalties
  Crude Oil and NGLs (mbbls/d)                                                 -         11.1
  Natural Gas (mmcf/d)                                                         -           43
After Royalties
  Crude Oil and NGLs (mbbls/d)                                                 -          8.5
  Natural Gas (mmcf/d)                                                         -           29
                                                                        ----------------------
</TABLE>

(3) Considered a mining operation for US reporting purposes.

LOWER PRODUCTION DECREASED NET INCOME FOR THE QUARTER BY $114 MILLION
Production  before royalties  decreased 15% from the first quarter in 2005 and
declined  slightly from the fourth quarter of last year.  Our 2006  production
excludes  volumes from our Canadian oil and gas  properties  that were sold in
the third quarter of 2005. Removing the impact of these property dispositions,
production decreased 8% from the first quarter of 2005.

The following  table  summarizes our production  volume changes since the last
quarter:

<TABLE>
<CAPTION>
                                                                          Before        After
(mboe/d)                                                                Royalties    Royalties
----------------------------------------------------------------------------------------------
<S>                                                                       <C>           <C>
Production, Fourth Quarter 2005                                              225          165
    Production changes:
      Yemen                                                                   (5)          (6)
      Canada                                                                   1            1
      United States                                                            4            4
      United Kingdom                                                          (2)          (2)
      Syncrude                                                                (1)          (3)
                                                                       ----------- -----------
Production, First Quarter 2006                                               222          159
                                                                       =========== ===========
</TABLE>

We expect production  increases to come from our major development projects at
Syncrude Stage 3, Buzzard in the North Sea, and bitumen  production  from Long
Lake  commencing  later this year. Long Lake synthetic crude oil production is
expected  to begin in  2007.  Production  volumes  discussed  in this  section
represent before-royalties volumes, net to our working interest.

                                      30
<PAGE>

YEMEN
Production  from the Masila field decreased 5% from the fourth quarter and 22%
from the first quarter of 2005.  Production  declines from Masila  reflect the
maturity of the field and the impact of a reduced  2006  development  drilling
program.  In 2005, we drilled 36 development  wells and we have 30 development
wells planned for 2006. In the first quarter,  we drilled nine of these wells.
Base  declines  are  expected  to  continue  as we  maximize  recovery  of the
remaining reserves on the block.

Block 51 production increased 55% from the first quarter of 2005, when we used
temporary  facilities  to  achieve  early  production.  Most of the  permanent
processing  facilities are now complete and on stream.  We have drilled six of
our planned 17 development  wells. A second drilling rig was added late in the
quarter to accelerate  this drilling  program.  Production on Block 51 fell 5%
from the fourth quarter as a result of minor  equipment  repairs and unplanned
power outages.

CANADA
Production in Canada  increased 3% from the previous  quarter from  successful
drilling  on our  heavy  oil  properties  and mild  winter  weather.  The warm
weather, however, created access limitations in some areas and delayed some of
our  first  quarter  drilling  activity  and  re-completion   work.   Canadian
production  was 32% lower  than the first  quarter  of 2005 as a result of the
sale of certain  conventional  oil and gas  properties in the third quarter of
last year. These properties produced  approximately  18,300 boe/d in the first
quarter of last year.  Production  volumes in Canada are  expected to increase
later this year with the commencement of bitumen production from Long Lake and
new gas production from our coal bed methane project.

UNITED STATES
Gulf of Mexico  production  was 12% higher than the  previous  quarter but 21%
lower than the first quarter of 2005.  Some of the production that was shut-in
from  Hurricanes  Katrina  and Rita  was  restored  during  the  quarter,  but
production of 2,300 boe/d remains shut-in due to  infrastructure  repairs.  We
expect this production to return mid-year.

While water cuts at Aspen moderated during the quarter,  production from Aspen
declined  13% from the  fourth  quarter.  We are  currently  drilling  another
development well at Aspen but drilling has been suspended  following damage to
the rig  caused  by a work  boat.  The rig is in dry dock for  repairs  and we
expect drilling to resume in the second quarter. Gunnison production increased
3,000  boe/d  from  the  fourth  quarter.  Gunnison  was  shut-in  during  the
hurricanes but the wells are currently  producing at capacity.  Development of
the Dawson  Deep  discovery  is expected  to be  completed  later in the year.
Development  of the Wrigley  discovery  was delayed by the tight  drilling rig
market in the Gulf but a rig has been  secured and  production  is expected in
early 2007.

UNITED KINGDOM
Production  from the Scott and Telford  fields was  consistent  with the first
quarter  of 2005  but  lower  by 10%  from  the  previous  quarter.  Unplanned
maintenance late in the quarter reduced gas production and full production has
since been restored.  Farragon produced  approximately  4,000 boe/d during the
quarter  following  start-up in December 2005.  Our Buzzard  development is on
time and on budget,  and we expect to begin  producing from this field in late
2006.

OTHER COUNTRIES
Production from our Guando field in Colombia averaged 5,800 bbls/d, consistent
with the first  quarter of 2005.  Our infill well  drilling  program is almost
complete and we expect to maintain current  production rates for the remainder
of the year. We sold our Ejulebe field assets, offshore Nigeria, in the second
quarter of 2005.

SYNCRUDE
Syncrude  production  was  reduced 9% from the  fourth  quarter as a result of
maintenance and turnaround work on a coker during the quarter.  Production was
30%  higher  than the first  quarter  of 2005 as  hydrotreating  capacity  was
limited in early 2005.  Start-up of the Stage 3 expansion mid-year is expected
to increase our production  capacity by 8,000 bbls/d.  Strong  realized prices
have enabled us to fully recover  allowed capital costs as defined for Alberta
government royalty purposes.  As a result in 2006, our Syncrude royalty regime
increases from a 1% gross revenue  royalty to a 25% net revenue  royalty.  Our
production after royalties decreases as a result of this higher royalty rate.


                                      31
<PAGE>

<TABLE>
<CAPTION>
COMMODITY PRICES

                                                                           Three Months
                                                                         Ended March 31
                                                                      2006             2005
--------------------------------------------------------------------------------------------
<S>                                                                  <C>              <C>
CRUDE OIL AND NGLS
    West Texas Intermediate (WTI) (US$/bbl)                          63.48            49.85
                                                                  --------------------------

    Differentials (1) (US$/bbl)
      Masila (Yemen)                                                  3.76             6.68
      Heavy Oil (Canada)                                             28.89            19.33
      Mars (US)                                                       7.90             7.15
      Dated Brent (UK)                                                1.73             2.35

    Producing Assets (Cdn$/bbl)
      Yemen                                                          68.32            54.38
      Canada                                                         30.00            35.99
      United States                                                  63.73            50.90
      United Kingdom                                                 69.02            54.53
      Other Countries                                                58.81            46.63
      Syncrude                                                       69.95            65.15

    Corporate Average (Cdn$/bbl)                                     63.11            51.33
                                                                  --------------------------

NATURAL GAS
    New York Mercantile Exchange (NYMEX) (US$/mmbtu)                  7.87             6.48
    AECO (Cdn$/mcf)                                                   8.79             6.34
                                                                  --------------------------

    Producing Assets (Cdn$/mcf)
      Canada                                                          7.65             5.80
      United States                                                   9.06             8.32
      United Kingdom                                                 11.82             6.92

    Corporate Average (Cdn$/mcf)                                      8.71             6.98
                                                                  --------------------------

NEXEN'S AVERAGE REALIZED OIL AND GAS PRICE (Cdn$/boe)                61.11            49.55
                                                                  --------------------------

AVERAGE FOREIGN EXCHANGE RATE
    Canadian to US Dollar (US$)                                     0.8660           0.8152
                                                                  --------------------------
</TABLE>

Note:
(1)  These differentials represent a discount relative to WTI.

HIGHER REALIZED COMMODITY PRICES INCREASED QUARTERLY NET INCOME BY $164 MILLION
While WTI  softened  slightly  from the  previous  quarter,  it is 27%  higher
compared  to the  first  quarter  of 2005.  As a result  of  strong  benchmark
commodity  prices,  we  realized  higher  prices for our crude oil,  averaging
$63.11/bbl  in the  quarter,  23% higher than the first  quarter of 2005.  Our
realized gas price  increased 25% from a year ago to average  $8.71/mcf in the
first  three  months  of the  year.  NYMEX  increased  21% in the same  period
averaging US$7.87/mmbtu.

The full  benefit  of higher  benchmark  prices  did not flow  through  to our
realized  prices as a result of a weaker US dollar during the quarter.  All of
our oil sales and most of our gas sales are denominated in or referenced to US
dollars.  As a result,  the  weakening US dollar  decreased  net sales for the
quarter by approximately  $55 million,  and reduced our realized crude oil and
natural gas prices by  approximately  $3.95/bbl and  $0.55/mcf,  respectively,
compared to the first quarter of 2005.

CRUDE OIL REFERENCE PRICES
As was the case in 2005,  crude oil supply  levels and  global  demand  growth
remain  adequate,  but the  availability  of refining  capacity  continued  to
tighten and  worldwide  political  concerns  have not abated.  Most  worldwide
refining  capacity requires  light-sweet crude as feedstock,  but only a small
portion of new worldwide supply is light or sweet. With light-sweet  crudes in
greatest  demand  but  limited  supply,  prices  for both WTI and  Brent  have
remained high.

Throughout the first quarter,  strong gasoline prices have supported crude oil
prices,  as increases  to crude stocks were not enough to offset  decreases in
gasoline  stocks.  Despite high crude  inventories in North America,  extended
refinery  maintenance  in the US has  increased  concerns  over the  supply of
refined products, specifically gasoline inventories heading into the US summer
driving  season.  In  addition,  new  US  gasoline  regulations  have  created

                                      32
<PAGE>

compliance  hurdles for refineries to meet new renewable fuel standards and to
secure  sufficient  replacement  gasoline  additives  ahead of the high-demand
summer driving season.  The high North American crude inventories are expected
to decline as  refineries  return  from  maintenance  and  increase  crude oil
purchases once again.

Growing  anticipation of another significant  hurricane season later this year
is expected to provide continued support for crude prices, amid concerns about
further infrastructure damage, limited refinery capacity and product supply.

On the political side, Nigeria continues to experience production  disruptions
with almost a quarter of the country's production shut-in at the end of March.
Continued  political and labour unrest  throughout  the Middle East and Europe
have increased supply concerns.  With speculation  around many of these events
and  their  possible  impact,  we  continue  to  see  greater  volatility  and
significant  participation by hedge funds and other investors in the commodity
markets.


CRUDE OIL DIFFERENTIALS
With the exception of Masila and Brent, crude oil differentials widened in the
first quarter due to the underlying  strength of WTI and the growing worldwide
demand for light-sweet  crude oil. With light-sweet  blends in high demand for
the majority of worldwide  refineries,  and with  continued  growth in product
demand  (gasoline  and heating oil),  refining  capacity is having a difficult
time keeping up, all in the midst of extended refinery maintenance programs in
early 2006.  As the demand for lighter  blends  continues to grow  relative to
heavy  blends,  and given  that the  world's  supply of heavy  sour  crudes is
increasing  faster  than  the  supply  of  light  crudes,  we  expect  to  see
differentials remain wide.

In Canada,  heavy crude oil  differentials  widened  considerably in the first
quarter, averaging just under US$29/bbl. These differentials widened to almost
US$33/bbl in February before  strengthening  to US$27/bbl at the end of March.
Canadian  heavy oil traded at a larger  discount  to WTI than other  worldwide
heavies during the quarter.  This reflects normal seasonal  decline in demand,
mild winter weather and capacity constraints on the Enbridge pipeline relative
to growing  Canadian heavy crude oil  production,  which  essentially  trapped
volumes within Canada.  In the early part of the second quarter,  we have seen
Canadian  heavy  differentials  decrease to the  US$16/bbl to US$18/bbl  range
mainly as a result of the onset of seasonal asphalt demand and the shipping of
more  Canadian  heavy  volumes to the US Gulf in light of  increased  pipeline
capacity  from  a  recent  line  reversal.   We  also  expect  Canadian  heavy
differentials  to narrow  further  given the  addition of heavy oil  upgrading
capacity  currently  underway.  This will bring Canadian  heavies in line with
heavies from the rest of the world.

The US Gulf Coast Mars differential  widened slightly,  averaging  US$7.90/bbl
throughout  the first  quarter.  Temporary  decline in demand due to  refinery
maintenance  caused  this  widening in the Mars  differential  as did the warm
winter in North  America.  Medium sour crude from the Gulf has been  competing
with incremental OPEC production for limited sour refining capacity worldwide.

The Masila  differential  narrowed  relative to WTI during the first  quarter,
averaging  US$3.76/bbl.  Masila  crude,  unlike other  worldwide  sour grades,
strengthened mainly from higher demand caused by cold weather throughout North
Asia.

The Brent/WTI  differential  strengthened  during the first quarter  averaging
US$1.73/bbl.  Production  outages in the North Sea and Nigeria,  combined with
the cold winter in North  Asia,  helped to push Brent up relative to the North
American WTI benchmark.  These factors resulted in higher prices for our North
Sea barrels.


NATURAL GAS REFERENCE PRICES
NYMEX natural gas prices  averaged  US$7.87/mmbtu.  NYMEX reached record price
and volatility  levels in late 2005,  driven mainly by the US hurricanes  last
year and speculation around the 2006 North American winter season. Prices have
since  softened  considerably  due to a weak  winter  heating  season  and the
subsequent overhang of high gas inventories.  The mildest January temperatures
on record in several key North American natural gas consuming regions resulted
in a weakening  of NYMEX and created a  significant  build in gas  inventories
despite the hurricane-related Gulf of Mexico production shut-ins.  Inventories
at the end of the first quarter  reached  their  highest  levels ever for this
time period.

Overall,  high  inventory  levels,  coupled  with  forecasts  for a worse than
average  hurricane  season  later this year,  will likely  continue to provide
price volatility in the coming months.


                                      33
<PAGE>

<TABLE>
<CAPTION>
OPERATING COSTS

                                                          Three Months Ended March 31
(Cdn$/boe)                                              2006                       2005
-------------------------------------------------------------------------------------------------
                                                 Before        After        Before         After
                                           Royalties (1)   Royalties   Royalties(1)    Royalties
                                           ------------------------------------------------------
<S>                                        <C>             <C>         <C>             <C>
Conventional Oil and Gas (2)                       6.56        9.50           5.44          8.00
Synthetic Crude Oil
    Syncrude                                      40.12       44.36          39.91         40.31
Total Oil and Gas (2)                              8.78       12.46           6.94          9.94
                                           ------------------------------------------------------
</TABLE>

Notes:

(1)  Operating costs per boe are our total oil and gas operating costs divided
     by our working interest  production before  royalties.  We use production
     before  royalties  to  monitor  our  performance  consistent  with  other
     Canadian oil and gas companies.
(2)  2005 operating costs include results of discontinued operations (see Note
     15 to our Unaudited Consolidated Financial Statements).

HIGHER OIL AND GAS OPERATING COSTS DECREASED NET INCOME FOR THE QUARTER
BY $13 MILLION
Operating  costs in the quarter were impacted by  maintenance  and  turnaround
activities  in the Gulf of Mexico and at Syncrude,  coupled with industry cost
pressures in the US.

Our  operations  at Masila in Yemen are  maturing  and have  higher  operating
costs,  mainly  from  increased  service rig  activity to minimize  production
declines.  These higher costs added $0.05/boe to our corporate average.  Block
51 operating costs increased our corporate average by $0.38/boe. This reflects
cost  increases  resulting  from  increased  operating  personnel   headcount,
additional  water  handling  costs  and  maintenance   costs  associated  with
equipment repairs and power outages.

Operating  costs in the Gulf of Mexico have  increased  due to  industry  cost
pressures caused by the 2005 hurricane  season.  Equipment and  transportation
costs have not returned to pre-storm  levels.  We also  expensed $3 million of
costs relating to workovers on the Shelf during the first quarter. The Gulf of
Mexico increased our corporate average by $0.65/boe from the prior year.

North Sea  operating  costs are largely  unchanged  but  following the sale of
Canadian  production in 2005,  barrels from the North Sea are  contributing  a
higher  percentage  of our  total  production.  As the  North  Sea has  higher
operating costs than our average cost per barrel, the change in production mix
has increased our corporate average by $0.09/boe.

US-dollar  denominated  operating costs were lower when translated to Canadian
dollars as a result of the weak US dollar.  Our corporate  average was reduced
by $0.28/boe as a result.

Syncrude increased our corporate average operating costs by $0.92/boe from the
first  quarter  of  2005  primarily  as  a  result  of  coker  turnaround  and
maintenance  costs  spread over fewer  barrels  and higher  natural gas prices
early in the  quarter.  Natural gas prices  spiked in December and we incurred
additional energy costs in January as prices were still high.  Operations have
returned to normal levels with minimal downtime  expected for the remainder of
the second quarter.

<TABLE>
<CAPTION>
DEPRECIATION, DEPLETION, AMORTIZATION AND IMPAIRMENT (DD&A)

                                                          Three Months Ended March 31
(Cdn$/boe)                                              2006                       2005
-------------------------------------------------------------------------------------------------
                                                 Before        After        Before         After
                                           Royalties (1)   Royalties   Royalties(1)    Royalties
                                           ------------------------------------------------------
<S>                                        <C>             <C>         <C>             <C>
Conventional Oil and Gas (2)                      12.83        18.58         10.40         15.28
Synthetic Crude Oil
    Syncrude                                       3.78         4.18          3.56          3.60
Average Oil and Gas (2)                           12.23        17.36         10.10         14.47
                                           ------------------------------------------------------
</TABLE>

Notes:
(1)  DD&A  per boe is our  DD&A  for oil and  gas  operations  divided  by our
     working interest  production before  royalties.  We use production before
     royalties to monitor our  performance  consistent with other Canadian oil
     and gas companies.
(2)  2005 DD&A includes results of discontinued operations (see Note 15 to our
     Unaudited Consolidated Financial Statements).


HIGHER OIL AND GAS DD&A REDUCED NET INCOME FOR THE QUARTER BY $10 MILLION
In Yemen,  higher Block 51 production  increased our corporate  unit depletion
rate by $1.35/boe compared to the first quarter of 2005 as a result of carried
interest  accounting  for the  recovery  of Block  51  capital  costs.  Higher
production  volumes  and  realized  oil  prices  have  resulted  in the faster
recovery of capital costs we paid on behalf of the government. In addition, we
have started to deplete the permanent facilities, which were completed in late
2005 and early 2006.

                                      34
<PAGE>

North Sea  depletion  increased  our  corporate  average  by  $0.75/boe.  This
increase  reflects  expensing  $15  million of  purchase  price  allocated  to
unproved properties subject to unsuccessful  exploration activities.  The sale
of  Canadian  production  in 2005  has  effectively  increased  our  corporate
depletion rate since a greater proportion of our production now comes from the
North Sea. Our North Sea assets have higher than average depletion rates. This
change in production mix has increased our corporate average by $0.69/boe.

The  strengthening  Canadian dollar offset these increases as the depletion of
our international and US assets is denominated in US dollars. This lowered our
corporate average by $0.64/boe compared to the first quarter of 2005.

EXPLORATION EXPENSE

                                                               Three Months
                                                              Ended March 31
(Cdn$ millions)                                              2006        2005
-------------------------------------------------------------------------------
Seismic                                                        22           5
Unsuccessful Exploration Drilling                              65           8
Other                                                          16          15
                                                           --------------------
Total Exploration Expense (1)                                 103          28
                                                           ====================

New Growth Exploration                                        117         110
Geological and Geophysical Costs                               22           5
                                                           --------------------
Total Exploration Expenditures                                139         115
                                                           ====================

Note:
(1)  Includes exploration expense from discontinued operations (see Note 15 to
     our Unaudited Consolidated Financial Statements).


HIGHER EXPLORATION EXPENSE DECREASED NET INCOME FOR THE QUARTER BY $75 MILLION
Exploration  activity  in the quarter was focused in the North Sea and Gulf of
Mexico.  During the quarter,  we completed a successful  sidetrack well on our
Knotty Head discovery, confirming reservoirs found in the original exploration
well. Additional appraisal work is planned to further define the discovery.

Our exploration  expense includes costs associated with unsuccessful  wells in
the Gulf of Mexico,  North Sea and Nigeria. In the Gulf of Mexico, we expensed
$44  million  for the  Pathfinder  well.  Pathfinder,  a  deep-water  sub-salt
prospect  drilled  to a total  depth  of  31,196  feet,  found  non-commercial
quantities of  hydrocarbons.  A sidetrack well was also drilled at Pathfinder,
but it encountered poor quality sands. No further work is planned and the well
has been abandoned.

In the North Sea, unsuccessful  exploration drilling at Zanzibar and Black Cat
was  expensed.  Our  evaluation of Zanzibar  showed no reservoir  sands in the
target zone.  Similarly,  the target zones of the Black Cat prospect were wet.
Both wells were plugged and abandoned as dry holes and we expensed $17 million
during the quarter.  Exploration  expense also includes  costs relating to our
Ukot South well, offshore Nigeria, which encountered wet sands and was plugged
and abandoned.

Higher  geological and  geophysical  activity in the deep-water Gulf of Mexico
increased our seismic  costs by $12 million  during the quarter as we continue
efforts to identify new exploration targets in the area.


                                      35
<PAGE>

<TABLE>
<CAPTION>
OIL AND GAS MARKETING

                                                                              Three Months
                                                                             Ended March 31
(Cdn$ millions)                                                            2006         2005
---------------------------------------------------------------------------------------------
<S>                                                                      <C>          <C>
    Marketing Revenue, net                                                  437          224
    Transportation                                                         (232)        (172)
    Other                                                                     -           (2)
                                                                       ----------------------
Net Revenue                                                                 205           50
                                                                       ======================

Physical Sales Volumes (excluding intra-segment transactions)
    Crude Oil (mboe/d)                                                      587          476
    Natural Gas (bcf/d)                                                     5.4          5.0

Value-at-Risk
    Quarter-end                                                              19           26
    High                                                                     26           30
    Low                                                                      17           20
    Average                                                                  20           25
                                                                       ----------------------
</TABLE>

HIGHER CONTRIBUTION FROM MARKETING INCREASED NET INCOME BY $155 MILLION
Our gas  marketing  group  took  advantage  of  continuing  volatility  in the
physical and financial North American gas markets caused by hurricanes in 2005
and warmer than expected  winter  weather.  Significant  swings in natural gas
prices during the winter  resulted in large and volatile basis spreads between
different locations and different time periods. Recognizing these disconnects,
our gas marketing group  positioned  themselves to benefit from the correction
to more historical market price relationships.

Our strategy with respect to our  transportation  assets enabled us to capture
profits as the  supply/market  basis returned to historic levels. As a result,
the financial contracts we use to hedge our transportation increased in value.
In  addition,  we  profited  from the sale of a portion  of our gas in storage
early in the quarter when prices were higher. We subsequently  re-injected gas
volumes into storage later in the quarter when prices fell.  Our gas marketing
group  also  focused  on  trading  within  markets  where  we have a  physical
presence,  using both time and  location  spreads to capture  profits.  Record
market  volatility  allowed us to take  advantage  of numerous  near-term  and
longer-term anomalies.

Our crude oil group  continued  to  capitalize  on forward  prices,  using the
contango forward price curve (increasing prices) to generate profits.

Results from our marketing  group vary by quarter and results for each quarter
are not necessarily  indicative of results to be expected in future  quarters.
Quarterly  marketing  results  depend on a variety of  factors  such as market
volatility,  changes in time and location spreads,  the manner in which we use
our  storage  and  transportation  assets  and  the  value  of  the  financial
instruments we use to hedge these assets.

COMPOSITION OF NET MARKETING REVENUE

                                                              Three Months
                                                             Ended March 31
(Cdn$ millions)                                           2006           2005
------------------------------------------------------------------------------
Trading Activities                                         202            48
Non-Trading Activities                                       3             2
                                                    --------------------------
                                                           205            50
                                                    ==========================

TRADING ACTIVITIES
We enter into  contracts  to purchase  and sell crude oil and natural  gas. We
also use financial and  derivative  contracts,  including  futures,  forwards,
swaps and options for hedging and trading purposes. These derivative contracts
are valued as described in the MD&A included in our 2005 Annual Report on Form
10-K.  Results from trading  activities  include physical purchases and sales,
gains and losses on derivative  contracts  and income  relating to our storage
and transportation assets.

                                      36
<PAGE>

FAIR VALUE OF DERIVATIVE CONTRACTS
At March 31, 2006, the fair value of our  derivative  contracts not designated
as accounting  hedges  totalled $213  million.  The following  table shows the
valuation methods underlying these contracts together with details of contract
maturity:

<TABLE>
<CAPTION>
(Cdn$ millions)                                                                       MATURITY
------------------------------------------------------------------------------------------------------------------------------
                                                         less than                                       more than
                                                           1 year        1-3 years       4-5 years        5 years       Total
                                                        ----------------------------------------------------------------------
<S>                                                      <C>             <C>             <C>             <C>            <C>
Prices
    Actively Quoted Markets                                    58             (10)              (2)            -           46
    From Other External Sources                                75              68               25            (1)         167
    Based on Models and Other Valuation Methods                 -               -                -             -            -
                                                        ----------------------------------------------------------------------
Total                                                         133              58               23            (1)         213
                                                        ======================================================================
</TABLE>

At March 31, 2006, we had $4 million of unrecognized  losses on our derivative
contracts  designated  as  accounting  hedges  of the  future  sale of our gas
inventory.  These losses will be  recognized  in income when the  inventory is
sold.  These  contracts  were valued from actively  quoted  markets and settle
within 12 months.

We do not use option valuation methods to record income on transportation  and
storage contracts.

<TABLE>
<CAPTION>
CHANGES IN FAIR VALUE OF DERIVATIVE CONTRACTS

(Cdn$ millions)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                            <C>
Fair Value at December 31, 2005                                                                                          169
    Change in Fair Value of Contracts                                                                                    197
    Net Losses (Gains) on Contracts Closed                                                                              (153)
    Changes in Valuation Techniques and Assumptions (1)                                                                    -
                                                                                                              ---------------
Fair Value at March 31, 2006                                                                                             213
Unrecognized Losses on Hedges of Future Sale of Gas Inventory
    at March 31, 2006                                                                                                     (4)
                                                                                                              ---------------
Total Outstanding at March 31, 2006                                                                                      209
                                                                                                              ===============
</TABLE>

Note:
(1)  Our valuation methodology has been applied consistently in each period.

<TABLE>
<CAPTION>
TOTAL CARRYING VALUE OF DERIVATIVE CONTRACTS

                                                                                                    March 31     December 31
(Cdn$ millions)                                                                                         2006            2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>                <C>
Current Assets                                                                                           348            382
Non Current Assets                                                                                       181            232
                                                                                              -------------------------------
   Total Derivative Contract Assets                                                                      529            614
                                                                                              ===============================

Current Liabilities                                                                                      215            321
Non Current Liabilities                                                                                  101            124
                                                                                              -------------------------------
   Total Derivative Contract Liabilities                                                                 316            445
                                                                                              ===============================

   Total Derivative Contract Net Assets (1)                                                              213            169
                                                                                              ===============================
</TABLE>

Note:
(1)  Does not include  designated  hedges.  We  recognize  gains and losses on
     effective hedges in the same period as the hedged item.

NON-TRADING ACTIVITIES
We enter into fee-for-service  contracts related to transportation and storage
of third  party  oil and gas.  In  addition,  we earn  income  from our  power
generation  facility.  We earned $3 million from these activities in the first
quarter (2005 - $2 million).

In 2004 and 2005,  we increased our  transportation  capacity and were paid to
assume future obligations  associated with this capacity.  We have $29 million
of deferred revenue on our balance sheet to recognize the liability associated
with these obligations. We are amortizing this deferred revenue to earnings as
the capacity is used.

                                      37
<PAGE>

CHEMICALS

REDUCED CHEMICALS CONTRIBUTION DECREASED NET INCOME BY $1 MILLION
Net sales  increased due to strong  volumes and higher prices  relative to the
first  quarter of 2005.  However,  this  favourable  result  was  matched by a
corresponding  increase in operating costs reflecting high  electricity  costs
driven by high natural gas prices.

In Brazil,  our sales and operations  remained strong as a result of continued
strong demand from Aracruz  Cellulose,  our primary customer in Brazil, and an
expanded presence in the merchant market.

<TABLE>
<CAPTION>
CORPORATE EXPENSES

GENERAL AND ADMINISTRATIVE (G&A)

                                                                                              Three Months
                                                                                             Ended March 31
(Cdn$ millions)                                                                           2006             2005
----------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                  <C>
General and Administrative Expense before Stock-Based Compensation                          75              56
Stock-Based Compensation (1)                                                               139             125
                                                                                --------------------------------
Total General and Administrative Expense                                                   214             181
                                                                                ================================
</TABLE>

Note:
(1)  Includes the tandem option plan, stock options for our US-based employees
     and stock appreciation rights.

HIGHER COSTS DECREASED QUARTERLY NET INCOME BY $33 MILLION
Our stock-based compensation expense increased as the result of our increasing
common  share  price.  Our  share  price  was  $64.30/share  at the end of the
quarter,  a  16%  increase  over  year  end.  Cash  payments  related  to  our
stock-based compensation programs was $37 million during the first quarter.

G&A  expenses are  increasing  from higher  employee  levels as we continue to
develop our oil and gas  operations  internationally  and expand our marketing
operations.  Strong  performance  from our marketing  group during the quarter
also increased our accrual for results-based compensation programs.

<TABLE>
<CAPTION>
INTEREST AND FINANCING COSTS

                                                                                            Three Months
                                                                                           Ended March 31
(Cdn$ millions)                                                                         2006             2005
--------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                 <C>
Interest                                                                                  66              67
    Less: Capitalized Interest                                                           (57)            (33)
                                                                                ------------------------------
Net Interest Expense                                                                       9              34
                                                                                ==============================
</TABLE>

LOWER INTEREST EXPENSE INCREASED QUARTERLY NET INCOME BY $25 MILLION
Our absolute  financing  costs are comparable  with the first quarter of 2005.
Interest  expense  related to our  acquisition  credit  facilities in 2005 was
replaced by the  interest  costs from the US$1.04  billion of  long-term  debt
issued in March 2005. During the quarter, the stronger Canadian dollar lowered
our US-dollar  denominated  interest by $3 million. New credit facilities from
the Canexus LP are  included  with our results,  increasing  our expense by $2
million in the quarter.

We are capitalizing  interest on our major  development  projects in the North
Sea,  at  Long  Lake  and  at  Syncrude  until  completion  of  the  projects.
Capitalized  interest in 2006 increased  primarily from additional spending at
the Buzzard and Long Lake projects.  We expect that capitalized  interest will
continue to increase as we spend additional capital on these projects prior to
their completion later this year and in 2007.


                                      38
<PAGE>

<TABLE>
<CAPTION>
INCOME TAXES

                                                                                           Three Months
                                                                                          Ended March 31
(Cdn$ millions)                                                                        2006             2005
-------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>             <C>
Current                                                                                 109             79
Future                                                                                  271            (60)
                                                                                -----------------------------
Total Provision for Income Taxes                                                        380             19
                                                                                =============================

Disclosed as:
Provision for Income Taxes - Continuing Operations                                      380               7
Provision for Income Taxes - Discontinued Operations (1)                                  -              12
                                                                                -----------------------------
Total Provision for Income Taxes                                                        380              19
                                                                                =============================

Effective Tax Rate (%)                                                                  125              34
                                                                                -----------------------------
</TABLE>

Note:
(1)  See Note 15 to our Unaudited Consolidated Financial Statements.

EFFECTIVE TAX RATE FOR THE QUARTER INCREASES TO 125%
Current  income taxes  include cash taxes in Yemen of $67 million  (2005 - $59
million). Strong results are generating an increase in current taxes in the US
and are  expected  to continue to  increase  our  current tax  provision.  Our
current income tax provision also includes current taxes in Colombia,  federal
and state taxes in the US and capital taxes in Canada.  Recent tax  reductions
announced by the Alberta  government are expected to reduce future tax expense
in the second quarter.

During the quarter, the UK government  substantively  enacted increases to the
supplementary  charge on our North Sea oil and gas activities from 10% to 20%,
effective   January  1,  2006.  This  has  increased  our  future  income  tax
liabilities, resulting in a charge of $277 million.

<TABLE>
<CAPTION>
OTHER

                                                                                          Three Months
                                                                                         Ended March 31
(Cdn$ millions)                                                                       2006             2005
------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>              <C>
Decrease in Fair Value of Crude Oil Put Options                                         (4)           (173)
                                                                                ----------------------------
</TABLE>

Following our North Sea  acquisition in late 2004, we purchased put options on
60,000 bbls/d of oil  production for 2005 and 2006 to ensure base cash flow in
those years while we invest in our major development  projects.  These options
created an average floor price for this production of US$43.17/bbl in 2005 and
US$38.17/bbl in 2006.  Accounting rules require that these options be recorded
at fair value throughout their term. As a result, changes in forward crude oil
prices  cause gains or losses to be  recorded on these  options at each period
end.  A gain of $56  million  was  recorded  in the  fourth  quarter  of 2004,
bringing  the fair value of these  options to $200  million.  During the first
quarter of 2005, a significant  increase in forward crude prices resulted in a
value loss of $173 million.  Strong WTI prices in 2006 have reduced the market
value of these  options to nil and we  expensed  $4  million  during the first
quarter as a result.



                                      39
<PAGE>

<TABLE>
<CAPTION>
LIQUIDITY

CAPITAL STRUCTURE

                                                                         March 31    December 31
(Cdn$ millions)                                                              2006           2005
-------------------------------------------------------------------------------------------------
<S>                                                                  <C>              <C>
NET DEBT (1)
   Bank Debt                                                                  208            171
   Public Senior Notes                                                      2,982          2,980
                                                                     ----------------------------
     Senior Debt                                                            3,190          3,151
   Subordinated Debt                                                          537            536
                                                                     ----------------------------
     Total Debt                                                             3,727          3,687
   Less: Cash and Cash Equivalents                                            (30)           (48)
                                                                     ----------------------------
                                                                            3,697          3,639
   Less: Non-Cash Working Capital and Restricted Cash (2)                     135              2
                                                                     ----------------------------
TOTAL NET DEBT                                                              3,832          3,641
                                                                     ============================

SHAREHOLDERS' EQUITY (3)                                                    3,941          4,008
                                                                     ============================
</TABLE>

Notes:
(1)  Includes all of our debt and is  calculated  as  long-term  debt less net
     working capital.
(2)  Excludes short-term borrowings since these are included in bank debt.
(3)  At March 31,  2006,  there  were  261,674,080  common  shares  and US$460
     million  of  unsecured   subordinated   securities   outstanding.   These
     subordinated  securities  may be redeemed by issuing common shares at our
     option after November 8, 2008. The number of shares  issuable  depends on
     the common share price on the redemption date.

<TABLE>
<CAPTION>
CHANGE IN WORKING CAPITAL

                                                          March 31     December 31       Increase/
(Cdn$ millions)                                               2006            2005      (Decrease)
---------------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>              <C>
Cash and Cash Equivalents                                       30              48            (18)
Restricted Cash                                                124              70             54
Accounts Receivable                                          2,374           3,151           (777)
Inventories and Supplies                                       651             504            147
Accounts Payable and Accrued Liabilities                    (3,274)         (3,710)           436
Other                                                          (10)            (17)             7
                                                       --------------------------------------------
Net Working Capital                                           (105)             46           (151)
                                                       ============================================
</TABLE>

Accounts  receivable and payable related to our marketing  operation decreased
from year end as a result of lower  natural  gas  prices.  Natural  gas prices
spiked in December 2005,  which  increased our accrued gas sales and purchases
at the end of the year.  Natural  gas  prices  fell 55% early in the  quarter,
lowering our accruals at the end of the quarter. We also took advantage of low
gas prices  during the quarter and  increased  our gas storage  position by 12
bcf.  Offsetting the decrease in marketing payables was an increase in accrued
stock-based compensation obligations as a result of our strong share price.


NET DEBT

Our net debt levels are directly  related to our operating  cash flows and our
capital expenditure activities. Changes in net debt are related to:

<TABLE>
<CAPTION>
(Cdn$ millions)
------------------------------------------------------------------------------------------------
<S>                                                                                <C>
Capital Expenditures                                                                       753
Cash Flow from Operating Activities                                                        734
                                                                                   -------------
Excess of Capital Expenditures over Cash Flow                                               19

Dividends on Common Shares                                                                  13
Issue of Common Shares                                                                     (13)
Foreign Exchange Translation of US-dollar Debt and Cash                                     12
Increase in Current Obligation Related to Stock-Based Compensation                         104
Other                                                                                       56
                                                                                   -------------
Increase in Net Debt                                                                       191
                                                                                   =============
</TABLE>

                                      40
<PAGE>

OUTLOOK FOR REMAINDER OF 2006
We continue to expect our 2006 full year production to average between 220,000
and 240,000 boe/d before royalties.  We expect to generate  approximately $2.6
billion  in cash flow  (before  remediation  and  geological  and  geophysical
expenditures) in 2006, assuming the following for the remainder of the year:

------------------------------------------------------------------------------
WTI (US$/bbl)                                                           55.00
NYMEX Natural Gas (US$/mmbtu)                                            9.25
US to Canadian Dollar Exchange Rate                                      0.85
                                                                 -------------

To date,  we have  incurred  approximately  25% of our  planned  2006  capital
investment  of $2.9  billion.  Our 2006  capital  program is largely  targeted
towards our major  development  projects in the North Sea, Long Lake, coal bed
methane,  and Syncrude Stage 3, all planned to come on-stream  within the next
two years.

Our future  liquidity is primarily  dependent on cash flows generated from our
operations,  existing  committed  credit  facilities and our ability to access
debt and equity  markets.  We are in the midst of developing a number of major
projects  over the next two years and our  capital  requirement  to bring them
on-stream is significant.  Based on the assumptions noted above, we expect our
capital investment  program and dividend  requirements to exceed our cash flow
by more than $250 million in 2006.  We plan to fund this  shortfall by drawing
on our unused committed credit  facilities.  In the fourth quarter of 2006, we
will also repay $92 million of medium  term notes that  become  due,  which we
expect to fund using our committed  credit  facilities.  At March 31, 2006, we
had  undrawn  committed  term  credit  facilities  of $2.4  billion  that  are
available   until  2010,  of  which  $142  million  was  utilized  to  support
outstanding  letters  of  credit.  We also had $732  million  of  uncommitted,
unsecured credit facilities,  of which $36 million was drawn at March 31, 2006
and $173 million was utilized to support outstanding letters of credit.

In the first quarter of 2006, we declared  common share dividends of $0.05 per
share (2005 - $0.05). We expect to declare common share dividends of $0.15 per
share in the remainder of the year.

CONTRACTUAL OBLIGATIONS, COMMITMENTS AND GUARANTEES
We have assumed various contractual  obligations and commitments in the normal
course of our  operations  and financing  activities.  We have included  these
obligations  and  commitments  in our MD&A in our 2005  Annual  Report on Form
10-K.  During  the  quarter,  our  capital  commitments  related  to our major
development projects increased by $410 million, mainly relating to the signing
of  contracts  relating  to our Ettrick  development  in the North Sea. Of the
increase,  we expect to incur  approximately $46 million in one to three years
time,  $216  million in four to five years  time and $148  million  after five
years.

CONTINGENCIES
There are a number of lawsuits and claims  pending,  the  ultimate  results of
which cannot be ascertained at this time. We record costs as they are incurred
or become  determinable.  We believe the resolution of these matters would not
have a  material  adverse  effect  on our  liquidity,  consolidated  financial
position  or results of  operations.  These  matters  are  described  in LEGAL
PROCEEDINGS in Item 3 contained in our 2005 Annual Report on Form 10-K.  There
have been no significant developments since year end except as noted below.

In June 2003, a subsidiary of Occidental  Petroleum  Corporation  (Occidental)
initiated an arbitration  against us at the International Court of Arbitration
of the  International  Chamber of Commerce  (ICC Court)  regarding  an Area of
Mutual  Interest  agreement  relating  to two small  areas (the  Heijah/Tawila
Extension  Lands) of Block 51 in the Republic of Yemen. In April 2006, the ICC
Court  released  its partial  award  which held that we were  obliged to offer
Occidental  the right to  acquire  50% of our  interest  in the  Heijah/Tawila
Extension Lands and that we breached that obligation. The result of this award
is that  Occidental  is entitled to  monetary  damages.  The ICC Court did not
determine the amount of damages due to Occidental in this partial award. These
damages will be determined at the  conclusion of the second and final phase of
the arbitration  which will likely occur in 2007. The amount of damages cannot
be  reasonably  estimated  at this  time.  Resolution  of this  matter  is not
expected  to have a material  adverse  effect on our  liquidity,  consolidated
financial position or results of operations.


                                      41
<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS

CANADIAN PRONOUNCEMENTS
In an effort to harmonize Canadian GAAP with US GAAP, the Canadian  Accounting
Standards Board (AcSB) has issued sections:

  o    1530, COMPREHENSIVE INCOME;
  o    3855, FINANCIAL INSTRUMENTS -- RECOGNITION AND MEASUREMENT; and
  o    3865, HEDGES.

Under these new  standards,  all  financial  assets should be measured at fair
value  with the  exception  of loans,  receivables  and  investments  that are
intended to be held to maturity and certain equity  investments,  which should
be measured at cost.  Similarly,  all financial liabilities should be measured
at fair value when they are held for trading or they are derivatives.

Gains and  losses on  financial  instruments  measured  at fair  value will be
recognized  in the  income  statement  in the  periods  they  arise  with  the
exception of gains and losses arising from:

  o    financial  assets held for sale, for which  unrealized gains and losses
       are deferred in other comprehensive income until sold or impaired; and

  o    certain financial instruments that qualify for hedge accounting.

Sections  3855  and 3865  make  use of  "other  comprehensive  income".  Other
comprehensive income comprises revenues,  expenses,  gains and losses that are
recognized  in  comprehensive  income,  but  are  excluded  from  net  income.
Unrealized gains and losses on qualifying hedging instruments,  translation of
self-sustaining  foreign  operations,   and  unrealized  gains  or  losses  on
financial  instruments  held for sale will be included in other  comprehensive
income and reclassified to net income when realized.  Comprehensive income and
its components will be a required disclosure under the new standard.

These new  standards  are  effective  for fiscal  years  beginning on or after
October 1, 2006 and early adoption is permitted.  Adoption of these  standards
as at  March  31,  2006  would  have the  following  impact  on our  Unaudited
Consolidated Financial Statements:

(Cdn$ millions)                                            Increase/(Decrease)
------------------------------------------------------------------------------
Accounts Payable                                                            4
Future Income Tax Liabilities                                              (1)
Shareholders' Equity                                                       (3)
                                                           -------------------

In December 2005, the CICA's  Emerging Issues  Committee  issued Abstract 159,
CONDITIONAL ASSET RETIREMENT OBLIGATIONS (EIC-159). EIC-159 clarifies that the
term conditional asset retirement obligation, as used in CICA Handbook Section
3110, ASSET RETIREMENT  OBLIGATIONS refers to a legal obligation to perform an
asset  retirement  activity where the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity.  EIC-159 also clarifies when there would be sufficient  information to
reasonably estimate the fair value of an asset retirement obligation.  EIC-159
is effective for interim and annual  reporting  periods ending after March 31,
2006.  We do not expect the  adoption of this  section  will have any material
impact on our results of operations or financial position.

In March 2006,  the CICA's  Emerging  Issues  Committee  issued  Abstract 160,
STRIPPING  COSTS  INCURRED  IN THE  PRODUCTION  PHASE  OF A  MINING  OPERATION
(EIC-160). EIC-160 outlines accounting for overburden and mine waste materials
removed in the process of accessing mineral deposits  according to the benefit
received by the entity. Generally,  stripping costs should be accounted for as
variable  production costs and included in the costs of inventory  produced in
the  period  the  stripping  costs are  incurred.  If it can be shown that the
stripping was for betterment of the mineral  property,  stripping costs should
be capitalized.  The standard  outlines the  requirement  for  amortization of
capitalized  stripping  costs as well as a  reconciliation  of stripping costs
incurred  in the  production  phase.  EIC-160 is  effective  for fiscal  years
beginning  on or after July 1, 2006.  We do not  expect the  adoption  of this
section  will  have any  material  impact  on our  results  of  operations  or
financial position.

US PRONOUNCEMENTS
In September  2005, the Emerging  Issues Task Force (EITF) reached a consensus
on Issue No. 04-13,  ACCOUNTING  FOR PURCHASES AND SALES OF INVENTORY WITH THE
SAME COUNTERPARTY. This issue addresses the question of when it is appropriate
to measure  purchases  and sales of inventory at fair value and record them in
cost of sales and  revenues  and when they  should be  recorded  as  exchanges
measured at the book value of the item sold. The EITF concluded that purchases
and sales of  inventory  with the same  counterparty  that are entered into in
contemplation  of one another  should be combined  and  recorded as  exchanges
measured at the book value of the item sold.  The consensus  should be applied
to new  arrangements  entered into and  modifications  or renewals of existing
agreements,  beginning  with the second  quarter of 2006. We do not expect the
adoption  of this  statement  will have a  material  impact on our  results of
operations or financial position.

                                      42
<PAGE>

In February  2006,  the  Financial  Accounting  Standards  Board (FASB) issued
Statement  155,  ACCOUNTING  FOR  CERTAIN  HYBRID  INSTRUMENTS,  which  amends
Statement 133,  ACCOUNTING FOR DERIVATIVE  INSTRUMENTS AND HEDGING ACTIVITIES,
and Statement 140,  ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS
AND   EXTINGUISHMENTS  OF  LIABILITIES.   Statement  155  permits  fair  value
remeasurement  for any hybrid  financial  instrument that contains an embedded
derivative that otherwise would require  bifurcation from its host contract in
accordance with Statement 133. Statement 155 also clarifies and amends certain
other  provisions  of  Statement  133 and  Statement  140.  This  statement is
effective  for all  financial  instruments  acquired or issued in fiscal years
beginning  after  September  15,  2006.  We do not expect the adoption of this
statement  will  have a  material  impact  on our  results  of  operations  or
financial position.

On  January 1, 2006 we  adopted  FASB  Statement  123  (revised),  SHARE-BASED
PAYMENT (Statement 123(R)) using the modified  prospective approach and graded
vesting  amortization.  Under  Statement  123(R) our tandem  options and stock
appreciation  rights are considered  liability based stock compensation plans.
Under the  modified  prospective  approach,  no amounts are  restated in prior
periods.  Upon adoption of Statement 123(R) we recorded a cumulative effect of
a change in  accounting  principle of $2 million.  This amount was recorded in
general  and  administrative  expenses  in our  US  GAAP  Consolidated  Income
Statement.

The impact of adopting  SFAS  123(R) on our results as reported  under US GAAP
for the three months ended March 31, 2006 is as follows:

<TABLE>
<CAPTION>

                                                                         Prior to adoption    After adoption     Increase/
(Cdn$ millions, except per share amounts)                                  of FAS 123(R)      of FAS 123(R)     (Decrease)
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                  <C>                <C>
Income from Continuing Operations before Income Taxes - US GAAP                        312               305           (7)
Net Income - US GAAP                                                                   203               199           (4)
Basic Earnings per Common Share - US GAAP ($/share)                                   0.78              0.76        (0.02)
Diluted Earnings per Common Share - US GAAP ($/share)                                 0.76              0.74        (0.02)
                                                                        --------------------------------------------------
</TABLE>

Prior to the adoption of Statement 123(R) we accounted for our liability based
stock  compensation  plans  in  accordance  with  FASB   Interpretation.   28,
ACCOUNTING  FOR STOCK  APPRECIATION  RIGHTS AND OTHER VARIABLE STOCK OPTION OR
AWARD  PLANS (the  intrinsic  value  method).  Accordingly,  obligations  were
accrued on a graded vesting basis and represented  the difference  between the
market value of our common shares and the exercise price of underlying options
and rights.  Under  Statement  123(R),  obligations  for liability based stock
compensation  plans are measured at their fair value,  and are  re-measured in
each subsequent reporting period.

At March 31, 2006, we had $103 million of  unrecognized  compensation  expense
related to tandem options which we expect to recognize over a weighted-average
period of 1.4 years  and $52  million  of  unrecognized  compensation  expense
related  to stock  appreciation  rights  which we expect to  recognize  over a
weighted-average period of 1.3 years.

EQUITY SECURITY REPURCHASES

During the quarter we made no purchases of our own equity securities.

SUMMARY OF QUARTERLY RESULTS
<TABLE>
<CAPTION>

                                                                                   Three Months Ended
                                                                          2004                    2005                    2006
                                                           --------------------------------------------------------------------
(Cdn$ millions, except per share amounts)                      Jun    Sept     Dec      Mar      Jun     Sep      Dec      Mar
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>     <C>     <C>      <C>      <C>    <C>      <C>       <C>
Net Sales from Continuing Operations                           697     778     805      856      909   1,094    1,073      980

Net Income (Loss) from Continuing Operations                   117     200     226       19      170     211      300      (79)
Net Income from Discontinued Operations                         26      20      20       18       30     404        -        -
                                                           --------------------------------------------------------------------
Net Income (Loss)                                              143     220     246       37      200     615      300      (79)
                                                           ====================================================================

Earnings (Loss) per Common Share from
     Continuing Operations ($/share)
   Basic                                                      0.45    0.77    0.87     0.07     0.65    0.81     1.15    (0.30)
   Diluted                                                    0.44    0.76    0.86     0.07     0.64    0.79     1.12    (0.30)

Earnings (Loss) per Common Share ($/share)
   Basic                                                      0.55    0.85    0.95     0.14     0.77    2.36     1.15    (0.30)
   Diluted                                                    0.54    0.84    0.94     0.14     0.76    2.30     1.12    (0.30)
                                                           --------------------------------------------------------------------
</TABLE>

                                      43
<PAGE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain  statements  in this  report,  including  those  appearing in ITEM 2 -
MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS, are forward-looking  statements.(1) Forward-looking statements are
generally  identifiable by terms such as ANTICIPATE,  BELIEVE,  INTEND,  PLAN,
EXPECT,  ESTIMATE,  BUDGET,  OUTLOOK  or  other  similar  words,  and  include
statements relating to future production associated with our coal bed methane,
Long Lake, Syncrude, North Sea and West Africa projects.

These statements are subject to known and unknown risks and  uncertainties and
other  factors  which  may  cause  actual  results,  levels  of  activity  and
achievements  to differ  materially  from those  expressed  or implied by such
statements. These risks, uncertainties and other factors include:

  o   market prices for oil, natural gas and chemicals products;
  o   our  ability to  produce  and  transport  crude oil and  natural  gas to
      markets;
  o   the  results  of  exploration  and  development   drilling  and  related
      activities;
  o   foreign-currency exchange rates;
  o   economic  conditions  in the  countries and regions in which we carry on
      business;
  o   governmental actions that increase taxes, change environmental and other
      laws and regulations;
  o   renegotiations of contracts;
  o   results of litigation, arbitration or regulatory proceedings; and
  o   political  uncertainty,  including  actions by terrorists,  insurgent or
      other  groups,  or other  armed  conflict,  including  conflict  between
      states.

The above items and their possible impact are discussed more fully in the
section titled RISK FACTORS in Item 7 and QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK in Item 7A of our 2005 Annual Report on Form
10-K.

The impact of any one risk, uncertainty or factor on a particular
forward-looking statement is not determinable with certainty as these are
interdependent and management's future course of action depends upon our
assessment of all information available at that time. Any statements regarding
the following are forward-looking statements:

  o   future crude oil, natural gas or chemicals prices;
  o   future production levels;
  o   future cost recovery oil revenues from our operations in Yemen;
  o   future capital  expenditures  and their  allocation to  exploration  and
      development activities;
  o   future asset dispositions;
  o   future sources of funding for our capital program;
  o   future debt levels;
  o   future cash flows and their uses;
  o   future drilling of new wells;
  o   ultimate recoverability of reserves;
  o   expected finding and development costs;
  o   expected operating costs;
  o   future demand for chemicals products;
  o   future  expenditures  and future  allowances  relating to  environmental
      matters; and
  o   dates by which certain areas will be developed or will come on-stream.

We believe that any  forward-looking  statements made are reasonable  based on
information available to us on the date such statements were made. However, no
assurance  can  be  given  as  to  future  results,  levels  of  activity  and
achievements.  We undertake  no  obligation  to update  publicly or revise any
forward-looking   statements   contained  in  this  report.   All   subsequent
forward-looking  statements,  whether  written or oral,  attributable to us or
persons  acting on our behalf are  expressly  qualified  in their  entirety by
these cautionary statements.


--------
(1)  Within the meaning of the United  States  PRIVATE  SECURITIES  LITIGATION
     REFORM ACT OF 1995, Section 21E of the United States SECURITIES  EXCHANGE
     ACT OF 1934, as amended,  and Section 27A of the United States SECURITIES
     ACT OF 1933, as amended.

                                      44
<PAGE>

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are  exposed  to  normal  market  risks  inherent  in the  oil  and gas and
chemicals  business,  including  commodity price risk,  foreign-currency  rate
risk,  interest rate risk and credit risk. We recognize these risks and manage
our  operations  to  minimize  our  exposures  to the  extent  practical.  The
information  presented on market risks in Item 7A on pages 75 - 78 in our 2005
Annual Report on Form 10-K has not changed materially since December 31, 2005.

ITEM 4.    CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our Chief  Executive  Officer and Chief  Financial  Officer have evaluated the
effectiveness  of our  disclosure  controls  and  procedures  (as  defined  in
Exchange  Act Rules  13a-15(e)  and  15-d-15(e))  as of the end of the  period
covered  by this  report.  They  concluded  that,  as of the end of the period
covered by this report,  our disclosure  controls and procedures were adequate
and effective in ensuring that  material  information  relating to the Company
and its consolidated subsidiaries would be made known to them by others within
those entities,  particularly during the period in which this report was being
prepared.  Management  recognizes that any controls and procedures,  no matter
how well  designed  and  operated,  can provide only  reasonable  assurance of
achieving the desired control  objectives,  and in reaching a reasonable level
of  assurance,  management  necessarily  is required to apply its  judgment in
evaluating the cost-benefit relationship of possible controls and procedures.

CHANGES IN INTERNAL CONTROLS

We have  continually  had in place systems  relating to internal  control over
financial  reporting.  During the first  quarter,  we continued to improve and
enhance our financial  reporting systems by implementing our existing Systems,
Applications and Products in Data Processing (SAP) systems into our UK oil and
gas operations. The conversion of data and the implementation and operation of
SAP has been continually  monitored and reviewed.  To keep pace with growth in
our US  operations,  we are  implementing  additional  inventory  tracking and
procure-to-pay  process controls.  We have evaluated these changes and confirm
that  there has not been any change in the  Company's  internal  control  over
financial  reporting  during  the first  quarter  of 2006 that has  materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.  As well, based on these evaluations,  there
were no material  weaknesses in these internal controls  requiring  corrective
action. As a result, no such corrective actions were taken.


                                      45
<PAGE>

                                    PART II

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 6.    EXHIBITS

 31.1      Certification of Chief Executive Officer pursuant to Section 302 of
           the Sarbanes-Oxley Act of 2002.

 31.2      Certification of Chief Financial Officer pursuant to Section 302 of
           the Sarbanes-Oxley Act of 2002.

 32.1      Certification  of  periodic  report  by  Chief  Executive   Officer
           pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section
           906 of the Sarbanes-Oxley Act of 2002.

 32.2      Certification  of  periodic  report  by  Chief  Financial   Officer
           pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section
           906 of the Sarbanes-Oxley Act of 2002.



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on May 1, 2006.

                                          NEXEN INC.


                                          /s/ Charles W. Fischer
                                          ---------------------------
                                          Charles W. Fischer
                                          President and Chief Executive Officer
                                          (Principal Executive Officer)



                                          /s/ Michael J. Harris
                                          ----------------------------
                                          Michael J. Harris
                                          Controller
                                          (Principal Accounting Officer)



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