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

                                 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 June 30, 2007

|_|    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 LOGO OMITTED]

                                   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).
                     Yes  [_]                   No   [X]

On June 30, 2007, there were 527,149,918 common shares issued and outstanding.

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

                                   NEXEN INC.
                                     INDEX


PART I        FINANCIAL INFORMATION                                        PAGE

   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

This report should be read in  conjunction  with our 2006 Annual Report on Form
10-K,  our amended  2006 Form  10-K/A and with our current  reports on Form 8-K
filed or furnished during the year.


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
81 of our 2006 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>                                      <C>         <C>
/d       =    per day                                  mmboe   =   million barrels of oil equivalent
bbl      =    barrel                                   mcf     =   thousand cubic feet
mbbls    =    thousand barrels                         mmcf    =   million cubic feet
mmbbls   =    million barrels                          bcf     =   billion cubic feet
mmbtu    =    million British thermal units            NGL     =   natural gas liquid
boe      =    barrels of oil equivalent                WTI     =   West Texas Intermediate
mboe     =    thousand barrels of oil equivalent       MW      =   Megawatt
</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 June 29, 2007,  the noon-day  exchange rate was  US$0.9404 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
for the Three and Six Months Ended June 30, 2007 and 2006....................4

Unaudited Consolidated Balance Sheet
as at June 30, 2007 and December 31, 2006....................................5

Unaudited Consolidated Statement of Cash Flows
for the Three and Six Months Ended June 30, 2007 and 2006....................6

Unaudited Consolidated Statement of Shareholders' Equity
for the Three and Six Months Ended June 30, 2007 and 2006....................7

Unaudited Consolidated Statement of Comprehensive Income
for the Three and Six Months Ended June 30, 2007 and 2006....................7

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






                                       3
<PAGE>

NEXEN INC.
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30
Cdn$ millions, except per share amounts

<TABLE>
<CAPTION>
                                                                                 Three Months                    Six Months
                                                                                 Ended June 30                 Ended June 30
                                                                              2007          2006            2007          2006
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>           <C>             <C>           <C>
REVENUES AND OTHER INCOME
    Net Sales                                                                1,399         1,039           2,539         2,019
    Marketing and Other (Note 13)                                              299           376             547           802
                                                                            --------------------------------------------------
                                                                             1,698         1,415           3,086         2,821
                                                                            --------------------------------------------------
EXPENSES
    Operating                                                                  289           223             579           473
    Depreciation, Depletion, Amortization and Impairment                       360           260             694           526
    Transportation and Other                                                   210           203             456           463
    General and Administrative                                                  38           108             240           328
    Exploration                                                                105            46             154           149
    Interest (Note 6)                                                           46            11              94            20
                                                                            --------------------------------------------------
                                                                             1,048           851           2,217         1,959
                                                                            --------------------------------------------------

INCOME BEFORE INCOME TAXES                                                     650           564             869           862
                                                                            --------------------------------------------------

PROVISION FOR INCOME TAXES
    Current                                                                    151           136             211           245
    Future                                                                     126            14             161           283
                                                                            --------------------------------------------------
                                                                               277           150             372           528
                                                                            --------------------------------------------------

NET INCOME BEFORE NON-CONTROLLING INTERESTS                                    373           414             497           334
    Less: Net Income Attributable to Non-Controlling Interests                  (5)           (6)             (8)           (9)
                                                                            --------------------------------------------------

NET INCOME                                                                     368           408             489           325
                                                                            ==================================================

EARNINGS PER COMMON SHARE ($/share)
    Basic (Note 11)                                                           0.70          0.78            0.93          0.62
                                                                            ==================================================

    Diluted (Note 11)                                                         0.68          0.76            0.91          0.61
                                                                            ==================================================
</TABLE>

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.


                                       4
<PAGE>

NEXEN INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
Cdn$ millions, except share amounts

<TABLE>
<CAPTION>
                                                                                          June 30           December 31
                                                                                             2007                  2006
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                   <C>
ASSETS
    CURRENT ASSETS
      Cash and Cash Equivalents                                                               158                   101
      Restricted Cash and Margin Deposits                                                      96                   197
      Accounts Receivable (Note 2)                                                          2,861                 2,951
      Inventories and Supplies (Note 3)                                                       857                   786
      Future Income Tax Assets                                                                277                   479
      Other                                                                                    51                    67
                                                                                    ------------------------------------
         Total Current Assets                                                               4,300                 4,581
                                                                                    ------------------------------------

    PROPERTY, PLANT AND EQUIPMENT
      Net of Accumulated Depreciation, Depletion, Amortization
         and Impairment of $6,502 (December 31, 2006 - $6,399)                             12,147                11,739
    FUTURE INCOME TAX ASSETS                                                                   78                   141
    DEFERRED CHARGES AND OTHER ASSETS (Note 4)                                                321                   318
    GOODWILL                                                                                  348                   377
                                                                                    ------------------------------------
TOTAL ASSETS                                                                               17,194                17,156
                                                                                    ====================================

LIABILITIES AND SHAREHOLDERS' EQUITY
    CURRENT LIABILITIES
      Short-Term Borrowings (Note 6)                                                           61                   158
      Accounts Payable and Accrued Liabilities                                              3,665                 3,879
      Accrued Interest Payable                                                                 65                    55
      Dividends Payable                                                                        13                    13
                                                                                    ------------------------------------
         Total Current Liabilities                                                          3,804                 4,105
                                                                                    ------------------------------------

    LONG-TERM DEBT (Note 6)                                                                 4,852                 4,673
    FUTURE INCOME TAX LIABILITIES                                                           2,274                 2,468
    ASSET RETIREMENT OBLIGATIONS (Note 7)                                                     690                   683
    DEFERRED CREDITS AND OTHER LIABILITIES (Note 8)                                           421                   516
    NON-CONTROLLING INTERESTS                                                                  73                    75

    SHAREHOLDERS' EQUITY (Note 10)
      Common Shares, no par value
        Authorized:                Unlimited
        Outstanding:               2007 - 527,149,918 shares
                                   2006 - 525,026,412 shares                                  893                   821
      Contributed Surplus                                                                       5                     4
      Retained Earnings                                                                     4,435                 3,972
      Accumulated Other Comprehensive Income (Note 1)                                        (253)                 (161)
                                                                                    ------------------------------------
         Total Shareholders' Equity                                                         5,080                 4,636
                                                                                    ------------------------------------
    COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 14)

                                                                                    ------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                 17,194                17,156
                                                                                    ====================================
</TABLE>

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.


                                       5
<PAGE>

NEXEN INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30
Cdn$ millions

<TABLE>
<CAPTION>
                                                                               Three Months                  Six Months
                                                                               Ended June 30                Ended June 30
                                                                            2007          2006            2007         2006
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>              <C>            <C>           <C>
 OPERATING ACTIVITIES
    Net Income                                                               368           408             489          325
    Charges and Credits to Income not Involving Cash (Note 12)               447           293             882          965
    Exploration Expense                                                      105            46             154          149
    Changes in Non-Cash Working Capital (Note 12)                           (304)         (377)           (272)        (304)
    Other                                                                    (34)            4            (223)         (27)
                                                                       --------------------------------------------------------
                                                                             582           374           1,030        1,108

FINANCING ACTIVITIES
    Proceeds from Long-Term Notes                                          1,660             -           1,660            -
    Proceeds from (Repayment of) Term Credit Facilities, Net              (1,321)          417            (955)         413
    Proceeds from Term Credit Facilities of Canexus                           15             -              33            -
    Proceeds from (Repayment of) Short-Term Borrowings, Net                  (44)           50             (92)          85
    Dividends on Common Shares (Note 10)                                     (13)          (13)            (26)         (26)
    Issue of Common Shares and Exercise of Stock Options                      11            24              40           37
    Other                                                                    (28)           (7)            (35)         (14)
                                                                       --------------------------------------------------------
                                                                             280           471             625          495

INVESTING ACTIVITIES
    Capital Expenditures
      Exploration and Development                                           (747)         (767)         (1,537)      (1,486)
      Proved Property Acquisitions                                           (45)            -             (46)          (3)
      Chemicals, Corporate and Other                                         (27)          (52)            (47)         (62)
    Business Acquisitions, Net of Cash Acquired                                -           (57)              -          (78)
    Proceeds on Disposition of Assets                                          -            25               -           25
    Changes in Restricted Cash and Margin Deposits                            66            66              82           12
    Changes in Non-Cash Working Capital (Note 12)                             16            36              44           59
    Other                                                                    (10)          (11)            (14)          (4)
                                                                       --------------------------------------------------------
                                                                            (747)         (760)         (1,518)      (1,537)


EFFECT OF EXCHANGE RATE CHANGES ON CASH
    AND CASH EQUIVALENTS                                                     (67)          (29)            (80)         (28)
                                                                       --------------------------------------------------------

INCREASE IN CASH AND CASH EQUIVALENTS                                         48            56              57           38

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                              110            30             101           48
                                                                       --------------------------------------------------------

CASH AND CASH EQUIVALENTS - END OF PERIOD                                    158            86             158           86
                                                                       ========================================================
</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 AND SIX MONTHS ENDED JUNE 30
Cdn$ millions

                                                                                    Three Months                  Six Months
                                                                                   Ended June 30                 Ended June 30
                                                                                2007           2006             2007        2006
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>              <C>         <C>
COMMON SHARES
    Balance at Beginning of Period                                               866            763              821         732
      Issue of Common Shares                                                       4             21               25          26
      Proceeds from Options Exercised for Shares                                   7              3               15          11
      Accrued Liability Relating to Options Exercised for Shares                  16             12               32          30
                                                                        ---------------------------------------------------------
    Balance at End of Period                                                     893            799              893         799
                                                                        =========================================================

CONTRIBUTED SURPLUS
    Balance at Beginning of Period                                                 4              2                4           2
      Stock-Based Compensation Expense                                             1              1                1           1
                                                                        ---------------------------------------------------------
    Balance at End of Period                                                       5              3                5           3
                                                                        =========================================================

RETAINED EARNINGS
    Balance at Beginning of Period                                             4,080          3,327            3,972       3,423
      Net Income                                                                 368            408              489         325
      Dividends on Common Shares                                                 (13)           (13)             (26)        (26)
                                                                        ---------------------------------------------------------
    Balance at End of Period                                                   4,435          3,722            4,435       3,722
                                                                        =========================================================

ACCUMULATED OTHER COMPREHENSIVE INCOME
    Balance at Beginning of Period                                              (167)          (167)            (161)          -
      Opening Cumulative Foreign Currency Translation Adjustment                   -              -               -          (161)
      (Note 1)
      Opening Derivatives Designated as Cash Flow Hedges (Note 1)                  -              -               61           -
      Other Comprehensive Income                                                 (86)           (63)            (153)         (69)
                                                                        ---------------------------------------------------------
    Balance at End of Period                                                    (253)          (230)            (253)        (230)
                                                                        =========================================================

<CAPTION>
NEXEN INC.
UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30
Cdn$ millions
                                                                                   Three Months                    Six Months
                                                                                   Ended June 30                  Ended June 30
                                                                                2007           2006             2007        2006
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>           <C>               <C>        <C>
    Net Income                                                                   368           408               489        325
    Other Comprehensive Income, Net of Income Taxes:
      Foreign Currency Translation Adjustment:
        Net Losses on Investment in Self-Sustaining Foreign Operations          (437)         (220)             (495)      (218)
        Net Gains on Hedges of Self-Sustaining Foreign Operations (1)            353           154               403        147
        Realized Translation Adjustments Recognized in Net Income (2)             (2)            3                 -          2
      Cash Flow Hedges:
        Realized Mark to Market Gains Recognized in Net Income                     -             -               (61)         -
                                                                        ---------------------------------------------------------
      Other Comprehensive Income                                                 (86)          (63)             (153)       (69)
                                                                        ---------------------------------------------------------
    Comprehensive Income                                                         282           345               336        256
                                                                        =========================================================
</TABLE>
------------
(1)  Net of income  taxes for the three  months  ended  June 30 of $57  million
     (2006 - $19  million)  and for the six months ended June 30 of $66 million
     (2006 - $18 million).
(2)  Net of income taxes for the three months ended June 30 of $1 million (2006
     - nil) and six months ended June 30 of $nil (2006 - $nil).

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 16. 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 June 30, 2007 and the
results of our operations and our cash flows for the three and six months ended
June 30, 2007 and 2006.

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,  derivative  contract  assets and  liabilities  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
and six  months  ended  June 30,  2007 are not  necessarily  indicative  of the
results of operations or cash flows to be expected for the year ending December
31, 2007.

These Unaudited Consolidated Financial Statements should be read in conjunction
with our Audited Consolidated  Financial Statements included in our 2006 Annual
Report on Form 10-K.  Except as described  below,  the  accounting  policies we
follow are described in Note 1 of the Audited Consolidated Financial Statements
included in our 2006 Annual Report on Form 10-K.

CHANGE IN ACCOUNTING POLICIES
On January 1, 2007, we adopted the following new accounting standards issued by
the    Canadian     Accounting     Standards     Board    (AcSB):     FINANCIAL
INSTRUMENTS--RECOGNITION  AND MEASUREMENT (Section 3855), HEDGES (Section 3865)
and COMPREHENSIVE INCOME (Section 1530).

FINANCIAL INSTRUMENTS--RECOGNITION AND MEASUREMENT
Section 3855 requires all  financial  assets and  liabilities  to be carried at
fair value in the  Unaudited  Consolidated  Balance Sheet with the exception of
loans and receivables, investments that are intended to be held to maturity and
non-trading  financial liabilities which are to be carried at cost or amortized
cost.

Realized and unrealized  gains and losses on financial  assets and  liabilities
carried at fair value are recognized in the Unaudited Consolidated Statement of
Income in the periods such gains and losses arise. Transaction costs related to
these   financial   assets  and  liabilities  are  included  in  the  Unaudited
Consolidated Statement of Income when incurred.  Unrealized gains and losses on
financial  assets  and  liabilities  carried  at cost  or  amortized  cost  are
recognized in the Unaudited  Consolidated Statement of Income when these assets
or liabilities settle.

We hold  financial  instruments  that were  carried at fair value  prior to the
adoption of Section 3855 as described in Note 9. The  valuation  methods we use
to determine the fair value of these financial  instruments  remain  unchanged.
Financial  instruments  we carry at cost or amortized cost include our accounts
receivable,  accounts  payable,  short-term and long-term  debt.  Upon adopting
Section 3855 with respect to the amortized  cost using the  effective  interest
rate method of our long-term debt, we have reclassed  deferred  financing costs
previously  included in deferred  charges and other assets as unamortized  debt
issue costs which reduce the carrying value of our long-term debt.

HEDGES
Section 3865 prescribes new standards for hedge accounting.

For cash flow  hedges,  changes  in the fair  value of a  financial  instrument
designated as a cash flow hedge are  recognized  in the Unaudited  Consolidated
Statement  of Income in the same  period as the  hedged  item.  Any fair  value
change in the  financial  instrument  before that period is  recognized  on the
Unaudited  Consolidated Balance Sheet. The effective portion of this fair value
change is recognized  in other  comprehensive  income with any  ineffectiveness
recognized in the Unaudited  Consolidated Statement of Income during the period
of change.

For fair value hedges, both the financial instrument designated as a fair value
hedge  and  the   underlying   commitment   are  recognized  on  the  Unaudited
Consolidated Balance Sheet at fair value. Changes in the fair value of both are
reflected in the Unaudited Consolidated Statement of Income.


                                       8
<PAGE>

Adoption  of these new  standards  for hedge  accounting  required us to record
unrealized  mark to market gains on cash flow hedges that were  previously  not
included on our Unaudited Consolidated Balance Sheet at December 31, 2006 as an
adjustment to the opening  balance of accumulated  other  comprehensive  income
(see Note 9).

COMPREHENSIVE INCOME
Section  1530  provides  for  a  new  Statement  of  Comprehensive  Income  and
establishes  accumulated other comprehensive  income as a separate component of
shareholders'  equity.  The Unaudited  Consolidated  Statement of Comprehensive
Income reflects changes in accumulated other comprehensive  income and includes
the  effective  portion of changes in the fair value of  financial  instruments
designated  as cash  flow  hedges,  as  well as  changes  in  foreign  currency
translation  amounts arising in respect of  self-sustaining  foreign operations
together with the impact of any related hedges. Amounts included in accumulated
other  comprehensive  income are  reclassified  to the  Unaudited  Consolidated
Statement  of Income when  realized.  On adoption of Section  1530,  cumulative
foreign  currency  translation  adjustments  relating  to  our  self-sustaining
foreign operations were reclassed to accumulated other comprehensive income and
comparative amounts have been restated.

We adopted these standards prospectively. Comparative amounts for prior periods
have not been  restated  with the  exception of amounts  related to  cumulative
foreign  currency  translation  adjustments.  Adoption of these standards as at
January 1, 2007 had the following impact on our Unaudited  Consolidated Balance
Sheet:

<TABLE>
<CAPTION>
                                                                                                                  January 1, 2007
                                                                                                               Increase/(Decrease)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>              <C>
To Include Unrealized Mark to Market Gains on Cash Flow Hedges at December 31, 2006:
    Accounts Receivable                                                                                                        25
    Accounts Payable and Accrued Liabilities                                                                                  (65)
    Future Income Tax Liabilities                                                                                              29
    Accumulated Other Comprehensive Income                                                                                     61

To Include Cumulative Foreign Currency Translation in Accumulated Other Comprehensive Income:
    Cumulative Foreign Currency Translation Adjustment                                                                        161
    Accumulated Other Comprehensive Income                                                                                   (161)

To Include Unamortized Debt Issue Costs with Long-Term Debt:
    Deferred Charges and Other Assets                                                                                         (59)
    Long-Term Debt                                                                                                            (59)
                                                                                                 ---------------------------------
<CAPTION>
2.   ACCOUNTS RECEIVABLE

                                                                                                   June 30           December 31
                                                                                                      2007                  2006
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>              <C>
Trade
    Marketing                                                                                         2,006                 2,226
    Oil and Gas                                                                                         705                   600
    Chemicals and Other                                                                                  63                    58
                                                                                                 ---------------------------------
                                                                                                      2,774                 2,884
Non-Trade                                                                                                99                    80
                                                                                                 ---------------------------------
                                                                                                      2,873                 2,964
Allowance for Doubtful Receivables                                                                      (12)                  (13)
                                                                                                 ---------------------------------
Total                                                                                                 2,861                 2,951
                                                                                                 =================================
</TABLE>


                                       9
<PAGE>

<TABLE>
<CAPTION>
3.   INVENTORIES AND SUPPLIES

                                                                                                      June 30         December 31
                                                                                                         2007                2006
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>              <C>
Finished Products
    Marketing                                                                                             722                 609
    Oil and Gas                                                                                             2                  21
    Chemicals and Other                                                                                    12                  14
                                                                                                  -------------------------------
                                                                                                          736                 644
Work in Process                                                                                             6                   5
Field Supplies                                                                                            115                 137
                                                                                                  -------------------------------
Total                                                                                                     857                 786
                                                                                                  ===============================
<CAPTION>
4.   DEFERRED CHARGES AND OTHER ASSETS

                                                                                                      June 30         December 31
                                                                                                         2007                2006
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>              <C>
Long-Term Marketing Derivative Contracts (Note 9)                                                         208                 153
Deferred Financing Costs (Note 1)                                                                           -                  59
Asset Retirement Remediation Fund                                                                          14                  13
Crude Oil Put Options (Note 9)                                                                             23                  19
Other                                                                                                      76                  74
                                                                                                  ---------------------------------
Total                                                                                                     321                 318
                                                                                                  =================================
</TABLE>

5.   SUSPENDED WELL COSTS

The following  table shows the changes in  capitalized  exploratory  well costs
during the six month period ended June 30, 2007 and the year ended December 31,
2006,  and does  not  include  amounts  that  were  initially  capitalized  and
subsequently expensed in the same period.

<TABLE>
<CAPTION>
                                                                                   Six Months Ended                   Year Ended
                                                                                            June 30                  December 31
                                                                                               2007                         2006
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                       <C>
Balance at Beginning of Period                                                                  226                          252
    Additions to Capitalized Exploratory Well Costs Pending the
      Determination of Proved Reserves                                                           77                          129
    Capitalized Exploratory Well Costs Charged to Expense                                       (22)                         (70)
    Transfers to Wells, Facilities and Equipment Based on
      Determination of Proved Reserves                                                           (8)                         (84)
    Effects of Foreign Exchange                                                                 (18)                          (1)
                                                                                           ---------------------------------------
Balance at End of Period                                                                        255                          226
                                                                                           =======================================
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                               June 30           December 31
                                                                                                  2007                  2006
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>               <C>
Capitalized for a Period of One Year or Less                                                       104                   179
Capitalized for a Period of Greater than One Year                                                  151                    47
                                                                                              ---------------------------------
Balance at End of Period                                                                           255                   226
                                                                                              =================================
Number of Projects that have Exploratory Well Costs Capitalized for a Period
    Greater than One Year                                                                            6                     4
                                                                                              ---------------------------------
</TABLE>

As at June 30, 2007, we have  exploratory  costs that have been capitalized for
more than one year  relating to our interest in two  exploratory  blocks in the
Gulf of Mexico ($98  million),  our interest in an  exploratory  block offshore
Nigeria ($19 million),  our coalbed  methane  exploratory  activities in Canada
($17 million),  an  exploratory  well on Block 51 in Yemen ($11 million) and an
exploratory  block in the North Sea ($6  million).  We have  capitalized  costs
related to successful wells drilled in Nigeria,  Gulf of Mexico, North Sea, and
at Block 51 in Yemen. In Canada, we have capitalized exploratory costs relating
to our  coalbed  methane  projects.  We are  assessing  all of these  wells and
projects, and are working with our partners to prepare development plans, drill
additional appraisal wells or to assess commercial viability.


                                       10
<PAGE>

<TABLE>
<CAPTION>
6. LONG-TERM DEBT AND SHORT-TERM BORROWINGS

                                                                                                     June 30       December 31
                                                                                                        2007              2006
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>           <C>
Term Credit Facilities (a)                                                                                 -             1,078
Canexus LP Term Credit Facilities (US$178 million)                                                       189               174
Medium-Term Notes, due 2007 (1)                                                                          150               150
Medium-Term Notes, due 2008                                                                              125               125
Notes, due 2013 (US$500 million)                                                                         532               583
Notes, due 2015 (US$250 million)                                                                         266               291
Notes, due 2017 (US$250 million) (b)                                                                     266                 -
Notes, due 2028 (US$200 million)                                                                         213               233
Notes, due 2032 (US$500 million)                                                                         532               583
Notes, due 2035 (US$790 million)                                                                         840               920
Notes, due 2037 (US$1,250 million) (c)                                                                 1,329                 -
Subordinated Debentures, due 2043 (US$460 million)                                                       489               536
                                                                                              -----------------------------------
                                                                                                       4,931             4,673
Unamortized Debt Issue Costs (Note 1)                                                                    (79)                -
                                                                                              -----------------------------------
Total Long-Term Debt                                                                                   4,852             4,673
                                                                                              ===================================
</TABLE>
------------
(1)  Amounts due July 2007 are not included in current liabilities as we expect
     to refinance this amount with our term credit facilities.

(a)  TERM CREDIT FACILITIES

We have committed,  unsecured term credit facilities of $3.3 billion, which are
available to 2011. The lenders have the option to extend the term annually.  At
June 30, 2007 we had not drawn on these facilities  (December 31, 2006 - $1,078
million).   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.  The
weighted-average  interest rate on our term credit  facilities was 5.9% for the
three  months  ended  June 30,  2007  (2006 - 5.7%) and 5.9% for the six months
ended June 30,  2007 (2006 - 5.5%).  At June 30,  2007,  $397  million of these
facilities were utilized to support outstanding letters of credit (December 31,
2006 - $294 million).

(b)  NOTES, DUE 2017

In May 2007,  we issued  US$250  million of 10 year notes.  Interest is payable
semi-annually at a rate of 5.65% and the principal is to be repaid in May 2017.
We may redeem part or all of the notes at any time. The  redemption  price will
be the  greater  of par and an  amount  that  provides  the same  yield as a US
Treasury  security having a term to maturity equal to the remaining term of the
notes plus 0.2%.  The proceeds were used to repay the  outstanding  term credit
facilities.

(c)  NOTES, DUE 2037

In May 2007, we issued US$1,250  million of 30 year notes.  Interest is payable
semi-annually at a rate of 6.40% and the principal is to be repaid in May 2037.
We may redeem part or all of the notes at any time. The  redemption  price will
be the  greater  of par and an  amount  that  provides  the same  yield as a US
Treasury  security having a term to maturity equal to the remaining term of the
notes plus 0.35%.  The proceeds were used to repay the outstanding  term credit
facilities.

(d)  INTEREST EXPENSE
<TABLE>
<CAPTION>
                                                                                   Three Months                    Six Months
                                                                                   Ended June 30                  Ended June 30
                                                                                 2007         2006             2007         2006
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>          <C>             <C>          <C>
Long-Term Debt                                                                     83           65              164          127
Other                                                                               4            6                9           10
                                                                                ---------------------------------------------------
                                                                                   87           71              173          137
   Less: Capitalized                                                              (41)         (60)             (79)        (117)
                                                                                ---------------------------------------------------
Total                                                                              46           11               94           20
                                                                                ===================================================
</TABLE>

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


                                      11
<PAGE>

(e)  SHORT-TERM BORROWINGS

Nexen has  uncommitted,  unsecured  credit  facilities  of  approximately  $631
million,  of which $61  million  (US$57  million)  was  drawn at June 30,  2007
(December 31, 2006 - $158 million). We have also utilized $130 million of these
facilities to support  outstanding letters of credit at June 30, 2007 (December
31,  2006  -  $252  million).  Interest  is  payable  at  floating  rates.  The
weighted-average  interest rate on our  short-term  borrowings was 5.8% for the
three  months  ended  June 30,  2007  (2006 - 5.4%) and 5.8% for the six months
ended June 30, 2007 (2006 - 5.3%).

7. ASSET RETIREMENT OBLIGATIONS

Changes in carrying amounts of the asset retirement obligations associated with
our  property,  plant and  equipment for the six months ended June 30, 2007 and
the year ended December 31, 2006, are as follows:

<TABLE>
<CAPTION>
                                                                            Six Months Ended                Year Ended
                                                                                     June 30               December 31
                                                                                        2007                      2006
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                    <C>
Balance at Beginning of Period                                                           704                       611
    Obligations Assumed with Development Activities                                       36                        75
    Obligations Discharged with Disposed Properties                                        -                        (1)
    Expenditures Made on Asset Retirements                                               (12)                      (44)
    Accretion                                                                             22                        37
    Revisions to Estimates                                                                (3)                      (10)
    Effects of Foreign Exchange                                                          (36)                       36
                                                                                -----------------------------------------
Balance at End of Period (1,2)                                                           711                       704
                                                                                =========================================
</TABLE>
------------
(1)  Obligations  due within 12 months of $21 million  (December 31, 2006 - $21
     million) have been included in accounts payable and accrued liabilities.
(2)  Obligations  relating to our oil and gas activities amount to $665 million
     (December  31,  2006 -  $658  million)  and  obligations  relating  to our
     chemicals  business  amount  to  $46  million  (December  31,  2006  - $46
     million).

Our total estimated  undiscounted asset retirement obligations amount to $1,783
million  (December 31, 2006 - $1,770  million).  We have  discounted  the total
estimated   asset   retirement    obligations    using   a    weighted-average,
credit-adjusted  risk-free rate of 5.7%.  Approximately $94 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.

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.

8.   DEFERRED CREDITS AND OTHER LIABILITIES
<TABLE>
<CAPTION>
                                                                                     June 30         December 31
                                                                                        2007                2006
-----------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>             <C>
Long-Term Marketing Derivative Contracts (Note 9)                                        111                 199
Deferred Transportation Revenue                                                           87                  89
Fixed-Price Natural Gas Contracts (Note 9)                                                62                  74
Capital Lease Obligations                                                                 50                  48
Defined Benefit Pension Obligations                                                       50                  48
Stock-Based Compensation Liability                                                        13                   6
Other                                                                                     48                  52
                                                                                 --------------------------------
Total                                                                                    421                 516
                                                                                 ================================
</TABLE>


                                      12
<PAGE>

9.   FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

We use derivatives in our marketing group for trading  purposes and we also use
derivatives  to manage  commodity  price  risk for  non-trading  purposes.  Our
derivative  instruments are carried at fair value on the Unaudited Consolidated
Balance Sheet. Our other financial instruments are carried at cost or amortized
cost.

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

The  carrying  value,  fair  value,  and  unrecognized  gains or  losses on our
outstanding derivatives and other financial liabilities are:

<TABLE>
<CAPTION>
                                                             JUNE 30, 2007                            DECEMBER 31, 2006
-----------------------------------------------------------------------------------------------------------------------------------
                                                 Carrying       Fair    Unrecognized         Carrying      Fair     Unrecognized
                                                    Value      Value     Gain/(Loss)            Value     Value      Gain/(Loss)
                                                 ----------------------------------------     -------------------------------------
<S>                                               <C>        <C>                 <C>          <C>       <C>               <C>
Derivatives
    Commodity Price Risk
      Non-Trading Activities
        Crude Oil Put Options                          23         23               -               19        19              -
        Fixed-Price Natural Gas Contracts             (85)       (85)              -              (96)      (96)             -
        Natural Gas Swaps                              (5)        (5)              -               (8)       (8)             -

      Trading Activities
        Crude Oil and Natural Gas                     129        129               -              372       372              -
        Future Sale of Gas Inventory                    -          -               -                -        25             25

    Foreign Currency Exchange Rate Risk
      Trading Activities                                2          2               -              (12)      (12)             -
                                                 ------------------------------------     ----------------------------------------
Total Derivatives                                      64         64               -              275       300             25
                                                 ====================================     ========================================

Other Financial Liabilities
      Long-Term Debt                               (4,852)    (4,819)             33           (4,673)   (4,728)           (55)
                                                 ====================================     ========================================
</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.  Other financial  assets used in the normal course of business include
cash and cash  equivalents,  restricted  cash and margin  deposits and accounts
receivable.  Other financial  liabilities  include  accounts  payable,  accrued
interest  payable,  short-term  borrowings  and long-term  debt.  Fair value of
long-term  debt is estimated  based on  third-party  brokers and quoted  market
prices.

(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
In 2006,  we  purchased  WTI crude oil put  options  to provide a base level of
price protection  without  limiting our upside to higher prices.  These options
establish  an annual  average WTI floor price of  US$50/bbl  in 2007 on 105,000
bbls/d at a cost of $26  million.  The crude oil put options are stated at fair
value and are included in accounts  receivable as they settle within 12 months.
Any change in fair value is included in  marketing  and other on the  Unaudited
Consolidated Statement of Income.

During the  quarter,  we purchased  put options on 36 million  barrels or about
100,000  bbls/d of our 2008 crude oil  production.  These  options  establish a
Dated Brent floor price of US$50/bbl on these volumes and are settled annually.
The put options were  purchased  for $24 million and are carried at fair value.
Any change in fair  value is  included  in  marketing  and other  income on the
Unaudited Consolidated Statement of Income.

<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               105,000       2007            50                  -
Dated Brent Crude Oil Put Options       100,000       2008            50                 23
                                                                             ----------------
                                                                                         23
                                                                             ================
</TABLE>


                                      13
<PAGE>

FIXED-PRICE NATURAL GAS CONTRACTS AND NATURAL GAS SWAPS

In July and August 2005, we sold certain  Canadian oil and gas  properties  and
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 included in the
Unaudited  Consolidated Balance Sheet at fair value. Amounts settling within 12
months are included in accounts  payable and amounts  settling  greater than 12
months are included in deferred  credits and other  liabilities.  Any change in
fair value is included in  marketing  and other in the  Unaudited  Consolidated
Statement of Income.

<TABLE>
<CAPTION>
                                         Notional                               Average               Fair
                                          Volumes            Term                 Price              Value
-----------------------------------------------------------------------------------------------------------
                                           (Gj/d)                                ($/Gj)     (Cdn$ millions)
<S>                                        <C>           <C>                <C>              <C>
Fixed-Price Natural Gas Contracts          15,514         2007 - 2008              2.46                (23)
                                           15,514         2008 - 2010       2.56 - 2.77                (62)
                                                                                                 ----------
                                                                                                       (85)
                                                                                                 ==========
</TABLE>

Following  the sale of the  Canadian  oil and gas  properties,  we entered into
natural gas swaps to hedge our fixed price  exposure with floating  natural gas
prices.  Any change in fair value is  included  in  marketing  and other in the
Unaudited  Consolidated  Statement of Income. Amounts settling within 12 months
are included in accounts receivable and amounts settling greater than 12 months
are included in deferred charges and other assets.

<TABLE>
<CAPTION>
                                         Notional                               Average               Fair
                                          Volumes            Term                 Price              Value
-----------------------------------------------------------------------------------------------------------
                                           (Gj/d)                                ($/Gj)     (Cdn$ millions)
<S>                                        <C>           <C>                     <C>        <C>
Natural Gas Swaps                          15,514        2007 - 2008               7.60                 (5)
                                           15,514        2008 - 2010               7.60                  -
                                                                                                 ----------
                                                                                                        (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 fair value.  The $129 million fair value of the derivative  contracts
at June 30, 2007 is included in the  Unaudited  Consolidated  Balance Sheet and
any change is included in  marketing  and other in the  Unaudited  Consolidated
Statement of Income.

FUTURE SALE OF GAS INVENTORY
In an  attempt to  mitigate  the  exposure  to  fluctuations  in cash flow from
changes in the price of natural gas 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.  From time to time, we have  designated,  in
writing,  some of these derivative  contracts as cash flow hedges of the future
sale of our storage inventory.

With the adoption of Section 3865 HEDGES as described in Note 1, the  effective
portion of gains and losses  relating to cash flow  hedges are now  included in
other  comprehensive  income  until  the gains or losses  are  realized  in net
income.  Prior to the  adoption of Section  3865,  gains and losses  related to
derivatives classified as cash flow hedges were unrecognized.

At December 31, 2006,  we held NYMEX  natural gas futures  contracts  and swaps
that were  designated  as cash flow  hedges on the future  sale of natural  gas
inventory.  On adoption of Section 3865, the fair value of $25 million  related
to these cash flow hedges was  recognized in accounts  receivable on January 1,
2007.  The fair value gain of $16 million,  net of income  taxes,  was included
with the opening  balance of  accumulated  other  comprehensive  income (AOCI).
During the first quarter of 2007, the inventory was sold and as a result, gains
on these  cash  flow  hedges  were  recognized  in  marketing  and other on the
Unaudited Consolidated Statement of Income.

In late  2006,  we  de-designated  certain  futures  contracts  that  had  been
designated  as cash flow hedges of future  sales of our natural gas in storage.
These contracts were  de-designated  since it became  uncertain that the future
sales of natural gas would occur within the  designated  time frame.  As it was
reasonably  possible that the future sales could have taken place as designated
at the  inception  of the  hedging  relationship,  gains of $65  million on the
futures  contracts were deferred in accounts  payable at December 31, 2006. The
adoption of Section 3865 required that the deferred gains ($45 million,  net of
income  taxes) be  reclassified  to AOCI on  January  1,  2007.  The gains were
recognized in marketing and other on the  Unaudited  Consolidated  Statement of
Income during the first quarter of 2007.

At June 30, 2007, there were no cash flow hedges in place.


                                      14
<PAGE>

(c)  FOREIGN CURRENCY EXCHANGE RATE RISK MANAGEMENT

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.  However,  we pay  for  many  of our
purchases in Canadian  dollars.  We enter into US-dollar  forward contracts and
swaps to manage  this  exposure.  Gains and  losses  on our  US-dollar  forward
contracts and swaps are included in the Unaudited  Consolidated  Balance Sheet,
and any  change  in fair  value  is  included  in  marketing  and  other in the
Unaudited Consolidated Statement of Income. At June 30, 2007, the fair value of
our US-dollar  forward  contracts and swaps was $2 million.

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

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

<TABLE>
<CAPTION>
                                                                          June 30           December 31
                                                                             2007                  2006
--------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                   <C>
Accounts Receivable                                                           365                   731
Deferred Charges and Other Assets (1)                                         208                   153
                                                                         -------------------------------------
    Total Derivative Contract Assets                                          573                   884
                                                                         =====================================

Accounts Payable and Accrued Liabilities                                      331                   325
Deferred Credits and Other Liabilities (1)                                    111                   199
                                                                         -------------------------------------
    Total Derivative Contract Liabilities                                     442                   524
                                                                         =====================================

    Total Derivative Contract Net Assets (2)                                  131                   360
                                                                         =====================================
</TABLE>
------------
(1)  These  derivative  contracts  settle  beyond 12 months and are  considered
     non-current.
(2)  Comprised  of $129  million  (2006 - $372  million)  related to  commodity
     contracts and gains of $2 million  (2006 - losses of $12 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 their  requirements.  We have margin deposits of $96 million  (December
31,  2006 - $197  million),  which have been  included in  restricted  cash and
margin deposits on our Unaudited Consolidated Balance Sheet at June 30, 2007.

10.  SHAREHOLDERS' EQUITY

DIVIDENDS

Dividends per common share for the three months ended June 30, 2007 were $0.025
(2006 - $0.025).  Dividends  per common share for the six months ended June 30,
2007 were $0.05 (2006 - $0.05). Dividends paid to holders of common shares have
been designated as "eligible dividends" for Canadian tax purposes.

11.  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 26, 2007. All
common share and per common share amounts have been  retroactively  restated to
reflect this share split.


                                      15
<PAGE>

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 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                      Six Months
                                                                                  Ended June 30                    Ended June 30
(millions of shares)                                                         2007            2006              2007         2006
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>             <C>              <C>          <C>
Weighted-average number of common shares outstanding                         527.0           524.2            526.5        523.8
Shares issuable pursuant to tandem options                                    26.9            28.4             27.6         28.8
Shares to be purchased from proceeds of tandem options                       (15.6)          (15.1)           (15.4)       (15.0)
                                                                       ----------------------------------------------------------
Weighted-average number of diluted common shares outstanding                 538.3           537.5            538.7        537.6
                                                                       ==========================================================
</TABLE>

In calculating the weighted-average number of diluted common shares outstanding
for the three and six months ended June 30, 2007, we excluded 36,000 and 37,667
options respectively, because their exercise price was greater than the average
market price in those periods.  In calculating the  weighted-average  number of
diluted common shares  outstanding  for the three and six months ended June 30,
2006, 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
instruments.

12.  CASH FLOWS

(a) CHARGES AND CREDITS TO INCOME NOT INVOLVING CASH

<TABLE>
<CAPTION>
                                                                                Three Months                    Six Months
                                                                               Ended June 30                   Ended June 30
                                                                           2007             2006            2007          2006
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>              <C>             <C>             <C>
Depreciation, Depletion, Amortization and Impairment                        360              260             694             526
Stock-Based Compensation                                                    (70)               4             (26)            112
Future Income Taxes                                                         126               14             161             283
Change in Fair Value of Crude Oil Put Options                                 4               (3)             20               1
Net Income Attributable to Non-Controlling Interests                          5                6               8               9
Other                                                                        22               12              25              34
                                                                       -----------------------------------------------------------
Total                                                                       447              293             882             965
                                                                       ===========================================================
</TABLE>

(b)  CHANGES IN NON-CASH WORKING CAPITAL

<TABLE>
<CAPTION>
                                                                                Three Months                    Six Months
                                                                               Ended June 30                   Ended June 30
                                                                           2007             2006            2007          2006
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>              <C>             <C>             <C>
   Accounts Receivable                                                     (142)               8             (67)            837
   Inventories and Supplies                                                (244)            (108)           (179)           (258)
   Other Current Assets                                                      15               16              11              21
   Accounts Payable and Accrued Liabilities                                  54             (272)             (4)           (843)
   Accrued Interest Payable                                                  29               15              11              (2)
                                                                       -----------------------------------------------------------
Total                                                                      (288)            (341)           (228)           (245)
                                                                       ===========================================================

Relating to:
   Operating Activities                                                    (304)            (377)           (272)           (304)
   Investing Activities                                                      16               36              44              59
                                                                       -----------------------------------------------------------
Total                                                                      (288)            (341)           (228)           (245)
                                                                       ===========================================================
</TABLE>

(c)  OTHER CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                                Three Months                    Six Months
                                                                               Ended June 30                   Ended June 30
                                                                           2007             2006            2007          2006
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>              <C>             <C>             <C>
Interest Paid                                                                55               50             156             130
Income Taxes Paid                                                           100              138             157             208
                                                                       -----------------------------------------------------------
</TABLE>


                                      16
<PAGE>

13.  MARKETING AND OTHER

<TABLE>
<CAPTION>
                                                                                Three Months                    Six Months
                                                                               Ended June 30                   Ended June 30
                                                                           2007             2006            2007          2006
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>              <C>             <C>             <C>
Marketing Revenue, Net                                                      284              293             531             730
Change in Fair Value of Crude Oil Put Options                                (4)               3             (20)             (1)
Interest                                                                     10               11              19              19
Foreign Exchange Losses                                                     (38)             (27)            (43)            (48)
Other (1)                                                                    47               96              60             102
                                                                       -----------------------------------------------------------
Total                                                                       299              376             547             802
                                                                       ============================================================
</TABLE>
------------
(1)  Other income for the three and six months ended June 30, 2006 includes $74
     million of  business  interruption  proceeds  received  from our  insurers
     relating to generator failures in 2005 at our UK oil and gas operations.


14.  COMMITMENTS, CONTINGENCIES AND GUARANTEES

As  described  in  Note 15 to the  Audited  Consolidated  Financial  Statements
included in our 2006 Annual Report on Form 10-K, 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.




                                      17
<PAGE>

15.  OPERATING SEGMENTS AND RELATED INFORMATION

Nexen is involved in  activities  relating  to Oil and Gas,  Energy  Marketing,
Syncrude and Chemicals in various geographic  locations as described in Note 20
to the Audited  Consolidated  Financial  Statements included in our 2006 Annual
Report on Form 10-K.

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2007
                                                                                                                Corporate
                                                                                  Energy                              and
                                                   Oil and Gas                 Marketing    Syncrude  Chemicals     Other    Total
-----------------------------------------------------------------------------------------------------------------------------------
                                                  United   United      Other
                                Yemen    Canada   States  Kingdom  Countries(1)
                                ----------------------------------------------
<S>                             <C>      <C>      <C>     <C>      <C>           <C>         <C>       <C>        <C>       <C>
Net Sales                         288      113       148      592         35           7         115       101        -      1,399
Marketing and Other                 3        3         -       24          -         284           -        17      (32)(2)    299
                                ---------------------------------------------------------------------------------------------------
Total Revenues                    291      116       148      616         35         291         115       118      (32)     1,698
Less: Expenses
 Operating                         42       42        26       53          2           6          51        67        -        289
 Depreciation, Depletion,
   Amortization and
    Impairment                     64       41        62      158          3           3          12        11        6        360
 Transportation and Other           1        6         -        -          -         189           4         8        2        210
 General and Administrative (3)    (4)       8        (5)      (3)         1          23           -         8       10         38
 Exploration                        2        9        49       18         27(4)        -           -         -        -        105
 Interest                           -        -         -        -          -           -           -         3       43         46
                                ---------------------------------------------------------------------------------------------------
Income (Loss)
 before Income Taxes              186       10        16      390          2          70          48        21      (93)       650
Less: Provision for (Recovery
 of) Income Taxes                  64(5)     2         -      202          9          26          13         6      (45)       277
Less: Non-Controlling
 Interests                          -        -         -        -          -           -           -         5        -          5
                                ---------------------------------------------------------------------------------------------------
Net Income (Loss)                 122        8        16      188         (7)         44          35        10      (48)       368
                                ===================================================================================================

Identifiable Assets               441    4,543(6)  1,581    5,107        258       3,355(7)    1,186       495      228     17,194
                                ===================================================================================================

Capital Expenditures
 Development and Other             31      316       128      158          7           1           8        14       12        675
 Exploration                        5       12        49       17         16           -           -         -        -         99
 Proved Property Acquisitions       -        -         -       45(8)       -           -           -         -        -         45
                                ---------------------------------------------------------------------------------------------------
                                   36      328       177      220         23           1           8        14       12        819
                                ===================================================================================================

Property, Plant and Equipment
 Cost                           2,260    5,920     2,878    4,702        241         229       1,314       802      303     18,649
 Less: Accumulated DD&A         2,012    1,521     1,406      636         77          52         196       444      158      6,502
                                ---------------------------------------------------------------------------------------------------
Net Book Value                    248    4,399(6)  1,472    4,066        164         177       1,118       358      145     12,147
                                ===================================================================================================
</TABLE>
-------------
(1)  Includes results of operations from producing activities in Colombia.
(2)  Includes  interest income of $10 million,  foreign  exchange losses of $38
     million  and  decrease  in the fair  value of crude oil put  options of $4
     million.
(3)  Includes recovery of stock-based compensation of $55 million.
(4)  Includes exploration activities primarily in Nigeria, Norway and Colombia.
(5)  Includes Yemen cash taxes of $65 million.
(6)  Includes costs of $3,028 million  related to our Long Lake project,  which
     are not being depreciated, depleted or amortized.
(7)  Approximately  81%  of  Marketing's   identifiable   assets  are  accounts
     receivable and inventories.
(8)  Includes  acquisition  of  additional  interests  in the Scott and Telford
     fields.


                                      18
<PAGE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2007
                                                                                                                Corporate
                                                                                  Energy                              and
                                                   Oil and Gas                 Marketing    Syncrude  Chemicals     Other    Total
-----------------------------------------------------------------------------------------------------------------------------------
                                                  United   United      Other
                                Yemen    Canada   States  Kingdom  Countries(1)
                                ----------------------------------------------
<S>                             <C>      <C>      <C>     <C>      <C>           <C>         <C>       <C>        <C>       <C>
Net Sales                         531      228       316      936         64          23         234       207        -      2,539
Marketing and Other                 6        4         -       28          -         531           -        22      (44)(2)    547
                                ---------------------------------------------------------------------------------------------------
Total Revenues                    537      232       316      964         64         554         234       229      (44)     3,086
Less: Expenses
 Operating                         84       81        54      106          4          19          98       133        -        579
 Depreciation, Depletion,
   Amortization and
    Impairment                    122       82       146      272          6           7          25        22       12        694
 Transportation and Other           4       13         -        -          -         409           9        19        2        456
 General and Administrative (3)    (3)      40        14        2         25          53           -        17       92        240
 Exploration                        5       14        62       38         35(4)        -           -         -        -        154
 Interest                           -        -         -        -          -           -           -         6       88         94
                                ---------------------------------------------------------------------------------------------------
Income (Loss)
 before Income Taxes              325        2        40      546         (6)         66         102        32     (238)       869
Less: Provision for (Recovery
 of) Income Taxes                 113(5)     -        14      284          7          26          30         9     (111)       372
Less: Non-Controlling
 Interests                          -        -         -        -          -           -           -         8        -          8
                                ---------------------------------------------------------------------------------------------------
Net Income (Loss)                 212        2        26      262        (13)         40          72        15     (127)       489
                                ===================================================================================================

Identifiable Assets               441    4,543(6)  1,581    5,107        258       3,355(7)    1,186       495      228     17,194
                                ===================================================================================================

Capital Expenditures
 Development and Other             63      672       267      298         15           1          15        26       20      1,377
 Exploration                       10       45        63       63         26           -           -         -        -        207
 Proved Property Acquisitions       -        -         -       46(8)       -           -           -         -        -         46
                                ---------------------------------------------------------------------------------------------------
                                   73      717       330      407         41           1          15        26       20      1,630
                                ===================================================================================================

Property, Plant and Equipment
 Cost                           2,260    5,920     2,878    4,702        241         229       1,314       802      303     18,649
 Less: Accumulated DD&A         2,012    1,521     1,406      636         77          52         196       444      158      6,502
                                ---------------------------------------------------------------------------------------------------
Net Book Value                    248    4,399(6)  1,472    4,066        164         177       1,118       358      145     12,147
                                ===================================================================================================
</TABLE>
------------
(1)  Includes results of operations from producing activities in Colombia.
(2)  Includes  interest income of $19 million,  foreign  exchange losses of $43
     million  and  decrease  in the fair value of crude oil put  options of $20
     million.
(3)  Includes stock-based compensation expense of $61 million.
(4)  Includes exploration activities primarily in Nigeria, Norway and Colombia.
(5)  Includes Yemen cash taxes of $109 million.
(6)  Includes costs of $3,028 million  related to our Long Lake project,  which
     are not being depreciated, depleted or amortized.
(7)  Approximately  81%  of  Marketing's   identifiable   assets  are  accounts
     receivable and inventories.
(8)  Includes  acquisition  of  additional  interests  in the Scott and Telford
     fields.


                                      19
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2006
                                                                                                                Corporate
                                                                                  Energy                              and
                                                   Oil and Gas                 Marketing    Syncrude  Chemicals     Other    Total
-----------------------------------------------------------------------------------------------------------------------------------
                                                  United   United      Other
                                Yemen    Canada   States  Kingdom  Countries(1)
                                ----------------------------------------------
<S>                             <C>      <C>      <C>     <C>      <C>           <C>         <C>       <C>        <C>       <C>
Net Sales                         364      122       161      134         39           7         114        98        -      1,039
Marketing and Other                 1        5         -       77(2)       1         293           -        12      (13)(3)    376
                                ---------------------------------------------------------------------------------------------------
Total Revenues                    365      127       161      211         40         300         114       110      (13)     1,415
Less: Expenses
 Operating                         38       34        22       20          1           5          44        59        -        223
 Depreciation, Depletion,
   Amortization and
    Impairment                     91       38        49       54          3           1           6        10        8        260
 Transportation and Other           1        1         -        -          -         186           5        10        -        203
 General and Administrative (4)     -        9        10        2          9          39           -         6       33        108
 Exploration                        -        8        15        8         15(5)        -           -         -        -         46
 Interest                           -        -         -        -          -           -           -         3        8         11
                                ---------------------------------------------------------------------------------------------------
Income (Loss)
 before Income Taxes              235       37        65      127         12          69          59        22      (62)       564
Less: Provision for (Recovery
 of) Income Taxes                  82(6)   (20)       22       42          4          42          19         7      (48)       150
Less: Non-Controlling
 Interests                          -        -         -        -          -           -           -         6        -          6
                                ---------------------------------------------------------------------------------------------------
Net Income (Loss)                 153       57        43       85          8          27          40         9      (14)       408
                                ===================================================================================================

Identifiable Assets               540    3,105     1,437    5,081        173       2,698(7)    1,177       462      295     14,968
                                ===================================================================================================

Capital Expenditures
 Development and Other             28      309        80      159          4          34          20         8       10        652
 Exploration                       10       71        72        6          8           -           -         -        -        167
 Proved Property Acquisitions       -        -         -        -          -           -           -         -        -          -
                                ---------------------------------------------------------------------------------------------------
                                   38      380       152      165         12          34          20         8       10        819
                                ===================================================================================================

Property, Plant and Equipment
 Cost                           2,235    4,369     2,512    4,129        202         209       1,292       828      262     16,038
 Less: Accumulated DD&A         1,923    1,369     1,196      319         70          42         174       474      136      5,703
                                ---------------------------------------------------------------------------------------------------
Net Book Value                    312    3,000     1,316    3,810        132         167       1,118       354      126     10,335
                                ===================================================================================================
</TABLE>
------------
(1)  Includes results of operations from producing activities in Colombia.
(2)  Includes  proceeds of $74 million  from  business  interruption  insurance
     claims for generator failures in 2005 at our UK oil and gas operations.
(3)  Includes  interest income of $11 million,  foreign  exchange losses of $27
     million  and  increase  in the fair  value of crude oil put  options of $3
     million.
(4)  Includes stock-based compensation expense of $11 million.
(5)  Includes exploration activities primarily in Nigeria and Colombia.
(6)  Includes Yemen cash taxes of $81 million.
(7)  Approximately  84%  of  Marketing's   identifiable   assets  are  accounts
     receivable and inventories.


                                      20
<PAGE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2006
                                                                                                                Corporate
                                                                                  Energy                              and
                                                   Oil and Gas                 Marketing    Syncrude  Chemicals     Other    Total
-----------------------------------------------------------------------------------------------------------------------------------
                                                  United   United      Other
                                Yemen    Canada   States  Kingdom  Countries(1)
                                ----------------------------------------------
<S>                             <C>      <C>      <C>     <C>      <C>           <C>         <C>       <C>        <C>       <C>
Net Sales                         692      233       342      268         67          14         198       205        -      2,019
Marketing and Other                 4        6         -       79(2)       1         730           -        12      (30)(3)    802
                                ---------------------------------------------------------------------------------------------------
Total Revenues                    696      239       342      347         68         744         198       217      (30)     2,821
Less: Expenses
 Operating                         74       68        52       42          3          12          97       125        -        473
 Depreciation, Depletion,
   Amortization and
    Impairment                    168       75       104      125          5           4          11        20       14        526
 Transportation and Other           3       11         -        -          -         418          11        20        -        463
 General and Administrative (4)    14       51        45        6         25          75           -        13       99        328
 Exploration                        -       14        77       28         30(5)        -           -         -        -        149
 Interest                           -        -         -        -          -           -           -         5       15         20
                                ---------------------------------------------------------------------------------------------------
Income (Loss)
 before Income Taxes              437       20        64      146          5         235          79        34     (158)       862
Less: Provision for (Recovery
 of) Income Taxes                 153(6)   (26)       22      324(7)       2         101          26        11      (85)       528
Less: Non-Controlling
 Interests                          -        -         -        -          -           -           -         9        -          9
                                ---------------------------------------------------------------------------------------------------
Net Income (Loss)                 284       46        42     (178)         3         134          53        14      (73)       325
                                ===================================================================================================

Identifiable Assets               540    3,105     1,437    5,081        173       2,698(8)    1,177       462       295    14,968
                                ===================================================================================================

Capital Expenditures
 Development and Other             75      634       144      279         13          35          57        10       17      1,264
 Exploration                       15      117       112       25         15           -           -         -        -        284
 Proved Property Acquisitions       -        2         -        1          -           -           -         -        -          3
                                ---------------------------------------------------------------------------------------------------
                                   90      753       256      305         28          35          57        10       17      1,551
                                ===================================================================================================

Property, Plant and Equipment
 Cost                           2,235    4,369     2,512    4,129        202         209       1,292       828      262     16,038
 Less: Accumulated DD&A         1,923    1,369     1,196      319         70          42         174       474      136      5,703
                                ---------------------------------------------------------------------------------------------------
Net Book Value                    312    3,000     1,316    3,810        132         167       1,118       354      126     10,335
                                ===================================================================================================
</TABLE>
------------
(1)  Includes results of operations from producing activities in Colombia.
(2)  Includes  proceeds of $74 million  from  business  interruption  insurance
     claims for generator failures in 2005 at our UK oil and gas operations.
(3)  Includes  interest income of $19 million,  foreign  exchange losses of $48
     million  and  decrease  in the fair  value of crude oil put  options of $1
     million.
(4)  Includes stock-based compensation expense of $156 million.
(5)  Includes exploration activities primarily in Nigeria and Colombia.
(6)  Includes Yemen cash taxes of $148 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.
(8)  Approximately  84%  of  Marketing's   identifiable   assets  are  accounts
     receivable and inventories.


                                      21
<PAGE>

16. 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 AND SIX MONTHS ENDED JUNE 30

<TABLE>
<CAPTION>
                                                                                Three Months                   Six Months
                                                                                Ended June 30                Ended June 30
(Cdn$ millions, except per share amounts)                                    2007          2006          2007          2006
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>           <C>           <C>
REVENUES AND OTHER INCOME
    Net Sales                                                               1,399         1,039         2,539         2,019
    Marketing and Other (i)                                                   299           377           545           813
                                                                           ------------------------------------------------
                                                                            1,698         1,416         3,084         2,832
                                                                           ------------------------------------------------
EXPENSES
    Operating (ii)                                                            296           225           592           477
    Depreciation, Depletion, Amortization and Impairment                      360           260           694           526
    Transportation and Other                                                  210           203           456           463
    General and Administrative (iv)                                            51           122           250           343
    Exploration                                                               105            46           154           149
    Interest                                                                   46            11            94            20
                                                                           ------------------------------------------------
                                                                            1,068           867         2,240         1,978
                                                                           ------------------------------------------------

INCOME BEFORE INCOME TAXES                                                    630           549           844           854
                                                                           ------------------------------------------------
PROVISION FOR INCOME TAXES
    Current                                                                   151           136           211           245
    Deferred (i) - (iv)                                                       120            10           153             4
                                                                           ------------------------------------------------
                                                                              271           146           364           249
                                                                           ------------------------------------------------

NET INCOME BEFORE NON-CONTROLLING INTERESTS                                   359           403           480           605
    Less: Net Income Attributable to Non-Controlling Interests                 (5)           (6)           (8)           (9)
                                                                           ------------------------------------------------

NET INCOME - US GAAP (1)                                                      354           397           472           596
                                                                           ================================================
EARNINGS PER COMMON SHARE ($/share)
    Basic (Note 11)                                                          0.67          0.76          0.90          1.14
                                                                           ================================================

    Diluted (Note 11)                                                        0.66          0.74          0.88          1.11
                                                                           ================================================
</TABLE>
------------
(1) Reconciliation of Canadian and US GAAP Net Income

<TABLE>
<CAPTION>
                                                                                Three Months                   Six Months
                                                                                Ended June 30                Ended June 30
                                                                             2007           2006           2007          2006
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>            <C>            <C>            <C>
       Net Income - Canadian GAAP                                             368            408            489            325
       Impact of US Principles, Net of Income Taxes:
         Ineffective Portion of Cash Flow Hedges (i)                            -              1             (2)             7
         Pre-operating Costs (ii)                                              (5)            (2)            (8)            (3)
         Deferred Income Taxes (iii)                                            -              -              -            277
         Liability-based Stock Compensation Plans (iv)                         (9)           (10)            (7)           (10)
                                                                             ---------------------------------------------------
       Net Income - US GAAP                                                   354            397            472            596
                                                                             =================================================
</TABLE>


                                      22
<PAGE>

(b)  UNAUDITED CONSOLIDATED BALANCE SHEET - US GAAP

<TABLE>
<CAPTION>
                                                                                                June 30      December 31
(Cdn$ millions, except share amounts)                                                              2007             2006
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>              <C>
ASSETS
    CURRENT ASSETS
      Cash and Cash Equivalents                                                                     158              101
      Restricted Cash and Margin Deposits                                                            96              197
      Accounts Receivable                                                                         2,861            2,976
      Inventories and Supplies                                                                      857              786
      Deferred Income Tax Asset                                                                     277              479
      Other                                                                                          51               67
                                                                                                ------------------------
        Total Current Assets                                                                      4,300            4,606
                                                                                                ------------------------

    PROPERTY, PLANT AND EQUIPMENT
      Net of Accumulated Depreciation, Depletion, Amortization and
         Impairment of $6,895 (December 31, 2006 - $6,792) (ii); (vi)                            12,087           11,692
    DEFERRED INCOME TAX ASSETS                                                                       78              141
    DEFERRED CHARGES AND OTHER ASSETS                                                               321              263
    GOODWILL                                                                                        348              377
                                                                                                ------------------------
TOTAL ASSETS                                                                                     17,134           17,079
                                                                                                ========================

LIABILITIES AND SHAREHOLDERS' EQUITY
    CURRENT LIABILITIES
      Short-Term Borrowings                                                                          61              158
      Accounts Payable and Accrued Liabilities (iv)                                               3,700            3,839
      Accrued Interest Payable                                                                       65               55
      Dividends Payable                                                                              13               13
                                                                                                ------------------------
        Total Current Liabilities                                                                 3,839            4,065
                                                                                                ------------------------

    LONG-TERM DEBT                                                                                4,852            4,618
    DEFERRED INCOME TAX LIABILITIES (i) - (vi)                                                    2,226            2,427
    ASSET RETIREMENT OBLIGATIONS                                                                    690              683
    DEFERRED CREDITS AND LIABILITIES (v)                                                            502              597
    NON-CONTROLLING INTERESTS                                                                        73               75
    SHAREHOLDERS' EQUITY
      Common Shares, no par value
        Authorized:   Unlimited
        Outstanding:  2007 - 527,149,918 shares
                      2006 - 525,026,412 shares                                                     893              821
      Contributed Surplus                                                                             5                4
      Retained Earnings (i) - (vi)                                                                4,363            3,945
      Accumulated Other Comprehensive Income (i); (v)                                              (309)            (156)
                                                                                                ------------------------
          Total Shareholders' Equity                                                              4,952            4,614
                                                                                                ------------------------
     COMMITMENTS, CONTINGENCIES AND GUARANTEES

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                       17,134           17,079
                                                                                                ========================
</TABLE>

(c)  UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - US GAAP
     FOR THE THREE AND SIX MONTHS ENDED JUNE 30

<TABLE>
<CAPTION>
                                                                            Three Months                 Six Months
                                                                           Ended June 30                Ended June 30
(Cdn$ millions)                                                        2007           2006           2007           2006
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>            <C>            <C>
Net Income - US GAAP                                                    354            397            472            596
Other Comprehensive Income, Net of Income Taxes:
    Foreign Currency Translation Adjustment                             (86)           (63)           (92)           (65)
    Change in Mark to Market on Cash Flow Hedges (i)                      -              6            (61)            20
                                                                       -------------------------------------------------
Comprehensive Income                                                    268            340            319            551
                                                                       =================================================
</TABLE>


                                      23
<PAGE>

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

<TABLE>
<CAPTION>
                                                                      June 30       December 31
(Cdn$ millions)                                                          2007              2006
-------------------------------------------------------------------------------------------------
<S>                                                                   <C>           <C>
Foreign Currency Translation Adjustment                                  (253)             (161)
Mark to Market on Cash Flow Hedges (i)                                      -                61
Unamortized Defined Benefit Pension Costs (v)                             (56)              (56)
                                                                 --------------------------------
                                                                         (309)             (156)
                                                                 ================================
</TABLE>

NOTES:
i.    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.  On January 1, 2007,  we adopted  the
      equivalent Canadian standard for derivative instruments.

      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, 2006,  accounts receivable
      includes  gains of $25 million on futures  contracts and swaps we used to
      hedge commodity price risk on the future sale of our gas inventory. Gains
      of  $23  million  ($16  million,  net of  income  taxes)  related  to the
      effective  portion  and  deferred  in AOCI at  December  31,  2006,  were
      recognized  in  marketing  and other in the first  quarter  of 2007.  The
      ineffective portion of the gains of $2 million ($2 million, net of income
      taxes) was recognized in marketing and other in 2006 under US GAAP. Under
      Canadian  GAAP, the  ineffective  portion was recognized in net income in
      the first quarter of 2007.

      At June 30,  2006,  our US GAAP  net  income  includes  $11  million  ($7
      million, net of income taxes) relating to the ineffective portion of cash
      flow hedges.

      Also  included in AOCI at December 31, 2006 are gains of $65 million ($45
      million,  net of income taxes) related to de-designated cash flow hedges.
      These gains were  recognized  in marketing and other in the first quarter
      of 2007.  Under  Canadian  GAAP,  these  deferred  gains are  included in
      accounts  payable and accrued  liabilities  at December 31, 2006 and have
      been  recognized  in marketing  and other income in the first  quarter of
      2007.

      At June 30, 2007, there were no cash flow hedges in place.

      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 June 30, 2007 and at December
      31, 2006, we had no fair value hedges in place.

ii.   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 $7 million and
            $13  million  for the three and six  months  ended  June 30,  2007,
            respectively  ($5  million  and $8  million,  respectively,  net of
            income taxes) (2006 - $2 million and $4 million,  respectively  ($2
            million and $3 million, respectively, net of income taxes)); and

      o     property, plant and equipment is lower under US GAAP by $41 million
            (December 31, 2006 - $28 million).

iii.  Under US GAAP,  enacted tax rates are used to calculate  deferred  income
      taxes, whereas under Canadian GAAP, substantively enacted rates are used.
      During the first quarter of 2006, 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.

iv.   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. We are also
      required  to  accelerate  the  recognition  of  stock-based  compensation
      expense  for  all  stock-based  awards  made  to our  retirement-eligible
      employees  under Canadian GAAP.  However,  under US GAAP, the accelerated
      recognition  for such employees is only required for  stock-based  awards
      granted on or after January 1, 2006. As a result:


                                      24
<PAGE>

      o     general and administrative expense is higher by $13 million and $10
            million  for  the  three  and  six  months  ended  June  30,  2007,
            respectively  ($9  million  and $7  million,  respectively,  net of
            income taxes) (2006 - higher by $14 million and $15 million for the
            three and six months ended June,  respectively ($10 million and $10
            million, respectively, net of income taxes)); and

      o     accounts payable and accrued  liabilities are higher by $35 million
            as at June 30, 2007 (December 31, 2006 - $25 million).

v.    On December 31, 2006, we adopted FASB Statement 158 EMPLOYERS' ACCOUNTING
      FOR DEFINED BENEFIT PENSION AND OTHER  POSTRETIREMENT PLANS (FAS 158). At
      June 30, 2007, the unfunded  amount of our defined  benefit pension plans
      was $81 million.  This amount has been  included in deferred  credits and
      other liabilities and $56 million,  net of income taxes has been included
      in AOCI.  Prior to the  adoption  of FAS 158 on  December  31,  2006,  we
      included our minimum unfunded  pension  liability in deferred credits and
      other liabilities and in AOCI.

vi.   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 results in our property, plant and equipment under US
      GAAP being lower by $19 million.

STOCK-BASED COMPENSATION EXPENSE FOR RETIRED AND RETIREMENT-ELIGIBLE  EMPLOYEES
Under US GAAP, we recognize  stock-based  compensation  expense for our retired
and  retirement-eligible  employees  over  an  accelerated  vesting  period  in
accordance  with the  provisions  of Statement  123(R) for  stock-based  awards
granted  to  employees  on or after  January 1, 2006.  For  stock-based  awards
granted  prior to the adoption of Statement  123(R),  stock-based  compensation
expense for our retired and retirement-eligible  employees is recognized over a
graded vesting  period.  If we applied the  accelerated  vesting  provisions of
Statement   123(R)  to   stock-based   awards   granted  to  our   retired  and
retirement-eligible  employees prior to the adoption of Statement 123(R), there
would be no material  change to our  stock-based  compensation  expense for the
three and six months ended June 30, 2007 and 2006.


CHANGES IN ACCOUNTING POLICIES - US GAAP
INCOME TAXES
On  January  1,  2007,  we  adopted  FASB   Interpretation  48  ACCOUNTING  FOR
UNCERTAINTY  IN INCOME  TAXES (FIN 48) with respect to FAS 109  ACCOUNTING  FOR
INCOME TAXES  regarding  accounting and disclosure for uncertain tax positions.
On the  adoption  of FIN 48, we  recorded  a  cumulative  effect of a change in
accounting principle of $28 million.  This amount increased our deferred income
tax liabilities,  with a corresponding  decrease to our retained earnings as at
January 1, 2007 in our US GAAP - Unaudited  Consolidated  Balance Sheet.  As at
January 1 and June 30, 2007, the total amount of our  unrecognized tax benefits
was approximately $210 million,  all of which, if recognized,  would affect our
effective  tax rate.  As at January 1 and June 30,  2007,  the total  amount of
interest and  penalties in relation to uncertain  tax  positions  recognized in
deferred income tax liabilities in the US GAAP - Unaudited Consolidated Balance
Sheet is  approximately  $9 million.  We had no interest or penalties in the US
GAAP - Unaudited  Consolidated  Statement of Income for the first half of 2007.
Our income tax filings are subject to audit by taxation  authorities  and as at
January  1 and June 30,  2007 the  following  tax  years  remained  subject  to
examination;  (i) Canada - 1985 to date, (ii) United Kingdom - 2002 to date and
(iii) United States - 2003 to date. We do not anticipate  any material  changes
to the  unrecognized tax benefits  previously  disclosed within the next twelve
months.

NEW US ACCOUNTING PRONOUNCEMENTS

In September  2006,  the  Financial  Accounting  Standards  Board (FASB) issued
Statement  157,  FAIR VALUE  MEASUREMENTS.  Statement  157 defines  fair value,
establishes a framework for  measuring  fair value under US generally  accepted
accounting  principles and expands  disclosures about fair value  measurements.
This statement is effective for fiscal years beginning after November 15, 2007.
We do not expect the adoption of this statement will have a material  impact on
our results of operations or financial position.

Effective  December  31,  2006,  we  adopted  the  recognition  and  disclosure
provisions of FASB Statement  158,  EMPLOYERS'  ACCOUNTING FOR DEFINED  BENEFIT
PENSION  AND  OTHER   POSTRETIREMENT   PLANS.   This  statement  also  requires
measurement  of the funded status of a plan as of the balance  sheet date.  The
measurement  provisions  of the statement are effective for fiscal years ending
after  December  15,  2008.  We do not  expect  the  adoption  of the change in
measurement date in 2008 to have a material impact on our results of operations
or financial position.

In  February  2007,  FASB  issued  Statement  159,  THE FAIR  VALUE  OPTION FOR
FINANCIAL  ASSETS  AND  FINANCIAL  LIABILITIES.  The  statement  allows for the
elective measurement of eligible financial  instruments and certain other items
at fair value in order to  mitigate  volatility  in reported  earnings  without
having to apply complex and detailed hedge accounting  rules. This statement is
effective for fiscal years  beginning after November 15, 2007. We are currently
evaluating  the  provisions  of Statement 159 and have not yet  determined  the
impact this  statement  will have on our results from  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 16 TO THE UNAUDITED  CONSOLIDATED
FINANCIAL STATEMENTS. THE DATE OF THIS DISCUSSION IS JULY 11, 2007.

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 81 OF OUR 2006  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,  DERIVATIVE  CONTRACT ASSETS AND
LIABILITIES  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 SECOND QUARTER RESULTS

<TABLE>
<CAPTION>
                                                                        Three Months                   Six Months
                                                                        Ended June 30                 Ended June 30
                                                                      2007        2006              2007        2006
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>         <C>               <C>         <C>
Net Income                                                             368         408               489         325
Earnings per Common Share ($/share)                                   0.70        0.78              0.93        0.62
Cash Flow from Operating Activities                                    582         374             1,030       1,108

Production, before Royalties (mboe/d)                                  253         215               246         219
Production, after Royalties (mboe/d)                                   208         158               199         159
Nexen's Average Realized Oil and Gas Price (Cdn$/boe)                68.48       66.78             63.95       63.90

Capital Investment, including Acquisitions                             819         876             1,630       1,629
Net Debt (1)                                                         4,755       3,930             4,755       3,930
                                                                  -----------------------------------------------------
</TABLE>
------------
(1)  Net debt is defined as long-term debt and short-term  borrowings less cash
     and cash equivalents.

Increasing production and high commodity prices generated strong net income and
cash flow from  operating  activities  during the quarter.  Our second  quarter
realized oil and gas prices  increased  3% from the same period in 2006,  while
WTI was 8% lower  than last  year.  The  impact of WTI  prices on our  realized
prices is becoming less relevant as approximately 80% of our current production
is priced based on North Sea Brent  crude.  Brent crude oil prices fell only 1%
during the same period.

Production  after royalties  increased 9% from the previous quarter by bringing
new  high-margin,  royalty-free  production  on stream at Buzzard.  At Buzzard,
eight  development  wells are now tied into the  production  system and the gas
export  system has been  commissioned.  Increases  from Buzzard were  partially
offset  by  natural  declines  in  Yemen  and in the  Gulf of  Mexico.  We also
experienced  unexpected  production  downtime at Aspen and  Syncrude  following
maintenance to third party processing  facilities and turnaround  advancements.
In the Gulf of Mexico,  the Wrigley  development  began producing in early July
and we expect to bring another  development  well at Aspen on stream by the end
of the third quarter.

At Long Lake,  steaming of the  reservoir  is going well.  While  commissioning
activities  delayed the startup of our large  steam  generation  units by a few
weeks,  we still  expect all 81 SAGD well  pairs  (ten pads) to be  circulating
steam by the end of August.  As we circulate steam and heat up the reservoir to
establish  communication  between wells, we will start to produce  bitumen.  We
expect  bitumen  production  to  ramp up to peak  rates  over a 12 to 24  month
period.

The increase in our net debt compared to last year largely reflects the ongoing
investment at Long Lake and on Ettrick in the UK North Sea. The increase in net
debt  was  partially  offset  by the  weakening  US  dollar  as  our  US-dollar
denominated debt was lower when translated to Canadian dollars.


                                      26
<PAGE>

CAPITAL INVESTMENT

Our  capital  investment  strategy  continues  to  focus  on  developing  major
projects,  exploring our growth basins,  maximizing the remaining  value of our
core assets and  investing in new  technology.  In 2007, we are investing in:

    o   Major  Development  projects  such as Long Lake Phase 1, Ettrick in the
        North Sea and coalbed methane in Canada;
    o   Early Stage  Developments  including Phase 2 of Long Lake, shale gas in
        Canada and the Usan project, offshore West Africa;
    o   New  Growth  Exploration  targeting  up to 19  high-impact  exploration
        prospects, primarily in the Gulf of Mexico and the North Sea; and
    o   Core Asset  Developments  in our existing asset base including  Wrigley
        and Aspen in the Gulf of Mexico.

Details of our capital programs are set out below.

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2007

                                                          Major     Early Stage       New Growth       Core Asset
                                                    Development     Development      Exploration      Development         Total
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>              <C>              <C>               <C>
Oil and Gas
   Synthetic (mainly Long Lake)                             258              21                3                -           282
   United Kingdom                                           131               -               17               72           220
   Yemen                                                      -               -                5               31            36
   United States                                              9               -               49              119           177
   Canada                                                    22               5                9               10            46
   Other Countries                                            -               3               16                4            23
Syncrude                                                      -               -                -                8             8
                                                    ----------------------------------------------------------------------------
                                                            420              29               99              244           792
Chemicals, Marketing, Corporate and Other                     -               -                -               27            27
                                                    ----------------------------------------------------------------------------
Total Capital                                               420              29               99              271           819
                                                    ============================================================================
As a % of Total Capital                                     51%              4%              12%              33%          100%
                                                    ----------------------------------------------------------------------------

<CAPTION>
SIX MONTHS ENDED JUNE 30, 2007

                                                          Major     Early Stage       New Growth       Core Asset
                                                    Development     Development      Exploration      Development         Total
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>              <C>              <C>               <C>
Oil and Gas
   Synthetic (mainly Long Lake)                             513              71                3                -           587
   United Kingdom                                           254               -               63               90           407
   Yemen                                                      -               -               10               63            73
   United States                                             23               -               63              244           330
   Canada                                                    44               9               42               35           130
   Other Countries                                            -               8               26                7            41
Syncrude                                                      -               -                -               15            15
                                                    ----------------------------------------------------------------------------
                                                            834              88              207              454         1,583
Chemicals, Marketing, Corporate and Other                     -               -                -               47            47
                                                    ----------------------------------------------------------------------------
Total Capital                                               834              88              207              501         1,630
                                                    ============================================================================
As a % of Total Capital                                     51%              5%              13%              31%          100%
                                                    ----------------------------------------------------------------------------
</TABLE>

MAJOR AND EARLY STAGE DEVELOPMENT PROJECTS

SYNTHETIC

At Long Lake,  commissioning  of our large steam  generator  units is underway.
While we are  experiencing  delays in the start up of these units,  all 81 SAGD
well pairs (ten pads) are  expected to be steaming by the end of August.  As we
circulate  steam and heat up the reservoir to establish  communication  between
the wells, we will start to produce  bitumen.  We expect bitumen  production to
ramp  up to  full  rates  over  a 12 to 24  month  period.  While  our  initial
steam-to-oil  ratios  will be high as we heat up the  reservoir,  we expect our
steam-to-oil ratio to average approximately 3.0 over the project life.

Upgrader  construction is approximately  90% complete and projected to start up
late this year.  Full  production  of premium  synthetic  crude oil is expected
within 12 to 18 months of upgrader start up. Production  capacity for the first
phase of Long Lake is approximately  60,000 bbls/d (30,000 bbls/d net to us) of
premium synthetic crude. Our cost estimate for Phase 1 ranges from $5.0 to $5.3
billion ($2.5 to $2.65 billion net to us).


                                      27
<PAGE>

We plan to sequentially  develop  additional  60,000 bbls/d (30,000 bbls/d net)
phases using the same technology and design as Long Lake. The timing of Phase 2
sanctioning  will depend on  accumulating  sufficient  production  history from
Phase 1 and  receiving  additional  clarity on fiscal and  regulatory  policies
related to oil sands development and climate change.

UNITED KINGDOM - ETTRICK
Our Ettrick field  development  in the North Sea continues to progress well and
is  approximately  70% complete.  The project will consist of three  production
wells and one water injector tied back to a leased floating production, storage
and offloading  vessel (FPSO).  The FPSO is designed to handle 30,000 bbls/d of
oil, 35 mmcf/d of gas and to re-inject 55,000 bbls/d of water.  Production from
the  field is  expected  to  commence  in mid 2008  with  our  share  averaging
approximately  9,000  boe/d  for the  year.  We have  an 80%  operated  working
interest.

Elsewhere  in the North Sea,  we are  evaluating  development  options  for our
Golden Eagle discovery.

CANADA - COALBED METHANE (CBM)
Our Mannville CBM project in the Fort  Assiniboine area of Alberta is currently
producing  approximately  24 mmcf/d.  We expect this to double by year-end  and
continue  to grow as we develop  additional  sections  of land in the  Corbett,
Thunder and Doris fields using multiple leg-horizontal wells.

OFFSHORE WEST AFRICA
The Usan field  development,  located in Nigeria  on  offshore  Block  OPL-222,
continues  to progress  toward  project  sanction.  The  project  will have the
ability to process an  average of 180,000  bbls/day  of oil during the  initial
production  plateau period through a new FPSO with a two million barrel storage
capacity.  We expect the Usan development to be formally  sanctioned this year,
at which time the major  deep-water  facilities and drilling  contracts will be
awarded. We have a 20% interest in exploration and development on this block.

NEW GROWTH EXPLORATION

We are  currently  drilling our Vicksburg  exploration  well located on De Soto
Canyon Block 353 in the Eastern Gulf.  We expect to have drilling  results late
in the third quarter. We have a 25% non-operated working interest.

At Knotty Head located on Green Canyon Block 512, we are expecting to drill our
next appraisal well in the first half of 2008. We have a 25% operated  interest
in the field.

At Longhorn  (previously named Ringo) located on Mississippi  Canyon Block 546,
we have an appraisal well planned later this year and at Alaminos  Canyon Block
856 (Great White West), we are continuing to evaluate  development  options. We
have  non-operated  working  interests  of  25%  and  30%  in  these  projects,
respectively.

In the North Sea, we are drilling an appraisal well at Selkirk located on Block
22/22b. Results from this well are expected in the third quarter. We have a 38%
operated  working  interest here.  Additionally,  we plan to drill an appraisal
well at Bugle, and spud three exploration wells later this year.

Over the next 12 months or so, we expect to drill at least 18 exploration wells
with the  majority  in the Gulf of  Mexico  and the UK North  Sea.  During  the
quarter, we were also awarded an additional two licenses in the Norwegian North
Sea.

CORE ASSET DEVELOPMENT

At Buzzard, we currently have eight development wells on stream. The production
ramp  up to  date  has  met  our  expectations  and  we  have  sufficient  well
deliverability to take advantage of additional  processing capacity that may be
available  on the  platform.  The facility is designed to process up to 200,000
bbls/d of oil and 60 mmcf/d of gas.

At our Wrigley  development on Mississippi Canyon Block 506, we began producing
early in the third  quarter.  We expect  production  to  quickly  ramp up to 60
mmcf/d (30 mmcf/d net to us). We have a 50% non-operated interest.

At Aspen,  we are  completing  a  sidetrack  well to exploit a number of deeper
sands.  We expect this well to come on stream in the third  quarter.  We have a
100% operated working interest at Aspen.


                                      28
<PAGE>

<TABLE>
<CAPTION>
FINANCIAL RESULTS

CHANGE IN NET INCOME

                                                                                                 2007 VS. 2006
                                                                                         Three Months       Six Months
                                                                                        Ended June 30    Ended June 30
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>              <C>
NET INCOME AT JUNE 30, 2006                                                                       408              325
                                                                                        =================================
    Favourable (unfavourable) variances:

       Production Volumes, After Royalties
         Crude Oil                                                                                360              593
         Natural Gas                                                                              (18)             (36)
         Change in Crude Oil Inventory                                                              8                2
                                                                                        ---------------------------------
           Total Volume Variance                                                                  350              559

       Realized Commodity Prices
         Crude Oil                                                                                 (8)             (47)
         Natural Gas                                                                               15               (3)
                                                                                        ---------------------------------
           Total Price Variance                                                                     7              (50)

       Oil and Gas Operating Expense
         Conventional                                                                             (50)             (90)
         Syncrude                                                                                  (7)              (1)
                                                                                        ---------------------------------
           Total Operating Expense Variance                                                       (57)             (91)

       Depreciation, Depletion, Amortization and Impairment
         Oil & Gas and Syncrude                                                                   (99)            (165)
         Other                                                                                     (1)              (3)
                                                                                        ---------------------------------
           Total Depreciation, Depletion, Amortization and Impairment Variance                   (100)            (168)

       Exploration Expense                                                                        (59)              (5)

       Energy Marketing Contribution                                                              (13)            (188)

       Chemicals Contribution                                                                       2                5

       General and Administrative Expense                                                          70               88

       Interest Expense                                                                           (35)             (74)

       Current Income Taxes                                                                       (15)              34
       Future Income Taxes                                                                       (112)             122

       Other
         Decrease in Fair Value of Crude Oil Put Options                                           (7)             (19)
         Business Interruption Insurance Proceeds                                                 (74)             (74)
         Other                                                                                      3               25
                                                                                        ---------------------------------

NET INCOME AT JUNE 30, 2007                                                                       368              489
                                                                                        =================================
</TABLE>

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


                                      29
<PAGE>

<TABLE>
<CAPTION>
OIL & GAS AND SYNCRUDE

PRODUCTION (BEFORE ROYALTIES) (1)
                                                                           Three Months                   Six Months
                                                                          Ended June 30                 Ended June 30
                                                                      2007           2006            2007           2006
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>            <C>             <C>            <C>
Crude Oil and NGLs (mbbls/d)
    Yemen                                                             73.3           95.2            75.2           98.8
    Canada                                                            17.2           20.6            17.5           21.4
    United States                                                     16.0           17.8            18.8           18.5
    United Kingdom                                                    85.6           17.2            70.7           16.5
    Other Countries                                                    6.2            6.6             6.0            6.2
Syncrude (2)                                                          19.0           17.4            20.2           16.1
                                                                   -------------------------------------------------------
                                                                     217.3          174.8           208.4          177.5
                                                                   -------------------------------------------------------
Natural Gas (mmcf/d)
    Canada                                                             116            104             117            105
    United States                                                       86            107              93            114
    United Kingdom                                                      14             32              14             27
                                                                   -------------------------------------------------------
                                                                       216            243             224            246
                                                                   -------------------------------------------------------

Total (mboe/d)                                                         253            215             246            219
                                                                   =======================================================

<CAPTION>
PRODUCTION (AFTER ROYALTIES)

                                                                           Three Months                   Six Months
                                                                          Ended June 30                 Ended June 30
                                                                      2007           2006            2007           2006
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>            <C>             <C>            <C>
Crude Oil and NGLs (mbbls/d)
    Yemen                                                             41.6           52.3            43.3           53.0
    Canada                                                            13.4           16.2            13.8           17.0
    United States                                                     14.2           15.6            16.8           16.3
    United Kingdom                                                    85.6           17.2            70.7           16.5
    Other Countries                                                    5.7            6.0             5.5            5.7
Syncrude (2)                                                          16.4           15.7            17.6           14.5
                                                                   -------------------------------------------------------
                                                                     176.9          123.0           167.7          123.0
                                                                   -------------------------------------------------------

Natural Gas (mmcf/d)
    Canada                                                            97               88              96             89
    United States                                                     74               91              80             97
    United Kingdom                                                    14               32              14             27
                                                                   -------------------------------------------------------
                                                                     185              211             190            213
                                                                   -------------------------------------------------------

Total (mboe/d)                                                       208              158             199            159
                                                                   =======================================================
</TABLE>
------------
(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)  Considered a mining operation for US reporting purposes.


                                      30
<PAGE>

HIGHER PRODUCTION INCREASED NET INCOME FOR THE QUARTER BY $350 MILLION
Production after royalties increased 9% from the prior quarter and 32% from the
second quarter of 2006 as we continue to ramp up our high-margin,  royalty-free
Buzzard production in the UK North Sea.  Production before royalties  increased
6% from the previous quarter and 18% from the second quarter of 2006.

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

                                                          Before         After
(mboe/d)                                               Royalties     Royalties
--------------------------------------------------------------------------------
Production, first quarter 2007                               238          191
    Production changes:
      United Kingdom                                          30           30
      United States                                           (8)          (7)
      Yemen                                                   (4)          (3)
      Syncrude                                                (2)          (2)
      Other                                                   (1)          (1)
                                                         -----------------------
Production, second quarter 2007                              253          208
                                                         =======================

We expect our production will continue to increase in 2007 by reaching facility
design  capacity at Buzzard,  from  bringing a  sidetrack  development  well on
stream at Aspen and new production  from Wrigley in the Gulf of Mexico and from
bitumen  production at Long Lake later this year. Long Lake synthetic crude oil
production is expected to begin in late 2007.  Production  volumes discussed in
this section represent before-royalties volumes, net to our working interest.

YEMEN
Production  from the Masila field  decreased 6% from the prior  quarter and 20%
from the second  quarter of 2006.  Production  declines  at Masila  reflect the
maturity  of the field and the impact of a reduced  2007  development  drilling
program. We have drilled nine development wells and four sidetrack wells on the
Masila  block to date  this  year.  We plan to drill at least  five  additional
development  wells  and  seven  sidetrack  wells  in the  second  half of 2007.
Production  declines  are  expected to continue as we  concentrate  our capital
spending on maximizing recovery of the remaining reserves on the block.

Block 51  production  remained  steady  from the first  quarter;  however,  our
production decreased 33% from the second quarter of 2006 as a result of natural
declines.  Our 2007 capital investment program includes further  development of
the BAK A field and we have drilled seven of eleven planned  development  wells
this year. We are also  de-bottlenecking  the  production  facilities to handle
additional  water,  continuing  to  optimize  wells  and  completing  the water
handling and power plant expansions.

CANADA
Production  in Canada was  slightly  lower than the  previous  quarter  and the
second  quarter of 2006.  Natural  declines  at our heavy oil  properties  were
partially offset by our capital program additions.  Declines in our natural gas
properties in the Medicine Hat region have been offset by capital investment in
infill drilling and well optimization  activities.  CBM production continues to
increase  as our  wells  in the Fort  Assiniboine  area  de-water  and we bring
additional development wells and facilities on stream.

Production  volumes are  expected to  increase  in the  remainder  of 2007 from
additional CBM natural gas volumes and new Long Lake bitumen production towards
the end of the year.

UNITED STATES
Gulf of Mexico  production  decreased 8,100 boe/d or 21% from the prior quarter
largely  from  downtime  caused by  equipment  maintenance  and  natural  field
declines. Our Aspen production was reduced approximately 1,500 boe/d during the
quarter as processing  facilities on the non-operated  Bullwinkle platform were
shut-in  for  approximately  twelve  days  for  maintenance.  We  expect  Aspen
production to increase as we are completing a sidetrack on Aspen-1 to exploit a
deeper sand and expect it on stream during the third quarter.

Gunnison  production  decreased  15% from the prior  quarter due to  mechanical
problems in one high volume well,  while shelf  production  declined  from last
year as a result  of  lower  performance,  equipment  maintenance  and  program
delays. Production from our 50% non-operated Wrigley development began early in
the third quarter and we expect to reach peak rates of 60 mmcf/d (30 mmcf/d net
to us) later in the third quarter.


                                      31
<PAGE>

UNITED KINGDOM
Buzzard  continued to ramp up during the quarter as expected and is approaching
facility design  capacity.  Production for the quarter  averaged  157,500 boe/d
(68,000 boe/d, net to us) from eight development wells.  During the quarter, we
commissioned  the gas export  system and began  selling  gas  through the Frigg
pipeline.  We have now  commissioned all remaining  production  systems and are
evaluating the performance of the production facilities.  We plan to drill four
additional  development  wells  by  the  end  of the  year.  We  are  reviewing
de-bottlenecking  opportunities  as we maximize  production  efficiency  of the
facilities.

Production  on the  Scott/Telford  fields was 1,500  boe/d lower from the first
quarter despite acquiring  additional  working interests in the fields early in
the quarter. The decrease was a result of natural declines and downtime related
to maintenance and workover activity.  The non-operated Farragon field produced
approximately 2,800 boe/d during the quarter,  with lower than expected natural
declines.

OTHER COUNTRIES
Production  from our Guando field in Colombia  averaged 6,200 bbls/d during the
quarter, 7% above the prior quarter. We began a 35 well infill drilling program
earlier  in the  year  and 14 wells  have  been  drilled  to  date.  We  expect
production from Colombia to average between 6,000 and 7,000 bbls/d in 2007.

SYNCRUDE
Syncrude production was 11% lower than the prior quarter due to downtime caused
by an extended  turnaround  on the LC Finer and by  completing a turnaround  on
Coker 8-3.  Circulation  difficulties that restricted the capacity of Coker 8-3
since mid December have now been resolved and we expect higher  production  for
the remainder of the year.

In 2007, we expect our total-year  production  from Syncrude to average between
20,000 and 25,000 boe/d.




                                      32
<PAGE>

<TABLE>
<CAPTION>
COMMODITY PRICES
                                                                          Three Months                 Six Months
                                                                          Ended June 30                Ended June 30
                                                                     2007           2006             2007          2006
------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>            <C>              <C>           <C>
CRUDE OIL AND NGLS
    West Texas Intermediate (WTI) (US$/bbl)                         65.03          70.70            61.60         67.09
                                                                   -----------------------------------------------------

    Differentials (1) (US$/bbl)
      Heavy Oil                                                     20.00          17.88            18.29         23.39
      Mars                                                           2.84           6.97             3.97          7.43
      Masila                                                        (3.33)          2.71            (0.66)         3.24
      Dated Brent                                                   (3.73)          1.08            (1.66)         1.40

    Producing Assets (Cdn$/bbl)
      Yemen                                                         77.34          76.86            69.99         72.44
      Canada                                                        41.89          51.67            41.80         40.44
      United States                                                 68.18          70.23            62.63         66.86
      United Kingdom                                                74.07          73.24            70.18         71.16
      Other Countries                                               68.04          69.63            64.07         64.60
      Syncrude                                                      77.12          79.50            73.39         75.14

    Corporate Average (Cdn$/bbl)                                    72.27          72.90            67.20         67.92
                                                                   -----------------------------------------------------

NATURAL GAS
    New York Mercantile Exchange (NYMEX) (US$/mmbtu)                 7.66           6.67             7.42          7.27
    AECO (Cdn$/GJ)                                                   6.99           5.95             7.03          7.37
                                                                   -----------------------------------------------------

    Producing Assets (Cdn$/mcf)
      Canada                                                         7.06           6.21             7.11          6.93
      United States                                                  8.85           7.51             8.71          8.33
      United Kingdom                                                 3.32           5.52             3.59          8.31

    Corporate Average (Cdn$/mcf)                                     7.52           6.68             7.56          7.70
                                                                   -----------------------------------------------------

NEXEN'S AVERAGE REALIZED OIL AND GAS PRICE (Cdn$/boe)               68.48          66.78            63.95         63.90
                                                                   -----------------------------------------------------

AVERAGE FOREIGN EXCHANGE RATE
    Canadian to US Dollar                                            0.9107         0.8918           0.8812        0.8786
                                                                   -----------------------------------------------------
</TABLE>
------------
(1)  These differentials are a discount/(premium) to WTI.

HIGHER REALIZED  COMMODITY PRICES INCREASED  QUARTERLY NET INCOME BY $7 MILLION
WTI prices increased 12% over the previous quarter,  but were 8% lower than the
second quarter of 2006. We realized  higher prices for our crude oil sales as a
result of strong benchmark  commodity prices compared to the previous  quarter.
Our realized  crude oil price  averaged  $72.27/bbl in the quarter,  17% higher
than the  previous  quarter.  Our  realized  gas  price  decreased  1% from the
previous quarter to average $7.52/mcf. NYMEX increased 7% in the same period.

CRUDE OIL REFERENCE PRICES
Crude oil prices  remained  strong  throughout the second quarter of 2007, with
WTI  averaging  US$65.03/bbl.  The  trading  range for WTI in the  quarter  was
between  US$60.68/bbl  and  US$71.06/bbl.  The main drivers behind strong crude
prices  continue  to be  geopolitical  issues in Nigeria  and the Middle  East,
strong  gasoline  demand  in North  America  and the  threat  of a severe  2007
hurricane season in the Gulf of Mexico.

Concerns over  geopolitical  stability are supporting  strong crude oil prices.
Geopolitical  risk in Nigeria and Iran,  the world's  eighth and fourth largest
oil exporters,  respectively,  play a dominant role in applying upward pressure
on crude  prices.  Violence  in  Nigeria  continues  to create  supply  outages
reducing  production by 800,000 barrels per day or  approximately  one third of
total Nigerian  capacity.  In addition,  the recent  presidential  election has
contributed to volatile prices. Aside from Nigeria, on-going tensions involving
Iran and its uranium enrichment program have led US warships to converge in the
Gulf. More recently,  Turkey has created new geopolitical concern in the Middle
East. It was reported that Turkish  troops have entered  northern Iraq, an area
rich in oil.  Turkey has denied  these  reports  but stated that the country is
trying to establish temporary security zones near the Iraq border.


                                      33
<PAGE>

In the US, supply  concerns around gasoline stocks are driving higher crude oil
prices.  Reduced refinery  utilization and speculation around the impact of the
summer driving season have caused prices to remain high. Hurricane  forecasters
are predicting an active US storm season which may rival that of two years ago.
Crude  prices have  strengthened  in  anticipation  of  significant  production
disruptions in the Gulf of Mexico. In the current tight supply environment, any
potential supply  disruptions can have a significant impact on global crude oil
prices as there is perceived to be little spare capacity.

CRUDE OIL DIFFERENTIALS
In Canada,  heavy crude oil differentials  averaged  US$20.00/bbl (31% of WTI),
compared to US$17.88/bbl in the second quarter of 2006 (25% of WTI).  Heavy oil
differentials are wide due to weak demand for heavier crude given the number of
complex  refineries  off-line and strong light crude prices.  The market should
improve as refineries  come back on-line and demand  increases  with the summer
asphalt season.

The Brent/WTI  differential  strengthened  during the second quarter with Brent
trading  at  a  premium  averaging   US$3.73/bbl  compared  to  a  discount  of
US$1.08/bbl  for the same  period  last  year.  The  Brent  index  is  becoming
increasingly  relevant  for  us as  approximately  80%  of  our  current  crude
production is priced based on Brent. Brent historically traded at a discount of
US$1.50  to  US$2.00  per  barrel to WTI but the  spread  broke away last year.
Regional issues,  such as an overabundance of crude in local storage around the
Cushing, Oklahoma area where WTI is priced and the limited ability to move that
crude  to  world  markets  are  causing  WTI to  trade  at  lower  prices  than
international  crude grades.  By  comparison,  Brent prices are still strong as
multiple  transportation options allow it to remain a global crude oil. For the
present time, WTI does not represent a global benchmark  price.  Demand for WTI
relative  to Brent is  expected to  strengthen  during the third  quarter as US
refineries  are  brought  back on line and crude  stocks at  Cushing  return to
normal  operational  levels.  Longer  term,  we expect WTI will be  impacted by
weaker  world  demand  growth and by  competition  from new  Canadian oil sands
production.

On the US Gulf  Coast,  the Mars  differential  narrowed  during the quarter to
reach new  historical  lows,  averaging  US$2.84/bbl  (4% of WTI)  compared  to
US$6.97/bbl  (10% of WTI) in the same  period  last year.  The  narrowing  Mars
differential reflects weaker prices for WTI. Offshore US crude such as Mars has
access to water  transportation  routes  preventing  it from being  impacted by
constraints in WTI pricing.

The Yemen  Masila  differential  narrowed  substantially  relative  to WTI with
Masila  trading at a premium  averaging  US$3.33/bbl  compared to a discount of
US$2.71/bbl  in the second  quarter of 2006.  Strong demand growth in China has
been the primary  driver for the  strengthening  of Masila crude.  In addition,
stronger Brent pricing has provided upside support since Masila crude is priced
off Brent.

NATURAL GAS REFERENCE PRICES
NYMEX natural gas prices averaged  US$7.66/mmbtu  for the quarter,  compared to
US$6.67/mmbtu  in the second quarter of 2006.  Natural gas prices  strengthened
despite new sources of supply from higher liquefied  natural gas (LNG) imports.
European  gas prices  collapsed  in April from mild  weather,  causing spot LNG
cargoes to be diverted to the US market.  However,  North American  natural gas
prices  remained  strong during the typically mild shoulder season from support
provided by strong crude oil prices,  the possibility of hot summer weather and
a potentially active hurricane season.

<TABLE>
<CAPTION>
OPERATING COSTS
                                                                                       Three Months               Six Months
                                                                                       Ended June 30             Ended June 30
(Cdn$/boe)                                                                            2007       2006          2007         2006
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>        <C>           <C>          <C>
Operating costs based on our working interest production before royalties (1)
     Conventional Oil and Gas                                                         7.76       6.47          7.99         6.52
     Synthetic Crude Oil
       Syncrude                                                                      29.91      27.84         27.00        33.45
     Total Oil and Gas                                                                9.41       8.21          9.54         8.50
                                                                                  -----------------------------------------------

Operating costs based on our net production after royalties
     Conventional Oil and Gas                                                         9.50       9.29          9.97         9.41
     Synthetic Crude Oil
       Syncrude                                                                      34.54      30.93         30.89        37.09
     Total Oil and Gas                                                               11.48      11.46         11.81        11.96
                                                                                  -----------------------------------------------
</TABLE>
------------
(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.


                                      34
<PAGE>

HIGHER  OIL  AND  GAS OPERATING COSTS  DECREASED NET  INCOME FOR THE QUARTER BY
$57 MILLION
Our  oil and  gas  average  operating  cost  was  impacted  by  changes  in our
production mix during the quarter. New production from Buzzard in the North Sea
and  additional  Syncrude  production  are  higher  contributors  to our  total
production.  Operating  costs  on the  Buzzard  platform  are  lower  than  our
corporate  average,  reducing our consolidated  average by $1.64/boe during the
quarter.  The impact of Buzzard  production  increased our operating expense by
$29 million in the quarter.  Additional higher-cost production from the Stage 3
expansion at Syncrude increased our corporate average by $0.56/boe.

In Yemen, lower production at Masila and Block 51, together with higher service
rig activity and  maintenance  programs,  have  increased  our  corporate  unit
average  cost by  $0.77/boe.  Industry  cost  pressures  caused  by the  strong
commodity price  environment have increased our Gulf of Mexico operating costs.
We have also performed additional down hole and surface maintenance activity to
maintain production rates which has increased costs. These increases,  combined
with a decrease in production,  increased our corporate  average unit operating
cost by $0.41/boe.

In Canada,  operating costs increased our corporate  average by $0.58/boe.  Our
heavy oil properties  have higher  operating costs per boe as many of our costs
are fixed in nature  and heavy oil  production  volumes  are  decreasing.  Unit
operating  costs  at CBM are  higher  initially  as we  de-water  the  wells to
stimulate  gas  production.  Costs  have also  increased  as we ramp up our CBM
operations  with more  wells  coming on stream at Fort  Assiniboine.  We expect
operating  costs to decrease over time as the wells de-water and gas production
increases.

Our   Scott/Telford   costs  increased  during  the  quarter  as  we  performed
maintenance and workovers on the platform and producing  wells.  The additional
maintenance  costs and  decreases  in  production  volumes have  increased  our
corporate average by $0.25/boe.

Syncrude  operating  costs per barrel  increased 7% from the second  quarter of
2006  primarily as a result of costs  incurred  from the Coker 8-3 and LC Finer
turnarounds and partially  offset by increased  production  volumes.  We expect
unit  operating  costs to decrease in the third quarter with higher  production
rates and less downtime. The impact of the higher Syncrude unit costs increased
our corporate average by $0.21/boe during the quarter.

<TABLE>
<CAPTION>
DEPRECIATION, DEPLETION, AMORTIZATION AND IMPAIRMENT (DD&A)
                                                                              Three Months                Six Months
                                                                             Ended June 30                Ended June 30
(Cdn$/boe)                                                                 2007        2006              2007        2006
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>         <C>               <C>         <C>
DD&A based on our working interest production before royalties (1)
     Conventional Oil and Gas                                             15.28       13.18             15.24       13.01
     Synthetic Crude Oil
       Syncrude                                                            6.79        3.47              6.72        3.61
     Average Oil and Gas                                                  14.65       12.39             14.55       12.31
                                                                       ---------------------------------------------------

DD&A based on our net production after royalties
     Conventional Oil and Gas                                             18.71       18.93             19.01       18.78
     Synthetic Crude Oil
       Syncrude                                                            7.84        3.85              7.68        4.00
     Average Oil and Gas                                                  17.86       17.31             18.01       17.33
                                                                       ---------------------------------------------------
</TABLE>
------------
(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.


HIGHER OIL AND GAS DD&A  DECREASED  NET INCOME FOR THE QUARTER BY $100  MILLION
Our  production  mix has  changed  with new  volumes  added  from  the  Buzzard
development  in the North Sea. The impact of new Buzzard  production  increased
our DD&A expense by $112 million during the quarter.  Costs relating to Buzzard
are higher than our corporate  average as they include our acquisition cost and
the  costs to  complete  the  project,  increasing  our  corporate  average  by
$1.23/boe.  This was  partially  offset at our Scott and Telford  fields  where
higher reserves reduced our corporate average $0.53/boe. Buzzard unit depletion
rates are expected to decrease in the next few years as we  anticipate  booking
additional  proved  reserves  from  production   experience  and  from  further
development drilling.

In  Yemen,  lower  capital  expenditures  as a result of our  reduced  drilling
program decreased our corporate unit depletion rate by $0.08/boe as compared to
the second quarter of 2006.


                                      35
<PAGE>

Depletion of our Canadian assets increased our corporate  average by $0.16/boe.
This largely  reflects the timing of reserve  bookings from our CBM projects in
central Alberta,  as well as land acquisitions in 2006. We expect our depletion
rate for our coalbed  methane  projects to decline as the wells de-water and we
are able to recognize  additional  reserves.  Our depletion rate in the Gulf of
Mexico increased our corporate average depletion rate by $1.14/boe  compared to
2006 from higher costs related to the additional  development well at Aspen and
from reserve reductions at the end of 2006.

Syncrude  DD&A  includes  costs to develop the Stage 3  expansion  that came on
stream in mid 2006. The depletion of the expansion  costs increased our average
by $0.33/boe.

<TABLE>
<CAPTION>
EXPLORATION EXPENSE

                                                               Three Months                   Six Months
                                                              Ended June 30                  Ended June 30
                                                             2007        2006              2007        2006
----------------------------------------------------------------------------------------------------------------
<S>                                                          <C>         <C>               <C>         <C>
Seismic                                                        50          25                60          47
Unsuccessful Exploration Drilling                              33           6                54          71
Other                                                          22          15                40          31
                                                           -----------------------------------------------------
Total Exploration Expense                                     105          46               154         149
                                                           =====================================================

New Growth Exploration                                         99         167               207         284
Geological and Geophysical Costs                               50          25                60          47
                                                           -----------------------------------------------------
Total Exploration Expenditures                                149         192               267         331
                                                           -----------------------------------------------------

                                                           -----------------------------------------------------
Exploration Expense as a % of Exploration Expenditures        71%         24%                58%        45%
                                                           =====================================================
</TABLE>

HIGHER EXPLORATION  EXPENSE DECREASED NET INCOME FOR THE QUARTER BY $59 MILLION
Exploration capital during the quarter included activity in the Gulf of Mexico,
the North Sea and Colombia.  We have four exploration wells currently  drilling
in the Gulf of  Mexico.  In the  deepwater,  our  Vicksburg  prospect  is being
drilled to a depth of 26,000  feet.  Our drilling on the shelf  includes  three
exploration wells and results are expected in the third quarter.

In the UK North Sea,  we expensed  $8 million as we plugged  and  abandoned  an
unsuccessful  exploration  well at Dee. We are currently  drilling an appraisal
well at Selkirk  located on Block  22/22b and results are expected in the third
quarter. An additional  appraisal well at Bugle and three exploration wells are
planned for the second half of the year in the North Sea.

In  Colombia,  we  expensed  $10 million of costs  related to our  unsuccessful
Atalea-1 exploratory well on our Boqueron Deep prospect. In Canada, we incurred
$6 million in dry hole costs on three CBM explorations wells.

Seismic  data  acquisition  was higher  during  the  quarter as a result of the
timing of data acquisitions,  particularly in the Gulf of Mexico as we continue
to  review  our  exploration  opportunities.  Over the next 12 months or so, we
expect to drill at least 18 exploration  wells with the majority in the Gulf of
Mexico and the UK North Sea.


                                      36
<PAGE>

<TABLE>
<CAPTION>
ENERGY MARKETING
                                                                             Three Months                    Six Months
                                                                            Ended June 30                   Ended June 30
                                                                         2007           2006              2007         2006
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>             <C>              <C>          <C>
    Physical Sales (1)                                                 11,503          8,983            22,401       19,441
    Physical Purchases (1)                                            (11,260)        (8,763)          (21,884)     (18,889)
    Net Financial Transactions (1)                                         41             73                14          178
                                                                    --------------------------------------------------------
Net Revenue                                                               284            293               531          730
    Transportation Expense                                               (189)          (186)             (409)        (418)
    Other                                                                   1              2                 4            2
                                                                    --------------------------------------------------------
NET MARKETING REVENUE                                                      96            109               126          314
                                                                    ========================================================

CONTRIBUTION TO NET MARKETING REVENUE BY PRODUCT TYPE:
    North American Natural Gas                                             49             70                74          258
    Global Crude Oil                                                       26             34                14           45
    North American Power                                                    1              3                 8            6
    Other                                                                  20              2                30            5
                                                                    --------------------------------------------------------
NET MARKETING REVENUE                                                      96            109               126          314
    General and Administrative                                            (23)           (39)              (53)         (75)
                                                                    --------------------------------------------------------
NET MARKETING REVENUE AFTER GENERAL AND ADMINISTRATIVE                     73             70                73          239
    Depreciation, Depletion, Amortization and Impairment                   (3)            (1)               (7)          (4)
                                                                    --------------------------------------------------------
MARKETING CONTRIBUTION TO INCOME BEFORE INCOME TAXES                       70             69                66          235
                                                                    ========================================================

PHYSICAL SALES VOLUMES (2)
    North American Natural Gas (bcf/d)                                    4.9            5.4               5.1          5.4
    Global Crude Oil (mbbls/d)                                            826            660               839          624
    North American Power (MW/d)                                         4,267          4,200             4,407        4,249

VALUE-AT-RISK
    Quarter-end                                                            34             20                34           20
    High                                                                   38             27                38           27
    Low                                                                    24             18                24           17
    Average                                                                30             21                29           21
                                                                    --------------------------------------------------------
</TABLE>
------------
(1)  Marketing's   physical  sales,   physical   purchases  and  net  financial
     transactions are reported net on the Unaudited  Consolidated  Statement of
     Income as marketing and other.
(2)  Excludes intra-segment transactions.

LOWER NET MARKETING  REVENUE  DECREASED NET INCOME BY $13 MILLION
Results from our marketing  group were lower than the same period last year. In
2006,  volatility  in the North  American  natural  gas  markets  and  industry
speculation  coming off an active 2005 hurricane  season widened  summer/winter
spreads and  narrowed  location  spreads  across the natural gas forward  price
curve. Early last year, we positioned  ourselves  financially to take advantage
of these spreads. In 2007, the natural gas market has not yet presented similar
opportunities  to last year as there is reduced  speculation  on the  potential
impact of the 2007  hurricane  season.  In  particular,  summer/winter  spreads
across the forward price curve are narrower than last year.

Our global  crude oil group  continues  to expand  internationally.  Our second
quarter results were slightly lower from last year as the contango  (increasing
prices) in the crude oil forward price curve  decreased  late in June 2007 as a
result of strong current month pricing.  During the quarter,  we realized gains
largely from better pricing of physical  sales  relative to our  purchases,  as
well as  realizing  gains on selling  crude oil from  storage.  Elsewhere,  our
European gas and power marketing group had strong results during the quarter by
anticipating  weakness in near-term  natural gas prices relative to next winter
in the United Kingdom.

Results from our marketing group vary by quarter and historical results 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 change in value of the financial instruments
we use to hedge these assets.

As part of our gas  marketing  strategy,  we hold physical  transportation  and
storage  capacity  contracts  that  allow  us  to  take  advantage  of  pricing
differences  between  locations  (i.e.  west vs. east) and time  periods  (i.e.
summer vs.  winter).  These capacity  contracts  have market value,  similar to
financial  commodity  contracts,  as future margins  realized  depend on future
prices and, more importantly,  pricing  differences.  The market value of these


                                      37
<PAGE>


capacity  contracts varies depending on the change in future prices and pricing
relationships.  We routinely hedge the economic value of our capacity contracts
using various types of derivative contracts, thereby limiting volatility in our
economic  results.  Accounting  rules,  however,  increase  volatility  in  our
reported results since they require us to recognize the change in fair value of
derivative  contracts  hedging our capacity  contracts,  but do not allow us to
recognize the change in fair value of the capacity  contracts  themselves until
the  contracts  are used.  As a result,  when  prices or pricing  relationships
change,  we may be required to include gains or losses in our reported  results
in different periods even though our underlying economic results may be largely
unchanged.

<TABLE>
<CAPTION>
COMPOSITION OF NET MARKETING REVENUE
                                                         Three Months                          Six Months
                                                         Ended June 30                       Ended June 30
                                                    2007              2006              2007             2006
----------------------------------------------------------------------------------------------------------------
<S>                                                 <C>              <C>               <C>               <C>
Trading Activities                                    97               107               121               309
Non-Trading Activities                                (1)                2                 5                 5
                                                ----------------------------------------------------------------
                                                      96               109               126               314
                                                ================================================================
</TABLE>

TRADING ACTIVITIES

In  marketing,  we enter into  contracts to purchase and sell energy  products,
primarily for crude oil and natural gas. We also use  financial and  derivative
contracts,  including  futures,  forwards,  swaps and  options  for hedging and
trading  purposes.  We account for all  derivative  contracts not designated as
hedges for accounting purposes using  mark-to-market  accounting and record the
net gain or loss from their revaluation in marketing and other income. The fair
value of these  instruments  is included with  accounts  receivable or payable.
They are  classified  as long-term  or  short-term  based on their  anticipated
settlement date.

We value  derivative  trading  contracts daily using:

     o   actively quoted markets such as the New York  Mercantile  Exchange and
         the International Petroleum Exchange; and

     o   other external  sources such as the Natural Gas Exchange,  independent
         price publications and over-the-counter broker quotes.

FAIR VALUE OF DERIVATIVE CONTRACTS

At June 30, 2007, the fair value of our derivative  contracts not designated as
accounting  hedges  totalled  $131  million.  Below is a breakdown of this fair
value by valuation method and contract maturity.

<TABLE>
<CAPTION>
                                                                                       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                                       (60)           17           (10)            -         (53)
    From Other External Sources                                    94            69            28            (7)        184
    Based on Models and Other Valuation Methods                     -             -             -             -           -
                                                          -------------------------------------------------------------------
Total                                                              34            86            18            (7)        131
                                                          ===================================================================

<CAPTION>
CHANGES IN FAIR VALUE OF DERIVATIVE CONTRACTS

                                                                                                                      Total
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                                 <C>
Fair Value at December 31, 2006                                                                                         360
    Change in Fair Value of Contracts                                                                                    31
    Net Losses (Gains) on Contracts Closed                                                                             (260)
    Changes in Valuation Techniques and Assumptions (1)                                                                   -
                                                                                                                  -----------
Fair Value at June 30, 2007                                                                                             131
                                                                                                                  ===========
</TABLE>
------------
(1)  Our valuation methodology has been applied consistently in each period.

The fair values of our  derivative  contracts will be realized over time as the
contracts  settle.  Until then,  the value of certain  contracts will vary with
forward  commodity prices and price  differentials.  While forward prices vary,
the value of the  contracts  only  varies to the extent  they are  economically
exposed or  unprotected.  As most of our unrealized  value is not  economically
exposed, we expect to realize the majority of this fair value.

Contract  maturities  vary  from a single  day up to 19 years.  Those  maturing
beyond one year primarily relate to North American  natural gas positions.  The
relatively short maturity of our contracts,  the high quality of our valuations
from quoted  markets and  external  sources and the limited  economic  exposure
combine to lower our portfolio risk.


                                      38
<PAGE>

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 facilities at Balzac and Soderglen.


CHEMICALS

HIGHER CHEMICALS CONTRIBUTION INCREASED NET INCOME BY $2 MILLION
North American prices for sodium chlorate remained strong in the second quarter
offsetting a slight decrease in sales volumes arising from unplanned  shutdowns
at our North  Vancouver  chlor-alkali  facility,  pulp mill  outages and higher
electricity  costs.  Our  operations  in  Brazil  remain  strong as a result of
continued demand from Aracruz Cellulose, our primary customer in Brazil.

Chemicals  net income  includes  foreign  exchange  gains of $13 million in the
second quarter (2006 - $7 million) on Canexus US-dollar denominated debt.


CORPORATE EXPENSES

GENERAL AND ADMINISTRATIVE (G&A)
<TABLE>
<CAPTION>
                                                                              Three Months                 Six Months
                                                                             Ended June 30                Ended June 30
                                                                            2007       2006              2007       2006
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>        <C>              <C>        <C>
General and Administrative Expense before Stock-Based Compensation            93         97               179        172
Stock-Based Compensation (1)                                                 (55)        11                61        156
                                                                           --------------------------------------------------
Total General and Administrative Expense                                      38        108               240        328
                                                                           ==================================================
</TABLE>
------------
(1)  Includes the tandem option plan, stock options for our US-based  employees
     and stock appreciation rights.


LOWER COSTS INCREASED QUARTERLY NET INCOME BY $70 MILLION
Changes in our share price  create  volatility  in our net income as we account
for  stock-based  compensation  using the  intrinsic-value  method.  During the
quarter, we recorded a recovery of our stock-based  compensation expense as our
share price was lower than at the end of the first quarter.  In 2006, our share
price was largely  unchanged  for the second  quarter  and we recorded  nominal
stock-based  compensation  expense as a result.  Cash payments to employees for
our  stock-based  compensation  programs  were $15  million  during  the second
quarter and $87 million year-to-date.

Reduced  performance  by our marketing  group relative to last year reduced our
accrual for  results-based  compensation  programs.  This was largely offset by
additional costs of higher employee levels as we continue to expand our oil and
gas operations  internationally  and expand our marketing  operations in Europe
and North America.


                                      39
<PAGE>

INTEREST AND FINANCING COSTS
<TABLE>
<CAPTION>
                                                                              Three Months                 Six Months
                                                                             Ended June 30                Ended June 30
                                                                            2007       2006              2007        2006
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>        <C>              <C>        <C>
Interest                                                                      87         71               173         137
    Less: Capitalized Interest                                               (41)       (60)              (79)       (117)
                                                                        ------------------------------------------------------
Net Interest Expense                                                          46         11                94          20
                                                                        ======================================================
</TABLE>

HIGHER INTEREST EXPENSE DECREASED QUARTERLY NET INCOME BY $35 MILLION
Our financing costs increased $19 million from the second quarter of 2006 as we
funded capital investment of our Long Lake project and the Ettrick  development
in the North Sea with our credit facilities. The stronger Canadian to US dollar
exchange rate reduced our US-dollar  denominated  interest  costs by $3 million
during the quarter.  In May 2007, we issued US$1.5  billion of long-term  debt,
which was used to repay the term credit facilities.

We  capitalized  less  interest on our major  development  projects  during the
quarter as we completed the Buzzard and Syncrude  Stage 3 development  projects
in 2006. In 2007, we are capitalizing  interest on our Long Lake development in
the Athabasca oil sands and on our Ettrick project in the North Sea.

INCOME TAXES

<TABLE>
<CAPTION>
                                                                              Three Months                 Six Months
                                                                              Ended June 30                Ended June 30
                                                                             2007       2006              2007       2006
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>        <C>              <C>        <C>
Current                                                                       151        136               211       245
Future                                                                        126         14               161       283
                                                                        ------------------------------------------------------
Total Provision for Income Taxes                                              277        150               372       528
                                                                        ======================================================

Effective Tax Rate (%)                                                         43%        27%                43%      61%
                                                                        ------------------------------------------------------
</TABLE>

EFFECTIVE TAX RATE INCREASED TO 43%

Current  income taxes  include  cash taxes in Yemen of $65 million  (2006 - $81
million) for the quarter and $109 million (2006 - $148  million)  year-to-date.
New  production  from Buzzard in the North Sea,  combined  with high  commodity
prices,  resulted in a second  quarter  current tax provision of $67 million in
the United Kingdom.  On a go forward basis, we expect to be cash taxable in the
UK. Our income tax provision  also  includes  current taxes in Colombia and the
United States.

Our  provision  for future income taxes in the first quarter of 2006 included a
one-time  expense of $277  million  related  to tax rate  changes in the UK. In
early  2006,  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.   Excluding  the  charge,   our  effective  2006
year-to-date  tax rate was 29%. Our effective tax rate in 2007 increased to 43%
for the second quarter and  year-to-date  as we are  generating  more income in
higher-taxable jurisdictions such as the UK North Sea.

OTHER

<TABLE>
<CAPTION>
                                                                              Three Months                 Six Months
                                                                              Ended June 30                Ended June 30
                                                                             2007       2006              2007       2006
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>        <C>              <C>        <C>
Change in Fair Value of Crude Oil Put Options                                  (4)         3               (20)        (1)
                                                                        ------------------------------------------------------
</TABLE>

During the second  quarter of 2006, we purchased  put options on  approximately
105,000 bbls/d of our 2007 crude oil production.  These options establish a WTI
floor price of US$50/bbl on these volumes,  are settled  annually and provide a
base level of price  protection  without  limiting our upside to higher prices.
The put options were  purchased  for $26 million and are carried at fair value.
At December 31, 2006,  the options had a fair value of $19 million.  During the
second quarter we recorded a loss of $3 million (2006 - gain of $3 million) and
year to date we  recorded a loss of $19  million  (2006 - $1  million)  for the
change in fair value as a result of the rise in WTI.

During the quarter,  we expanded our cash flow protection strategy into 2008 by
purchasing put options on 36 million barrels or approximately 100,000 bbls/d of
our 2008 crude oil  production.  These options  establish an annual Dated Brent
floor price of US$50/bbl on these  volumes.  The put options were purchased for
$24 million and are carried at fair value.  At June 30, 2007, the options had a
fair value of $23  million  and we recorded a loss of $1 million for the change
in fair value as a result of the rise in Dated Brent.


                                      40
<PAGE>

LIQUIDITY

CAPITAL STRUCTURE

<TABLE>
<CAPTION>
                                                                 June 30          December 31
                                                                    2007                 2006
------------------------------------------------------------------------------------------------
<S>                                                                <C>                  <C>
NET DEBT (1)
   Bank Debt                                                         250                1,410
   Public Senior Notes                                             4,190                2,885
                                                               ---------------------------------
     Senior Debt                                                   4,440                4,295
   Subordinated Debt                                                 473                  536
                                                               ---------------------------------
     Total Debt                                                    4,913                4,831
   Less: Cash and Cash Equivalents                                  (158)                (101)
                                                               ---------------------------------
TOTAL NET DEBT                                                     4,755                4,730
                                                               =================================

SHAREHOLDERS' EQUITY (2)                                           5,080                4,636
                                                               =================================
</TABLE>
------------
(1)  Includes  all  of our  debt  and  is  calculated  as  long-term  debt  and
     short-term borrowings less cash and cash equivalents.
(2)  At June 30, 2007, there were 527,149,918  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.

During the second quarter, we issued US$1.5 billion of senior notes with US$250
million  maturing in 10 years and US$1,250  million  maturing in 30 years.  The
issuance of the new debt increased the average  term-to-maturity of our debt to
21 years.  Proceeds from the debt issue were used to repay the outstanding term
credit facilities.  In June, we also filed a universal base shelf prospectus in
the US and Canada  allowing us to  potentially  raise  US$2.5  billion of debt,
equity or other hybrid securities, should the need arise.

NET DEBT

Our net debt levels are directly  related to our  operating  cash flows and our
capital expenditure activities. Changes in net debt for the first six months of
2007 are related to:

<TABLE>
-----------------------------------------------------------------------------------------------
<S>                                                                                 <C>
Capital Investment                                                                     1,630
Cash Flow from Operating Activities                                                   (1,030)
                                                                                    -----------
   Excess of Capital Investment over Cash Flow                                           600

Dividends on Common Shares                                                                26
Issue of Common Shares                                                                   (40)
Foreign Exchange Translation of US-dollar Debt and Cash                                 (407)
Other                                                                                   (154)
                                                                                    -----------
Increase in Net Debt                                                                      25
                                                                                    ===========

<CAPTION>
CHANGE IN WORKING CAPITAL

                                                     June 30       December 31       Increase/
                                                        2007              2006      (Decrease)
-----------------------------------------------------------------------------------------------
<S>                                                 <C>            <C>               <C>
Cash and Cash Equivalents                                158               101             57
Restricted Cash                                           96               197           (101)
Accounts Receivable                                    2,861             2,951            (90)
Inventories and Supplies                                 857               786             71
Future Income Tax Assets                                 277               479           (202)
Accounts Payable and Accrued Liabilities              (3,665)           (3,879)           214
Other                                                    (27)               (1)           (26)
                                                  ---------------------------------------------
Net Working Capital                                      557               634            (77)
                                                  =============================================
</TABLE>

Accounts  receivable  were  lower  than  year  end as  gains  from  2006 on our
marketing  derivative contracts were realized during the first quarter of 2007,
partially  offset by increases in our oil and gas  production.  Inventories and
supplies  increased as our marketing group acquired  additional natural gas and
crude oil  inventory to take  advantage of trading  opportunities.  Our accrued
liabilities  decreased  from  the  end of  2006  as we  settled  the  Block  51
arbitration  early in 2007.  Lower  accruals for our  stock-based  compensation
obligations also reduced accounts payable and accrued liabilities.


                                      41
<PAGE>

OUTLOOK FOR REMAINDER OF 2007

We expect our 2007  production to be at or slightly  below the lower end of our
guidance range of 275,000 to 305,000 boe/d before  royalties for the full year.
We expect to generate $3.3 to $3.6 billion in cash flow (before remediation and
geological and geophysical  expenditures)  in 2007,  assuming the following for
the remainder of the year:

-------------------------------------------------------------------------------
WTI (US$/bbl)                                                            60.00
Brent (US$/bbl)                                                          65.00
NYMEX natural gas (US$/mmbtu)                                             7.00
Oil & Gas and Syncrude operating costs (Cdn$/boe)                         8.75
US to Canadian dollar exchange rate                                       0.90
                                                                 --------------

To date, we have incurred  almost half of our planned 2007 capital  investment.
Our 2007 capital program is largely focused on bringing Long Lake on stream and
advancing the Ettrick  development in the North Sea towards completion in 2008.
In addition,  we continue to invest in exploration  opportunities in our growth
areas.

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.  In July 2007,  we are  required to repay $150  million of
medium term notes that become due; however,  we plan to fund this with our term
credit facilities. At June 30, 2007, we had committed term credit facilities of
$3.3 billion that are  available  until 2011.  At the end of the quarter we had
not drawn on these  facilities and utilized $397 million of these facilities to
support letters of credit.  We also had $631 million of uncommitted,  unsecured
credit  facilities,  of which $61 million (US$57 million) was drawn at June 30,
2007 and $130 million was utilized to support letters of credit.

In the second quarter, we declared common share dividends of $0.025 per share.

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 2006 Annual Report on Form 10-K.
In 2007, we entered into work commitments  related to a drilling rig, which has
been contracted to work for us in the North Sea,  totaling $93 million over the
next two years.  There have been no other significant  developments  since year
end.

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 2006 Annual Report on Form 10-K.  There
have been no significant developments since year end.


NEW ACCOUNTING PRONOUNCEMENTS

CANADIAN PRONOUNCEMENTS
In December 2006, the Canadian Accounting Standards Board (AcSB) issued two new
Sections  in  relation  to  financial  instruments:   Section  3862,  FINANCIAL
INSTRUMENTS  -  DISCLOSURES,   and  Section  3863,   FINANCIAL   INSTRUMENTS  -
PRESENTATION.  Both  sections  will  become  effective  for annual and  interim
periods  beginning  on or after  October  1,  2007 and will  require  increased
disclosure of financial instruments.

In December 2006, the AcSB issued Section 1535, CAPITAL DISCLOSURES,  requiring
disclosure  of  information  about  an  entity's  capital  and the  objectives,
policies,  and  processes for managing  capital.  The standard is effective for
annual periods beginning on or after October 1, 2007.

In June 2007, the AcSB issued Section 3031, INVENTORIES, which replaces Section
3030. The new section is harmonized with International Accounting Standards and
provides additional guidance on the measurement and disclosure requirements for
inventories.  Specifically, Section 3031 requires inventories to be measured at
the lower of cost and net realizable  value. The new requirements are effective
for fiscal years  beginning on or after  January 1, 2008.  We do not expect the
adoption of this section to have a material impact on our results of operations
or financial position.


                                      42
<PAGE>

US PRONOUNCEMENTS
In September  2006,  the  Financial  Accounting  Standards  Board (FASB) issued
Statement  157,  FAIR VALUE  MEASUREMENTS.  Statement  157 defines  fair value,
establishes a framework for  measuring  fair value under US generally  accepted
accounting  principles and expands  disclosures about fair value  measurements.
This statement is effective for fiscal years beginning after November 15, 2007.
We do not expect the adoption of this statement will have a material  impact on
our results of operations or financial position.

Effective  December  31,  2006,  we  adopted  the  recognition  and  disclosure
provisions of FASB Statement  158,  EMPLOYERS'  ACCOUNTING FOR DEFINED  BENEFIT
PENSION  AND  OTHER   POSTRETIREMENT   PLANS.   This  statement  also  requires
measurement  of the funded status of a plan as of the balance  sheet date.  The
measurement  provisions  of the statement are effective for fiscal years ending
after  December  15,  2008.  We do not  expect  the  adoption  of the change in
measurement date in 2008 to have a material impact on our results of operations
or financial position.

In  February  2007,  FASB  issued  Statement  159,  THE FAIR  VALUE  OPTION FOR
FINANCIAL  ASSETS  AND  FINANCIAL  LIABILITIES.  The  statement  allows for the
elective measurement of eligible financial  instruments and certain other items
at fair value in order to  mitigate  volatility  in reported  earnings  without
having to apply complex and detailed hedge accounting  rules. This statement is
effective for fiscal years  beginning after November 15, 2007. We are currently
evaluating  the  provisions  of Statement 159 and have not yet  determined  the
impact this  statement  will have on our results from  operations  or financial
position.

EQUITY SECURITY REPURCHASES

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

<TABLE>
<CAPTION>
SUMMARY OF QUARTERLY RESULTS
                                                                              Three Months Ended

                                                       2005        |                    2006                 |         2007
                                                   Sep      Dec    |     Mar       Jun      Sep       Dec    |     Mar     Jun
----------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>      <C>            <C>     <C>        <C>       <C>        <C>     <C>
Net Sales                                        1,094    1,073          980     1,039      997       920        1,140   1,399

Net Income (Loss) from Continuing Operations       205      303          (83)      408      199        77          121     368
Net Income from Discontinued Operations            404        -            -         -        -         -            -       -
                                                ----------------------------------------------------------------------------------
Net Income (Loss)                                  609      303          (83)      408      199        77          121     368
                                                ==================================================================================

Earnings (Loss) per Common Share from
     Continuing Operations ($/share)
   Basic                                          0.39     0.58        (0.16)     0.78     0.38      0.15         0.23    0.70
   Diluted                                        0.38     0.56        (0.16)     0.76     0.37      0.14         0.22    0.68

Earnings (Loss) per Common Share ($/share)
   Basic                                          1.17     0.58        (0.16)     0.78     0.38      0.15         0.23    0.70
   Diluted                                        1.13     0.56        (0.16)     0.76     0.37      0.14         0.22    0.68
                                                ----------------------------------------------------------------------------------
</TABLE>



                                      43
<PAGE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain  statements  in this  report,  including  those  appearing  in ITEM 7 -
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 expected  full year  production,  cash flow and capital
expenditures as well as future production  associated with our coalbed methane,
Long Lake,  Syncrude,  North Sea,  Gulf of Mexico and West Africa  projects and
other 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 explore,  develop,  produce  and  transport  crude oil and
     natural gas to markets;
o    the  results  of  exploration   and   development   drilling  and  related
     activities;
o    volatility in energy trading markets;
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  or   royalties,   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
sections  titled  RISK  FACTORS  in Item 1A and  QUANTITATIVE  AND  QUALITATIVE
DISCLOSURES  ABOUT  MARKET  RISK in Item 7A of our 2006  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    possible commerciality, development plans or capacity expansions;
o    future ability to execute dispositions of assets or businesses;
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 77 - 80 in our 2006 Annual Report on Form 10-K
has not changed materially since December 31, 2006.


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 designed to be and 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 and that the information  required to be disclosed by the
Company in the reports that it files or submits under the  Securities  Exchange
Act is recorded,  processed,  summarized  and reported  within the time periods
specified in the SEC's rules and forms. 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 they do
not expect that the Company's  disclosure  controls and  procedures or internal
controls over financial reporting will prevent all errors or fraud. 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.  There has not been any change in the Company's  internal
control over  financial  reporting  during the second  quarter of 2007 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

Our Annual  General and Special  Meeting of  Shareowners  was held on April 26,
2007. The following  actions were taken at the Meeting,  for which proxies were
solicited pursuant to Section 85 of the Securities Act (Ontario).

(a)    Each of the twelve director nominees proposed by management were elected
       by a vote, conducted by ballot as follows:

<TABLE>
<CAPTION>
       Director                                        For                 %             Withheld                %
       -------------------------------------------------------------------------- -------------------------------
<S>                                          <C>                     <C>                <C>                 <C>
       Charles W. Fischer                      174,027,639             99.86              241,238             0.14
       Dennis G. Flanagan                      174,155,485             99.93              113,392             0.07
       David A. Hentschel                      173,982,068             99.84              286,809             0.16
       S. Barry Jackson                        173,459,612             99.54              809,265             0.46
       Kevin J. Jenkins                        173,468,741             99.54              800,136             0.46
       A. Anne McLellan, P.C.                  164,547,898             94.42            9,720,979             5.58
       Eric P. Newell, O.C.                    174,231,395             99.98               37,482             0.02
       Thomas C. O'Neill                       171,908,416             98.65            2,360,461             1.35
       Francis M. Saville, Q.C.                171,605,884             98.47            2,662,993             1.53
       Richard M. Thomson, O.C.                171,905,726             98.64            2,363,151             1.36
       John M. Willson                         173,464,292             99.54              804,585             0.46
       Victor J. Zaleschuk                     174,230,301             99.98               38,576             0.02
</TABLE>

(b)    The  appointment  of Deloitte & Touche LLP,  Chartered  Accountants,  to
       serve as the  independent  auditor  for 2007 was  approved  by a show of
       hands.  Proxies of 173,949,131 (99.88%) for and 204,889 (0.12%) withheld
       were received.

(c)    The  confirmation  of By-Law  No. 3 and the  repeal of By-Law  No. 2 was
       approved by a show of hands.  Proxies of  174,071,362  (99.95%)  for and
       82,658 (0.05%) against were received.

(d)    The  special  resolution  to amend the  Articles of the  Corporation  to
       effect a  two-for-one  division of the common  shares was  approved by a
       show of hands.  Proxies of  174,120,324  (99.98%) for and 32,499 (0.02%)
       against were received.


ITEM 6.    EXHIBITS

3.16   Certificate and Articles of Amendment of the Registrant  dated April 26,
       2007 (filed as Exhibit 3.16 to Form 8-K dated April 27, 2007).

4.55   Senior  Debt  Indenture  dated May 4, 2007  between the  Registrant  and
       Deutsche Bank Trust Company Americas,  pertaining to the issue of senior
       notes from time to time  (filed as Exhibit  4.1 to Form 8-K dated May 7,
       2007).

4.56   First  Supplemental  Indenture  dated May 4, 2007 to the Trust Indenture
       dated May 4, 2007 between the Registrant and Deutsche Bank Trust Company
       Americas pertaining to the issuance of US$250 million,  5.65% notes dues
       2017 and the issuance of US$1.25 billion, 6.40% notes due 2037 (filed as
       Exhibit 4.2 to Form 8-K dated April 12, 2007).

10.48  Indemnification Agreement made between the Registrant and Brendon Muller
       as of April 9, 2007 (filed as Exhibit  10.48 to Form 8-K dated April 12,
       2007).

10.50  Pricing  Agreement  dated May 1, 2007 among the  Registrant  and Banc of
       America  Securities LLC, Citigroup Global Markets Inc. and Deutsche Bank
       Securities  Inc.,  as  Underwriters  (filed as Exhibit  10.1 to Form 8-K
       dated April 12, 2007).

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.


                                      46
<PAGE>



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 July 12, 2007.

                                       NEXEN INC.


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



                                       /s/ Brendon T. Muller
                                       -------------------------------
                                       Brendon T. Muller
                                       Controller
                                       (Principal Accounting Officer)





                                      47