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

                                  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, 2008

|_|    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  (or for such  shorter  period  that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                     Yes   [X]                  No  [_]

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

         Large accelerated filer [X]     Accelerated filer [_]

         Non-Accelerated filer [_]     Smaller reporting company  [_]

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

                     Yes  [_]                   No   [X]

On June 30, 2008, there were 530,282,975 common shares issued and outstanding.

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

<TABLE>
<CAPTION>
                                   NEXEN INC.
                                      INDEX

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

   Item 2.    Management's Discussion and Analysis of Financial Condition
              and Results of Operations...........................................29

   Item 3.    Quantitative and Qualitative Disclosures about Market Risk..........51

   Item 4.    Controls and Procedures.............................................51

PART II       OTHER INFORMATION

   Item 4.    Submission of Matters to a Vote of Security Holders.................52

   Item 6.    Exhibits............................................................52
</TABLE>

This report should be read in  conjunction  with our 2007 Annual Report on Form
10-K and with our  current  reports  on Forms 8-K and 10-Q  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
76 of our 2007 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>
<CAPTION>
<S>          <C>                                       <C>         <C>
/d       =   per day                                   mcf     =   thousand cubic feet
bbl      =   barrel                                    mmcf    =   million cubic feet
mbbls    =   thousand barrels                          bcf     =   billion cubic feet
mmbbls   =   million barrels                           NGL     =   natural gas liquid
mmbtu    =   million British thermal units             WTI     =   West Texas Intermediate
boe      =   barrels of oil equivalent                 MW      =   megawatt
mboe     =   thousand barrels of oil equivalent        Brent   =   Dated Brent
mmboe    =   million barrels of oil equivalent         NYMEX   =   New York Mercantile Exchange
</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 30, 2008, the noon-day exchange rate was US$0.9817 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, 2008 and 2007.....................4

Unaudited Consolidated Balance Sheet
as at June 30, 2008 and December 31, 2007.....................................5

Unaudited Consolidated Statement of Cash Flows
for the Three and Six Months Ended June 30, 2008 and 2007.....................6

Unaudited Consolidated Statement of Shareholders' Equity
for the Three and Six Months Ended June 30, 2008 and 2007.....................7

Unaudited Consolidated Statement of Comprehensive Income
for the Three and Six Months Ended June 30, 2008 and 2007.....................7

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




                                       3
<PAGE>

<TABLE>
<CAPTION>
NEXEN INC.
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30
                                                                           Three Months              Six Months
                                                                          Ended June 30             Ended June 30
(Cdn$ millions, except per share amounts)                               2008         2007         2008         2007
--------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>          <C>          <C>          <C>
REVENUES AND OTHER INCOME
    Net Sales                                                          2,071        1,399        3,941        2,539
    Marketing and Other (Note 16)                                         34          299          256          547
                                                                 ---------------------------------------------------
                                                                       2,105        1,698        4,197        3,086
                                                                 ---------------------------------------------------
EXPENSES
    Operating                                                            348          289          657          579
    Depreciation, Depletion, Amortization and Impairment                 334          360          698          694
    Transportation and Other                                             195          210          400          456
    General and Administrative                                           418           38          473          240
    Exploration                                                          101          105          133          154
    Interest (Note 7)                                                     16           46           43           94
                                                                 ---------------------------------------------------
                                                                       1,412        1,048        2,404        2,217
                                                                 ---------------------------------------------------

INCOME BEFORE INCOME TAXES                                               693          650        1,793          869
                                                                 ---------------------------------------------------

PROVISION FOR INCOME TAXES
    Current                                                              451          151          843          211
    Future                                                              (139)         126          (62)         161
                                                                 ---------------------------------------------------
                                                                         312          277          781          372
                                                                 ---------------------------------------------------

NET INCOME BEFORE NON-CONTROLLING INTERESTS                              381          373        1,012          497
    Less: Net Income Attributable to Non-Controlling Interests            (1)          (5)          (2)          (8)
                                                                 ---------------------------------------------------

NET INCOME                                                               380          368        1,010          489
                                                                 ===================================================

EARNINGS PER COMMON SHARE ($/share)
    Basic (Note 14)                                                     0.72         0.70         1.91         0.93
                                                                 ===================================================
    Diluted (Note 14)                                                   0.70         0.68         1.87         0.91
                                                                 ===================================================
</TABLE>

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.


                                      4
<PAGE>

<TABLE>
<CAPTION>
NEXEN INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
                                                                                    June 30     December 31
(Cdn$ millions, except share amounts)                                                  2008            2007
------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>         <C>
ASSETS
    CURRENT ASSETS
      Cash and Cash Equivalents                                                         614             206
      Restricted Cash                                                                   263             203
      Accounts Receivable (Note 2)                                                    4,909           3,502
      Inventories and Supplies (Note 3)                                               1,078             659
      Other                                                                             109              89
                                                                            --------------------------------
         Total Current Assets                                                         6,973           4,659
                                                                            --------------------------------

    PROPERTY, PLANT AND EQUIPMENT
      Net of Accumulated Depreciation, Depletion, Amortization and
      Impairment of $7,991 (December 31, 2007 - $7,195)                              13,425          12,498
    FUTURE INCOME TAX ASSETS                                                            268             268
    DEFERRED CHARGES AND OTHER ASSETS (Note 4)                                          703             324
    GOODWILL                                                                            335             326
                                                                            --------------------------------
TOTAL ASSETS                                                                         21,704          18,075
                                                                            ================================

LIABILITIES AND SHAREHOLDERS' EQUITY
    CURRENT LIABILITIES
      Accounts Payable and Accrued Liabilities (Note 6)                               5,749           4,135
      Income Taxes Payable                                                              730              45
      Accrued Interest Payable                                                           55              54
      Dividends Payable                                                                  27              13
                                                                            --------------------------------
         Total Current Liabilities                                                    6,561           4,247
                                                                            --------------------------------

    LONG-TERM DEBT (Note 7)                                                           4,449           4,610
    FUTURE INCOME TAX LIABILITIES                                                     2,264           2,290
    ASSET RETIREMENT OBLIGATIONS (Note 9)                                               934             792
    DEFERRED CREDITS AND OTHER LIABILITIES (Note 10)                                    781             459
    NON-CONTROLLING INTERESTS                                                            62              67

    SHAREHOLDERS' EQUITY (Note 13)
      Common Shares, no par value
        Authorized:        Unlimited
        Outstanding:       2008 - 530,282,975 shares
                           2007 - 528,304,813 shares                                    972             917
      Contributed Surplus                                                                 2               3
      Retained Earnings                                                               5,953           4,983
      Accumulated Other Comprehensive Loss                                             (274)           (293)
                                                                            --------------------------------
         Total Shareholders' Equity                                                   6,653           5,610
                                                                            --------------------------------
    COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 17)

                                                                            --------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                           21,704          18,075
                                                                            ================================
</TABLE>

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.


                                      5
<PAGE>

<TABLE>
<CAPTION>
NEXEN INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30
                                                                                Three Months               Six Months
                                                                                Ended June 30              Ended June 30
 (Cdn$ millions)                                                             2008          2007         2008          2007
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>          <C>           <C>           <C>
 OPERATING ACTIVITIES
    Net Income                                                                380           368        1,010           489
    Charges and Credits to Income not Involving Cash (Note 15)                471           447          854           882
    Exploration Expense                                                       101           105          133           154
    Changes in Non-Cash Working Capital (Note 15)                             232          (304)         372          (272)
    Other                                                                     (21)          (34)         (38)         (223)
                                                                       ----------------------------------------------------
                                                                            1,163           582        2,331         1,030

FINANCING ACTIVITIES
    Repayment of Short-Term Borrowings, Net                                     -           (44)           -           (92)
    Repayment of Term Credit Facilities, Net                                    -        (1,321)        (228)         (955)
    Repayment of Medium-Term Notes (Note 7)                                  (125)            -         (125)            -
    Proceeds from Long-Term Notes                                               -         1,660            -         1,660
    Proceeds from (Repayment of) Term Credit Facilities of Canexus, Net       (18)           15          (10)           33
    Proceeds from Canexus Notes (Note 7)                                       51             -           51             -
    Dividends on Common Shares                                                (27)          (13)         (40)          (26)
    Issue of Common Shares and Exercise of Tandem Options                      14            11           40            40
    Other                                                                      (5)          (28)          (9)          (35)
                                                                       ----------------------------------------------------
                                                                             (110)          280         (321)          625

INVESTING ACTIVITIES
    Capital Expenditures
      Exploration and Development                                            (606)         (747)      (1,375)       (1,537)
      Proved Property Acquisitions                                             (2)          (45)          (2)          (46)
      Chemicals, Corporate and Other                                          (30)          (27)         (47)          (47)
    Changes in Restricted Cash                                               (174)           66          (53)           82
    Changes in Non-Cash Working Capital (Note 15)                             (76)           16          (54)           44
    Other                                                                     (70)          (10)         (97)          (14)
                                                                       ----------------------------------------------------
                                                                             (958)         (747)      (1,628)       (1,518)


EFFECT OF EXCHANGE RATE CHANGES ON CASH
    AND CASH EQUIVALENTS                                                       (5)          (67)          26           (80)
                                                                       ----------------------------------------------------

INCREASE IN CASH AND CASH EQUIVALENTS                                          90            48          408            57

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                               524           110          206           101
                                                                       ----------------------------------------------------

CASH AND CASH EQUIVALENTS - END OF PERIOD                                     614           158          614           158
                                                                       ====================================================
</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
                                                                                     Three Months               Six Months
                                                                                     Ended June 30            Ended June 30
(Cdn$ millions)                                                                    2008         2007         2008        2007
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>          <C>          <C>         <C>
COMMON SHARES
    Balance at Beginning of Period                                                  949          866          917         821
      Issue of Common Shares                                                          4            4           24          25
      Proceeds from Tandem Options Exercised for Shares                              10            7           16          15
      Accrued Liability Relating to Tandem Options Exercised for Shares               9           16           15          32
                                                                               ----------------------------------------------
    Balance at End of Period                                                        972          893          972         893
                                                                               ==============================================

CONTRIBUTED SURPLUS
    Balance at Beginning of Period                                                    3            4            3           4
      Stock-Based Compensation Expense                                                -            1            -           1
      Exercise of Tandem Options                                                     (1)           -           (1)          -
                                                                               ----------------------------------------------
    Balance at End of Period                                                          2            5            2           5
                                                                               ==============================================

RETAINED EARNINGS
    Balance at Beginning of Period                                                5,600        4,080        4,983       3,972
      Net Income                                                                    380          368        1,010         489
      Dividends on Common Shares (Note 13)                                          (27)         (13)         (40)        (26)
                                                                               ----------------------------------------------
    Balance at End of Period                                                      5,953        4,435        5,953       4,435
                                                                               ==============================================

ACCUMULATED OTHER COMPREHENSIVE LOSS
    Balance at Beginning of Period                                                 (266)        (167)        (293)       (161)
      Opening Derivatives Designated as Cash Flow Hedges                              -            -            -          61
      Other Comprehensive Income/(Loss)                                              (8)         (86)          19        (153)
                                                                               ----------------------------------------------
    Balance at End of Period                                                       (274)        (253)        (274)       (253)
                                                                               ==============================================

NEXEN INC.
UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30
                                                                                     Three Months              Six Months
                                                                                     Ended June 30            Ended June 30
(Cdn$ millions)                                                                    2008         2007         2008        2007
-----------------------------------------------------------------------------------------------------------------------------
NET INCOME                                                                          380          368        1,010         489
    Other Comprehensive Income, Net of Income Taxes:
      Foreign Currency Translation Adjustment:
        Net Gains (Losses) on Investment in Self-Sustaining Foreign Operations      (42)        (437)         144        (495)
        Net Gains (Losses) on Hedges of Self-Sustaining Foreign Operations (1)       34          353         (125)        403
        Realized Translation Adjustments Recognized in Net Income (2)                 -           (2)           -           -
      Cash Flow Hedges:
        Realized Mark-to-Market Gains Recognized in Net Income                       -             -           -          (61)
                                                                               ----------------------------------------------
      Other Comprehensive Income/(Loss)                                              (8)         (86)          19        (153)
                                                                               ----------------------------------------------
COMPREHENSIVE INCOME                                                                372          282        1,029         336
                                                                               ==============================================
</TABLE>

(1)  Net of income tax expense for the three  months  ended June 30, 2008 of $4
     million  (2007 - $57  million)  and net of income tax recovery for the six
     months  ended  June 30,  2008 of $19  million  (2007 - net of  income  tax
     expense of $66 million).
(2)  Net of income tax  recovery for the three months ended June 30, 2007 of $1
     million.

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 19. 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,  2008 and
December 31, 2007 and the results of our  operations and our cash flows for the
three and six months ended June 30, 2008 and 2007.

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,  2008 are not  necessarily  indicative  of the
results of operations or cash flows to be expected for the year ending December
31, 2008.

These Unaudited Consolidated Financial Statements should be read in conjunction
with our Audited Consolidated  Financial Statements included in our 2007 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 2007 Annual Report on Form 10-K.

CHANGE IN ACCOUNTING POLICIES

INVENTORIES
In 2007,  we adopted  CICA  Section  3031  INVENTORIES  issued by the  Canadian
Accounting Standards Board (AcSB). Effective October 1, 2007, we began carrying
the commodity  inventories  held for trading by our energy  marketing  group at
fair value, less any costs to sell. This standard was adopted prospectively and
our  results for the first six months of 2007 have not been  restated  for this
change in accounting policy.

CAPITAL DISCLOSURES
On January  1,  2008,  we  prospectively  adopted  CICA  Section  1535  CAPITAL
DISCLOSURES  issued  by  the  AcSB.  This  Section  establishes  standards  for
disclosing information about an entity's objectives, policies and processes for
managing its capital structure. The disclosures have been included in Note 8.

FINANCIAL INSTRUMENTS DISCLOSURES AND PRESENTATION
On January 1, 2008, we prospectively adopted the following new standards issued
by the AcSB:  FINANCIAL  INSTRUMENTS - DISCLOSURE  (Section 3862) and FINANCIAL
INSTRUMENTS - PRESENTATION  (Section 3863). These accounting standards replaced
FINANCIAL  INSTRUMENTS  -  DISCLOSURE  AND  PRESENTATION  (Section  3861).  The
disclosures required by Section 3862 and 3863 provide additional information on
the risks  associated  with our financial  instruments  and how we manage those
risks. The additional  disclosures  required by these standards are provided in
Notes 11 and 12.

NEW ACCOUNTING PRONOUNCEMENTS
In  January  2006,  the AcSB  adopted a  strategic  plan for the  direction  of
accounting  standards in Canada.  Accounting  standards for public companies in
Canada will  converge  with the  International  Financial  Reporting  Standards
(IFRS) by 2011 and we will be required to report  according  to IFRS  standards
for the year ended December 31, 2011. We are currently  assessing the impact of
the  convergence  of  Canadian  GAAP with IFRS on our  results  of  operations,
financial position and disclosures.

In February 2008, the AcSB issued Section 3064,  GOODWILL AND INTANGIBLE ASSETS
and amended Section 1000,  FINANCIAL STATEMENT CONCEPTS clarifying the criteria
for the  recognition  of assets,  intangible  assets and  internally  developed
intangible assets.  Items that no longer meet the definition of an asset are no
longer  recognized  with assets.  The  standard is  effective  for fiscal years
beginning on or after October 1, 2008 and early  adoption is  permitted.  We do
not  expect the  adoption  of this  section  to have a  material  impact on our
results of operations and financial position.

                                      8
<PAGE>

<TABLE>
<CAPTION>
2.  ACCOUNTS RECEIVABLE

                                                                          June 30    December 31
                                                                             2008           2007
-------------------------------------------------------------------------------------------------
<S>                                                                         <C>            <C>
Trade
    Marketing                                                               3,650          2,501
    Oil and Gas                                                             1,030            819
    Chemicals and Other                                                        79             60
                                                                   ------------------------------
                                                                            4,759          3,380
Non-Trade                                                                     157            132
                                                                   ------------------------------
                                                                            4,916          3,512
Allowance for Doubtful Receivables                                             (7)           (10)
                                                                   ------------------------------
Total                                                                       4,909          3,502
                                                                   ==============================

3.  INVENTORIES AND SUPPLIES
                                                                          June 30    December 31
                                                                             2008           2007
-------------------------------------------------------------------------------------------------
Finished Products
    Marketing                                                                 950            577
    Oil and Gas                                                                48             14
    Chemicals and Other                                                        19             13
                                                                   ------------------------------
                                                                            1,017            604
Work in Process                                                                 5              3
Field Supplies                                                                 56             52
                                                                   ------------------------------
Total                                                                       1,078            659
                                                                   ==============================

4.  DEFERRED CHARGES AND OTHER ASSETS
                                                                          June 30    December 31
                                                                             2008           2007
-------------------------------------------------------------------------------------------------
Long-Term Marketing Derivative Contracts (Note 11)                            500            248
Long-Term Capital Prepayments                                                 112              9
Crude Oil Put Options and Natural Gas Swaps (Note 11)                          26              -
Asset Retirement Remediation Fund                                              13             13
Other                                                                          52             54
                                                                   ------------------------------
Total                                                                         703            324
                                                                   ==============================
</TABLE>

5.       SUSPENDED WELL COSTS

The following  table shows the changes in  capitalized  exploratory  well costs
during the six months ended June 30, 2008 and the year ended December 31, 2007,
and does not include amounts that were initially  capitalized and  subsequently
expensed in the same period. Capitalized exploratory well costs are included in
property, plant and equipment.

<TABLE>
<CAPTION>
                                                                     Six Months Ended       Year Ended
                                                                              June 30      December 31
                                                                                 2008             2007
-------------------------------------------------------------------------------------------------------
<S>                                                                               <C>              <C>
Balance at Beginning of Period                                                    326              226
    Additions to Capitalized Exploratory Well Costs Pending the
      Determination of Proved Reserves                                            124              215
    Capitalized Exploratory Well Costs Charged to Expense                         (20)             (10)
    Transfers to Wells, Facilities and Equipment Based on
      Determination of Proved Reserves                                              -              (74)
    Effects of Foreign Exchange                                                    16              (31)
                                                                   ------------------------------------
Balance at End of Period                                                          446              326
                                                                   ====================================
</TABLE>

                                      9
<PAGE>

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
                                                                                         2008            2007
--------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>             <C>
Capitalized for a Period of One Year or Less                                              250             202
Capitalized for a Period of Greater than One Year                                         196             124
                                                                                 -----------------------------
Balance at End of Period                                                                  446             326
                                                                                 =============================
Number of Projects that have Exploratory Well Costs Capitalized for a Period
    Greater than One Year                                                                   8               5
                                                                                 -----------------------------
</TABLE>

As at June 30, 2008, we have  exploratory  costs that have been capitalized for
more than one year relating to our interests in four exploratory  blocks in the
North  Sea ($58  million),  an  exploratory  block in the Gulf of  Mexico  ($55
million),  our coalbed methane exploratory  activities in Canada ($46 million),
exploratory  activities  on Block 51 in Yemen ($19 million) and our interest in
an exploratory  block,  offshore  Nigeria ($18 million).  These costs relate to
projects with successful  exploration  wells for which we have not been able to
record proved reserves.  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.

<TABLE>
<CAPTION>
6.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

                                                                                  June 30     December 31
                                                                                     2008            2007
----------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>             <C>
Accrued Payables                                                                    2,982           2,546
Marketing Derivative Contracts (Note 11)                                            1,148             413
Trade Payables                                                                        708             578
Stock-based Compensation                                                              551             393
Other                                                                                 360             205
                                                                            ------------------------------
Total                                                                               5,749           4,135
                                                                            ==============================

7.  LONG-TERM DEBT AND SHORT-TERM BORROWINGS
                                                                                  June 30     December 31
                                                                                     2008            2007
----------------------------------------------------------------------------------------------------------
Term Credit Facilities (a)                                                              -             211
Canexus Limited Partnership Term Credit Facilities (US$193 million) (b)               197             202
Medium-Term Notes, due 2008 (c)                                                         -             125
Canexus Notes, due 2013 (US$50 million) (d)                                            51               -
Notes, due 2013 (US$500 million)                                                      509             494
Notes, due 2015 (US$250 million)                                                      255             247
Notes, due 2017 (US$250 million)                                                      255             247
Notes, due 2028 (US$200 million)                                                      204             198
Notes, due 2032 (US$500 million)                                                      509             494
Notes, due 2035 (US$790 million)                                                      805             781
Notes, due 2037 (US$1,250 million)                                                  1,273           1,235
Subordinated Debentures, due 2043 (US$460 million)                                    468             454
                                                                           -------------------------------
                                                                                    4,526           4,688
Less: Unamortized Debt Issue Costs                                                    (77)            (78)
                                                                           -------------------------------
                                                                                    4,449           4,610
                                                                           ===============================
</TABLE>

(a) TERM CREDIT FACILITIES

We have  unsecured  term credit  facilities of $3.1 billion  available to 2012,
none of which were drawn at June 30, 2008 (December 31, 2007 - US$214 million).
Borrowings are available as Canadian bankers'  acceptances,  LIBOR-based loans,
Canadian prime rate loans, US-dollar base rate loans or British pound call-rate
loans.  Interest is payable at floating rates.  The  weighted-average  interest
rate on our term credit facilities was 3.3% for the three months ended June 30,
2008  (2007 - 5.9%) and 3.7% for the six  months  ended  June 30,  2008 (2007 -
5.9%).  At June 30, 2008,  $229 million of these  facilities  were  utilized to
support outstanding letters of credit (December 31, 2007 - $283 million).

                                      10
<PAGE>

(b) CANEXUS LP TERM CREDIT FACILITIES

During the quarter, the Canexus LP term credit facility was amended to increase
the  available  amount from $350  million to $410  million and to increase  the
available  short-term  swing line loans under the facility  from $20 million to
$35 million.  These  committed,  secured term credit  facilities  are available
until 2011. At June 30, 2008, $197 million (US$193  million) was drawn on these
facilities  (December  31, 2007 - $202  million).  Borrowings  are available as
Canadian bankers' acceptances,  LIBOR-based loans, Canadian prime rate loans or
US-dollar base rate loans.  Interest is payable monthly at floating rates.  The
term credit  facilities are secured by a floating charge  debenture over all of
the assets at Canexus LP. The credit  facility  also  contains  covenants  with
respect to certain financial ratios. The weighted-average  interest rate on our
term credit  facilities was 4.6% for the three months ended June 30, 2008 (2007
- 6.2%).

(c) MEDIUM-TERM NOTES, DUE 2008

During  October  1997,  we issued $125  million of notes.  Interest was payable
semi-annually at a rate of 6.3% and the principal was repaid in June 2008.

(d) CANEXUS NOTES, DUE 2013

During the quarter,  Canexus issued US$50 million of notes. Interest is payable
quarterly  at a rate of 6.57%,  and the  principal is to be repaid in May 2013.
Canexus 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 terms of the
notes plus 0.20%.

<TABLE>
<CAPTION>
(e) INTEREST EXPENSE

                                                              Three Months             Six Months
                                                             Ended June 30            Ended June 30
                                                           2008         2007        2008         2007
------------------------------------------------------------------------------------------------------
<S>                                                         <C>          <C>         <C>          <C>
Long-Term Debt                                              69           83          145          164
Other                                                        6            4           10            9
                                                   ---------------------------------------------------
                                                            75           87          155          173
   Less: Capitalized                                       (59)         (41)        (112)         (79)
                                                   ---------------------------------------------------
Total                                                       16           46           43           94
                                                   ===================================================
</TABLE>

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

(f) SHORT-TERM BORROWINGS

Nexen has  uncommitted,  unsecured  credit  facilities  of  approximately  $656
million,  none of which were drawn at June 30, 2008  (December 31, 2007 - nil).
We utilized $21 million of these facilities to support  outstanding  letters of
credit at June 30, 2008 (December 31, 2007 - $196 million). Interest is payable
at  floating  rates.  The  weighted-average  interest  rate  on our  short-term
borrowings  was 3.7% for the three months ended June 30, 2008 (2007 - 5.8%) and
3.8% for the six months ended June 30, 2008 (2007 - 5.8%).

8.  CAPITAL DISCLOSURES

Our objective for managing our capital  structure is to ensure that we have the
financial  capacity,  liquidity  and  flexibility  to fund  our  investment  in
full-cycle  exploration  and  development of  conventional  and  unconventional
resources and for energy marketing  activities.  We generally rely on operating
cash flows to fund capital investments.  However,  given the long cycle-time of
some of our development  projects which require  significant capital investment
prior to cash flow generation and volatile  commodity prices, it is not unusual
for capital  expenditures to exceed our cash flow from operating  activities in
any  given  year.  As such,  our  financing  needs  depend on where we are in a
particular   development   cycle.  This  requires  us  to  maintain   financial
flexibility and liquidity. Our capital management policies are aimed at:

    o  maintaining an appropriate  balance between  short-term debt,  long-term
       debt and equity;

    o  maintaining  sufficient  undrawn  committed  credit  capacity to provide
       liquidity;

    o  ensuring  ample  covenant room  permitting us to draw on credit lines as
       required;

    o  maintaining a reasonable level of leverage; and

    o  ensuring  we  maintain  a  credit  rating  that is  appropriate  for our
       circumstances.

                                      11
<PAGE>

We have the ability to make  adjustments  to our capital  structure  by issuing
additional   equity  or  debt,   returning  cash  to  shareholders  and  making
adjustments  to our  capital  investment  programs.  Our  capital  consists  of
shareholders'  equity,   short-term  and  long-term  debt  and  cash  and  cash
equivalents as follows:

<TABLE>
<CAPTION>
                                                                    June 30    December 31
                                                                       2008           2007
-------------------------------------------------------------------------------------------
<S>                                                                   <C>            <C>
NET DEBT (1)
   Bank Debt                                                            197            413
   Senior Notes                                                       3,799          3,758
                                                             ------------------------------
     Senior Debt                                                      3,996          4,171
   Subordinated Debt                                                    453            439
                                                             ------------------------------
     Total Debt                                                       4,449          4,610
   Less: Cash and Cash Equivalents                                     (614)          (206)
                                                             ------------------------------
TOTAL NET DEBT                                                        3,835          4,404
                                                             ==============================

SHAREHOLDERS' EQUITY                                                  6,653          5,610
                                                             ==============================
</TABLE>

(1) Includes all of our  borrowings  and is  calculated  as long-term  debt and
    short-term borrowings less cash and cash equivalents.

We monitor the leverage in our capital  structure by reviewing the ratio of net
debt to cash  flow  from  operating  activities  as well as  interest  coverage
ratios.

We use the ratio of net debt to cash flow from  operating  activities  as a key
indicator of our leverage and to monitor the strength of our balance sheet. Net
debt is a non-GAAP  measure  which is  calculated  using the GAAP  measures  of
long-term  debt and  short-term  borrowings  less  cash  and  cash  equivalents
(excluding restricted cash).

For the  twelve  months  ended  June 30,  2008,  our net debt to cash flow from
operating  activities ratio was 0.9 times compared to 1.6 times at December 31,
2007. While we typically  expect the target ratio to fluctuate  between 1.0 and
2.0  times  under  normalized  commodity  prices,  this can be  higher  when we
identify strategic opportunities  requiring additional investment.  Whenever we
exceed our target  ratio,  we assess  whether to implement a strategy to reduce
our leverage and lower this ratio back to target levels. In the past, each time
we exceeded our internal net debt to cash flow from operating activities target
band, we successfully brought our leverage down through asset sales and capital
management.

Our  interest  coverage  ratio  allows us to  monitor  our  ability to fund the
interest  requirements  associated  with our  debt.  The  higher  the  interest
coverage,  the better  positioned we are to finance our longer-term  investment
projects. Our interest coverage strengthened in 2008 from 12.1 times at the end
of 2007 to 16.9 times at June 30, 2008.

Interest coverage is calculated by dividing our twelve-month  trailing earnings
before interest, taxes,  depreciation,  depletion,  amortization and impairment
(EBITDA) by interest expense before capitalized interest.  EBITDA is a non-GAAP
measure  which is  calculated  using net  income  excluding  interest  expense,
provision  for income  taxes,  exploration  expenses,  DD&A and other  non-cash
expenses. The calculation of EBITDA is set out in the following table.

<TABLE>
<CAPTION>
                                                                 Twelve Months    Twelve Months
                                                                         Ended            Ended
                                                                       June 30      December 31
                                                                          2008             2007
------------------------------------------------------------------------------------------------
<S>                                                                      <C>              <C>
Net Income                                                               1,607            1,086
  Add:
    Interest Expense                                                       117              168
    Provision for Income Taxes                                           1,201              792
    Depreciation, Depletion, Amortization and Impairment                 1,771            1,767
    Exploration Expense                                                    305              326
    Other Non-cash Expenses                                                139              (52)
                                                             -----------------------------------
EBITDA                                                                   5,140            4,087
                                                             ===================================
</TABLE>


                                      12
<PAGE>

9.  ASSET RETIREMENT OBLIGATIONS

Changes in carrying amounts of the asset retirement obligations associated with
our property, plant and equipment are as follows:

<TABLE>
<CAPTION>
                                                                          Six              Year
                                                                 Months Ended             Ended
                                                                      June 30       December 31
                                                                         2008              2007
------------------------------------------------------------------------------------------------
<S>                                                                       <C>               <C>
Balance at Beginning of Period                                            832               704
    Obligations Incurred with Development Activities                       11               105
    Expenditures Made on Asset Retirements                                (16)              (23)
    Accretion                                                              26                44
    Revisions to Estimates                                                102                79
    Effects of Foreign Exchange                                            19               (77)
                                                             -----------------------------------
Balance at End of Period (1), (2)                                         974               832
                                                             ===================================
</TABLE>
(1) Obligations  due within 12 months of $40 million  (December  31, 2007 - $40
    million) have been included in accounts payable and accrued liabilities.

(2) Obligations  relating to our oil and gas activities  amount to $925 million
    (December  31,  2007  -  $786  million)  and  obligations  relating  to our
    chemicals business amount to $49 million (December 31, 2007 - $46 million).


Our total estimated  undiscounted inflated asset retirement  obligations amount
to $2,366 million (December 31, 2007 - $2,165 million).  We have discounted the
total  estimated  asset  retirement   obligations  using  a   weighted-average,
credit-adjusted  risk-free rate of 5.9%. Approximately $135 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 obligation to remediate becomes determinable.

<TABLE>
<CAPTION>
10. DEFERRED CREDITS AND OTHER LIABILITIES

                                                                   June 30     December 31
                                                                      2008            2007
-------------------------------------------------------------------------------------------
<S>                                                                    <C>             <C>
Long-Term Marketing Derivative Contracts (Note 11)                     437             163
Deferred Transportation Revenue                                         71              82
Fixed-Price Natural Gas Contracts and Swaps (Note 11)                   61              51
Defined Benefit Pension Obligations                                     60              57
Capital Lease Obligations                                               53              52
Long-Term Stock-based Compensation                                      30               2
Other                                                                   69              52
                                                             ------------------------------
Total                                                                  781             459
                                                             ==============================
</TABLE>

11. FINANCIAL INSTRUMENTS

Financial  instruments  carried at fair value on our balance sheet include cash
and cash  equivalents,  restricted  cash and  derivatives  used for trading and
non-trading  purposes.  Our  other  financial  instruments  including  accounts
receivable,  accounts payable, income taxes payable,  accrued interest payable,
dividends payable, short-term borrowings and long-term debt are carried at cost
or  amortized  cost.  The  carrying  value of our  short-term  receivables  and
payables  approximates  their  fair  value  because  the  instruments  are near
maturity.

In our energy  marketing  group,  we enter into  contracts to purchase and sell
crude oil and  natural gas and use  derivative  contracts,  including  futures,
forwards,  swaps and options,  for hedging and trading  purposes  (collectively
derivatives).  We also use  derivatives  to  manage  commodity  price  risk and
foreign  currency risk for non-trading  purposes.  We categorize our derivative
instruments as trading or non-trading  activities and carry the  instruments at
fair value on our balance  sheet.  Refer to the  derivatives  section below for
details of our derivatives and fair values as at June 30, 2008. The fair values
are  included  with  accounts  receivable  or  payable  and are  classified  as
long-term or short-term  based on  anticipated  settlement  date. Any change in
fair value is included in marketing and other income.

                                      13
<PAGE>

We carry our long-term debt at amortized cost using the effective interest rate
method.  At June 30, 2008,  the estimated  fair value of our long-term debt was
$4,370 million (December 31, 2007 - $4,692 million) as compared to the carrying
value of $4,449 million (December 31, 2007 - $4,610 million). The fair value of
long-term  debt is  estimated  based on prices  provided by quoted  markets and
third-party brokers.

DERIVATIVES

a)  TOTAL CARRYING VALUE OF DERIVATIVE CONTRACTS RELATED TO TRADING ACTIVITIES
The fair value and carrying  amounts related to derivative  instruments held by
our energy marketing operations are as follows:

<TABLE>
<CAPTION>
                                                                   June 30     December 31
                                                                      2008            2007
-------------------------------------------------------------------------------------------
<S>                                                                    <C>            <C>
Accounts Receivable                                                    851            334
Deferred Charges and Other Assets (1)                                  500            248
                                                             ------------------------------
    Total Derivative Assets                                          1,351            582
                                                             ==============================

Accounts Payable and Accrued Liabilities                             1,148            413
Deferred Credits and Other Liabilities (1)                             437            163
                                                             ------------------------------
    Total Derivative Liabilities                                     1,585            576
                                                             ==============================

    Total Net Derivatives related to Trading Activities               (234)             6
                                                             ==============================
</TABLE>
(1) These  derivative  contracts  settle  beyond 12 months  and are  considered
    non-current.


b)  TOTAL CARRYING VALUE OF DERIVATIVE CONTRACTS RELATED TO NON-TRADING
    ACTIVITIES
The fair value and carrying amounts related to derivative  instruments  related
to non-trading activities are as follows:

<TABLE>
<CAPTION>
                                                                   June 30     December 31
                                                                      2008            2007
-------------------------------------------------------------------------------------------
<S>                                                                    <C>             <C>
Accounts Receivable                                                     22              -
Deferred Charges and Other Assets (1)                                   26              1
                                                             ------------------------------
    Total Derivative Assets                                             48              1
                                                             ==============================

Accounts Payable and Accrued Liabilities                                50             28
Deferred Credits and Other Liabilities (1)                              61             51
                                                             ------------------------------
    Total Derivative Liabilities                                       111             79
                                                             ==============================

    Total Net Derivatives related to Non-Trading Activities            (63)           (78)
                                                             ==============================
</TABLE>
(1) These  derivative  contracts  settle  beyond 12 months  and are  considered
    non-current.

CRUDE OIL PUT OPTIONS
In 2008,  we purchased put options on  approximately  70,000 bbls/d of our 2009
crude oil  production.  These options  establish an annual  average Dated Brent
floor price of US$60/bbl on these volumes. In 2007, we purchased put options on
36  million  barrels  or  approximately  100,000  bbls/d of our 2008  crude oil
production.  These options  establish an annual average Dated Brent floor price
of US$50/bbl on these volumes.

The put options are carried at fair value  within  amounts  receivable  and are
classified as long-term or  short-term  based on their  anticipated  settlement
date. Any change in fair value is included in marketing and other income.

<TABLE>
<CAPTION>
                                                Notional                                        Average                  Fair
                                                 Volumes                    Term            Floor Price                 Value
------------------------------------------------------------------------------------------------------------------------------
                                                (bbls/d)                                      (US$/bbl)        (Cdn$ millions)
<S>                                              <C>                        <C>               <C>              <C>
Dated Brent Crude Oil Put Options                100,000                    2008                     50                    -
Dated Brent Crude Oil Put Options                 70,000                    2009                     60                    4
                                                                                                               ---------------
                                                                                                                           4
                                                                                                               ===============
</TABLE>


                                      14
<PAGE>

FIXED-PRICE NATURAL GAS CONTRACTS AND NATURAL GAS SWAPS
We have  fixed-price  natural gas sales  contracts and  offsetting  natural gas
swaps that are not part of our trading  activities.  These sales  contracts and
swaps are carried at fair value and are  classified  as long-term or short-term
based on  their  anticipated  settlement  date.  Any  change  in fair  value is
included in marketing and other 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                      2008                  2.46                 (50)
                                                 15,514               2009 - 2010           2.56 - 2.77                 (61)
Natural Gas Swaps                                15,514                      2008                  7.60                  22
                                                 15,514               2009 - 2010                  7.60                  22
                                                                                                              ----------------
                                                                                                                        (67)
                                                                                                              ================
</TABLE>

c)  FAIR VALUE OF DERIVATIVES
Wherever  possible,  the estimated fair value of our derivative  instruments is
based  on  quoted  market  prices,  and if not  available,  on  estimates  from
third-party  brokers.  We  utilize  market  data  or  assumptions  that  market
participants  would  use  when  pricing  the  asset  or  liability,   including
assumptions  about risk. As a basis for  establishing  fair value, we utilize a
mid-market  pricing  convention between bid and ask and then adjust our pricing
to the ask price when we have a net open sell  position  and the bid price when
we have a net open buy position. We incorporate the credit risk associated with
counterparty  default  into  our  estimates  of  fair  value.  Inputs  to  fair
valuations  may  be  readily  observable,   market-corroborated,  or  generally
unobservable.  We  utilize  valuation  techniques  that  maximize  the  use  of
observable  inputs  wherever  possible  and  minimize  the use of  unobservable
inputs.  To value  longer-term  transactions  and  transactions  in less active
markets for which pricing information is not generally available,  unobservable
inputs may be used.

We  classify  the fair  value of our  derivatives  according  to the  following
hierarchy  based  on  the  amount  of  observable  inputs  used  to  value  the
instruments.

    o  Level 1 - Quoted  prices are  available in active  markets for identical
       assets or liabilities as of the reporting date. Active markets are those
       in which  transactions  occur in  sufficient  frequency  and  volume  to
       provide  pricing  information  on an ongoing  basis.  Level 1  primarily
       consists of financial  instruments such as  exchange-traded  derivatives
       and we use  information  from  markets  such as the New York  Mercantile
       Exchange and the International Petroleum Exchange.

    o  Level 2 - Pricing  inputs are other than quoted prices in active markets
       included in Level 1, which are either directly or indirectly  observable
       as of the  reported  date.  Level 2  valuations  are  based  on  inputs,
       including quoted forward prices for commodities,  time value, volatility
       factors, and broker quotations, which can be observed or corroborated in
       the  marketplace.  Instruments  in this  category  include  non-exchange
       traded  derivatives  such  as  over-the-counter  physical  forwards  and
       options.  We obtain  information  from  sources  such as the Natural Gas
       Exchange,  independent price  publications and  over-the-counter  broker
       quotes.

    o  Level 3 -  Valuations  in this level are based on inputs  which are less
       observable,  unavailable or where the  observable  data does not support
       the majority of the instrument's fair value. Level 3 instruments include
       longer-term  transactions,   transactions  in  less  active  markets  or
       transactions   at  locations  for  which  pricing   information  is  not
       available.  In these instances,  internally developed  methodologies are
       used to determine fair value which primarily  includes  extrapolation of
       observable future prices to similar  locations,  similar  instruments or
       later time periods.


                                      15
<PAGE>

The following table includes our derivatives  that are carried at fair value on
a recurring  basis for our trading and  non-trading  activities  as at June 30,
2008.  Financial  assets  and  liabilities  are  classified  in the fair  value
hierarchy  in their  entirety  based  on the  lowest  level  of  input  that is
significant to the fair value measurement.  Assessment of the significance of a
particular input to the fair value measurement requires judgment and may affect
placement within the fair value hierarchy levels.

<TABLE>
<CAPTION>
                                                               Level 1    Level 2     Level 3      Total
---------------------------------------------------------------------------------------------------------
<S>                                                                 <C>     <C>          <C>        <C>
Net Derivatives
    Trading Derivatives                                             15      (238)        (11)       (234)
    Non-Trading Derivatives                                          -       (63)         -          (63)
                                                             --------------------------------------------
    Total Net Derivatives                                           15      (301)        (11)       (297)
                                                             ============================================
</TABLE>

A reconciliation of changes in the fair value of our derivatives  classified as
Level 3 for the six months ended June 30, 2008 is provided below:

<TABLE>
<CAPTION>
                                                                                                  Level 3
----------------------------------------------------------------------------------------------------------
<S>                                                                                                   <C>
Fair Value at January 1, 2008                                                                          (7)
    Realized and unrealized gains (losses)                                                             (8)
    Purchases, issuances and settlements                                                               (2)
    Transfers in and/or out of Level 3                                                                  6
                                                                                                ----------
Fair Value at June 30, 2008                                                                           (11)
                                                                                                ==========

Unsettled gains (losses) relating to instruments still held as of June 30, 2008                        (2)
                                                                                                ==========
</TABLE>

Transfers in and/or out represent  existing  assets and  liabilities  that were
either  previously  categorized  as a higher level for which the inputs  became
unobservable or assets and liabilities that were previously classified as Level
3 for which the lowest significant input became observable during the period.

12. RISK MANAGEMENT

(a) MARKET RISK

We invest in significant capital projects, purchase and sell commodities, issue
short and long-term debt,  including amounts in foreign currencies,  and invest
in foreign  operations.  These activities expose us to market risk from changes
in commodity  prices,  foreign exchange rates and interest rates,  which affect
our  earnings  and the  value of the  financial  instruments  we  hold.  We use
derivatives  for trading and  non-trading  purposes as part of our overall risk
management  policy to manage  exposures  to market  risk that result from these
activities.

The following market risk discussion  relates primarily to commodity price risk
and foreign exchange risk related to our financial instruments. Our exposure to
interest rate risk is immaterial.


COMMODITY PRICE RISK
We are exposed to commodity  price  movements as part of our normal oil and gas
operations,  particularly  in relation to the prices received for our crude oil
and natural gas.  Commodity  price risk related to  conventional  and synthetic
crude oil prices is our most  significant  market risk exposure.  Crude oil and
natural gas are  sensitive  to numerous  worldwide  factors,  many of which are
beyond our  control,  and are  generally  sold at  contract  or posted  prices.
Changes in world crude oil and natural gas prices may significantly  affect our
results  of  operations  and  cash   generated   from   operating   activities.
Consequently,  such  prices  also  may  affect  the  value  of our  oil and gas
properties and our level of spending for exploration and development.

The majority of our oil and gas production is sold under short-term  contracts,
exposing us to the risk of price  movements.  Other  energy  contracts we enter
into also expose us to  commodity  price risk  between the time we purchase and
sell contracted  volumes.  We actively  manage these risks by using  derivative
contracts such as commodity put options.

Our energy  marketing  group markets and trades crude oil,  natural gas,  NGLs,
ethanol and power through  physical  purchase and sales  contracts,  as well as
financial  commodity  contracts.  These activities expose us to commodity price
risk, as well as foreign currency risk and volatility within these markets. Our
energy  marketing group actively  manages risk by utilizing energy and currency
derivatives.  We typically take advantage of location, time and quality spreads
using physical and financial contracts.  Our marketing group also tries to take
advantage of  volatility  within  commodity  markets and can establish net open
commodity positions to take advantage of existing market conditions.

                                      16
<PAGE>

Volatility  within  various  commodity  markets  can vary and change over time.
While this volatility gives us opportunities,  it can also cause our results to
vary  significantly  between periods.  We attempt to manage the associated risk
and take on positions  based on market  intelligence;  however,  it is possible
that we could incur financial loss.

Open  positions  exist when not all  contracted  purchases and sales terms have
been matched.  These net open positions allow us to generate  income,  but also
expose  us to  risk of loss  due to  fluctuating  market  prices  (market  risk
sensitivities in our portfolio).

We manage  the level of market  risk  through  daily  monitoring  of our energy
trading activities relative to:

    o  prescribed limits for Value-at-Risk (VaR);

    o  nominal size of commodity positions;

    o  stop loss limits; and

    o  stress testing.

VaR is a statistical  estimate assuming normal market conditions exist. Our VaR
calculation  estimates the maximum  probable loss, given a 95% confidence level
that we would  incur if we were to  unwind  our  outstanding  positions  over a
two-day  period.  We estimate VaR  primarily  by using the  Variance-Covariance
method based on historical commodity price volatility, correlation inputs where
available and by historical  simulation  in other  situations.  Our estimate is
based upon the following key assumptions:

    o  changes  in   commodity   prices   follow  a   statistical   pattern  of
       distribution;

    o  price volatility remains stable; and

    o  price correlation relationships remain stable.

If a severe  market shock  occurred,  the key  assumptions  underlying  our VaR
estimate  could be exceeded  and the  potential  loss could be greater than our
estimate.  We also use stress  testing using  extreme  market  movements  which
complements  our VaR estimates.  Stress  testing is used to quantify  potential
unexpected  losses from low  probability  market  movements.  Our VaR  analysis
incorporates  our  derivative  positions,   non-derivative  transportation  and
storage contracts and assets, as well as our commodity trading inventories.

Our  quarter  end,  high,  low,  and  average VaR amounts for the three and six
months ended June 30 are as follows:

<TABLE>
<CAPTION>
                                                           Three Months              Six Months
                                                           Ended June 30            Ended June 30
                                                         2008         2007         2008         2007
-----------------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>          <C>          <C>
Value-at-Risk
   Quarter End                                             31           34           31           34
   High                                                    40           38           40           38
   Low                                                     29           24           21           24
   Average                                                 34           30           32           29
                                                   --------------------------------------------------
</TABLE>

FOREIGN CURRENCY RISK
Foreign  exchange  risk is created by  fluctuations  in the fair values or cash
flows of financial  instruments  due to changes in foreign  exchange  rates.  A
substantial  portion of our  activities  are  transacted in or referenced to US
dollars including:

    o  sales of crude oil, natural gas and certain chemicals products;

    o  capital  spending  and  expenses  for  our  oil and  gas,  Syncrude  and
       chemicals operations;

    o  commodity  derivative  contracts used primarily by our energy  marketing
       group; and

    o  short-term and long-term borrowings.

In our oil and gas operations,  we manage our exposure to fluctuations  between
the US and  Canadian  dollar  by  matching  our  expected  net cash  flows  and
borrowings in the same  currency.  Net revenue from our foreign  operations and
our  US-dollar   borrowings  are  generally  used  to  fund  US-dollar  capital
expenditures and debt repayments.  We maintain revolving Canadian and US-dollar
borrowing  facilities that can be used or repaid depending on expected net cash
flows.  We designate our US-dollar  borrowings as a hedge against our US-dollar
net investment in self-sustaining foreign operations.  At June 30, 2008, we had
US$4,443  million of long-term  debt issued in US dollars and a one cent change
in the US dollar to Canadian  dollar  exchange rate would  increase or decrease
our accumulated other comprehensive income by approximately $45 million, before
income tax.

In  our  energy  marketing  group,  the  majority  of the  financial  commodity
contracts  are  denominated  in US  dollars.  We enter into  US-dollar  forward
contracts and swaps to manage this exposure.

                                      17
<PAGE>

We also have exposures to currencies other than the US dollar. A portion of our
United Kingdom operating expenses, capital spending and future asset retirement
obligations are denominated in British pounds and Euros. We do not have any
material exposure to highly inflationary foreign currencies.

(b) CREDIT RISK

Credit risk affects both our trading and non-trading activities and is the risk
of loss if  counterparties do not fulfill their  contractual  obligations.  The
majority  of our  accounts  receivable  are with  counterparties  in the energy
industry and are subject to normal industry credit risk. This  concentration of
risk  within  the  energy  industry  is  reduced  because  of our broad base of
domestic and international counterparties.  We assess the financial strength of
our  counterparties,  including those involved in marketing and other commodity
arrangements, and we limit the total exposure to individual counterparties.  As
well, a number of our contracts contain  provisions that allow us to demand the
posting of  collateral  in the event of a downgrade to a  non-investment  grade
credit  rating.  Credit risk,  including  credit  concentrations,  is routinely
reported to our management.  We also use standard agreements that allow for the
netting of exposures  associated  with a single  counterparty.  We believe this
minimizes  our overall  credit risk.  However,  there can be no assurance  that
these processes will protect us against all losses from non-performance.

At June 30, 2008:

    o  over 97% of our credit exposures were investment grade; and

    o  only one counterparty  individually  made up more than 10% of our credit
       exposure. This counterparty was investment grade.

Our maximum  counterparty  credit  exposure at the balance  sheet date consists
primarily of the carrying  amounts of  non-derivative  financial assets such as
accounts receivable,  as well as the fair value of derivative financial assets.
There are no  significant  amounts  past due or impaired  at the balance  sheet
date. Collateral received from customers at June 30, 2008 includes $132 million
of cash and $239 million of letters of credit related to our trading activities
and  the  cash  received  is  included  in our  accounts  payable  and  accrued
liabilities.

(c) LIQUIDITY RISK

Liquidity  risk is the  risk  that we will  not be able to meet  our  financial
obligations as they fall due. We require liquidity specifically to fund capital
requirements,  satisfy financial  obligations as they become due, and to engage
in our energy marketing business.  We generally rely on operating cash flows to
provide  liquidity and we also maintain  significant  undrawn  committed credit
facilities.  At June 30, 2008, we had unsecured term credit  facilities of $3.1
billion  available until 2012. At June 30, 2008, no amounts were drawn on these
facilities;  however,  $229  million  of the  facilities  were used to  support
outstanding   letters  of  credit.   We  also  had  $656  million  of  undrawn,
uncommitted,  unsecured credit facilities,  of which $21 million was supporting
letters of credit at June 30, 2008.

The following table details the contractual  maturities for our  non-derivative
financial liabilities,  including both the principal and interest cash flows at
June 30, 2008:

<TABLE>
<CAPTION>
                                                            Less than                              Greater than
                                                 Total         1 Year     1-3 Years     4-5 Years       5 Years
----------------------------------------------------------------------------------------------------------------
<S>                                              <C>              <C>           <C>           <C>         <C>
Long-Term Debt                                   4,526              -             -           197         4,329
Interest on Long-Term Debt (1)                   6,493            176           544           544         5,229
                                              ------------------------------------------------------------------
Total                                           11,019            176           544           741         9,558
                                              ==================================================================
</TABLE>
(1) Excludes  interest on term credit facilities of $3.1 billion and Canexus LP
    term  credit  facilities  of  $410  million  as the  amounts  drawn  on the
    facilities  fluctuate.  As a result,  we are unable to provide a reasonable
    estimate of the interest.

The following table details contractual maturities for our derivative financial
liabilities.  The balance sheet amounts for  derivative  financial  liabilities
included below are not materially different from the contractual amounts due on
maturity.

<TABLE>
<CAPTION>
                                                            Less than                              Greater than
                                                 Total         1 Year     1-3 Years     4-5 Years       5 Years
----------------------------------------------------------------------------------------------------------------
<S>                                               <C>       <C>           <C>           <C>           <C>
Trading Derivatives                                1,585        1,148           437            -             -
Non-Trading Derivatives                              111           50            61            -             -
                                              ------------------------------------------------------------------
Total                                              1,696        1,198           498            -             -
                                              ==================================================================
</TABLE>

The commercial  agreements our energy marketing group enters into often include
financial  assurance  provisions  that  allow  us  and  our  counterparties  to
effectively  manage credit risk. The agreements  normally require collateral to
be posted if an adverse credit-related event, such as a drop in credit ratings,
occurs.  Based on contracts in place and commodity  prices at June 30, 2008, we
could  be  required  to  post  collateral  of up to  $2.2  billion  if we  were
downgraded to  non-investment  grade.  These  obligations  are reflected on our
balance  sheet.  The posting of collateral  merely  secures the payment of such
amounts.

                                      18
<PAGE>

At June 30, 2008, collateral posted with counterparties includes $90 million of
cash and $35 million of letters of credit  related to our  trading  activities.
Cash posted is included with our accounts receivable.  Letters of credit issued
cannot be drawn on unless there has been default, which would have to be proven
to the bank in order for them to release  the  funds.  Cash  collateral  is not
normally applied to contract settlement.  Once a contract has been settled, the
collateral amounts are refunded. If there is a default, the cash is retained.

Our   exchange-traded   derivative   contracts   are  also  subject  to  margin
requirements. We have margin deposits of $263 million (December 31, 2007 - $203
million), which have been included in restricted cash.


13. SHAREHOLDERS' EQUITY

DIVIDENDS
During  the  quarter,  the  Board of  Directors  declared  an  increase  in the
quarterly  dividend to $0.05 per common share,  payable on July 1, 2008 (2007 -
$0.025).  Dividends  for the six months ended June 30, 2008 were $0.075 (2007 -
$0.05).  Dividends  paid to holders of common  shares have been  designated  as
"eligible dividends" for Canadian tax purposes.


14. EARNINGS PER COMMON SHARE

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)                                                2008         2007          2008        2007
-----------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>          <C>          <C>          <C>
Weighted-average number of common shares outstanding                530.0        527.0        529.5        526.5
Shares issuable pursuant to tandem options                           24.9         26.9         25.7         27.6
Shares notionally purchased from proceeds of tandem options         (14.4)       (15.6)       (16.4)       (15.4)
                                                             ----------------------------------------------------
Weighted-average number of diluted common shares outstanding        540.5        538.3        538.8        538.7
                                                             ====================================================
</TABLE>

In calculating the weighted-average number of diluted common shares outstanding
for the three and six months ended June 30, 2008, we excluded  1,667 and 25,833
tandem options, respectively, because their exercise price was greater than the
average  common  share  market  price  in  the  period.   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  tandem  options
respectively,  because their exercise price was greater than the average common
share market  price in the period.  During the periods  presented,  outstanding
tandem options were the only potential dilutive instruments.


15. CASH FLOWS

(a) CHARGES AND CREDITS TO INCOME NOT INVOLVING CASH

<TABLE>
<CAPTION>
                                                                      Three Months              Six Months
                                                                     Ended June 30             Ended June 30
                                                                   2008         2007         2008         2007
---------------------------------------------------------------------------------------------------------------
<S>                                                                <C>          <C>          <C>          <C>
Depreciation, Depletion, Amortization and Impairment                334          360          698          694
Stock-Based Compensation                                            259          (70)         200          (26)
Future Income Taxes                                                (139)         126          (62)         161
Change in Fair Value of Crude Oil Put Options                        10            4           10           20
Net Income Attributable to Non-Controlling Interests                  1            5            2            8
Other                                                                 6           22            6           25
                                                             --------------------------------------------------
Total                                                               471          447          854          882
                                                             ==================================================
</TABLE>

                                      19
<PAGE>

<TABLE>
<CAPTION>
(b) CHANGES IN NON-CASH WORKING CAPITAL

                                                                                     Three Months              Six Months
                                                                                     Ended June 30            Ended June 30
                                                                                   2008         2007         2008        2007
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>           <C>        <C>           <C>
   Accounts Receivable                                                             (878)        (142)      (1,324)        (67)
   Inventories and Supplies                                                        (310)        (244)        (388)       (179)
   Other Current Assets                                                              (6)          15          (16)         11
   Accounts Payable and Accrued Liabilities                                       1,040           52        1,358         (60)
   Income Taxes Payable                                                             309            2          674          56
   Accrued Interest Payable                                                         (12)          29            1          11
   Dividends Payable                                                                 13            -           13           -
                                                                            --------------------------------------------------
Total                                                                               156         (288)         318        (228)
                                                                            ==================================================

Relating to:
   Operating Activities                                                             232         (304)         372        (272)
   Investing Activities                                                             (76)          16          (54)         44
                                                                            --------------------------------------------------
Total                                                                               156         (288)         318        (228)
                                                                            ==================================================

(c) OTHER CASH FLOW INFORMATION

                                                                                     Three Months              Six Months
                                                                                     Ended June 30            Ended June 30
                                                                                   2008         2007         2008        2007
------------------------------------------------------------------------------------------------------------------------------
Interest Paid                                                                        82           55          148         156
Income Taxes Paid                                                                    76          100          161         157
                                                                            --------------------------------------------------
</TABLE>

Cash flow from other  operating  activities  includes cash outflows  related to
geological  and  geophysical  expenditures  of $24 million for the three months
ended June 30,  2008 (2007 - $50  million)  and $34  million for the six months
ended June 30, 2008 (2007 - $60 million).

<TABLE>
<CAPTION>
16.  MARKETING AND OTHER INCOME

                                                                                     Three Months              Six Months
                                                                                     Ended June 30            Ended June 30
                                                                                   2008         2007        2008          2007
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>          <C>         <C>           <C>
Marketing Revenue, Net                                                               21          284         232           531
Change in Fair Value of Crude Oil Put Options                                       (10)          (4)        (10)          (20)
Interest                                                                              3           10          13            19
Foreign Exchange Losses                                                              (6)         (38)         (1)          (43)
Other                                                                                26           47          22            60
                                                                            ---------------------------------------------------
Total                                                                                34          299         256           547
                                                                            ===================================================
</TABLE>

17.  COMMITMENTS, CONTINGENCIES AND GUARANTEES

As  described  in  Note 15 to the  Audited  Consolidated  Financial  Statements
included in our 2007 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.


                                      20
<PAGE>

18.   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 2007 Annual
Report on Form 10-K.

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2008

                                                                                                               Corporate
                                                                                  Energy                             and
 (Cdn$ millions)                              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                       319      206        198        973        54         21         189        111        -      2,071
 Marketing and Other               3        1          3         10         1         21           -          6      (11) (2)    34
                              ------------------------------------------------------------------------------------------------------
 Total Revenues                  322      207        201        983        55         42         189        117      (11)     2,105

  Less: Expenses
   Operating                      45       47         24         63         2         14          78         75        -        348
   Depreciation, Depletion,
    Amortization and
     Impairment                   40       47         62        143         4          4          12         11       11        334
   Transportation and Other        2        5          -          -         -        166           2         10       10        195
   General and Administrative(3)  13       78         45         13        58         41           -          8      162        418
   Exploration                     -       32         23         17        29 (4)      -           -          -        -        101
   Interest                        -        -          -          -         -          -           -          2       14         16
                              ------------------------------------------------------------------------------------------------------
 Income (Loss)
   before Income Taxes           222       (2)        47        747       (38)      (183)         97         11     (208)       693
  Less: Provision for
   (Recovery of) Income Taxes     78       (1)        17        378        (3)       (53)         27          3     (134)       312
  Less: Non-Controlling
   Interests                       -       -           -          -         -          -          -           1        -          1
                              ------------------------------------------------------------------------------------------------------
 Net Income (Loss)               144       (1)        30        369       (35)      (130)         70          7      (74)       380
                              ======================================================================================================


 Identifiable Assets             340    6,092 (5)  1,856      4,911       494      5,551 (6)   1,256        525      679     21,704
                              ======================================================================================================

 Capital Expenditures
  Development and Other           14      259         55        121        10          1          11         20        9        500
  Exploration                      4       26         42         55         9          -           -          -        -        136
  Proved Property Acquisition      -        2          -          -         -          -           -          -        -          2
                              ------------------------------------------------------------------------------------------------------
                                  18      287         97        176        19          1          11         20        9        638
                              ======================================================================================================

 Property, Plant and Equipment
  Cost                         2,284    7,424      3,480      5,128       310        264       1,348        866      312     21,416
  Less: Accumulated DD&A       2,088    1,682      1,937      1,235        88         68         223        483      187      7,991
                              ------------------------------------------------------------------------------------------------------
 Net Book Value                  196    5,742 (5)  1,543      3,893       222        196       1,125        383      125     13,425
                              ======================================================================================================
</TABLE>
(1) Includes results of operations from producing activities in Colombia.

(2) Includes  interest  income of $3  million,  foreign  exchange  losses of $6
    million, decrease in the fair value of crude oil put options of $10 million
    and other gains of $2 million.

(3) Includes stock-based compensation expense of $328 million.

(4) Includes exploration activities primarily in Norway and Colombia.

(5) Includes costs of $4,223 million  related to our Long Lake Project (Phase 1
    and future phases).

(6) Approximately   83%  of  Marketing's   identifiable   assets  are  accounts
    receivable and inventories.

                                      21
<PAGE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2008
                                                                                                             Corporate
                                                                              Energy                               and
 (Cdn$ millions)                              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                       595      353        379    1,912     100         35         347        220          -       3,941
 Marketing and Other               7        1          4       11       1        232           -         (1)         1(2)      256
                              -----------------------------------------------------------------------------------------------------
 Total Revenues                  602      354        383    1,923     101        267         347        219          1       4,197

  Less: Expenses
  Operating                       90       89         48      120       5         23         140        142          -         657
  Depreciation, Depletion,
    Amortization and
     Impairment                   74       94        136      313       8          7          24         21         21         698
  Transportation and Other         4       10          1        -       -        339           7         29 (3)     10         400
  General and Administrative (4)  11       79         51       12      59         67           1         15        178         473
  Exploration                      -       36         29       24      44 (5)      -           -          -          -         133
  Interest                         -        -          -        -       -          -           -          5         38          43
                              -----------------------------------------------------------------------------------------------------
 Income (Loss)
  before Income Taxes            423       46        118    1,454     (15)      (169)        175          7       (246)      1,793
 Less: Provision for
 (Recovery of) Income Taxes      148       13         42      737       -        (52)         49          3       (159)        781
 Less: Non-Controlling
 Interests                         -        -          -        -       -          -           -          2         -            2
                              -----------------------------------------------------------------------------------------------------
 Net Income (Loss)               275       33         76      717     (15)      (117)        126          2        (87)      1,010
                              =====================================================================================================

 Identifiable Assets             340    6,092 (6)  1,856    4,911     494      5,551 (7)   1,256        525        679      21,704
                              =====================================================================================================

 Capital Expenditures
  Development and Other           32      610        134      221      38          1          20         33         13       1,102
  Exploration                      9      112        109       71      19          -           -          -          -         320
  Proved Property Acquisition      -        2          -        -       -          -           -          -          -           2
                              -----------------------------------------------------------------------------------------------------
                                  41      724        243      292      57          1          20         33         13       1,424
                              =====================================================================================================

 Property, Plant and Equipment
  Cost                         2,284    7,424      3,480    5,128     310        264       1,348        866        312      21,416
  Less: Accumulated DD&A       2,088    1,682      1,937    1,235      88         68         223        483        187       7,991
                              -----------------------------------------------------------------------------------------------------
 Net Book Value                  196    5,742 (6)  1,543    3,893     222        196       1,125        383        125      13,425
                              =====================================================================================================
</TABLE>
(1) Includes results of operations from producing activities in Colombia.

(2) Includes  interest  income of $13 million,  foreign  exchange  losses of $1
    million, decrease in the fair value of crude oil put options of $10 million
    and other losses of $1 million.

(3) Includes  a  severance  accrual  of $7  million  in  connection  with North
    Vancouver technology conversion project.

(4) Includes stock-based compensation expense of $287 million.

(5) Includes exploration activities primarily in Norway and Colombia.

(6) Includes costs of $4,223 million  related to our Long Lake Project (Phase 1
    and future  phases).

(7) Approximately   83%  of  Marketing's   identifiable   assets  are  accounts
    receivable and inventories.

                                      22
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2007
                                                                                                             Corporate
                                                                               Energy                              and
 (Cdn$ millions)                              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        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 (5)  1,581    5,107      258      3,355 (6)   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 (7)    -          -           -           -        -           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 (5)  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  costs of $3,028 million  related to our Long Lake Project,  which
    are not being depreciated, depleted or amortized.

(6) Approximately   81%  of  Marketing's   identifiable   assets  are  accounts
    receivable  and  inventories.

(7) Includes  acquisition  of  additional  interests  in the Scott and  Telford
    fields.

                                      23
<PAGE>

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

                                                                                                              Corporate
                                                                                  Energy                           and
 (Cdn$ millions)                              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 Admin-
   istrative (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        -         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 (5)  1,581     5,107        258      3,355 (6)   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 (7)      -          -           -          -        -          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 (5)  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  costs of $3,028 million  related to our Long Lake Project,  which
    are not being depreciated, depleted or amortized.

(6) Approximately   81%  of  Marketing's   identifiable   assets  are  accounts
    receivable  and  inventories.

(7) Includes  acquisition  of  additional  interests  in the Scott and  Telford
    fields.

                                      24
<PAGE>

19.  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:

<TABLE>
<CAPTION>
(a)  UNAUDITED CONSOLIDATED STATEMENT OF INCOME - US GAAP FOR THE THREE AND SIX
     MONTHS ENDED JUNE 30

                                                                    Three Months               Six Months
                                                                    Ended June 30             Ended June 30
(Cdn$ millions, except per share amounts)                         2008         2007         2008         2007
--------------------------------------------------------------------------------------------------------------
<S>                                                              <C>          <C>          <C>          <C>
REVENUES AND OTHER INCOME
    Net Sales                                                    2,071        1,399        3,941        2,539
    Marketing and Other (vii); (viii)                             (102)         299          104          545
                                                             -------------------------------------------------
                                                                 1,969        1,698        4,045        3,084
                                                             -------------------------------------------------
EXPENSES
    Operating (ii)                                                 347          296          657          592
    Depreciation, Depletion, Amortization and Impairment           334          360          698          694
    Transportation and Other (viii)                                191          210          396          456
    General and Administrative (iii)                               390           51          452          250
    Exploration                                                    101          105          133          154
    Interest                                                        16           46           43           94
                                                             -------------------------------------------------
                                                                 1,379        1,068        2,379        2,240
                                                             -------------------------------------------------

INCOME BEFORE INCOME TAXES                                         590          630        1,666          844
                                                             -------------------------------------------------

PROVISION FOR INCOME TAXES
    Current                                                        451          151          843          211
    Deferred (i) - (vii)                                          (180)         120         (114)         153
                                                             -------------------------------------------------
                                                                   271          271          729          364
                                                             -------------------------------------------------

NET INCOME BEFORE NON-CONTROLLING INTERESTS                        319          359          937          480
    Net Income Attributable to Non-Controlling Interests            (1)          (5)          (2)          (8)
                                                             -------------------------------------------------

NET INCOME - US GAAP (1)                                           318          354          935          472
                                                             =================================================

EARNINGS PER COMMON SHARE ($/share)
    Basic (Note 14)                                               0.60         0.67         1.77         0.90
                                                             =================================================

    Diluted (Note 14)                                             0.59         0.66         1.74         0.88
                                                             =================================================

Note:
(1) RECONCILIATION OF CANADIAN AND US GAAP NET INCOME
                                                                     Three Months                Six Months
                                                                     Ended June 30             Ended June 30
                                                                   2008         2007         2008         2007
---- ----------------------------------------------------------------------------------------------------------
     Net Income - Canadian GAAP                                     380          368        1,010          489
     Impact of US Principles, Net of Income Taxes:
        Ineffective Portion of Cash Flow Hedges (i)                   -            -            -           (2)
        Pre-operating Costs (ii)                                      -           (5)           -           (8)
        Inventory Valuation (vii)                                   (83)           -          (90)           -
        Stock-based Compensation (iii)                               20           (9)          15           (7)
        Other                                                         1            -            -            -
                                                              -------------------------------------------------
     Net Income - US GAAP                                           318          354          935          472
                                                              =================================================
</TABLE>

                                      25
<PAGE>

<TABLE>
<CAPTION>
(b)  UNAUDITED CONSOLIDATED BALANCE SHEET - US GAAP

                                                                              June 30    December 31
(Cdn$ millions, except share amounts)                                            2008           2007
----------------------------------------------------------------------------------------------------
<S>                                                                           <C>        <C>
ASSETS
    CURRENT ASSETS
      Cash and Cash Equivalents                                                  614           206
      Restricted Cash                                                            263           203
      Accounts Receivable                                                      4,909         3,502
      Inventories and Supplies (vii)                                             886           615
      Other                                                                      109            89
                                                                       -----------------------------
        Total Current Assets                                                   6,781         4,615
                                                                       -----------------------------

    PROPERTY, PLANT AND EQUIPMENT
      Net of Accumulated Depreciation, Depletion, Amortization and
         Impairment of $8,384 (December 31, 2007 - $7,588) (ii); (v)          13,376        12,449
    GOODWILL                                                                     335           326
    DEFERRED INCOME TAX ASSETS                                                   268           268
    DEFERRED CHARGES AND OTHER ASSETS                                            703           324
                                                                       -----------------------------
TOTAL ASSETS                                                                  21,463        17,982
                                                                       =============================
LIABILITIES AND SHAREHOLDERS' EQUITY
    CURRENT LIABILITIES
      Accounts Payable and Accrued Liabilities (iii)                           5,781         4,188
      Income Taxes Payable                                                       730            45
      Accrued Interest Payable                                                    55            54
      Dividends Payable                                                           27            13
                                                                       -----------------------------
        Total Current Liabilities                                              6,593         4,300
                                                                       -----------------------------

    LONG-TERM DEBT                                                             4,449         4,610
    DEFERRED INCOME TAX LIABILITIES (i) - (vii)                                2,152         2,230
    ASSET RETIREMENT OBLIGATIONS                                                 934           792
    DEFERRED CREDITS AND LIABILITIES (iv)                                        856           534
    NON-CONTROLLING INTERESTS                                                     62            67
    SHAREHOLDERS' EQUITY
      Common Shares, no par value
        Authorized:   Unlimited
        Outstanding:  2008 - 530,282,975 shares
                      2007 - 528,304,813 shares                                  972           917
      Contributed Surplus                                                          2             3
      Retained Earnings (i) - (vii)                                            5,771         4,876
      Accumulated Other Comprehensive Loss (i); (iv)                            (328)         (347)
                                                                       -----------------------------
          Total Shareholders' Equity                                           6,417         5,449
                                                                       -----------------------------
     COMMITMENTS, CONTINGENCIES AND GUARANTEES

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                    21,463        17,982
                                                                       =============================
</TABLE>

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

                                                            Three Months              Six Months
                                                            Ended June 30            Ended June 30
(Cdn$ millions)                                           2008         2007        2008         2007
-----------------------------------------------------------------------------------------------------
<S>                                                        <C>          <C>         <C>          <C>
Net Income - US GAAP                                       318          354         935          472
Other Comprehensive Income, Net of Income Taxes:
    Foreign Currency Translation Adjustment                 (8)         (86)         19          (92)
    Change in Mark to Market on Cash Flow Hedges (i)         -            -           -          (61)
                                                        ---------------------------------------------
Comprehensive Income                                       310          268         954          319
                                                        =============================================
</TABLE>

                                      26
<PAGE>

<TABLE>
<CAPTION>
(d)  UNAUDITED CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE LOSS -
     US GAAP

                                                                        June 30    December 31
(Cdn$ millions)                                                            2008           2007
-----------------------------------------------------------------------------------------------
<S>                                                                     <C>        <C>
Foreign Currency Translation Adjustment                                    (274)          (293)
Unamortized Defined Benefit Pension Costs (iv)                              (54)           (54)
                                                                    ---------------------------
                                                                           (328)          (347)
                                                                    ===========================
</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.

     FUTURE  SALE OF GAS  INVENTORY:  At December  31,  2006,  we included  $25
     million of gains on cash flow hedges in accounts  receivable.  Accumulated
     Other  Comprehensive  Income (AOCI) includes the effective  portion of $23
     million ($16  million,  net of taxes) and $2 million ($2  million,  net of
     taxes) of the  ineffective  portion  was  included in our 2006 US GAAP net
     income.  Under  Canadian  GAAP,  these gains were  recognized in the first
     quarter of 2007.

     At June 30, 2008, there were no cash flow 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); and

     o   property,  plant and  equipment  is lower under US GAAP by $30 million
         (December 31, 2007 - $30 million).

iii. 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 under US GAAP:

     o   general  and  administrative  expense is lower by $28  million and $21
         million  ($20 million and $15  million,  net of income  taxes) for the
         three and six months ended June 30, 2008,  respectively (2007 - higher
         by $13  million  and $10  million,  respectively,  ($9  million and $7
         million, respectively, net of income taxes)); and

     o   accounts payable and accrued  liabilities are higher by $32 million as
         at June 30, 2008 (December 31, 2007 - $53 million).

iv.  On December 31, 2006, we adopted FASB Statement 158 EMPLOYERS'  ACCOUNTING
     FOR DEFINED BENEFIT PENSION AND OTHER  POSTRETIREMENT  PLANS (FAS 158). At
     June 30, 2008, the unfunded  amount of our defined  benefit  pension plans
     was $75  million.  This amount has been  included in deferred  credits and
     other  liabilities and $54 million,  net of income taxes has been included
     in AOCI.

v.   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.

vi.  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 June 30, 2008, the total amount of our
     unrecognized tax benefit was approximately $225 million,  all of which, if
     recognized,  would affect our effective tax rate. As at June 30, 2008, 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 $11 million. We had
     no interest or penalties in the US GAAP - Unaudited Consolidated Statement
     of Income for the first half of 2008.  Our income tax  filings are subject
     to audit by taxation authorities and as at June 30, 2008 the following tax
     years remained  subject to  examination;  (i) Canada - 1985 to date,  (ii)
     United  Kingdom - 2002 to date and (iii) United  States - 2004 to date. We
     do not anticipate any material  changes to the  unrecognized  tax benefits
     previously disclosed within the next twelve months.

                                      27
<PAGE>

vii.  Under Canadian  GAAP, we began carrying our commodity  inventory held for
      trading purposes at fair value, less any costs to sell, effective October
      31, 2007.  Under US GAAP, we are required to carry this  inventory at the
      lower of cost or net realizable value. As a result:

      o   marketing  and other income is lower by $132 million and $148 million
          ($83  million  and $90  million,  net of income  taxes) for the three
          months and six months ended June 30, 2008, respectively; and

      o   inventories  are lower by $192 million as at June 30, 2008  (December
          31, 2007 - $44 million).

viii. Under US GAAP,  asset  disposition  gains and  losses are  included  with
      transportation  and other expense.  Gains of $4 million for the three and
      six months ended June 30, 2008 were reclassified from marketing and other
      income to  transportation  and other  expense ($nil for the three and six
      months ended June 30, 2007).


CHANGES IN ACCOUNTING POLICIES - US GAAP
On January 1, 2008, we adopted FASB Statement 157 FAIR VALUE MEASUREMENTS which
defines  fair value,  establishes  a  framework  for  measuring  fair value and
expands  disclosures  about  fair  value  measurements.  The  adoption  of this
statement  did not have a  material  impact on our  results  of  operations  or
financial position.  The additional  disclosures  required by the statement are
included in Note 11.


NEW ACCOUNTING PRONOUNCEMENTS - US GAAP
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  will  have a  material  impact  on our  results  of
operations or financial position.

In December 2007, FASB issued Statement 141 (revised),  BUSINESS  COMBINATIONS.
Statement 141 establishes principles and requirements of the acquisition method
for business combinations and related disclosures.  This statement is effective
for fiscal years  beginning on or after December 15, 2008. We do not expect the
adoption  of this  statement  will have a  material  impact on our  results  of
operations or financial position.

In December  2007,  FASB issued  Statement  160,  NON-CONTROLLING  INTERESTS IN
CONSOLIDATED FINANCIAL STATEMENTS,  AN AMENDMENT OF ARB. NO. 51. This statement
clarifies  that a  non-controlling  interest in a  subsidiary  is an  ownership
interest  in the  consolidated  entity that should be reported as equity in the
consolidated financial statements. This statement is effective for fiscal years
beginning on or after  December 15, 2008. We do not expect the adoption of this
statement to have a material  impact on our results of  operations or financial
position.

In  March  2008,  FASB  issued  Statement  161,  DISCLOSURES  ABOUT  DERIVATIVE
INSTRUMENTS  AND HEDGING  ACTIVITIES,  AN AMENDMENT OF FASB  STATEMENT 133. The
statement requires qualitative  disclosures about the objectives and strategies
for using  derivatives,  quantitative  data  about the fair  value of gains and
losses on derivative  contracts and details of  credit-risk-related  contingent
features in their hedged positions.  The statement also requires the disclosure
of the  location  and  amounts  of  derivative  instruments  in  the  financial
statements.  This  statement is effective for fiscal years and interim  periods
beginning on or after  November 15, 2008. We do not expect the adoption of this
statement to have a material  impact on our results of  operations or financial
position.


                                      28
<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 19 TO THE UNAUDITED  CONSOLIDATED
FINANCIAL STATEMENTS. THE DATE OF THIS DISCUSSION IS JULY 16, 2008.

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 76 OF OUR 2007  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.

<TABLE>
<CAPTION>
EXECUTIVE SUMMARY OF SECOND QUARTER RESULTS
                                                                 Three Months              Six Months
                                                                 Ended June 30             Ended June 30
(Cdn$ millions)                                                2008         2007         2008         2007
-----------------------------------------------------------------------------------------------------------
<S>                                                             <C>          <C>        <C>            <C>
Net Income                                                      380          368        1,010          489
Earnings per Common Share, Basic ($/share)                     0.72         0.70         1.91         0.93
Cash Flow from Operating Activities                           1,163          582        2,331        1,030

Production, before Royalties (mboe/d)                           254          253          261          246
Production, after Royalties (mboe/d)                            211          208          217          199
Nexen's Average Realized Oil and Gas Price (Cdn$/boe)        108.26        68.48        96.36        63.95

Capital Investment                                              638          819        1,424        1,630
Net Debt (1)                                                  3,835        4,755        3,835        4,755
                                                          -------------------------------------------------
</TABLE>
Note:
(1) Net debt is defined as long-term debt and short-term  borrowings  less cash
    and cash equivalents.

Record commodity  prices  contributed to strong net income and generated over a
billion  dollars of cash flow from  operating  activities.  WTI and Dated Brent
increased 27% and 25%, respectively during the quarter to average US$123.98/bbl
and  US$121.38/bbl.  Our average  realized oil and gas price  increased  26% to
$108.26/bbl.  North Sea production was disrupted by a strike at the Grangemouth
refinery  which  reduced  quarterly  volumes  by  approximately   3,000  boe/d.
Maintenance activity at Syncrude also contributed to lower volumes. Buzzard and
Syncrude have since returned to full production rates.

At Long Lake, we continue to inject steam into the reservoir and currently have
35 of 81 well pairs converted to SAGD operation.  The well pairs that have been
converted  to  SAGD   operation   are   currently   producing,   in  aggregate,
approximately 13,000 bbls/d (6,500 bbls/d net to us). Commissioning of the Long
Lake upgrader is approximately 80% complete and we remain on track for start up
late in the third quarter.  Buzzard  production will be reduced  temporarily in
the third quarter for planned rig  movements  and another  coker  turnaround at
Syncrude is planned for later in the third  quarter.  In the UK North Sea,  our
Ettrick development is progressing with first production expected in the fourth
quarter.

Our net income includes a charge of $328 million for  stock-based  compensation
following a 33% increase in our stock price since the end of the first quarter.
Our marketing division reported a loss in the second quarter, primarily related
to  widening  location  spreads  between  western  supply  regions  and eastern
consuming  markets  at a time  when we were  positioned  to take  advantage  of
traditional seasonal narrowing between locations.

Our cash flow from operating  activities exceeded capital investment during the
quarter by $525 million and in June,  we repaid $125 million of long-term  debt
that was due. Our net debt is $569 million lower than year-end 2007 as a result
of our strong financial results.

                                      29
<PAGE>

CAPITAL INVESTMENT

Our strategy and capital  programs are focused on growing  long-term  value for
our shareholders responsibly. We are advancing our strategy as described below.
In 2008, we are  investing  in:

     o   bringing  Phase 1 of our Long Lake  project  on stream  and  advancing
         other phases;

     o   completing our Ettrick development in the UK North Sea;

     o   targeting a number of  exploration  prospects,  primarily in the North
         Sea and Gulf of Mexico; and

     o   advancing our position in the Horn River shale gas resource play.

Details of our capital programs are set out below.

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2008
                                                          Major      Early Stage      New Growth       Core Asset
(Cdn$ millions)                                     Development      Development     Exploration      Development       Total
------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>              <C>             <C>              <C>               <C>
Oil and Gas
     Synthetic (mainly Long Lake)                           187               46               -                -         233
     United Kingdom                                          62                -              55               59         176
     Yemen                                                    -                -               4               14          18
     United States                                            5                -              42               50          97
     Canada                                                   7                2              26               19          54
     Nigeria                                                  6                -               -                -           6
     Other Countries                                          -                -               9                4          13
Syncrude                                                      -                -               -               11          11
                                                 -----------------------------------------------------------------------------
                                                            267               48             136              157         608
Chemicals, Marketing, Corporate and Other                     -                -               -               30          30
                                                 -----------------------------------------------------------------------------
Total Capital                                               267               48             136              187         638
                                                 =============================================================================
As a % of Total Capital                                     42%               8%             21%              29%        100%
                                                 -----------------------------------------------------------------------------

SIX MONTHS ENDED JUNE 30, 2008
                                                          Major      Early Stage      New Growth       Core Asset
(Cdn$ millions)                                     Development      Development     Exploration      Development       Total
------------------------------------------------------------------------------------------------------------------------------
Oil and Gas
    Synthetic (mainly Long Lake)                            429              112               2                -         543
    United Kingdom                                          119                -              71              102         292
    Yemen                                                     -                -               9               32          41
    United States                                             7                -             109              127         243
    Canada                                                   19                8             110               44         181
    Nigeria                                                  29                -               1                -          30
    Other Countries                                           -                -              18                9          27
Syncrude                                                      -                -               -               20          20
                                                 -----------------------------------------------------------------------------
                                                            603              120             320              334       1,377
Chemicals, Marketing, Corporate and Other                     -                -               -               47          47
                                                 -----------------------------------------------------------------------------
Total Capital                                               603              120             320              381       1,424
                                                 =============================================================================
As a % of Total Capital                                     42%               8%             23%              27%        100%
                                                 -----------------------------------------------------------------------------
</TABLE>

SYNTHETIC
Commissioning  of the upgrader is  approximately  80% complete and we remain on
track for start up late in the third quarter.

We continue to inject steam into the reservoir and currently have 35 of 81 well
pairs converted to SAGD operation.  While the reservoir is performing  well, we
have been limited at surface by facility  start up issues that have  restricted
our ability to generate our full  complement of steam.  Reliability  of surface
facilities has been impacted by third party power outages, the recalibration of
burner tips on the once-through  steam generators and downtime  associated with
the heat  exchangers.  These issues have all been resolved and steam generation
is ramping up to planned rates.

In late  June,  there was a failure  of the main  third  party  transformer  at
Kinosis which required us to shutdown our SAGD facilities. As a result, bitumen
production and steam circulation was temporarily suspended.  Production volumes
subsequently  returned to  pre-shutdown  levels but this  slowed our  near-term
bitumen ramp up profile.

At this  stage  of the  ramp up  process  and  considering  our  past  steaming
constraints,  production is meeting  expectations with oil rates increasing and
steam-oil-ratios  (SOR) decreasing.  The well pairs that have been converted to
SAGD  operation are currently  producing,  in aggregate,  approximately  13,000
bbls/d or 6,500  bbls/d net to us, at a combined  SOR of about 3.0. The overall
SOR of the well pairs on SAGD operation,  together with those still circulating
steam, is currently ranging between 5.0 and 6.0. This is

                                      30
<PAGE>

expected to decrease to our long-term  expectation  of  approximately  3.0 when
peak rates are achieved in 2009.

We  continue to expect to have  sufficient  bitumen  feedstock  to start up the
upgrader  later this summer.  SAGD volumes are expected to continue  ramping up
through the  remainder of 2008 and reach the full design rate of 72,000  bbls/d
(36,000 bbls/d net to us) in late 2009.

Excellent progress has been made on upgrader commissioning. Synthetic crude and
pentane have been loaded into the OrCrude(TM)  unit and testing in this unit is
advancing  well.  Catalyst  loading is  complete  in the  hydrocracker  and the
sulphur  recovery units,  with these units moving into the final  commissioning
steps required before start up activities  commence.  In the gasification unit,
automation testing  activities are progressing with our licensor,  Shell Global
Solutions.

As  previously  announced,  a holding tank used to balance  liquid  oxygen flow
between  the  air  separation  plant  and  the  gasifier  was  damaged  in  the
commissioning  process.  Damage to the tank was limited to the upper section of
the tank and we have since  replaced this section.  Hydrotesting,  reinsulation
and commissioning of the tank will be completed early in the third quarter.  We
remain  on track to start up the  upgrader  later  this  summer.  Our  start up
schedule forecasts  production of synthetic crude to ramp up to full rates over
a 12 to 18 month period  following  initial  upgrader start up. The upgrader is
designed to produce  approximately  60,000 bbls/d  (30,000 bbls/d net to us) of
premium synthetic crude.

Work  continues  on Phase 2 and our goal is to  sanction  this  phase late this
year.  However,  ultimate timing depends on accumulating  sufficient  operating
history from Phase 1 and receiving clarity on proposed  regulatory changes such
as climate change.  Proposed federal climate change regulations indicate a move
towards carbon capture and sequestration of greenhouse gas emissions.  With the
addition of shift reactors to future phases,  our unique process allows for the
pre-combustion capture of these emissions for future sequestration.

UNITED KINGDOM - NORTH SEA
During the quarter,  we drilled exploration wells in the North Sea at Blackbird
and Pink.  Blackbird is located 6 km south of Ettrick and, if successful,  this
prospect could be fast tracked for development  given the short distance to the
Ettrick floating  production,  storage and offloading vessel (FPSO). We operate
both Ettrick and Blackbird and have an 80% working interest in each.

Pink has been  sidetracked and we are currently  evaluating the results of this
discovery.  The Pink well is a candidate for co-development  with Golden Eagle.
We have a 46% operated working interest in this field.

At Ettrick,  delivery of the leased FPSO has taken longer than  expected due to
third party labour  shortages in the Singapore  construction  yard. The FPSO is
designed to handle  30,000  bbls/d of oil and 35 mmcf/d of gas. We expect first
production to commence in the fourth quarter with a modest  contribution to our
annual production volumes.

UNITED STATES - GULF OF MEXICO
In the Eastern Gulf of Mexico, we recently spud the Fredericksburg  exploration
well.  This is the third prospect to be drilled in this area following  earlier
success at Vicksburg and Shiloh. We have a 20% interest in  Fredericksburg  and
Shiloh,  and a 25% interest in Vicksburg,  with Shell operating all three. When
we combine the  discoveries at Shiloh and Vicksburg  with several  prospects we
see on our land  holdings,  this area has the potential to become a significant
part of our Gulf of Mexico business.

Development of the Longhorn  discovery is progressing well and first production
is expected in 2009 with a peak  production  rate of  approximately  200 mmcf/d
gross (50 mmcf/d net to us). We have a 25%  non-operated  working  interest and
ENI is the operator.

At Knotty Head,  we plan to drill an appraisal  well in mid 2009 when the first
of our  two new  deep-water  drilling  rigs  arrives.  We  have a 25%  operated
interest in the field.

CANADA
The Horn River basin in northeast  British Columbia has the potential to become
one of the most significant shale gas plays in North America. Further appraisal
activity on our Dilly Creek lands is required before our reserve  estimates can
be finalized and commerciality  established.  We have increased our holdings to
approximately  88,000  acres  in the  Dilly  Creek  area  with  a 100%  working
interest.  This shale gas play has been  compared to the Barnett Shale in Texas
by other operators in the area as it displays  similar rock properties and play
characteristics.

Following the success of last winter's  drilling  program,  we have accelerated
the  drilling  of two  horizontal  wells  which will be fraced and tested  this
summer.  This winter,  we are planning an 8 to 16 well drilling and  completion
program.  We have  secured  access  to 70  mmcf/d of  pipeline  and  processing
capacity  for our shale gas  production  for a five year  period with a renewal
option.

                                      31
<PAGE>

In Canada,  we have  reinstated  the  investment  program for our Mannville CBM
development  project  following  modifications  to the  royalty  regime  by the
Government of Alberta which restored the economics  associated  with this play.
Our CBM  production  averaged 40 mmcf/d for the quarter.  This is a significant
increase  from last  quarter  and  primarily  reflects  improved  well  pumping
reliability.  We expect to exit the year around 46 mmcf/d as our existing wells
dewater and production increases.

OFFSHORE WEST AFRICA
Development of the Usan field,  offshore  Nigeria has recently  commenced.  The
field  development  plan includes a FPSO vessel with a storage  capacity of two
million barrels of oil. All major contracts for deep-water facilities have been
awarded and  contractors  are mobilizing for detailed  engineering  and project
execution.  Development of the Usan field  commenced  earlier this year than we
expected  and  we  recently  allocated  additional  capital  accordingly.   Our
investment is expected to be within the range of US$1.6 to US$2.0  billion over
the development  period.  The Usan field is expected to come on stream in early
2012 and will  ramp up to a peak  production  rate of  180,000  bbls/d  (36,000
bbls/d net to us).

The Usan field development is located in OML 138 and is covered by the original
production  sharing  contract  for OPL 222  issued in 1993,  with the  Nigerian
National  Petroleum  Corporation as  concessionaire.  The contract  conveys the
right to develop and produce crude oil and continue with exploration  activity.
We are  currently  processing  three-dimensional  seismic  in  anticipation  of
further exploratory drilling in the area in 2009. The Usan field was discovered
in 2002 and is located  approximately  100 km offshore in water depths  ranging
from 750 to 850  meters.  Drilling  of the  development  wells is  expected  to
commence next year.  Nexen has a 20% interest in  exploration  and  development
along with Elf Petroleum Nigeria Limited (20% and Operator),  Chevron Petroleum
Nigeria  Limited (30%) and Esso  Exploration and Production  Nigeria  (Offshore
East) Limited (30%).


                                      32
<PAGE>

<TABLE>
<CAPTION>
FINANCIAL RESULTS

CHANGE IN NET INCOME

                                                                                                 2008 VS. 2007
                                                                                        Three Months            Six Months
(Cdn$ millions)                                                                        Ended June 30         Ended June 30
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                   <C>
NET INCOME AT JUNE 30, 2007                                                                      368                   489
                                                                                  ===========================================
    Favourable (unfavourable) variances:

       Production Volumes, After Royalties
                  Crude Oil                                                                      (26)                  144
                  Natural Gas                                                                     17                    36
                  Change in Crude Oil Inventory                                                  (76)                  (64)
                                                                                  -------------------------------------------
           Total Volume Variance                                                                 (85)                  116

       Realized Commodity Prices
                  Crude Oil                                                                      680                 1,195
                  Natural Gas                                                                     53                    66
                                                                                  -------------------------------------------
           Total Price Variance                                                                  733                 1,261

       Oil and Gas Operating Expense
                  Conventional                                                                   (16)                  (23)
                  Syncrude                                                                       (27)                  (42)
                                                                                  -------------------------------------------
           Total Operating Expense Variance                                                      (43)                  (65)

       Depreciation, Depletion, Amortization and Impairment
                  Conventional                                                                    32                     3
                  Syncrude                                                                         -                     1
                  Other                                                                           (6)                   (8)
                                                                                  -------------------------------------------
           Total Depreciation, Depletion, Amortization and Impairment Variance                    26                    (4)

       Exploration Expense                                                                         4                    21

       Energy Marketing Contribution                                                            (234)                 (221)

       Chemicals Contribution                                                                    (11)                  (29)

       General and Administrative Expense                                                       (380)                 (233)

       Interest Expense                                                                           30                    51

       Current Income Taxes                                                                     (300)                 (632)
       Future Income Taxes                                                                       265                   223

       Other
                  Decrease in Fair Value of Crude Oil Put Options                                 (6)                   10
                  Other                                                                           13                    23
                                                                                  -------------------------------------------

NET INCOME AT JUNE 30, 2008                                                                      380                 1,010
                                                                                  ===========================================

Significant variances in net income are explained further in the following
sections.
</TABLE>

                                      33
<PAGE>

<TABLE>
<CAPTION>
OIL & GAS AND SYNCRUDE

PRODUCTION (BEFORE ROYALTIES) (1)

                                                                                  Three Months               Six Months
                                                                                  Ended June 30             Ended June 30
                                                                                2008         2007         2008         2007
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>          <C>          <C>            <C>
Crude Oil and NGLs (mbbls/d)
     United Kingdom                                                            100.3         85.6        103.1           70.7
     Yemen                                                                      57.6         73.3         59.9           75.2
     Canada                                                                     16.4         17.2         16.3           17.5
     United States                                                              11.3         16.0         12.5           18.8
     Other Countries                                                             5.7          6.2          5.8            6.0
     Long Lake Bitumen (2)                                                       3.2            -          1.9              -
Syncrude (mbbls/d) (3)                                                          19.1         19.0         19.2           20.2
                                                                         ----------------------------------------------------
                                                                               213.6        217.3        218.7          208.4
                                                                         ----------------------------------------------------
Natural Gas (mmcf/d)
     Canada                                                                      126          116          127          117
     United States                                                                99           86          105           93
     United Kingdom                                                               19           14           20           14
                                                                         ----------------------------------------------------
                                                                                 244          216          252          224
                                                                         ----------------------------------------------------

Total Production (mboe/d)                                                        254          253          261          246
                                                                         ====================================================

PRODUCTION (AFTER ROYALTIES) (1)

                                                                                  Three Months               Six Months
                                                                                  Ended June 30             Ended June 30
                                                                                2008         2007         2008         2007
----------------------------------------------------------------------------------------------------------------------------
Crude Oil and NGLs (mbbls/d)
     United Kingdom                                                            100.3         85.6        103.1           70.7
     Yemen                                                                      29.2         41.6         30.4           43.3
     Canada                                                                     12.6         13.4         12.4           13.8
     United States                                                               9.7         14.2         10.9           16.8
     Other Countries                                                             5.2          5.7          5.4            5.5
     Long Lake Bitumen (2)                                                       3.2            -          1.9            -
Syncrude (mbbls/d) (3)                                                          15.9         16.4         16.4           17.6
                                                                         ----------------------------------------------------
                                                                               176.1        176.9        180.5          167.7
                                                                         ----------------------------------------------------
Natural Gas (mmcf/d)
     Canada                                                                      108           97          107           96
     United States                                                                85           74           90           80
     United Kingdom                                                               19           14           20           14
                                                                         ----------------------------------------------------
                                                                                 212          185          217          190
                                                                         ----------------------------------------------------

Total Production (mboe/d)                                                        211          208          217          199
                                                                         ====================================================
</TABLE>
Notes:
(1)  We have presented  production  volumes before  royalties as we measure our
     performance  on this  basis  consistent  with other  Canadian  oil and gas
     companies.
(2)  Pre-operating  revenues  and costs  associated  with Long Lake bitumen are
     capitalized as development costs.
(3)  Considered a mining operation for US reporting purposes.

LOWER SALES VOLUMES REDUCED NET INCOME FOR THE QUARTER BY $85 MILLION
Production before royalties decreased 5% from the prior quarter while remaining
consistent with the second quarter of 2007. The decrease from the first quarter
was primarily the result of lower rates in the North Sea due to the Grangemouth
refinery labour strike in late April. Natural declines in Yemen and the Gulf of
Mexico were partially offset by bitumen production at Long Lake, which averaged
3,200 bbls/d in the second quarter.  Production  after  royalties  decreased 5%
from the prior quarter,  while remaining  comparable with the second quarter of
2007.

                                      34
<PAGE>

<TABLE>
<CAPTION>
The following table summarizes our production volume changes since the last
quarter:

                                                             Before       After
(mboe/d)                                                  Royalties   Royalties
--------------------------------------------------------------------------------
<S>                                                       <C>         <C>
Production, first quarter 2008                                  267         222
    Production changes:
      United Kingdom                                             (6)         (6)
      Yemen                                                      (5)         (3)
      United States                                              (5)         (4)
      Long Lake Bitumen                                           3           2
                                                        ------------------------
Production, second quarter 2008                                 254         211
                                                        ========================
</TABLE>

Production  volumes  discussed  in  this  section  represent   before-royalties
volumes, net to our working interest.

UNITED KINGDOM
Buzzard  production for the quarter  averaged  86,500 boe/d.  While this is 27%
higher than the second  quarter of 2007, it is 5% lower than the prior quarter.
The  Buzzard   platform   consistently   operates  above  the  original  design
expectations  but  production  was  reduced  temporarily  in the quarter due to
interruptions caused by a strike at the Grangemouth refinery.

In late April, a two day labour strike at the Grangemouth refinery in northeast
Scotland  shut  down  the  Forties  pipeline  system  and we were  required  to
temporarily  shut-in  production at Buzzard,  Scott/Telford  and Farragon.  The
downtime  caused by the strike  reduced our  quarterly  Buzzard  production  by
approximately  3,000 boe/d. In early July,  Buzzard was shutdown for three days
for a planned  rig move and  returned to full rates soon  after.  The  shutdown
corresponded with maintenance downtime on the Frigg gas pipeline. In August, we
have one week of scheduled downtime to move the rig back.

We have  commenced  work on a fourth  platform  at Buzzard  which will  contain
production  sweetening  facilities designed to handle higher levels of hydrogen
sulphide  previously  identified in the  reservoir.  Our share of the projected
cost of the fourth platform is expected to be between US$350 million and US$400
million and is expected to be in service in 2010.

In addition to the temporary  shut down of the Forties  pipeline  caused by the
Grangemouth  refinery  strike,  natural  declines and unplanned  maintenance at
Scott/Telford  contributed  to a 12% and 28% decrease in production as compared
to the  previous  quarter  and the second  quarter of 2007,  respectively.  Our
non-operated fields at Duart and Farragon contributed 5,000 boe/d to our second
quarter volumes, 16% higher than the prior quarter.

YEMEN
Production  from the Masila field  decreased 6% from the first  quarter and 18%
from the  second  quarter of 2007,  consistent  with  expectations.  Production
declines at Masila reflect the maturity of the field and the impact of drilling
fewer  development  wells than  prior  years.  We have  recently  expanded  our
drilling program for 2008,  focusing our capital spending on maximizing reserve
recoveries and economic  returns from existing  wells. In the first half of the
year,  we drilled  seven  development  wells and expect to drill 19  additional
wells in the  remainder  of the  year.  Production  declines  are  expected  to
continue as we maximize recovery of the remaining reserves on the block.

Block 51 production  decreased 34% from the second quarter of 2007 and 15% from
the prior  quarter due to natural  decline rates and fewer  development  wells.
During the  quarter,  we  continued to develop the BAK A field where we drilled
one  development  well.  In the second half of the year,  we plan to drill four
additional development wells on Block 51.

CANADA
Production in Canada is comparable from the previous quarter and 2% higher from
the second quarter of 2007. Our conventional  production from our heavy oil and
natural gas  properties  is consistent  with the previous  quarter and the same
period in 2007. CBM  production  continues to increase as the wells in our Fort
Assiniboine  area  de-water  and we  bring  additional  development  wells  and
facilities on stream.  The increase in natural gas  production has been largely
offset by a decrease in heavy oil volumes from last year, where we are managing
the natural declines with a reduced capital program.

UNITED STATES
Gulf of Mexico  production  decreased  8% from the same  period in 2007 and 14%
from  the  prior  quarter.  Quarterly  production  from  our  Aspen  wells  was
temporarily reduced to 3,300 boe/d as the Bullwinkle processing facilities were
modified to handle  additional  water  processing.  This  temporary  shortfall,
combined with natural declines,  reduced our volumes by 3,600 boe/d compared to
the first quarter.  Gunnison production remained flat over the prior quarter as
a result of successful  recompletions;  however,  natural  declines and ongoing
maintenance  work reduced  production  by 2,400 boe/d when compared to the same
period last year.

These  decreases  were  partially  offset by higher  rates at Wrigley and Green
Canyon.  Wrigley, which came on stream towards the end of the second quarter of
last year,  contributed  4,000 boe/d to our volumes this quarter as compared to
2,900 boe/d in the first  quarter.  We acquired the Green Canyon  properties in

                                      35
<PAGE>

mid 2007 and began  producing  from a third well at Green  Canyon 6 in May. The
three Green Canyon wells averaged 2,900 boe/d for the quarter.

On the shelf, we completed several successful workovers and recompletions which
enhanced well performance, offset by natural declines elsewhere. As we focus on
the deep waters of the Gulf of Mexico,  we are minimizing the amount of capital
invested in our mature assets on the shelf.

OTHER COUNTRIES
Production  from the Guando field in Colombia  averaged  5,700 boe/d during the
quarter. We began a 35 well infill drilling program in early 2007. The drilling
program was completed during the quarter and the remaining wells came on stream
mid April.  Landslides  shut in six wells in April and we expect  that three of
these wells will be back on stream in the third quarter. Under the terms of our
license, our interest in the Guando field will decrease by half to 10% once the
field has produced 60 million barrels, likely in mid 2009.

LONG LAKE BITUMEN
Long Lake SAGD  production is ramping up as we convert wells to SAGD production
from steam  circulation,  and production  averaged 3,200 bbls/d in the quarter.
Current  SAGD  production  is  approximately  6,500  bbls/d,  net  to us and is
expected to continue to increase throughout the remainder of the year.

SYNCRUDE
Syncrude production rates were consistent with the prior quarter and the second
quarter of 2007.  During the quarter,  production  was reduced as a result of a
turnaround  on Coker  8-1,  maintenance  activity  on other  units and  reduced
shipments  of synthetic  crude as a result of outages on the Pembina  pipeline.
All units were back on line in June and production is back to full rates.




                                      36
<PAGE>

<TABLE>
<CAPTION>
COMMODITY PRICES

                                                                           Three Months               Six Months
                                                                           Ended June 30             Ended June 30
                                                                          2008        2007          2008        2007
---------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>          <C>          <C>          <C>
CRUDE OIL AND NGLS
    West Texas Intermediate (WTI) (US$/bbl)                             123.98       65.03        110.94       61.60
                                                                     ------------------------------------------------

    Differentials (1) (US$/bbl)
      Heavy Oil                                                          22.08       20.00         21.96       18.29
      Mars                                                                6.96        2.84          6.94        3.97
      Masila                                                              3.92       (3.33)         3.12       (0.66)
      Dated Brent                                                         2.60       (3.73)         1.80       (1.66)

    Producing Assets (Cdn$/bbl)
      United Kingdom                                                    118.24       74.07        104.56       70.18
      Yemen                                                             120.39       77.34        107.97       69.99
      Canada                                                             93.16       41.89         79.62       41.80
      United States                                                     120.77       68.18        106.11       62.63
      Other Countries                                                   113.18       68.04        102.21       64.07
      Syncrude                                                          130.90       77.12        116.24       73.39

    Corporate Average (Cdn$/bbl)                                        118.00       72.27        104.68       67.20
                                                                     ------------------------------------------------

NATURAL GAS
    New York Mercantile Exchange (NYMEX) (US$/mmbtu)                     11.48        7.66         10.12        7.42
    AECO (Cdn$/GJ)                                                        8.86        6.99          7.81        7.03
                                                                     ------------------------------------------------

    Producing Assets (Cdn$/mcf)
      Canada                                                              9.67        7.06          8.50        7.11
      United States                                                      11.80        8.85         10.33        8.71
      United Kingdom                                                      7.06        3.32          6.95        3.59

    Corporate Average (Cdn$/mcf)                                         10.21        7.52          9.07        7.56
                                                                     ------------------------------------------------

NEXEN'S AVERAGE REALIZED OIL AND GAS PRICE (Cdn$/boe)                   108.26       68.48         96.36       63.95
                                                                     ------------------------------------------------

AVERAGE FOREIGN EXCHANGE RATE
    Canadian to US Dollar (US$)                                         0.9900      0.9107        0.9929      0.8812
                                                                     ------------------------------------------------
</TABLE>
Note:
(1) These differentials are a discount/(premium) to WTI.

HIGHER REALIZED COMMODITY PRICES INCREASED QUARTERLY NET INCOME BY $733 MILLION
Commodity  prices  continued to set new records during the second quarter.  WTI
increased 27% and 91% from the previous quarter and the second quarter of 2007,
respectively, while Dated Brent increased 25% and 77% over the same periods. We
realized a record price of $118.00/bbl  for our crude oil sales in the quarter.
This is 27% higher  than the  previous  quarter  and 63% higher than the second
quarter  of 2007.  The  increase  in our  realized  price  from  last  year was
mitigated  somewhat as the stronger  Canadian  dollar relative to the US dollar
partially  offset the increase in  benchmark  commodity  prices.  The weaker US
dollar reduced net sales by approximately $181 million and reduced our realized
crude oil and natural gas prices by  approximately  $10.96/bbl  and  $0.95/mcf,
respectively, from a year ago.

Our quarterly realized gas price increased 28% from the first quarter and NYMEX
increased  31%  during the same  period.  NYMEX  increased  50% from the second
quarter of last year. The weaker US dollar mitigated a portion of this increase
when  translated to Canadian  dollar and our realized gas price  increased only
36% in the same  period.  AECO  natural  gas prices  averaged  $8.86/GJ  in the
quarter, an increase of 27% from last year and 31% from the previous quarter.

CRUDE OIL REFERENCE PRICES
Crude oil prices were volatile  during the second quarter with WTI ranging from
a low of  US$99.55/bbl  to a record  high of  US$143.67/bbl.  The main  drivers
behind the high prices were the concerns  over the ability of future  supply to
meet demand, the weaker US dollar,  and geopolitical  issues in Nigeria and the
Middle East.

Demand for crude in the emerging  markets remains strong despite higher prices,
in  part  due to  government  subsidies.  Additional  Chinese  demand  is  also
generated in areas affected by the recent natural  disasters and by the Olympic
Games in August. Reduced subsidies in the other emerging markets have not had a
significant  impact on reducing overall demand in the region. The demand growth

                                      37
<PAGE>

from non-OECD  countries has not been matched with increases in world crude oil
supply putting pressure on prices.

Investors  continued  to see  oil and  other  commodities  as a  hedge  against
inflation,  and  fluctuations  in the strength of the US dollar  contributed to
crude oil price  volatility.  Interest  rates in the US  decreased  during  the
quarter  whereas  European  rates remained  unchanged  causing the US dollar to
weaken further and provide additional support for rising oil prices.

Geopolitical  risk  continues  to play a role in strong  crude oil  prices.  In
Nigeria, there were several attacks on pipelines and facilities, and production
fell to its lowest  level in a decade.  Nigerian  rebels  have also moved their
targets  offshore,  as the  Shell-operated  deep-water  Bonga oil field shut in
200,000  bbls/d of production  when it was attacked in late June. In the Middle
East,  tensions grew between Israel and Iran,  while in Iraq,  renewed  clashes
between Turkey and Kurdish rebels also supported oil prices.


CRUDE OIL DIFFERENTIALS
In Canada, heavy oil differentials  averaged  US$22.08/bbl (18% of WTI) for the
quarter,  compared to  US$21.85/bbl  in the  previous  quarter (22% of WTI) and
US$20.00/bbl   (31%  of  WTI)  for  the  second  quarter  of  2007.  Heavy  oil
differentials  narrowed  relative to WTI due to greater demand as refineries in
North America are adding coking  capacity to process  heavier crude  qualities.
This  factor is  increasing  the demand  for  Canadian  heavy oil and  bitumen.
Reductions  in supply to the US  market  from  Venezuela  also  contributed  to
increased demand for Canadian heavy oil.

The Brent/WTI  differential  widened during the quarter with Brent trading at a
discount to WTI of US$2.60/bbl  compared to US$1.00/bbl in the previous quarter
and a premium  of  US$3.73/bbl  for the second  quarter of 2007.  Historically,
Brent traded at a discount to WTI because of the transportation  cost to supply
Brent  crude to the US market.  In 2007,  Brent  traded at a premium to WTI for
part of the year as inventories at Cushing were high,  thereby putting downward
pressure on WTI. We anticipated  that this trend would re-emerge in 2008 due to
a weak US economy and strong Asian demand for Brent.  We expected  that Cushing
would  be  well  supplied  and  inventories   would  increase.   This  has  not
materialized  as  backwardation  of the WTI curve has not encouraged  inventory
building.

In the US Gulf Coast, the Mars  differential  narrowed slightly relative to WTI
from the  first  quarter  of 2008  but  remains  wider  than  historic  levels,
averaging  US$6.96/bbl  (6% of WTI) compared to US$6.93/bbl  (7% of WTI) in the
previous  quarter and  US$2.84/bbl  (4% of WTI) in the second  quarter of 2007.
Financial investment in WTI contracts created support for WTI relative to other
crude qualities, including Mars.

The Yemen Masila  differential  widened relative to WTI from the first quarter,
with Masila trading at a discount of US$3.92/bbl compared to US$2.32/bbl in the
previous  quarter and a premium of  US$3.33/bbl  in the second quarter of 2007.
The Masila price remains high  reflecting  strong demand from China,  India and
Thailand.  Masila sales are  typically  priced based on Brent crude oil and the
widening Masila differential to WTI reflects the WTI/Brent differential.


NATURAL GAS REFERENCE PRICES
NYMEX natural gas prices averaged  US$11.48/mmbtu for the quarter,  compared to
US$8.75/mmbtu in the previous quarter and  US$7.66/mmbtu for the second quarter
of 2007. Factors contributing to higher prices include higher crude oil prices,
fewer LNG imports into North America and colder than normal  winter  weather in
US consuming regions.  LNG imports continue to be below the 2007 average due to
stronger  demand  from  markets  such as Japan and  Spain.  Declining  drilling
activity in western  Canada  resulted in fewer exports to the US market.  These
supply  decreases were partially offset by new areas of  unconventional  supply
from sources such as the Barnett Shale in the US. A colder than average  winter
led to  decreasing  storage  levels  compared to  historical  averages.  Upward
pressure  on  natural  gas  prices is likely to remain  until  crude oil prices
decline or the North American natural gas inventories increase.


                                      38
<PAGE>

<TABLE>
<CAPTION>
OPERATING COSTS

                                                                                   Three Months             Six Months
                                                                                   Ended June 30           Ended June 30
(Cdn$/boe)                                                                        2008        2007        2008         2007
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>         <C>         <C>          <C>
Operating costs based on our working interest production before royalties(1)
     Conventional Oil and Gas                                                     9.01        7.76        8.20         7.99
     Synthetic Crude Oil
       Syncrude                                                                  45.09       29.91       40.10        27.00
     Average Oil and Gas                                                         11.89        9.41       10.60         9.54
                                                                              ----------------------------------------------

Operating costs based on our net production after royalties
     Conventional Oil and Gas                                                    10.97        9.50        9.95         9.97
     Synthetic Crude Oil
         Syncrude                                                                54.28       34.54       46.78        30.89
     Average Oil and Gas                                                         14.45       11.48       12.83        11.81
                                                                              ----------------------------------------------
</TABLE>
Note:
(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.

HIGHER OIL AND GAS OPERATING  COSTS DECREASED NET INCOME FOR THE QUARTER BY $43
MILLION
In the UK North Sea,  Buzzard  operating  costs were $4 million higher than the
prior year as a result of  increased  pipeline  transportation  rates driven by
higher commodity prices and from additional maintenance costs. Elsewhere in the
North Sea,  operating costs increased $5 million compared to the second quarter
of 2007. At Scott/Telford,  we incurred  additional diesel costs as a result of
turbine  repairs and we completed  maintenance on our water injection and power
generation facilities.  The increase in operating costs increased our corporate
average by $1.00/boe.

In Yemen,  declining production,  together with higher service rig activity and
maintenance  programs,  increased  the  average  operating  cost per  boe.  Our
corporate unit average cost increased by $0.49/boe and $0.42/boe for Masila and
Block 51, respectively.  Costs in the Gulf of Mexico deep water were higher due
to  workovers  and other  maintenance,  increasing  our  corporate  average  by
$0.09/boe.

In Canada,  operating costs increased our corporate average by $0.13/boe due to
inflationary  pressures and lower  production  rates.  Our heavy oil properties
have higher per unit  operating  costs as many of our costs are fixed in nature
and production is declining.  This has been  partially  offset by CBM operating
costs  which  decreased   slightly  with  less  downhole  activity  and  higher
production.  We expect CBM average unit operating costs will decrease over time
as the wells de-water and gas production continues to increase.

Syncrude  operating  costs  were  higher  by $27  million  from  last  year and
increased our corporate average by $1.21/boe.  The higher costs were the result
of obtaining  additional  third-party  bitumen  supply to upgrade,  unscheduled
maintenance and higher natural gas costs.

US-dollar  denominated  operating  costs were lower when translated to Canadian
dollars as a result of the  weaker US  dollar.  This  decreased  our  corporate
average by $0.80/boe for the quarter.


                                      39
<PAGE>

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

                                                                             Three Months                Six Months
                                                                             Ended June 30             Ended June 30
(Cdn$/boe)                                                                 2008         2007         2008         2007
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>          <C>          <C>          <C>
DD&A based on our working interest production before royalties (1)
     Conventional Oil and Gas                                             14.72        15.28        14.55        15.24
     Synthetic Crude Oil
       Syncrude                                                            6.53         6.79         6.70         6.72
     Average Oil and Gas                                                  14.07        14.65        13.96        14.55
                                                                       ------------------------------------------------

DD&A based on our net production after royalties
     Conventional Oil and Gas                                             17.91        18.71        17.65        19.01
     Synthetic Crude Oil
       Syncrude                                                            7.86         7.84         7.81         7.68
     Average Oil and Gas                                                  17.11        17.86        16.88        18.01
                                                                       ------------------------------------------------
</TABLE>
Note:
(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.

LOWER CONVENTIONAL DD&A INCREASED NET INCOME FOR THE QUARTER BY $32 MILLION
In 2007,  additional drilling and production  experience  increased our reserve
estimates at Buzzard. This reduced the Buzzard depletion rate and decreased our
corporate  unit  depletion  rate by $0.49/boe  compared to the same period last
year.  Buzzard unit  depletion is expected to decrease  further in the next few
years as we anticipate  booking  additional proved reserves.  DD&A on our other
North Sea assets increased our corporate  average by $0.53/boe,  reflecting the
maturity of these fields.

In Yemen,  production  declines,  combined with lower capital expenditures from
drilling fewer development  wells,  decreased our corporate unit depletion rate
by $0.11/boe as compared to the second quarter of 2007. Despite higher realized
oil prices,  lower production  volumes resulted in a slower recovery of capital
costs paid on behalf of the  government  which  reduced  our  carried  interest
amortization.

In  Canada,  our  CBM  projects  in  central  Alberta  continue  to  experience
differences  between  the  timing  of  capital  expenditures  on new  wells and
facilities and the recognition of associated  reserves.  This results in higher
depletion  rates early in the field's life and increased our corporate  average
DD&A rate by $0.26/boe from last year. We expect our depletion rate for our CBM
projects will decline over time as we recognize additional proved reserves as a
result of increasing the estimated  recovery  factor of the gas in place as the
wells de-water and we gain  additional  production  experience.  In the Gulf of
Mexico,  reserve  revisions  at the end of 2007  resulted  in higher  depletion
rates,  increasing  our corporate  average rate by $0.63/boe as compared to the
second quarter of 2007.

The  strengthening  Canadian  dollar  reduced our DD&A expense  relative to the
second  quarter  of 2007 as  depletion  of our  international  and US assets is
denominated in US dollars. This decreased our corporate average by $1.48/boe.


                                      40
<PAGE>

<TABLE>
<CAPTION>
EXPLORATION EXPENSE

                                                                      Three Months               Six Months
                                                                      Ended June 30             Ended June 30
(Cdn$ millions)                                                     2008         2007         2008         2007
----------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>          <C>          <C>          <C>
Seismic                                                               24           50           34           60
Unsuccessful Exploration Drilling                                     51           33           51           54
Other                                                                 26           22           48           40
                                                                ------------------------------------------------
Total Exploration Expense                                            101          105          133          154
                                                                ================================================

New Growth Exploration                                               136           99          320          207
Geological and Geophysical Costs                                      24           50           34           60
                                                                ------------------------------------------------
Total Exploration Expenditures                                       160          149          354          267
                                                                ================================================

Exploration Expense as a % of Exploration Expenditures                63%          70%          38%          58%
                                                                ------------------------------------------------
</TABLE>

LOWER EXPLORATION EXPENSE INCREASED NET INCOME FOR THE QUARTER BY $4 MILLION
Exploration  activity in the quarter  was  primarily  focused in the North Sea,
Norway,  Gulf of Mexico and Canada.  In the North Sea,  we drilled  exploration
wells at Blackbird and Pink.  Blackbird is located 6 km south of Ettrick and if
successful, this prospect could be fast tracked for development given the short
distance to the Ettrick FPSO. We operate both Ettrick and Blackbird and have an
80% working  interest in each.  Pink has been  sidetracked and we are currently
evaluating  the results of this  discovery.  The Pink well is a  candidate  for
co-development  with Golden Eagle. We have a 46% operated  working  interest in
this field.

In Canada,  we  expensed  $30  million for  unsuccessful  exploration  drilling
associated  with our CBM plays in Alberta.  We wrote off costs for a portion of
our Judy Creek and Virginia  Hills CBM wells where we do not expect to continue
development at this time.

We are continuing to assess our  opportunities  in new growth areas and develop
prospects  for our  exploration  drilling  program.  In the Gulf of Mexico,  we
drilled an unsuccessful exploration well at Sapphire resulting in an expense of
$17 million for the  quarter.  Elsewhere  in the Gulf,  drilling  continues  to
progress at our  Fredericksburg  and Cote De Mer  exploration  wells. We expect
results from these wells later this year.

Seismic  acquisition costs were higher than the previous quarter as we obtained
data for future  exploration  activities  on our newly  acquired  blocks in the
Norwegian North Sea.


                                      41
<PAGE>

<TABLE>
<CAPTION>
ENERGY MARKETING

                                                                                 Three Months               Six Months
                                                                                 Ended June 30             Ended June 30
(Cdn$ millions, except as indicated)                                           2008         2007         2008         2007
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>          <C>          <C>          <C>
    Physical Sales (1)                                                       18,281       11,503       32,508       22,401
    Physical Purchases (1)                                                  (18,084)     (11,260)     (31,822)     (21,884)
    Net Financial Transactions (1)                                             (317)          41         (604)          14
    Increase in Fair Market Value of Inventory                                  141            -          150            -
                                                                         --------------------------------------------------
Net Revenue                                                                      21          284          232          531
    Transportation Expense                                                     (166)        (189)        (339)        (409)
    Other                                                                         7            1           12            4
                                                                         --------------------------------------------------
NET MARKETING REVENUE                                                          (138)          96          (95)         126
                                                                         ==================================================

CONTRIBUTION TO NET MARKETING REVENUE BY REGION:
    North America                                                              (123)          71          (78)          92
    Asia                                                                          4            5            8            5
    Europe                                                                      (19)          20          (25)          29
                                                                         --------------------------------------------------
NET MARKETING REVENUE                                                          (138)          96          (95)         126
    Depreciation, Depletion, Amortization and Impairment                         (4)          (3)          (7)          (7)
    General and Administrative                                                  (41)         (23)         (67)         (53)
                                                                         --------------------------------------------------
MARKETING CONTRIBUTION TO INCOME BEFORE INCOME TAXES                           (183)          70         (169)          66
                                                                         ==================================================

NORTH AMERICA
    NATURAL GAS
    Physical Sales Volumes (2) (bcf/d)                                          7.3          4.9          7.0          5.1
    Transportation Capacity (bcf/d)                                             2.0          2.5          2.0          2.5
    Storage Capacity (bcf)                                                     54.2           51         54.2           51
    Financial Volumes (3) (bcf/d)                                              18.8         19.0         22.6         21.9

    CRUDE OIL
    Physical Sales Volumes (2) (mbbls/d)                                        689          650          669          661
    Storage Capacity (mbbls)                                                  2,699        2,554        2,699        2,554
    Financial Volumes (3) (mbbls/d)                                           1,420        2,083        1,416        2,211

    POWER
    Physical Sales Volumes (2) (MW/d)                                         4,612        4,267        4,884        4,407
    Generation Capacity (MW/hr)                                                 177           87          177           87

ASIA
    Physical Sales Volumes (2) (mbbls/d)                                        211          176          208          178
    Financial Volumes (3) (mbbls/d)                                             337          227          302          247

EUROPE
    Financial Volumes (3) (mbbls/d)                                             598          349        1,352          317

VALUE-AT-RISK
    Quarter-end                                                                  31           34           31           34
    High                                                                         40           38           40           38
    Low                                                                          29           24           21           24
    Average                                                                      34           30           32           29
                                                                         -------------------------------------------------
</TABLE>
Notes:
(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.  Physical volumes represent amounts
     delivered during the quarter.
(3)  Financial volumes represent amounts traded during the quarter.


                                      42
<PAGE>

LOWER CONTRIBUTION FROM ENERGY MARKETING DECREASED NET INCOME BY $234 MILLION

Energy   Marketing's  net  income   decreased  from  last  year  due  to  lower
contributions  from North  America and  Europe.  The second  quarter  presented
challenges as strong commodity prices, particularly with North American natural
gas prices, caused normal seasonal pricing relationships to break down.

Our  North  America  natural  gas  team  incurred  financial  losses  on  basis
positions.  Our basis  positions were  generally  designed to take advantage of
narrowing locational price differentials between the western supply regions and
eastern  consuming  markets in North  America.  Two  factors  were  expected to
contribute to narrowing:

     o   gas  injections  into storage would  strengthen  prices in the western
         supply regions including Alberta; and

     o   new pipeline  capacity from the US Rockies would strengthen  prices in
         this  supply  region to bring them in line with other  North  American
         prices.

Strong NYMEX gas prices worked against these  physical gas market  fundamentals
widening out location  differentials in both supply regions.  These losses were
offset, in part, by fair value gains on inventory during the quarter.  In 2007,
we  carried  our  trading  commodity  inventory  at the  lower  of  cost or net
realizable value.

We  recognized  losses on  derivatives  that  hedge our  economic  exposure  on
physical  transportation  and storage contracts that we hold primarily in North
America and to a lesser  extent in Europe.  We are unable to recognize the fair
value gains on these physical  contracts until they are used;  however,  we are
required to carry the derivative  contracts we use to hedge these  positions at
fair value. This hedging strategy creates a mismatch in our income statement by
recognizing  the change in value on the physical  assets in a different  period
than the change in value of the financial instruments hedging the exposure.

For our North America  crude team,  the first quarter saw gains as we were able
to move product  between  markets,  blend different crude qualities and buy and
sell at opportune  times.  We also generated  gains in the first quarter on our
heavy  crude  inventory  as a result  of  narrowing  heavy  oil  differentials.
Although we  continued  to follow  similar  strategies  in the second  quarter,
unseasonably  wider heavy  differentials,  combined with  relatively  expensive
condensate differentials, reduced blending opportunities.

Our European team incurred  losses during the second quarter  compared to gains
in the second quarter of 2007. We suffered losses on our short UK gas positions
and losses from trading Brent spreads.  These were offset, in part, by gains on
our spark spread  strategies.  Strong crude oil prices pulled the entire energy
complex up making normal seasonal strategies less effective.

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.

<TABLE>
<CAPTION>
COMPOSITION OF NET MARKETING REVENUE
                                                     Three Months               Six Months
                                                     Ended June 30             Ended June 30
(Cdn$ millions)                                    2008         2007         2008         2007
-----------------------------------------------------------------------------------------------
<S>                                                <C>          <C>          <C>          <C>
Trading Activities                                 (145)          97         (108)         121
Other Activities                                      7           (1)          13            5
                                               ------------------------------------------------
Net Marketing Revenue                              (138)          96          (95)         126
                                               ================================================
</TABLE>

TRADING ACTIVITIES
In  marketing,  we enter  into  contracts  to  purchase  and sell crude oil and
natural gas. We also use financial and derivative contracts, including futures,
forwards,  swaps and options for hedging and trading  purposes.  We account for
all derivative contracts not designated as hedges for accounting purposes using
fair value  accounting  and record  the change in fair value in  marketing  and
other  income.  The fair value of these  instruments  is included  with amounts
receivable or payable and they are classified as long-term or short-term  based
on their anticipated settlement date.

OTHER 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.

                                      43
<PAGE>

FAIR VALUE OF DERIVATIVE CONTRACTS
Wherever  possible,  the estimated fair value of our derivative  instruments is
based on  quoted  market  prices  and,  if not  available,  on  estimates  from
third-party  brokers.  We  utilize  market  data  or  assumptions  that  market
participants would use in pricing the asset or liability, including assumptions
about risk. Where we have offsetting positions, we utilize a mid-market pricing
convention as a basis for establishing fair value and adjust our pricing to the
highest  price when we have a net open sell  position and the lowest price when
we have a net open buy position.  We also  incorporate  credit risk  associated
with  counterparty  default into our  estimates  of fair value.  Inputs to fair
valuations  may  be  readily  observable,   market-corroborated,  or  generally
unobservable.  We  utilize  valuation  techniques  that  maximize  the  use  of
observable  inputs  wherever  possible  and  minimize  the use of  unobservable
inputs.  To value  longer-term  transactions  and  transactions  in less active
markets for which pricing information is not generally available,  unobservable
inputs may be used.

We  classify  the fair  value of our  derivatives  according  to the  following
hierarchy  based  on  the  amount  of  observable  inputs  used  to  value  the
instruments.

     o   Level 1 - Quoted prices are available in active  markets for identical
         assets or  liabilities  as of the reporting  date.  Active markets are
         those in which transactions  occur in sufficient  frequency and volume
         to provide pricing  information on an ongoing basis. Level 1 primarily
         consists of financial instruments such as exchange-traded  derivatives
         and we use  information  from markets such as the New York  Mercantile
         Exchange and the International Petroleum Exchange.

     o   Level 2 -  Pricing  inputs  are  other  than  quoted  prices in active
         markets  included in Level 1, which are either  directly or indirectly
         observable as of the reported  date.  Level 2 valuations  are based on
         inputs,  including quoted forward prices for commodities,  time value,
         volatility  factors,  and broker quotations,  which can be observed or
         corroborated in the marketplace.  Instruments in this category include
         non-exchange  traded  derivatives  such as  over-the-counter  physical
         forwards and options.  We obtain  information from sources such as the
         Natural   Gas   Exchange,    independent   price    publications   and
         over-the-counter broker quotes.

     o   Level 3 - Valuations  in this level are based on inputs which are less
         observable,  unavailable or where the observable data does not support
         the  majority  of the  instrument's  fair value.  Level 3  instruments
         include longer-term transactions,  transactions in less active markets
         or  transactions  at locations  for which pricing  information  is not
         available. In these instances,  internally developed methodologies are
         used to determine fair value which primarily includes extrapolation of
         observable future prices to similar locations,  similar instruments or
         later time periods.

At June 30,  2008,  the fair value of our  derivative  contracts  in our energy
marketing trading activities totalled a loss of $234 million. These derivatives
economically  hedge our physical  storage and  transportation  contracts  which
cannot be carried at fair value until they are used.  Below is a  breakdown  of
the derivative fair value by valuation method and contract maturity.

<TABLE>
<CAPTION>
(Cdn$ millions)                                                                       MATURITY
------------------------------------------------------------------------------------------------------------------------
                                                         Less than                               Greater than
                                                            1 year    1-3 years     4-5 years         5 years    Total
                                                       -----------------------------------------------------------------
  <S>                                                    <C>           <C>          <C>          <C>             <C>
  Level 1 - Actively Quoted Markets                           (77)           98            (7)              1       15
  Level 2 - Based on Other Observable Pricing Inputs         (212)          (32)            6               -     (238)
  Level 3 - Based on Unobservable Pricing Inputs               (8)           (3)            -               -      (11)
                                                       -----------------------------------------------------------------
Total                                                        (297)          (63)           (1)              1     (234)
                                                       =================================================================
</TABLE>

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

(Cdn$ millions)                                                                                                   Total
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                               <C>
Fair Value at December 31, 2007                                                                                       6
    Change in Fair Value of Contracts                                                                              (262)
    Net Losses (Gains) on Contracts Closed                                                                           34
    Changes in Valuation Techniques and Assumptions (1)                                                             (12)
                                                                                                               ---------
Fair Value at June 30, 2008                                                                                        (234)
                                                                                                               =========
</TABLE>
Note:
(1) Our valuation  methodology  has been applied  consistently  in each period,
    with the  exception of two portfolio  level  reserves that were included in
    the first  quarter of 2008 to account  for a) credit risk  associated  with
    counterparty default and b) liquidity risk in our portfolio.

The fair values of our  derivative  contracts will be realized over time as the
related contracts settle.  Until then, the value of certain contracts will vary
with forward commodity prices and price differentials.  The average term of our
derivative contracts is approximately 1.4 years. Those maturing beyond one year
primarily relate to North American natural gas positions.

                                      44
<PAGE>

CHEMICALS

LOWER CHEMICALS CONTRIBUTION DECREASED NET INCOME BY $11 MILLION
Net sales from Canexus  increased  primarily as North American  sodium chlorate
and  chlor-alkali  sales  volumes  are  higher  year-over-year  by 10% and 13%,
respectively.  The  increase in sales  volumes of  chlor-alkali  was  partially
offset by reduced prices,  while prices for sodium chlorate remained relatively
constant.  Our  operations  in Brazil  remain  strong as a result of  continued
demand from Aracruz Cellulose,  our primary customer.  In Brazil,  chlorate and
chlor-alkali prices increased 4% and 3%, respectively from a year ago. Chlorate
sales  volumes  increased 10% over the same period while  chlor-alkali  volumes
remained constant.

Operating  expenses  increased  from  a  year  ago  due  to  higher  costs  for
electricity and natural gas. Electricity is the most significant operating cost
in producing  sodium chlorate and chlor-alkali  products.  Chemicals net income
includes  foreign exchange gains of $2 million (2007 - gains of $13 million) on
Canexus US-dollar denominated debt.


CORPORATE EXPENSES
<TABLE>
<CAPTION>
GENERAL AND ADMINISTRATIVE (G&A)

                                                                                 Three Months                Six Months
                                                                                 Ended June 30             Ended June 30
(Cdn$ millions)                                                                2008         2007         2008         2007
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>          <C>          <C>          <C>
General and Administrative Expense before Stock-Based Compensation               90           93          186          179
Stock-Based Compensation (1)                                                    328          (55)         287           61
                                                                         --------------------------------------------------
Total General and Administrative Expense                                        418           38          473          240
                                                                         ==================================================
</TABLE>
Note:
(1) Includes expenses relating to the tandem option plan, stock options for our
    US-based employees and stock appreciation rights.

HIGHER G&A COSTS DECREASED QUARTERLY NET INCOME BY $380 MILLION
The  additional  G&A  expense was a result of higher  stock-based  compensation
expenses.  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,  stock-based  compensation  expense was higher as our share price
increased 33% from the end of the first quarter. This compared to a 7% decrease
in our share price in the second quarter of 2007,  which resulted in a recovery
of our stock-based  compensation expense. Cash payments made in connection with
our stock-based compensation programs during the second quarter amounted to $69
million (2007 - $15 million) and year-to-date  payments total $87 million (2007
- $87 million).

<TABLE>
<CAPTION>
INTEREST AND FINANCING COSTS

                                                                                 Three Months                Six Months
                                                                                 Ended June 30             Ended June 30
(Cdn$ millions)                                                                2008         2007         2008         2007
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>          <C>          <C>          <C>
Interest                                                                         75           87          155          173
    Less: Capitalized Interest                                                  (59)         (41)        (112)         (79)
                                                                         --------------------------------------------------
Net Interest Expense                                                             16           46           43           94
                                                                         ==================================================
</TABLE>

LOWER NET INTEREST EXPENSE INCREASED NET INCOME BY $30 MILLION
Our financing  costs  decreased $12 million from the second  quarter of 2007 as
cash  generated  from  operations  was used to  reduce  borrowings  on our debt
facilities. Capitalized interest on our Long Lake development project increased
$13 million  from the same period in 2007.  The  remainder  of the  increase in
capitalized  interest from last year relates to our oil and gas developments at
Ettrick  in the  North  Sea and  Usan,  offshore  West  Africa.  We will  cease
capitalizing  interest  on  Ettrick  and  Long  Lake  Phase  1  once  they  are
substantially  complete,  which is expected  to occur later this year.  Once we
cease capitalizing interest, our net interest expense should increase.


                                      45
<PAGE>

<TABLE>
<CAPTION>
INCOME TAXES

                                                                                 Three Months               Six Months
                                                                                 Ended June 30             Ended June 30
(Cdn$ millions)                                                                2008         2007         2008         2007
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>          <C>          <C>          <C>
Current                                                                         451          151          843          211
Future                                                                         (139)         126          (62)         161
                                                                         --------------------------------------------------
Total Provision for Income Taxes                                                312          277          781          372
                                                                         ==================================================

Effective Tax Rate (%)                                                           45%          43%          44%          43%
                                                                         --------------------------------------------------
</TABLE>

HIGHER TAXES DECREASED NET INCOME BY $35 MILLION,  WHILE THE EFFECTIVE TAX RATE
INCREASED TO 45%
While our effective tax rate  increased to 45% during the second  quarter,  the
total  provision  for income  taxes  increased  $35  million as compared to the
second  quarter  of  2007.  Record  commodity  prices,   combined  with  strong
production  at  Buzzard,  resulted  in  higher  earnings  in the UK  which  are
currently  taxable at 50%. This has been offset by lower  estimated  future tax
liabilities elsewhere.  Our income tax provision also includes current taxes in
Yemen, the United States and Colombia.

<TABLE>
<CAPTION>
OTHER

                                                                                 Three Months               Six Months
                                                                                 Ended June 30             Ended June 30
(Cdn$ millions)                                                                2008         2007         2008         2007
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>          <C>          <C>          <C>
Decrease in Fair Value of Crude Oil Put Options                                 (10)          (4)         (10)         (20)
                                                                         --------------------------------------------------
</TABLE>

During the first  quarter of 2008,  we purchased  put options on  approximately
70,000 bbls/d of our 2009 crude oil production. These options establish a Dated
Brent floor price of  US$60/bbl  on these  volumes,  are settled  annually  and
provide a base level of price protection  without limiting our upside to higher
prices.  The put options were purchased for $14 million and are carried at fair
value.  At June 30,  2008,  the  options  had a fair value of $4 million and we
recorded a loss of $10 million for the change in fair value.  During the second
quarter of 2007,  the  decrease in fair value  includes a loss of $4 million on
crude oil put options purchased in 2006 for our 2007 production.



                                      46
<PAGE>

<TABLE>
<CAPTION>
LIQUIDITY
CAPITAL STRUCTURE

                                                                                                  June 30    December 31
(Cdn$ millions)                                                                                      2008           2007
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                               <C>        <C>
NET DEBT (1)
   Bank Debt                                                                                          197            413
   Senior Notes                                                                                     3,799          3,758
                                                                                         --------------------------------
     Senior Debt                                                                                    3,996          4,171
   Subordinated Debt                                                                                  453            439
                                                                                         --------------------------------
     Total Debt                                                                                     4,449          4,610
   Less: Cash and Cash Equivalents                                                                   (614)          (206)
                                                                                         --------------------------------
TOTAL NET DEBT                                                                                      3,835          4,404
                                                                                         ================================

SHAREHOLDERS' EQUITY (2)                                                                            6,653          5,610
                                                                                         ================================
</TABLE>
Notes:
(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, 2008, there were  530,282,975  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.

NET DEBT

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

<TABLE>
<CAPTION>
(Cdn$ millions)
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                               <C>
Cash Flow from Operating Activities                                                                                2,331
Capital Investment                                                                                                (1,424)
                                                                                                            -------------
   Excess of Cash Flow over Capital Investment                                                                       907

Dividends on Common Shares                                                                                           (40)
Issue of Common Shares                                                                                                40
Foreign Exchange Translation of US-dollar Denominated Debt and Cash                                                 (131)
Long-Term Capital Prepayments                                                                                       (103)
Other                                                                                                               (104)
                                                                                                            -------------
Decrease in Net Debt                                                                                                 569
                                                                                                            =============
</TABLE>

<TABLE>
<CAPTION>
CHANGE IN WORKING CAPITAL

                                                                                     June 30    December 31
(Cdn$ millions)                                                                         2008           2007       Change
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>        <C>               <C>
Cash and Cash Equivalents                                                                614            206          408
Restricted Cash                                                                          263            203           60
Accounts Receivable                                                                    4,909          3,502        1,407
Inventories and Supplies                                                               1,078            659          419
Accounts Payable and Accrued Liabilities                                              (5,749)        (4,135)      (1,614)
Income Taxes Payable                                                                    (730)           (45)        (685)
Other                                                                                     27             22            5
                                                                                -----------------------------------------
Net Working Capital                                                                      412            412            -
                                                                                =========================================
</TABLE>

Our accounts receivable and accounts payable are higher due to a combination of
additional  production volumes and high commodity prices.  Accounts  receivable
and payable for our Energy  Marketing group increased $1,149 million and $1,374
million,  respectively  since the  beginning of the year.  These  increases are
driven by record  commodity  prices  which  have  increased  the  values of our
purchases and sales for both physical and financial contracts. The value of our
commodity  trading  inventory  was  higher  than year end as a result of strong
commodity  prices and higher volumes in storage.  Additionally,  strong Buzzard
production combined with higher commodity prices,  resulted in a higher current
tax provision at the end of the quarter.  Our strong share price  increased the
accrual for our  stock-based  compensation  programs by $158 million since year
end.


                                      47
<PAGE>

OUTLOOK FOR REMAINDER OF 2008

We expect our 2008 full year production to be between 260,000 and 280,000 boe/d
before royalties.  We expect to generate  approximately $4 billion in cash flow
(before  remediation  and geological and geophysical  expenditures)  after cash
taxes of  approximately  $1.2 billion in 2008,  assuming the  following for the
remainder of the year:

-------------------------------------------------------------------------------
WTI (US$/bbl)                                                         90.00 (1)
NYMEX natural gas (US$/mmbtu)                                          8.50 (2)
Oil & Gas and Syncrude Operating Costs (Cdn$/boe)                     11.00
US to Canadian dollar exchange rate                                    0.97
                                                                  -------------

Notes:
(1) The WTI forward  commodity price for the remainder of 2008 at July 16, 2008
    is US$135.75/bbl.
(2) The NYMEX  forward  commodity  price for the  remainder of 2008 at July 16,
    2008 is US$11.70/mmbtu.

We use short-term contracts to sell the majority of our oil and gas production,
exposing us to short-term price movements. A US$1/bbl change in WTI above US$50
increases or  decreases  our 2008 cash flow by  approximately  $40 million ($20
million for the  remainder of the year).  Our exposure to a $0.01 change in the
US to Canadian  dollar  exchange rate increases or decreases our 2008 cash flow
by approximately $40 million ($20 million for the remainder of the year).

We have increased our 2008 capital  investment program by between $600 and $800
million,  depending on program timing. This additional  investment allows us to
accelerate  various  projects  such as shale  gas,  coalbed  methane  (CBM) and
Medicine  Hat shallow gas and provides  Usan with funding for the  remainder of
2008. In our shale gas program, encouraging results have led us to increase our
investment  plans by almost $150 million.  Modifications  to the royalty regime
for  CBM  have  restored  development  economics  and we  have  reinstated  our
investment  program  accordingly.  In the  Medicine  Hat  area of  Alberta  and
Saskatchewan,  we plan to drill,  complete and tie-in approximately 190 shallow
gas wells.  At Usan,  we expect to invest a total of $300 million this year now
that development of the project is underway.  We have also allocated additional
capital to the Masila  field in Yemen  where we plan to drill more  development
wells.  We  expect  these  wells  will  increase  our 2008  exit  rate and 2009
production volumes.

At Ettrick, additional drilling is required later this year to maximize reserve
recoveries,  bringing  our  share  of  total  full-cycle  development  costs to
approximately  $620  million.  Capital  allocated to Long Lake brings the total
Phase 1 investment to the upper end of our previously announced range.

Our future  liquidity  and ability to fund capital  requirements  are generally
dependent upon  operating cash flows.  Given the long cycle time of some of our
development  projects and volatile  commodity  prices, it is not unusual in any
year for capital expenditures to exceed our cash flow. Accordingly, we maintain
significant  undrawn  committed  credit  facilities.  At June 30, 2008,  we had
undrawn,  unsecured  term credit  facilities  of $3.1 billion in place that are
available  until 2012,  of which $229 million were used to support  outstanding
letters  of  credit.  We  also  had  approximately  $656  million  of  undrawn,
uncommitted,  unsecured  credit  facilities,  of which $21 million were used to
support  outstanding letters of credit. In June 2008, we repaid $125 million of
medium-term notes that became due using our cash on hand.

We intend to seek approval from the Toronto Stock  Exchange  (TSX) for a Normal
Course  Issuer Bid.  Subject to approval by the TSX,  this Normal Course Issuer
Bid will allow us to repurchase for  cancellation up to 10% of our public float
of common shares.  10% of our public float amounts to  approximately 53 million
common shares.

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 2007 Annual Report on Form 10-K.
During  2008,  we entered  into  additional  work  commitments  of $490 million
including  non-discretionary capital spending for drilling, seismic, facilities
construction and other development commitments in our international operations.
In  addition,  the  development  of the Usan  field,  offshore  Nigeria has now
commenced.  As a result, we entered into additional work commitments related to
the  development  of the Usan field  totaling $840 million.  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 2007 Annual Report on Form 10-K.  There
have been no significant developments since year end.


                                      48
<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS

CANADIAN PRONOUNCEMENTS
In February  2008,  the Accounting  Standards  Board (AcSB)  confirmed that all
Canadian   publicly   accountable   enterprises   will  be  required  to  adopt
International  Financial  Reporting  Standards  (IFRS) for  interim  and annual
reporting  purposes for fiscal years  beginning on or after January 1, 2011. We
are  currently  assessing the impact of the  convergence  of Canadian GAAP with
IFRS on our  results of  operations,  financial  position  and  disclosures.  A
project team has been set up to manage this transition and to ensure successful
implementation  within the required  timeframe.  We will provide disclosures of
the key  elements of our plan and  progress  on the project as the  information
becomes available during the transition period.

In February 2008, the AcSB issued Section 3064,  GOODWILL AND INTANGIBLE ASSETS
and amended Section 1000,  FINANCIAL STATEMENT CONCEPTS clarifying the criteria
for the  recognition  of assets,  intangible  assets and  internally  developed
intangible assets.  Items that no longer meet the definition of an asset are no
longer  recognized  with assets.  The  standard is  effective  for fiscal years
beginning on or after October 1, 2008 and early  adoption is permitted.  We are
currently  evaluating  the impact  these  sections  will have on our results of
operations or financial position.

US PRONOUNCEMENTS
Effective  December  31,  2006,  we  adopted  the  recognition  and  disclosure
provisions of the Financial  Accounting  Standards Board (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 December 2007, FASB issued Statement 141 (revised),  BUSINESS  COMBINATIONS.
Statement  141  (revised)  establishes   principles  and  requirements  of  the
acquisition  method for business  combinations  and related  disclosures.  This
statement is  effective  for fiscal  years  beginning on or after  December 15,
2008. We do not expect the adoption of this statement to have a material impact
on our results of operations or financial position.

In December  2007,  FASB issued  Statement  160,  NON-CONTROLLING  INTERESTS IN
CONSOLIDATED  FINANCIAL  STATEMENTS,  AN AMENDMENT OF ARB. No51. This statement
clarifies  that a  non-controlling  interest in a  subsidiary  is an  ownership
interest  in the  consolidated  entity that should be reported as equity in the
consolidated financial statements. This statement is effective for fiscal years
beginning on or after  December 15, 2008. We do not expect the adoption of this
statement to have a material  impact on our results of  operations or financial
position.

In  March  2008,  FASB  issued  Statement  161,  DISCLOSURES  ABOUT  DERIVATIVE
INSTRUMENTS  AND HEDGING  ACTIVITIES,  AN AMENDMENT OF FASB  STATEMENT 133. The
statement requires qualitative  disclosures about the objectives and strategies
for using  derivatives,  quantitative  data  about the fair  value of gains and
losses on derivative  contracts and details of  credit-risk-related  contingent
features in their hedged positions.  The statement also requires the disclosure
of the  location  and  amounts  of  derivative  instruments  in  the  financial
statements.  This  statement is effective for fiscal years and interim  periods
beginning on or after  November 15, 2008. We do not expect the adoption of this
statement to have a material  impact on our results of  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
                                                                  2006     |               2007              |       2008
(Cdn$ millions)                                                Sep     Dec |   Mar      Jun      Sep     Dec |    Mar     Jun
---------------------------------------------------------------------------|---------------------------------|----------------
<S>                                                            <C>     <C>   <C>      <C>      <C>      <C>     <C>     <C>
Net Sales                                                      997     920   1,140    1,399    1,446    1,598   1,870   2,071

Net Income                                                     199      77     121      368      403      194     630     380
                                                           -------------------------------------------------------------------

Earnings per Common Share ($/share)
   Basic                                                      0.38    0.15    0.23     0.70     0.77     0.37    1.19    0.72
   Diluted                                                    0.37    0.14    0.22     0.68     0.75     0.36    1.17    0.70
                                                           -------------------------------------------------------------------
</TABLE>


                                      49
<PAGE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain  statements in this report,  including  those appearing in MANAGEMENT'S
DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS,
constitute  "forward-looking  statements"  (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)  or  "forward-looking
information"   (within   the   meaning  of   applicable   Canadian   securities
legislation).   Such  statements  or  information  (together   "forward-looking
statements")  are  generally  identifiable  by the  terminology  used  such  as
"ANTICIPATE",  "BELIEVE",  "INTEND",  "PLAN", "EXPECT",  "ESTIMATE",  "BUDGET",
"OUTLOOK",  "FORECAST" or other similar words, and include statements  relating
to or associated with  individual  wells,  regions or projects.  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 Yemen operations;

o   future  capital  expenditures  and  their  allocation  to  exploration  and
    development activities;

o   future earnings;

o   future asset dispositions;

o   future sources of funding for our capital program;

o   future debt levels;

o   possible commerciality;

o   development plans or capacity expansions;

o   future ability to execute dispositions of assets or businesses;

o   future cash flows and their uses;

o   future drilling of new wells;

o   ultimate recoverability of reserves or resources;

o   expected finding and development costs;

o   expected operating costs;

o   future demand for chemicals products;

o   estimates on a per share basis;

o   sales;

o   future   expenditures  and  future  allowances  relating  to  environmental
    matters;

o   dates by which certain areas will be developed or will come on-stream; and

o   changes in any of the foregoing.

Statements   relating  to  "reserves"  or   "resources"   are   forward-looking
statements,  as they involve the implied  assessment,  based on  estimates  and
assumptions  that the reserves and resources  described exist in the quantities
predicted or estimated, and can be profitably produced in the future.

The  forward-looking  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. Such factors include, among others:

o   market prices for oil and 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 including  changes to taxes or royalties,  changes in
    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.

These 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 2007 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   factors  are
interdependent,  and  management's  future course of action would depend on our
assessment of all information at that time.

Although  we believe  that the  expectations  conveyed  by the  forward-looking
statements are reasonable based on information available to us on the date such

                                      50
<PAGE>

forward-looking  statements  were made, no assurances can be given as to future
results,  levels of activity and  achievements.  Undue  reliance  should not be
placed on the statements contained herein, which are made as of the date hereof
and,  except as required by law, we undertake no obligation to update  publicly
or  revise  any  forward-looking  statements,   whether  as  a  result  of  new
information,   future  events  or  otherwise.  The  forward-looking  statements
contained herein are expressly qualified by this cautionary statement.

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 72 - 74 in our 2007 Annual Report on Form 10-K
has not changed materially since December 31, 2007.


ITEM 4.   CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company's Chief Executive Officer and Chief Financial Officer have designed
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities  Exchange Act of 1934), or caused such disclosure controls
and procedures to be designed under their supervision,  to ensure that material
information relating to the Company is made known to them,  particularly during
the  period  in  which  this  report  is  prepared.  They  have  evaluated  the
effectiveness  of such disclosure  controls and procedures as of the end of the
period covered by this report ("Evaluation  Date"). Based upon that evaluation,
the Chief Executive  Officer and Chief Financial  Officer concluded that, as of
the  Evaluation  Date,  the Company's  disclosure  controls and  procedures are
effective  (i) to ensure that  information  required to be  disclosed  by us in
reports that the Company  files or submits  under the Exchange Act is recorded,
processed,  summarized  and reported  within the time periods  specified in the
Securities  and Exchange  Commission  rules and forms;  and (ii) to ensure that
information  required to be disclosed in the reports that the Company  files or
submits  under  the  Exchange  Act  is  accumulated  and  communicated  to  our
management, including the Company's Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosures.

The  Company's  management,  including  its Chief  Executive  Officer and Chief
Financial Officer,  does not expect that the Company's  disclosure controls and
procedures or internal  controls will prevent all possible error and fraud. The
Company's disclosure controls and procedures are, however,  designed to provide
reasonable  assurance of achieving  their  objectives,  and the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
financial  controls and procedures are effective at that  reasonable  assurance
level.


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  first  half of 2008  that has
materially  affected,  or  is  reasonably  likely  to  materially  affect,  the
Company's internal control over financial reporting.


                                      51
<PAGE>

                                     PART II

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

Our Annual General and Special Meeting of Shareowners  (the "Meeting") was held
on April 29, 2008. 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                        307,207,555          98.56      4,477,672            1.44
     Dennis G. Flanagan                        307,215,147          98.57      4,470,080            1.43
     David A. Hentschel                        307,476,679          98.65      4,208,548            1.35
     S. Barry Jackson                          277,331,186          88.98     34,354,041           11.02
     Kevin J. Jenkins                          277,566,357          89.05     34,118,870           10.95
     A. Anne McLellan, P.C.                    271,264,150          87.03     40,421,077           12.97
     Eric P. Newell, O.C.                      308,072,278          98.84      3,612,949            1.16
     Thomas C. O'Neill                         274,650,148          88.12     37,035,079           11.88
     Francis M. Saville, Q.C.                  272,040,062          87.28     39,645,165           12.72
     Richard M. Thomson, O.C.                  274,944,202          88.21     36,741,025           11.79
     John M. Willson                           277,616,897          89.07     34,068,330           10.93
     Victor J. Zaleschuk                       306,656,006          98.39      5,029,221            1.61
</TABLE>

(b)  The appointment of Deloitte & Touche LLP, Chartered Accountants,  to serve
     as the  independent  auditors  for 2008 was  approved  by a show of hands.
     Proxies of  311,321,683  (99.93%) for and 203,876  (0.07%)  withheld  were
     received.

(c)  The continuation, amendment and restatement of the shareholder rights plan
     was approved by a vote,  conducted by ballot, of 279,072,751  (92.10%) for
     and 23,931,058 (7.90%) against.

(d)  The  shareowner  proposal  on majority  vote for  director  elections  was
     defeated by a vote,  conducted by ballot,  of 49,451,153  (16.32%) for and
     253,551,427 (83.68%) against.


ITEM 6.   EXHIBITS

4.57   Amended and Restated  Shareholder  Rights Plan Agreement dated April 29,
       2008 (filed as Exhibit 4.57 to Form 8-K dated April 30, 2008).

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

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

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

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


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on July 18, 2008.

                                          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)




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