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

                                 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 September 30, 2006

|_|    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
       EXCHANGE ACT OF 1934
       For the transition period from ____________ to ___________

                         COMMISSION FILE NUMBER 1-6702

                              [GRAPHIC OMITTED]

                              [LOGO - NEXEN INC.]


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

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


Indicate  by check  mark  whether  the  registrant  (1) has filed all  reports
required to be filed by Section 13 or 15(d) of the Securities  Exchange Act of
1934 during the  preceding 12 months,  and (2) has been subject to such filing
requirements for the past 90 days.

                   Yes  [X]                 No   [_]

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

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

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

                   Yes  [_]                 No   [X]

On  September  30,  2006,  there were  262,306,663  common  shares  issued and
outstanding.

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

                                   NEXEN INC.
                                     INDEX

PART I FINANCIAL INFORMATION    PAGE

   Item 1.   Unaudited Consolidated Financial Statements ....................3

   Item 2.   Management's Discussion and Analysis of Financial
             Condition and Results of Operations............................28

   Item 3.   Quantitative and Qualitative Disclosures about Market Risk.....47

   Item 4.   Controls and Procedures........................................47

PART II      OTHER INFORMATION

   Item 4.   Submission of Matters to a Vote of Security Holders............48

   Item 6.   Exhibits.......................................................48

This report should be read in  conjunction  with our 2005 Annual Report on Form
10-K,  our quarterly  reports on Form 10-Q for the periods  ending March 31 and
June 30, 2006 and with our current  reports on Form 8-K filed or  furnished  on
February 17, March 22, April 27, June 13, July 5, July 13 and July 20, 2006.


SPECIAL NOTE TO CANADIAN INVESTORS

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

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

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

<TABLE>
<S>          <C>                                     <C>         <C>
/d       =   per day                                 mboe    =   thousand barrels of oil equivalent
bbl      =   barrel                                  mmboe   =   million barrels of oil equivalent
mbbls    =   thousand barrels                        mcf     =   thousand cubic feet
mmbbls   =   million barrels                         mmcf    =   million cubic feet
mmbtu    =   million British thermal units           bcf     =   billion cubic feet
boe      =   barrels of oil equivalent               tcf     =   trillion cubic feet
NGL      =   natural gas liquid                      SAGD    =   steam-assisted gravity drainage
WTI      =   West Texas Intermediate                 CBM     =   coalbed methane
                                                     Gj      =   Gigajoule
</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 September 30, 2006,  the noon-day  exchange rate was US$0.8966 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 Nine Months Ended September 30, 2006 and 2005.............4

Unaudited Consolidated Balance Sheet
as at September 30, 2006 and December 31, 2005..............................5

Unaudited Consolidated Statement of Cash Flows
for the Three and Nine Months Ended September 30, 2006 and 2005.............6

Unaudited Consolidated Statement of Shareholders' Equity
for the Three and Nine Months Ended September 30, 2006 and 2005.............7

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





                                       3
<PAGE>

<TABLE>
<CAPTION>
NEXEN INC.
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30
Cdn$ millions, except per share amounts

                                                                             Three Months                Nine Months
                                                                           Ended September 30        Ended September 30
                                                                             2006       2005          2006         2005
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>       <C>           <C>          <C>
REVENUES AND OTHER INCOME
    Net Sales                                                                 997      1,094         3,016        2,859
    Marketing and Other (Note 15)                                             287         20         1,089          329
    Gain on Dilution of Interest in Chemicals Business (Note 2)                 -        193             -          193
                                                                        -----------------------------------------------
                                                                            1,284      1,307         4,105        3,381
                                                                        -----------------------------------------------
EXPENSES
    Operating                                                                 229        221           702          650
    Depreciation, Depletion, Amortization and Impairment                      244        256           770          748
    Transportation and Other (Note 17)                                        333        197           796          569
    General and Administrative                                                 60        342           385          647
    Exploration                                                                82         32           231          164
    Interest (Note 8)                                                          15         19            35           84
                                                                        -----------------------------------------------
                                                                              963      1,067         2,919        2,862
                                                                        -----------------------------------------------

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                         321        240         1,186          519
                                                                        -----------------------------------------------

PROVISION FOR INCOME TAXES
    Current                                                                   112         95           357          255
    Future (Note 19)                                                           13        (71)          297         (141)
                                                                        -----------------------------------------------
                                                                              125         24           654          114
                                                                        -----------------------------------------------

NET INCOME FROM CONTINUING OPERATIONS
   BEFORE NON-CONTROLLING INTERESTS                                           196        216           532          405
    Net Income Attributable to Non-Controlling Interests                        3          5            12            5
                                                                        -----------------------------------------------

NET INCOME FROM CONTINUING OPERATIONS                                         193        211           520          400
    Net Income from Discontinued Operations (Note 16)                           -        404             -          452
                                                                        -----------------------------------------------

NET INCOME                                                                    193        615           520          852
                                                                        ===============================================

EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS ($/share)
    Basic (Note 13)                                                          0.74       0.81          1.98         1.54
                                                                        ===============================================

    Diluted (Note 13)                                                        0.72       0.79          1.93         1.51
                                                                        ===============================================

EARNINGS PER COMMON SHARE ($/share)
    Basic (Note 13)                                                          0.74       2.36          1.98         3.28
                                                                        ===============================================

    Diluted (Note 13)                                                        0.72       2.30          1.93         3.21
                                                                        ===============================================
</TABLE>

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

                                       4
<PAGE>

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

                                                                                      September 30      December 31
                                                                                              2006             2005
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>              <C>
ASSETS
    CURRENT ASSETS
      Cash and Cash Equivalents                                                                 31               48
      Restricted Cash and Margin Deposits                                                      110               70
      Accounts Receivable (Note 4)                                                           2,667            3,151
      Inventories and Supplies (Note 5)                                                        736              504
      Future Income Tax Assets                                                                 512                -
      Other                                                                                     79               51
                                                                                    --------------------------------
         Total Current Assets                                                                4,135            3,824
                                                                                    --------------------------------

    PROPERTY, PLANT AND EQUIPMENT
      Net of Accumulated Depreciation, Depletion, Amortization and
         Impairment of $5,930 (December 31, 2005 - $5,468) (Note 7)                         10,962            9,594
    FUTURE INCOME TAX ASSETS                                                                   148              410
    DEFERRED CHARGES AND OTHER ASSETS (Note 6)                                                 287              398
    GOODWILL                                                                                   363              364
                                                                                    --------------------------------

                                                                                            15,895           14,590
                                                                                    ================================
LIABILITIES AND SHAREHOLDERS' EQUITY
    CURRENT LIABILITIES
      Short-Term Borrowings (Note 8)                                                           117                -
      Accounts Payable and Accrued Liabilities                                               3,532            3,710
      Accrued Interest Payable                                                                  37               55
      Dividends Payable                                                                         13               13
                                                                                    --------------------------------
         Total Current Liabilities                                                           3,699            3,778
                                                                                    --------------------------------

    LONG-TERM DEBT (Note 8)                                                                  4,075            3,687
    FUTURE INCOME TAX LIABILITIES                                                            2,454            1,960
    ASSET RETIREMENT OBLIGATIONS (Note 9)                                                      644              590
    DEFERRED CREDITS AND OTHER LIABILITIES (Note 10)                                           447              479
    NON-CONTROLLING INTERESTS (Note 2)                                                          80               88

    SHAREHOLDERS' EQUITY
      Common Shares, no par value
        Authorized:       Unlimited
        Outstanding:      2006 - 262,306,663 shares                                            809              732
                          2005 - 261,140,571 shares
      Contributed Surplus                                                                        3                2
      Retained Earnings                                                                      3,916            3,435
      Cumulative Foreign Currency Translation Adjustment                                      (232)            (161)
                                                                                    --------------------------------
         Total Shareholders' Equity                                                          4,496            4,008
                                                                                    --------------------------------

COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 17)                                         15,895           14,590
                                                                                    ================================
</TABLE>

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

                                       5
<PAGE>

<TABLE>
<CAPTION>
NEXEN INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30
Cdn$ millions

                                                                                Three Months               Nine Months
                                                                              Ended September 30       Ended September 30
                                                                               2006         2005         2006        2005
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>          <C>          <C>         <C>
 OPERATING ACTIVITIES
    Net Income from Continuing Operations                                       193          211          520         400
    Net Income from Discontinued Operations                                       -          404            -         452
    Charges and Credits to Income not Involving Cash (Note 14)                  205         (142)       1,168         666
    Exploration Expense                                                          82           32          231         164
    Changes in Non-Cash Working Capital (Note 14)                               212          216          (92)        120
    Other                                                                       (16)         (79)         (43)       (127)
                                                                          ------------------------------------------------
                                                                                676          642        1,784       1,675

FINANCING ACTIVITIES
    Proceeds from (Repayment of) Term Credit Facilities, Net                    136         (329)         551         (67)
    Proceeds from Long-Term Debt                                                  -            -            -       1,253
    Repayment of Long-Term Debt                                                   -         (577)           -      (1,818)
    Proceeds from (Repayment of) Short-Term Borrowings, Net                      37          (48)         122         (99)
    Dividends on Common Shares (Note 12)                                        (13)         (13)         (39)        (39)
    Issue of Common Shares and Exercise of Stock Options                          4           11           41          51
    Net Proceeds from Canexus Initial Public Offering (Note 2)                    -          301            -         301
    Proceeds from Term Credit Facilities of Canexus, Net (Notes 2 and 8)          6          173            4         173
    Other                                                                        (7)         (19)         (21)        (35)
                                                                          ------------------------------------------------
                                                                                163         (501)         658       (280)

INVESTING ACTIVITIES
    Capital Expenditures
      Exploration and Development                                              (844)        (624)      (2,330)     (1,869)
      Proved Property Acquisitions                                               (9)         (15)         (12)        (21)
      Chemicals, Corporate and Other                                            (26)          (9)         (88)        (33)
    Business Acquisitions, Net of Cash Acquired (Note 3)                          -            -          (78)          -
    Proceeds on Disposition of Assets                                             -          904           25         911
    Changes in Restricted Cash and Margin Deposits                              (52)        (210)         (40)       (210)
    Changes in Non-Cash Working Capital (Note 14)                                56          (81)         115         (54)
    Other                                                                       (18)           -          (22)          7
                                                                          ------------------------------------------------
                                                                               (893)         (35)      (2,430)     (1,269)


EFFECT OF EXCHANGE RATE CHANGES ON CASH
    AND CASH EQUIVALENTS                                                         (1)          (8)         (29)          1
                                                                          ------------------------------------------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                (55)          98          (17)        127

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                                  86          102           48          73
                                                                          ------------------------------------------------

CASH AND CASH EQUIVALENTS - END OF PERIOD                                        31          200           31         200
                                                                          ================================================
</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 NINE MONTHS ENDED SEPTEMBER 30
Cdn$ millions

                                                                                 Three Months               Nine Months
                                                                              Ended September 30        Ended September 30
                                                                               2006        2005          2006        2005
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>         <C>           <C>         <C>
COMMON SHARES
    Balance at Beginning of Period                                              799          694          732         637
    Issue of Common Shares                                                        2            4           28          24
    Exercise of Stock Options                                                     2            7           13          27
    Previously Recognized Liability Relating to Stock Options Exercised           6           14           36          31
                                                                           -----------------------------------------------
    Balance at End of Period                                                    809          719          809         719
                                                                           ===============================================

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

RETAINED EARNINGS
    Balance at Beginning of Period                                            3,736        2,546        3,435       2,335
    Net Income                                                                  193          615          520         852
    Dividends on Common Shares (Note 12)                                        (13)         (13)         (39)        (39)
                                                                           -----------------------------------------------
    Balance at End of Period                                                  3,916        3,148        3,916       3,148
                                                                           ===============================================

CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT
    Balance at Beginning of Period                                             (230)         (82)        (161)       (105)
    Translation Adjustment, Net of Income Taxes                                  (2)        (101)         (71)        (78)
                                                                           -----------------------------------------------
    Balance at End of Period                                                   (232)        (183)        (232)       (183)
                                                                           ===============================================
</TABLE>

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.





                                      7
<PAGE>

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

1.   ACCOUNTING POLICIES

Our Unaudited Consolidated Financial Statements are prepared in accordance with
Canadian  Generally  Accepted  Accounting  Principles  (GAAP).  The  impact  of
significant  differences  between  Canadian and United  States (US) GAAP on the
Unaudited  Consolidated  Financial  Statements  is disclosed in Note 21. 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 September 30, 2006 and
the results of our  operations and our cash flows for the three and nine months
ended September 30, 2006 and 2005.

We make estimates and  assumptions  that affect the reported  amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the Unaudited Consolidated  Financial Statements,  and revenues and expenses
during the reporting period. Our management reviews these estimates,  including
those  related to  accruals,  litigation,  environmental  and asset  retirement
obligations,  income taxes and determination of proved reserves,  on an ongoing
basis.  Changes in facts and  circumstances may result in revised estimates and
actual results may differ from these  estimates.  The results of operations and
cash  flows for the three and nine  months  ended  September  30,  2006 are not
necessarily  indicative  of the  results  of  operations  or cash  flows  to be
expected for the year ending December 31, 2006.

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

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

2.   CANEXUS INCOME FUND

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

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

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

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

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

                                       8
<PAGE>

Our interest in Canexus LP is greater than 50%. As a result,  we have the right
to  nominate a majority  of the  members of the board of Canexus  Limited,  the
corporation with  responsibility  for the strategic  management and operational
decisions of Canexus and Canexus LP. Nexen has nominated two representatives to
the  10-member  board of  Canexus  Limited.  Since we have  retained  effective
control of our chemicals business, the results,  assets and liabilities of this
business  have been  included  in these  financial  statements.  The  non-Nexen
ownership  interests in our  chemicals  business  are shown as  non-controlling
interests.

During the three and nine month  periods  ended  September 30, 2006, $7 million
and $21 million respectively, of distributions were paid to non-Nexen ownership
interests.

3.   BUSINESS ACQUISITIONS

We  completed  minor  business  acquisitions  in the  first  half of  2006  for
consideration of $78 million,  net of cash acquired.  These  acquisitions  were
accounted for using the purchase method of accounting and we recorded  goodwill
of $12 million.

<TABLE>
<CAPTION>
4.   ACCOUNTS RECEIVABLE

                                                                      September 30     December 31
(Cdn$ millions)                                                               2006            2005
---------------------------------------------------------------------------------------------------
<S>                                                                          <C>             <C>
Trade
    Marketing                                                                2,029           2,400
    Oil and Gas                                                                537             614
    Chemicals and Other                                                         53              48
                                                                     ------------------------------
                                                                             2,619           3,062
Non-Trade                                                                       58              96
                                                                     ------------------------------
                                                                             2,677           3,158
Allowance for Doubtful Accounts                                                (10)             (7)
                                                                     ------------------------------
Total                                                                        2,667           3,151
                                                                     ==============================
5.   INVENTORIES AND SUPPLIES

                                                                      September 30     December 31
(Cdn$ millions)                                                               2006            2005
---------------------------------------------------------------------------------------------------
Finished Products
    Marketing                                                                  549            320
    Oil and Gas                                                                  3             11
    Chemicals and Other                                                         13             15
                                                                     ------------------------------
                                                                               565             346
Work in Process                                                                  5               6
Field Supplies                                                                 166            152
                                                                     ------------------------------
Total                                                                          736            504
                                                                     ==============================
6.       DEFERRED CHARGES AND OTHER ASSETS

                                                                      September 30     December 31
(Cdn$ millions)                                                               2006            2005
---------------------------------------------------------------------------------------------------
Long-Term Marketing Derivative Contracts (Note 11)                             124            232
Deferred Financing Costs                                                        60             63
Crude Oil Put Options (Note 11)                                                 25              4
Asset Retirement Remediation Fund (Note 9)                                      13             14
Other                                                                           65             85
                                                                     ------------------------------
Total                                                                          287             398
                                                                     ==============================
</TABLE>

                                       9
<PAGE>

7.   SUSPENDED WELL COSTS

The following  table shows the changes in  capitalized  exploratory  well costs
included in property,  plant and  equipment  during the nine month period ended
September 30, 2006 and the year ended  December 31, 2005,  and does not include
amounts that were initially  capitalized and subsequently  expensed in the same
period.

<TABLE>
<CAPTION>
                                                                      September 30     December 31
(Cdn$ millions)                                                               2006            2005
---------------------------------------------------------------------------------------------------
<S>                                                                            <C>             <C>
Balance at Beginning of Period                                                 252             116
    Additions to Capitalized Exploratory Well Costs Pending the
      Determination of Proved Reserves                                         198             174
    Capitalized Exploratory Well Costs Charged to Expense                      (34)            (27)
    Transfers to Wells, Facilities and Equipment Based on
      Determination of Proved Reserves                                          (8)             (3)
    Effects of Foreign Exchange                                                (10)             (8)
                                                                     ------------------------------
Balance at End of Period                                                       398             252
                                                                     ==============================
</TABLE>

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

<TABLE>
<CAPTION>
                                                                      September 30     December 31
(Cdn$ millions)                                                               2006            2005
---------------------------------------------------------------------------------------------------
<S>                                                                            <C>            <C>
    Capitalized for a Period of One Year or Less                               248            165
    Capitalized for a Period of Greater than One Year                          150             87
                                                                     ------------------------------
Balance at End of Period                                                       398            252
                                                                     ==============================
Number of Projects that have Exploratory Well Costs Capitalized
    for a Period Greater than One Year                                           6              3
                                                                     ------------------------------
</TABLE>

As at September 30, 2006, we have exploratory costs that have been capitalized
for more than one year relating to our interest in an exploratory block,
offshore Nigeria ($79 million), our interests in three exploratory blocks in
the Gulf of Mexico ($49 million), our coalbed methane exploratory activities in
Canada ($15 million) and an exploratory block in the North Sea ($7 million).
Exploratory costs offshore Nigeria were first capitalized in 1998 and we have
subsequently drilled a further seven successful wells on the block. The joint
venture partners have finalized pre-development design studies and have
submitted a field development plan for government approval. When final
regulatory approvals are received and the project has been sanctioned, we will
book proved reserves. We have capitalized costs related to successful wells
drilled in 2004, 2005 and 2006 in the Gulf of Mexico, and in Canada, we have
capitalized exploratory costs relating to our coalbed methane projects. We have
additional drilling activities planned for our exploratory block in the North
Sea. We are continuing to assess all of these wells and projects, and we are
working with our partners to prepare development plans.

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

                                                                      September 30     December 31
(Cdn$ millions)                                                               2006            2005
---------------------------------------------------------------------------------------------------
<S>                                                                           <C>             <C>
Canexus LP Term Credit Facilities (US$151 million drawn)                       168             171
Term Credit Facilities (US$475 million drawn)                                  530               -
Debentures, due 2006 (1)                                                        91              93
Medium-Term Notes, due 2007                                                    150             150
Medium-Term Notes, due 2008                                                    125             125
Notes, due 2013 (US$500 million)                                               558             583
Notes, due 2015 (US$250 million)                                               279             292
Notes, due 2028 (US$200 million)                                               223             233
Notes, due 2032 (US$500 million)                                               558             583
Notes, due 2035 (US$790 million)                                               880             921
Subordinated Debentures, due 2043 (US$460 million)                             513             536
                                                                    -------------------------------
                                                                             4,075           3,687
                                                                    ===============================
</TABLE>
Note:
(1) Includes $50 million of principal that was effectively converted through a
    currency exchange contract to US$37 million.

                                      10
<PAGE>

<TABLE>
<CAPTION>
(a)  INTEREST EXPENSE

                                                         Three Months             Nine Months
                                                       Ended September 30       Ended September 30
(Cdn$ millions)                                        2006         2005         2006        2005
--------------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>         <C>         <C>
Long-Term Debt                                           72           65          199         197
Other                                                     5            3           15          12
                                                   -----------------------------------------------
                                                         77           68          214         209
   Less: Capitalized                                    (62)         (49)        (179)       (125)
                                                   -----------------------------------------------
Total                                                    15           19           35          84
                                                   ===============================================
</TABLE>

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

(b)  SHORT-TERM BORROWINGS

Nexen has  uncommitted,  unsecured  credit  facilities  of  approximately  $631
million,  $117 million of which was drawn at September  30, 2006  (December 31,
2005 - nil). We have also utilized $149 million of these  facilities to support
outstanding  letters of credit at September 30, 2006  (December 31, 2005 - $468
million).  Interest is payable at floating rates. The weighted average interest
rate on our short-term borrowings was 5.5% for the three months ended September
30, 2006 (2005 - 3.9%) and 5.3% for the nine months  ended  September  30, 2006
(2005- 3.4%).

(c)  TERM CREDIT FACILITIES

At September 30, 2006, we had committed,  unsecured  term credit  facilities of
$3.4  billion,  which are  available  to 2011.  At September  30, 2006,  US$475
million ($530 million) was drawn on these facilities (December 31, 2005 - nil).
Borrowings are available as Canadian bankers'  acceptances,  LIBOR-based loans,
Canadian  prime loans,  US-dollar  base rate loans or British  pound  call-rate
loans.  Interest is payable  monthly at floating  rates.  The weighted  average
interest rate on our term credit facilities was 5.8% for the three months ended
September  30, 2006 (2005 - 3.8%) and 5.7% for the nine months ended  September
30, 2006 (2005 - 3.7%). At September 30, 2006, $199 million of these facilities
were  utilized to support  outstanding  letters of credit  (December 31, 2005 -
$250 million).

9.   ASSET RETIREMENT OBLIGATIONS

Changes in carrying amounts of the asset retirement obligations associated with
our property,  plant and equipment for the nine months ended September 30, 2006
and the year ended December 31, 2005, are as follows:

<TABLE>
<CAPTION>
                                                                  September 30      December 31
(Cdn$ millions)                                                           2006             2005
------------------------------------------------------------------------------------------------
<S>                                                                        <C>              <C>
Balance at Beginning of Period                                             611              468
    Obligations Assumed with Development Activities                         53               72
    Obligations Discharged with Disposed Properties                         (2)             (37)
    Expenditures Made on Asset Retirements                                 (25)             (34)
    Accretion                                                               28               26
    Revisions to Estimates                                                  (2)             138
    Effects of Foreign Exchange                                              2              (22)
                                                                 -------------------------------
Balance at End of Period (1,2)                                             665              611
                                                                 ===============================
</TABLE>
Notes:
(1) Obligations due within 12 months of $21 million (December 31, 2005 - $21
    million) have been included in accounts payable and accrued liabilities.
(2) Obligations relating to our oil and gas activities amount to $616 million
    (December 31, 2005 - $564 million) and obligations relating to our chemicals
    business amount to $49 million (December 31, 2005 - $47 million).


Our total estimated  undiscounted asset retirement obligations amount to $1,627
million  (December 31, 2005 - $1,471  million).  We have  discounted  the total
estimated   asset   retirement    obligations    using   a    weighted-average,
credit-adjusted  risk-free rate of 5.7%.  Approximately $74 million included in
our asset retirement  obligations will be settled over the next five years. The
remaining  obligations  settle  beyond  five years and will be funded by future
cash flows from our operations.

In connection with the sale of our chemicals business in 2005 to Canexus LP, we
contributed  $14  million to a  remediation  fund which is being used for asset
retirement  obligations  associated with the assets sold. We have included this
on our  Unaudited  Consolidated  Balance  Sheet as  deferred  charges and other
assets.

We own  interests  in assets for which the fair  value of the asset  retirement
obligations  cannot be reasonably  determined because the assets currently have
an indeterminate life and we cannot determine when remediation activities would

                                      11
<PAGE>

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, at present, the
Syncrude  plant can  continue  to run  indefinitely  with  ongoing  maintenance
activities. The retirement obligations for these assets will be recorded in the
first year in which the lives of the assets are determinable.

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

                                                                    September 30    December 31
(Cdn$ millions)                                                             2006           2005
------------------------------------------------------------------------------------------------
<S>                                                                         <C>            <C>
Deferred Transportation                                                       99             87
Long-Term Marketing Derivative Contracts (Note 11)                            93            124
Fixed-Price Natural Gas Contracts (Note 11)                                   80            128
Capital Lease Obligations                                                     45              9
Defined Benefit Pension Obligations                                           44             39
Stock-Based Compensation Liability                                            42             53
Other                                                                         44             39
                                                                   -----------------------------
Total                                                                        447            479
                                                                   =============================
</TABLE>

11.  DERIVATIVE INSTRUMENTS AND FINANCIAL RISK MANAGEMENT

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

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

<TABLE>
<CAPTION>
(Cdn$ millions)                                   SEPTEMBER 30, 2006                      DECEMBER 31, 2005
----------------------------------------------------------------------------   --------------------------------
                                          Carrying      Fair   Unrecognized    Carrying    Fair   Unrecognized
                                             Value     Value    Gain/(Loss)       Value   Value    Gain/(Loss)
                                          ----------------------------------   --------------------------------
<S>                                       <C>          <C>     <C>             <C>        <C>     <C>
Commodity Price Risk
    Non-Trading Activities
      Crude Oil Put Options                     25        25              -           4       4            -
      Fixed Price Natural Gas Contracts       (101)     (101)             -        (175)   (175)           -
      Natural Gas Swaps                        (13)      (13)             -          29      29            -

    Trading Activities
      Crude Oil and Natural Gas                284       284              -         161     161            -
      Future Sale of Gas Inventory               -        85             85           -     (35)         (35)

Foreign Currency Risk
    Non-Trading Activities                      10        10              -          14      14            -
    Trading Activities                           -         -              -           8       8            -
                                          ----------------------------------   --------------------------------
Total Derivatives                              205       290             85          41       6          (35)
                                          ==================================   ================================

Financial Assets and Liabilities
      Long-Term Debt                        (4,075)   (4,156)           (81)     (3,687) (3,863)        (176)
                                          ==================================   ================================
</TABLE>

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

(b)  COMMODITY PRICE RISK MANAGEMENT

NON-TRADING ACTIVITIES

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

CRUDE OIL PUT OPTIONS
In 2006,  we  purchased  WTI crude oil put  options  to provide a base level of
price protection  without  limiting our upside to higher prices.  These options
establish  an annual  average WTI floor price of  US$50/bbl  in 2007 on 105,000
bbls/d  at a cost of $26  million.  In 2004,  we  purchased  WTI  crude oil put
options to manage the  commodity  price risk  exposure  of a portion of our oil

                                      12
<PAGE>

production in 2005 and 2006.  These options  established  an annual average WTI
floor  price  of  US$43/bbl  in 2005  and  US$38/bbl  in 2006 at a cost of $144
million. The 2005 WTI crude oil put options were not used and have expired. The
2006 and 2007 WTI crude oil put options are stated at fair value on our balance
sheet.  Any  change in fair value is  included  in  marketing  and other on the
Unaudited Consolidated Statement of Income.

<TABLE>
<CAPTION>
                                     Notional                         Average            Fair
                                      Volumes         Term              Price           Value
----------------------------------------------------------------------------------------------
                                     (bbls/d)                        (US$/bbl) (Cdn$ millions)
<S>                                   <C>             <C>                  <C>             <C>
WTI Crude Oil Put Options              30,000         2006                 39               -
                                       20,000         2006                 38               -
                                       10,000         2006                 36               -
                                      105,000         2007                 50              25
                                                                               ---------------
                                                                                           25
                                                                               ===============
</TABLE>

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

<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     2006 - 2007     2.28 - 2.47             (21)
                                       15,514     2007 - 2010     2.47 - 2.77             (80)
                                                                               ---------------
                                                                                         (101)
                                                                               ===============
</TABLE>

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

<TABLE>
<CAPTION>
                                     Notional                         Average            Fair
                                      Volumes            Term           Price           Value
----------------------------------------------------------------------------------------------
                                       (Gj/d)                           ($/Gj) (Cdn$ millions)
<S>                                    <C>        <C>            <C>                      <C>
Natural Gas Swaps                      15,514     2006 - 2007    9.17 - 10.59              (9)
                                       15,514     2007 - 2010            7.60              (4)
                                                                               ---------------
                                                                                          (13)
                                                                               ===============
</TABLE>

TRADING ACTIVITIES

CRUDE OIL AND NATURAL GAS
We enter  into  physical  purchase  and sales  contracts  as well as  financial
commodity  contracts to enhance our price realizations and lock in our margins.
The physical and  financial  commodity  contracts  (derivative  contracts)  are
stated at market value. The $284 million fair value of the derivative contracts
at September 30, 2006 is included in the Unaudited  Consolidated  Balance Sheet
and any change is included in marketing and other in the Unaudited Consolidated
Statement of Income.

FUTURE SALE OF GAS INVENTORY
We have certain NYMEX futures  contracts and swaps in place,  which effectively
lock in our margins on the future sale of our natural gas inventory in storage.
We have designated, in writing, some of these derivative contracts as cash flow
hedges of the future  sale of our  storage  inventory.  As a result,  gains and
losses on these  designated  futures  contracts and swaps are recognized in net
income when the  inventory  in storage is sold.  The  principal  terms of these
outstanding contracts and the unrecognized gains at September 30, 2006 are:

<TABLE>
<CAPTION>
                                         Hedged                            Average     Unrecognized
                                        Volumes              Month           Price             Gain
----------------------------------------------------------------------------------------------------
                                        (mmbtu)                         (US$/mmbtu)  (Cdn$ millions)
<S>                                  <C>              <C>                    <C>                 <C>
NYMEX Natural Gas Futures            27,190,000       January 2007           10.61               85
                                                                                    ----------------
                                                                                                 85
                                                                                    ================
</TABLE>

                                      13
<PAGE>

(c)  FOREIGN CURRENCY EXCHANGE RATE RISK MANAGEMENT

NON-TRADING ACTIVITIES

<TABLE>
<CAPTION>
                                                                                                       Fair
                                                          Amount           Term          Rate         Value
--------------------------------------------------------------------------------------------------------------
                                                                                 (for US$1.00) (Cdn$ millions)
<S>                                            <C>                  <C>                 <C>              <C>
Foreign Currency Call Options - Buzzard (i)    (pound)24 million           2006          2.00             -
Canadian Dollar Call Options - Canexus (ii)         US$5 million    2006 - 2007          0.85             1
Foreign Currency Swap (iii)                        US$37 million           2006         0.736             9
                                                                                               ---------------
                                                                                                         10
                                                                                               ===============
</TABLE>

(i)  FOREIGN CURRENCY CALL OPTIONS - BUZZARD
Our  Buzzard  development  project in the North Sea  creates  foreign  currency
exposure as a portion of the capital costs are  denominated  in British  pounds
and Euros. To reduce our exposure to fluctuations in these currencies  relative
to the US dollar,  we purchased  foreign  currency  call options in early 2005,
which  effectively set a ceiling on most of our British pound and Euro spending
exposure  from March 2005 through to the end of 2006.  Any change in fair value
is included in marketing and other in the Unaudited  Consolidated  Statement of
Income.

(ii) CANADIAN DOLLAR CALL OPTIONS - CANEXUS
The operations of Canexus are exposed to changes in the US-dollar exchange rate
as a portion of its sales are  denominated in US dollars.  Canexus LP purchased
Canadian  dollar call options to reduce this  exposure to  fluctuations  in the
Canadian-US dollar exchange rate. Canexus LP has the right to sell US$5 million
monthly and  purchase  Canadian  dollars at an exchange  rate of US$0.85  until
January  2007.  Any change in fair value is included in marketing  and other in
the Unaudited Consolidated Statement of Income.

(iii)    FOREIGN CURRENCY SWAP
We occasionally  use derivative  instruments to effectively  convert cash flows
from  Canadian to US dollars and vice versa.  At September  30, 2006, we held a
foreign currency  derivative  instrument that obligates us and the counterparty
to exchange principal and interest amounts. In November 2006, we will pay US$37
million and  receive  Cdn$50  million.  Any change in fair value is included in
marketing and other in the Unaudited Consolidated Statement of Income.

TRADING ACTIVITIES

Our sales and purchases of crude oil and natural gas are  generally  transacted
in or  referenced  to the US  dollar,  as are most of the  financial  commodity
contracts used by our marketing group. We enter into forward  contracts to sell
US dollars.  When  combined  with certain  commodity  sales  contracts,  either
physical or financial,  these forward contracts allow us to lock in our margins
on the  future  sale of crude oil and  natural  gas.  The fair  value of our US
dollar  forward  contracts  (September  30,  2006 - $nil)  is  included  in the
Unaudited  Consolidated  Balance Sheet. Any change in fair value is included in
marketing and other in the Unaudited Consolidated Statement of Income.




                                       14
<PAGE>

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

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

<TABLE>
<CAPTION>
                                                                                     September 30    December 31
(Cdn$ millions)                                                                              2006           2005
-----------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>            <C>
Accounts Receivable                                                                           718            382
Deferred Charges and Other Assets (1)                                                         124            232
                                                                                    -----------------------------
    Total Derivative Contract Assets                                                          842            614
                                                                                    =============================

Accounts Payable and Accrued Liabilities                                                      465            321
Deferred Credits and Other Liabilities (1)                                                     93            124
                                                                                    -----------------------------
    Total Derivative Contract Liabilities                                                     558            445
                                                                                    =============================

    Total Derivative Contract Net Assets (2)                                                  284            169
                                                                                    =============================
</TABLE>
Notes:
(1)  These  derivative  contracts  settle  beyond 12 months and are  considered
     non-current.
(2)  Comprised  of $284  million  (2005 - $161  million)  related to  commodity
     contracts  and $nil  (2005 - $8  million)  related  to  US-dollar  forward
     contracts and swaps.

Our  exchange-traded   derivative  contracts  are  subject  to  margin  deposit
requirements.  We have margin  deposits of (pound)10  million ($22  million) at
September  30,  2006  (December  31, 2005 - nil),  which have been  included in
restricted  cash and margin  deposits  on our  Unaudited  Consolidated  Balance
Sheet.

12.  SHAREHOLDERS' EQUITY DIVIDENDS

Dividends  per common share for the three months ended  September 30, 2006 were
$0.05 (2005 - $0.05).  Dividends  per common  share for the nine  months  ended
September 30, 2006 were $0.15 (2005 - $0.15).

13.  EARNINGS PER COMMON SHARE

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

<TABLE>
<CAPTION>
                                                                        Three Months              Nine Months
                                                                     Ended September 30        Ended September 30
(millions of shares)                                                  2006         2005         2006        2005
-----------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>          <C>          <C>         <C>
Weighted-Average Number of Common Shares Outstanding                 262.3        260.6        262.0       260.1
Shares Issuable Pursuant to Stock Options                             13.6         12.9         14.1        13.8
Notional Shares to be Purchased from Proceeds of Stock Options        (7.1)        (6.4)        (7.2)       (8.6)
                                                                   ----------------------------------------------
Weighted-Average Number of Diluted Common Shares Outstanding         268.8        267.1        268.9       265.3
                                                                   ==============================================
</TABLE>

In calculating the weighted-average number of diluted common shares outstanding
for the three and nine months ended  September  30, 2006 and 2005,  all options
were included because their exercise price was less than the quarterly  average
common  share  market  price  in the  period.  During  the  periods  presented,
outstanding stock options were the only potentially dilutive instruments.



                                      15
<PAGE>

14.  CASH FLOWS

<TABLE>
<CAPTION>
(a)  CHARGES AND CREDITS TO INCOME NOT INVOLVING CASH

                                                                        Three Months              Nine Months
                                                                      Ended September 30       Ended September 30
(Cdn$ millions)                                                        2006        2005         2006        2005
-----------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>         <C>          <C>         <C>
Depreciation, Depletion, Amortization and Impairment                    244         256          770         748
Stock-Based Compensation                                                (59)        227           50         390
Provision for Future Income Taxes (Note 19)                              13         (71)         297        (141)
Change in Fair Value of Crude Oil Put Options                             5           1            6         184
Non-Cash Items included in Discontinued Operations                        -        (381)           -        (325)
Gain on Dilution of Interest in Chemicals Business                        -        (193)           -        (193)
Net Income Attributable to Non-Controlling Interests                      3           5           12          5
Other                                                                    (1)         14           33          (2)
                                                                   ----------------------------------------------
Total                                                                   205        (142)       1,168         666
                                                                   ==============================================
(b)      CHANGES IN NON-CASH WORKING CAPITAL

                                                                         Three Months             Nine Months
                                                                      Ended September 30       Ended September 30
(Cdn$ millions)                                                        2006        2005         2006        2005
-----------------------------------------------------------------------------------------------------------------
   Accounts Receivable                                                 (280)       (639)         557        (817)
   Inventories and Supplies                                              11          35         (247)       (174)
   Other Current Assets                                                 (50)        (26)         (29)        (15)
   Accounts Payable and Accrued Liabilities                             603         783         (240)      1,067
   Accrued Interest Payable                                             (16)        (18)         (18)          5
                                                                   ----------------------------------------------
Total                                                                   268         135           23          66
                                                                   ==============================================

Relating to:
   Operating Activities                                                 212         216          (92)        120
   Investing Activities                                                  56         (81)         115         (54)
                                                                   ----------------------------------------------
Total                                                                   268          135          23          66
                                                                   ==============================================
(c)  OTHER CASH FLOW INFORMATION

                                                                         Three Months             Nine Months
                                                                      Ended September 30       Ended September 30
(Cdn$ millions)                                                        2006        2005         2006        2005
-----------------------------------------------------------------------------------------------------------------
Interest Paid                                                            87          80          217         190
Income Taxes Paid                                                       109          96          317         248
                                                                   ----------------------------------------------

15.  MARKETING AND OTHER

                                                                        Three Months              Nine Months
                                                                      Ended September 30       Ended September 30
(Cdn$ millions)                                                        2006        2005         2006        2005
---------------------------------------------------------------------------------------- ------------------------
Marketing Revenue, Net                                                  229          25          959         467
Change in Fair Value of Crude Oil Put Options                            (5)         (1)          (6)       (184)
Interest                                                                  8           4           27          22
Foreign Exchange Gains (Losses)                                          (1)        (27)         (49)          1
Business Interruption Insurance Proceeds                                 50           -          124           -
Other                                                                     6          19           34          23
                                                                   ----------------------------------------------
Total                                                                   287          20        1,089         329
                                                                   ===================== ========================
</TABLE>

                                      16
<PAGE>

16.  DISCONTINUED OPERATIONS

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

<TABLE>
<CAPTION>
                                                                        Three Months               Nine Months
                                                                     Ended September 30        Ended September 30
(Cdn$ millions, except per share amounts)                             2006         2005         2006        2005
-----------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>          <C>         <C>
Revenues and Other Income
    Net Sales                                                            -           27            -         154
    Gain on Disposition of Assets                                        -          225            -         225
                                                                -------------------------------------------------
                                                                         -          252            -         379
Expenses
    Operating                                                            -            4            -          27
    Depreciation, Depletion, Amortization and Impairment                 -            -            -          28
    Exploration Expense                                                  -            -            -           1
                                                                -------------------------------------------------
Income before Income Taxes                                               -          248            -         323
    Provision for Future Income Taxes                                    -         (156)           -        (129)
                                                                -------------------------------------------------
Net Income from Discontinued Operations                                  -          404            -         452
                                                                =================================================

Earnings Per Common Share ($/share)
   Basic (Note 13)                                                       -         1.55            -        1.74
                                                                =================================================
   Diluted (Note 13)                                                     -         1.51            -        1.70
                                                                =================================================
</TABLE>


17.  COMMITMENTS, CONTINGENCIES AND GUARANTEES

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

In June 2003, a subsidiary of  Occidental  Petroleum  Corporation  (Occidental)
initiated an arbitration  against us at the International  Court of Arbitration
of the  International  Chamber of  Commerce  (ICC Court)  regarding  an Area of
Mutual  Interest  agreement  relating  to certain  portions  of Block 51 in the
Republic of Yemen. In April 2006, the ICC Court released its tribunal's partial
award that held we were obliged to offer Occidental the right to acquire 50% of
our interest in those areas and that we breached that obligation. The result of
this award is that Occidental is entitled to monetary damages. The ICC tribunal
did not  determine  the amount of damages  due to  Occidental  in this  partial
award.  These damages will be  determined  at the  conclusion of the second and
final phase of the arbitration  which will likely occur in late 2007.  Based on
ongoing  analysis  and  discussions  with  Occidental,  we have  accrued  other
expenses  of  $134  million  with  respect  to  this  arbitration.  The  amount
ultimately paid may differ from this accrual.


                                      17
<PAGE>

18.  PENSION AND OTHER POST RETIREMENT BENEFITS

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

<TABLE>
<CAPTION>
                                                                        Three Months               Nine Months
                                                                     Ended September 30        Ended September 30
(Cdn$ millions)                                                       2006         2005         2006        2005
-----------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>          <C>         <C>
Nexen
    Cost of Benefits Earned by Employees                                 4            4           12          10
    Interest Cost on Benefits Earned                                     3            3            9          10
    Expected Return on Plan Assets                                      (3)          (3)          (9)         (8)
    Net Amortization and Deferral                                        1            -            3           1
                                                                  -----------------------------------------------
    Net Pension Expense                                                  5            4           15          13
                                                                  -----------------------------------------------

Canexus
    Cost of Benefits Earned by Employees                                 1            -            3           -
    Interest Cost on Benefits Earned                                     1            -            3           -
    Expected Return on Plan Assets                                      (1)           -           (3)          -
    Net Amortization and Deferral                                        -            -            -           -
                                                                  -----------------------------------------------
    Net Pension Expense                                                  1            -            3           -
                                                                  -----------------------------------------------

Syncrude
    Cost of Benefits Earned by Employees                                 1            1            3           3
    Interest Cost on Benefits Earned                                     1            1            3           4
    Expected Return on Plan Assets                                      (1)          (1)          (3)         (3)
    Net Amortization and Deferral                                        1            -            3           -
                                                                  -----------------------------------------------
    Net Pension Expense                                                  2            1            6           4
                                                                  -----------------------------------------------
Total                                                                    8            5           24          17
                                                                  ===============================================
</TABLE>

(b)  EMPLOYER FUNDING CONTRIBUTIONS

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


19.  PROVISION FOR FUTURE INCOME TAXES

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



                                      18
<PAGE>

20.  OPERATING SEGMENTS AND RELATED INFORMATION

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2006

                                                                                                             Corporate
                                                                                                                   and
(Cdn$ millions)                                       Oil and Gas                      Syncrude(1)  Chemicals    Other    Total
--------------------------------------------------------------------------------------------------------------------------------
                                                                       Other
                                                United    United   Countries
                               Yemen   Canada   States   Kingdom         (2) Marketing
                              ---------------------------------------------------------
<S>                            <C>      <C>    <C>       <C>         <C>      <C>         <C>         <C>       <C>       <C>
 Net Sales                       337      118    154       104        41         12         130         101         -       997
 Marketing and Other               2        1     51 (3)     2         -        229           -           -        2 (4)   287
                              --------------------------------------------------------------------------------------------------
                                 339      119    205       106        41        241         130         101         2    1,284
 Less: Expenses
  Operating                       36       35     27        21         2          6          42          60         -      229
  Depreciation, Depletion,
    Amortization and
     Impairment                   80       40     51        43         3          2           8          10         7      244
  Transportation and Other         1       11      -         -         -        173           3          11       134 (6)  333
  General and Administrative (5)  (3)       6      1         -         7         18           -           7        24       60
  Exploration                      1        4     63         5         9 (7)      -           -           -         -       82
  Interest                         -        -      -         -         -          -           -           3        12       15
                              --------------------------------------------------------------------------------------------------
 Income (Loss) from
    Continuing Operations
     before Income Taxes         224       23     63        37        20         42          77          10      (175)      321
                              ===========================================================================================
 Less: Provision for Income
  Taxes (8)                                                                                                                 125
 Less: Non-Controlling
  Interests                                                                                                                   3
                                                                                                                         ------
 Net Income                                                                                                                 193
                                                                                                                         ======

 Identifiable Assets             539    3,601  1,539     5,029       185      3,030 (9)   1,199         461       312    15,895
                              ==================================================================================================

 Capital Expenditures
  Development and Other           35      362    131       131         7          9          17           4        13       709
  Exploration                     13       89     43        10         6          -           -           -         -       161
  Proved Property Acquisitions     -        9      -         -         -          -           -           -         -         9
                              --------------------------------------------------------------------------------------------------
                                  48      460    174       141        13          9          17           4        13       879
                              ==================================================================================================

 Property, Plant and Equipment
  Cost                         2,282    4,825  2,646     4,292       210        219       1,306         836       276    16,892
  Less: Accumulated DD&A       2,003    1,403  1,243       358        73         44         179         483       144     5,930
                              --------------------------------------------------------------------------------------------------
 Net Book Value                  279    3,422  1,403     3,934       137        175       1,127         353       132    10,962
                              ==================================================================================================

Notes:
(1)  Syncrude is considered a mining operation for US reporting  purposes.  Property,  plant and equipment at September 30,
     2006 include mineral rights of $6 million.
(2)  Includes results of operations from producing activities in Colombia.
(3)  Includes $50 million of business interruption insurance proceeds related to production losses caused by Gulf of Mexico
     hurricanes in 2005.
(4)  Includes interest income of $8 million,  foreign exchange losses of $1 million and decrease in the fair value of crude
     oil put options of $5 million.
(5)  Includes stock-based compensation expense recovery of $14 million.
(6)  Includes $134 million accrual with respect to the Block 51 arbitration (see Note 17).
(7)  Includes exploration activities primarily in Nigeria and Colombia.
(8)  Includes Yemen cash taxes of $76 million.
(9)  Approximately 85% of Marketing's identifiable assets are accounts receivable and inventories.
</TABLE>

                                      19
<PAGE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2006

                                                                                                             Corporate
                                                                                                                   and
(Cdn$ millions)                                       Oil and Gas                      Syncrude(1)  Chemicals    Other    Total
--------------------------------------------------------------------------------------------------------------------------------
                                                                       Other
                                                United    United   Countries
                               Yemen   Canada   States   Kingdom         (2) Marketing
                              ---------------------------------------------------------
<S>                            <C>      <C>    <C>       <C>         <C>      <C>         <C>         <C>       <C>       <C>
 Net Sales                     1,029      351    496       372       108         26         328         306         -     3,016
 Marketing and Other               6        7     51 (3)    81 (4)     1        959           -          12       (28) (5)1,089
                              --------------------------------------------------------------------------------------------------
                               1,035      358    547       453       109        985         328         318       (28)    4,105
 Less: Expenses
  Operating                      110      103     79        63         5         18         139         185         -       702
  Depreciation, Depletion,
    Amortization and
     Impairment                  248      115    155       168         8          6          19          30        21       770
  Transportation and Other         4       22      -         -         -        591          14          31       134 (6)   796
  General and Administrative (7)  11       56     46         6        32         93           -          20       121       385
  Exploration                      1       18    140        33        39 (8)      -           -           -         -       231
  Interest                         -        -      -         -         -          -           -           8        27        35
                              --------------------------------------------------------------------------------------------------
 Income (Loss) from
    Continuing Operations
     before Income Taxes         661       44    127       183        25        277         156          44      (331)    1,186
                              ===========================================================================================
 Less: Provision for Income
  Taxes  (9), (10)                                                                                                          654
 Less: Non-Controlling
  Interests                                                                                                                  12
                                                                                                                         ------
 Net Income                                                                                                                 520
                                                                                                                         ======

 Identifiable Assets             539    3,601  1,539     5,029       185      3,030 (11)  1,199         461       312    15,895
                              ==================================================================================================

 Capital Expenditures
  Development and Other          110      996    275       410        20         44          74          14        30     1,973
  Exploration                     28      206    155        35        21          -           -           -         -       445
  Proved Property Acquisitions     -       11      -         1         -          -           -           -         -        12
                              --------------------------------------------------------------------------------------------------
                                 138    1,213    430       446        41         44          74          14        30     2,430
                              ==================================================================================================

 Property, Plant and Equipment
  Cost                         2,282    4,825  2,646     4,292       210        219       1,306         836       276    16,892
  Less: Accumulated DD&A       2,003    1,403  1,243       358        73         44         179         483       144     5,930
                              --------------------------------------------------------------------------------------------------
 Net Book Value                  279    3,422  1,403     3,934       137        175       1,127         353       132    10,962
                              ==================================================================================================

Notes:
(1)  Syncrude is considered a mining operation for US reporting  purposes.  Property,  plant and equipment at September 30,
     2006 include mineral rights of $6 million.
(2)  Includes results of operations from producing activities in Colombia.
(3)  Includes $50 million of business interruption insurance proceeds related to production losses caused by Gulf of Mexico
     hurricanes in 2005.
(4)  Includes $74 million of business interruption insurance proceeds for generator failures in 2005.
(5)  Includes  interest  income of $27 million,  foreign  exchange  losses of $49 million and decrease in the fair value of
     crude oil put options of $6 million.
(6)  Includes $134 million accrual with respect to the Block 51 arbitration (see Note 17).
(7)  Includes stock-based compensation expense of $139 million.
(8)  Includes exploration activities primarily in Nigeria and Colombia.
(9)  Includes Yemen cash taxes of $224 million.
(10) Includes future income tax expense of $277 million related to an increase in the  supplemental tax rate on oil and gas
     activities in the United Kingdom (see Note 19).
(11) Approximately 85% of Marketing's identifiable assets are accounts receivable and inventories.
</TABLE>

                                       20
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2005

                                                                                                             Corporate
                                                                                                                   and
(Cdn$ millions)                                       Oil and Gas                      Syncrude(1)  Chemicals    Other    Total
--------------------------------------------------------------------------------------------------------------------------------
                                                                       Other
                                                United    United   Countries
                               Yemen   Canada   States   Kingdom         (2) Marketing
                              ---------------------------------------------------------
<S>                            <C>      <C>    <C>       <C>         <C>      <C>         <C>         <C>       <C>       <C>
 Net Sales                       417      136    212        69        29          6         124         101         -     1,094
 Marketing and Other               3        -      -         1         -         25           -          15       (24) (3)   20
 Gain on Dilution of Interest
   in Chemicals Business           -        -      -         -         -          -           -         193          -      193
                              --------------------------------------------------------------------------------------------------
                                 420      136    212        70        29         31         124         309       (24)    1,307
 Less: Expenses
  Operating                       36       29     25        23         1          8          37          62         -       221
  Depreciation, Depletion,
    Amortization and
     Impairment                  107       35     57        33         2          3           4           9         6       256
  Transportation and Other         2        6      -         -         -        143           5          10        31       197
  General and Administrative (4)   1       39     34         -        70         39           -          12       147       342
  Exploration                      2        4     10         3        13 (5)      -           -           -         -        32
  Interest                         -        -      -         -         -          -           -           1        18        19
                              --------------------------------------------------------------------------------------------------
 Income (Loss) from
    Continuing Operations
     before Income Taxes         272       23     86        11       (57)      (162)         78         215      (226)      240
                              ==========================================================================================
 Less: Provision for Income
  Taxes  (6)                                                                                                                 24
 Less: Non Controlling
 Interests                                                                                                                    5
 Add:  Net Income from
  Discontinued Operations                                                                                                   404
                                                                                                                         ------
 Net Income                                                                                                                 615
                                                                                                                         ======

 Identifiable Assets             670    2,103  1,362     4,684       239      3,123 (7)   1,067         491        256   13,995
                              ==================================================================================================

 Capital Expenditures
  Development and Other           53      221     28       131         3          1          55           5         3       500
  Exploration                     11       26     46        35        15          -           -           -         -       133
  Proved Property Acquisitions     -       15      -         -         -          -           -           -         -        15
                              --------------------------------------------------------------------------------------------------
                                  64      262     74       166        18          1          55           5         3       648
                              ==================================================================================================

 Property, Plant and Equipment
  Cost                         2,174    3,254  2,308     3,838       252        168       1,179         821       232    14,226
  Less: Accumulated DD&A       1,737    1,279  1,106       120       116         69         168         447       116     5,158
                              --------------------------------------------------------------------------------------------------
 Net Book Value                  437    1,975  1,202     3,718       136         99       1,011         374       116     9,068
                              ==================================================================================================

Notes:
(1)  Syncrude is considered a mining operation for US reporting  purposes.  Property,  plant and equipment at September 30,
     2005 include mineral rights of $6 million.
(2)  Includes results of operations from producing activities in Nigeria and Colombia.
(3)  Includes  interest income of $4 million,  foreign  exchange  losses of $27 million,  and decrease in the fair value of
     crude oil put options of $1 million.
(4)  Includes stock based compensation expense of $260 million.
(5)  Includes exploration activities primarily in Nigeria, Colombia and Equatorial Guinea.
(6)  Includes Yemen cash taxes of $93 million.
(7)  Approximately 80% of marketing's identifiable assets are accounts receivable and inventories.
</TABLE>

                                       21
<PAGE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2005

                                                                                                             Corporate
                                                                                                                   and
(Cdn$ millions)                                       Oil and Gas                      Syncrude(1)  Chemicals    Other    Total
--------------------------------------------------------------------------------------------------------------------------------
                                                                       Other
                                                United    United   Countries
                               Yemen   Canada   States   Kingdom         (2) Marketing
                              ---------------------------------------------------------
<S>                            <C>      <C>    <C>       <C>         <C>      <C>         <C>         <C>       <C>       <C>
 Net Sales                     1,025      316    593       242        78         16         292         297         -     2,859
 Marketing and Other               6        2      -         1         4        467           -          16       (167) (3) 329
 Gain on Dilution of Interest
 in Chemicals Business             -        -      -         -         -          -           -         193          -      193
                              --------------------------------------------------------------------------------------------------
                               1,031      318    593       243        82        483         292         506      (167)    3,381
 Less: Expenses
  Operating                      109       85     69        76         7         20         110         174         -       650
  Depreciation, Depletion,
    Amortization and
     Impairment                  256      105    182       115        11          8          13          42 (4)    16       748
  Transportation and Other         4       17      -         -         -        461          13          30        44       569
  General and Administrative(5)    3       93     71         -       117         72           -          39       252       647
  Exploration                      5       15     83        18        43 (6)      -           -           -         -       164
  Interest                         -        -      -         -         -          -           -           1        83        84
                              --------------------------------------------------------------------------------------------------
 Income (Loss) from
    Continuing Operations
     before Income Taxes         654        3    188        34       (96)       (78)        156         220      (562)      519
                              ===========================================================================================
 Less: Provision for Income
  Taxes (7)                                                                                                                 114
 Less: Non Controlling
 Interest                                                                                                                     5
 Add: Net Income from
  Discontinued Operations                                                                                                   452
                                                                                                                         ------
 Net Income                                                                                                                 852
                                                                                                                         ======

 Identifiable Assets             670    2,103  1,362     4,684       239      3,123 (8)   1,067         491       256    13,995
                              ==================================================================================================

 Capital Expenditures
  Development and Other          184      651     95       423        10         14         149           9        10     1,545
  Exploration                     27       53    178        51        48          -           -           -         -       357
  Proved Property Acquisitions     -       17      3         1         -          -           -           -         -        21
                              --------------------------------------------------------------------------------------------------
                                 211      721    276       475        58         14         149           9        10     1,923
                              ==================================================================================================

 Property, Plant and Equipment
  Cost                         2,174    3,254  2,308     3,838       252        168       1,179         821       232    14,226
  Less: Accumulated DD&A       1,737    1,279  1,106       120       116         69         168         447       116     5,158
                              --------------------------------------------------------------------------------------------------
 Net Book Value                  437    1,975  1,202     3,718       136         99       1,011         374       116     9,068
                              ==================================================================================================

Notes:
(1)  Syncrude is considered a mining operation for US reporting  purposes.  Property,  plant and equipment at September 30,
     2005 include mineral rights of $6 million.
(2)  Includes results of operations from producing activities in Nigeria and Colombia.
(3)  Includes interest income of $22 million, foreign exchange gains of $1 million, decrease in the fair value of crude oil
     put options of $184 million and decrease in the fair value of foreign currency options of $6 million.
(4)  Includes impairment charge of $12 million related to the closure of our sodium chlorate plant in Amherstburg, Ontario.
(5)  Includes stock-based compensation expense of $450 million.
(6)  Includes exploration activities primarily in Nigeria, Colombia and Equatorial Guinea.
(7)  Includes Yemen cash taxes of $222 million.
(8)  Approximately 80% of marketing's identifiable assets are accounts receivable and inventories.
</TABLE>

                                       22
<PAGE>

21.  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 NINE MONTHS ENDED SEPTEMBER 30

                                                                              Three Months              Nine Months
                                                                           Ended September 30        Ended September 30
(Cdn$ millions, except per share amounts)                                  2006          2005         2006         2005
------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>          <C>           <C>          <C>
REVENUES AND OTHER INCOME
    Net Sales                                                               997        1,094         3,016        2,859
    Marketing and Other (ii)                                                298           12         1,111          321
    Gain on Dilution of Interest in Chemicals Business                        -          193             -          193
                                                                      --------------------------------------------------
                                                                          1,295        1,299         4,127        3,373
                                                                      --------------------------------------------------
EXPENSES
    Operating (iv)                                                          231          222           708          655
    Depreciation, Depletion, Amortization and Impairment (i)                244          265           770          777
    Transportation and Other                                                333          197           796          569
    General and Administrative (viii)                                        69          342           412          647
    Exploration                                                              82           32           231          164
    Interest                                                                 15           19            35           84
                                                                      --------------------------------------------------
                                                                            974        1,077         2,952        2,896
                                                                      --------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                       321          222         1,175          477
                                                                      --------------------------------------------------

PROVISION FOR INCOME TAXES
    Current                                                                 112           95           357          255
    Deferred (ii); (iv); (viii); (ix)                                       290          (74)          294         (145)
                                                                      --------------------------------------------------
                                                                            402           21           651          110
                                                                      --------------------------------------------------

NET INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE NON-CONTROLLING
INTERESTS                                                                   (81)         201           524          367
    Net Income Attributable to Non-Controlling Interests                      3            5            12            5
                                                                      --------------------------------------------------

NET INCOME (LOSS) FROM CONTINUING OPERATIONS                                (84)         196           512          362
    Net Income from Discontinued Operations                                   -          404             -          452
                                                                      --------------------------------------------------

NET INCOME (LOSS) - US GAAP (1)                                             (84)         600           512          814
                                                                      ==================================================
EARNINGS (LOSS) PER COMMON SHARE ($/share)
    Basic (Note 13)
      Net Income (Loss) from Continuing Operations                        (0.33)        0.75          1.95         1.39
      Net Income from Discontinued Operations                                 -         1.55             -         1.74
                                                                      --------------------------------------------------
                                                                          (0.33)        2.30          1.95         3.13
                                                                      ==================================================
    Diluted (Note 13)
      Net Income (Loss) from Continuing Operations                        (0.33)        0.74          1.91         1.36
      Net Income from Discontinued Operations                                 -         1.51             -         1.70
                                                                      --------------------------------------------------
                                                                          (0.33)        2.25          1.91         3.06
                                                                      ==================================================
</TABLE>
Note:
(1) RECONCILIATION OF CANADIAN AND US GAAP NET INCOME

<TABLE>
<CAPTION>
                                                                                Three Months             Nine Months
                                                                                    Ended                   Ended
                                                                                September 30             September 30
(Cdn$ millions)                                                               2006        2005         2006       2005
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>         <C>          <C>        <C>
      Net Income - Canadian GAAP                                               193         615          520        852
      Impact of US Principles, Net of Income Taxes:
        Depreciation, Depletion, Amortization and Impairment (i)                 -          (9)           -        (29)
        Ineffective Portion of Cash Flow Hedges (ii)                             7          (5)          14         (5)
        Liability-Based Stock Compensation Plans (viii)                         (6)          -          (18)         -
        Deferred Income Taxes (ix)                                            (277)          -            -          -
        Other (iv)                                                              (1)         (1)          (4)        (4)
                                                                       ------------------------------------------------
      Net Income (Loss) - US GAAP                                              (84)        600          512        814
                                                                       ================================================
</TABLE>

                                      23
<PAGE>

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

                                                                              September 30     December 31
(Cdn$ millions, except share amounts)                                                 2006            2005
-----------------------------------------------------------------------------------------------------------
<S>                                                                                <C>               <C>
ASSETS
    CURRENT ASSETS
      Cash and Cash Equivalents                                                        31                48
      Restricted Cash and Margin Deposits                                             110                70
      Accounts Receivable (ii)                                                      2,752             3,151
      Inventories and Supplies                                                        736               504
      Deferred Income Tax Assets                                                      512                 -
      Other                                                                            79                51
                                                                            --------------------------------
        Total Current Assets                                                        4,220             3,824
                                                                            --------------------------------

    PROPERTY, PLANT AND EQUIPMENT
      Net of Accumulated Depreciation, Depletion, Amortization and
         Impairment of $6,323 (December 31, 2005 - $5,861) (iv); (vii)             10,912             9,550
    DEFERRED INCOME TAX ASSETS (ix)                                                   157               410
    DEFERRED CHARGES AND OTHER ASSETS (v); (vi)                                       236               345
    GOODWILL                                                                          363               364
                                                                            --------------------------------
                                                                                   15,888            14,493
                                                                            ================================

LIABILITIES AND SHAREHOLDERS' EQUITY
    CURRENT LIABILITIES
      Short Term Borrowings                                                           117                 -
      Accounts Payable and Accrued Liabilities (ii); (viii)                         3,559             3,745
      Accrued Interest Payable                                                         37                55
      Dividends Payable                                                                13                13
                                                                            --------------------------------
        Total Current Liabilities                                                   3,726             3,813
                                                                            --------------------------------

    LONG-TERM DEBT (v)                                                              4,020             3,630
    DEFERRED INCOME TAX LIABILITIES (i) - (ix)                                      2,438             1,906
    ASSET RETIREMENT OBLIGATIONS                                                      644               590
    DEFERRED CREDITS AND LIABILITIES (vi)                                             473               505
    NON-CONTROLLING INTERESTS                                                          80                88
    SHAREHOLDERS' EQUITY
      Common Shares, no par value
        Authorized:   Unlimited
        Outstanding:  2006   - 262,306,663 shares
                      2005   - 261,140,571 shares                                     809               732
      Contributed Surplus                                                               3                 2
      Retained Earnings (ii); (iv); (viii); (ix)                                    3,891             3,418
      Accumulated Other Comprehensive Income (AOCI) (ii); (iii); (vi)                (196)             (191)
                                                                            --------------------------------
          Total Shareholders' Equity                                                4,507             3,961
                                                                            --------------------------------
    COMMITMENTS, CONTINGENCIES AND GUARANTEES
                                                                                   15,888            14,493
                                                                            ================================
</TABLE>
(c)  UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - US GAAP
     FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30

<TABLE>
<CAPTION>
                                                                    Three Months                Nine Months
                                                                 Ended September 30          Ended September 30
(Cdn$ millions)                                                    2006       2005            2006       2005
--------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>        <C>             <C>        <C>
Net Income (Loss) - US GAAP                                         (84)       600             512        814
Other Comprehensive Income, Net of Income Taxes:
    Translation Adjustment (iii)                                     (6)      (101)            (71)       (78)
    Unrealized Mark-to-Market Gains (Losses) (ii)                    46        (71)             66        (78)
                                                            --------------------------------------------------
Comprehensive Income (Loss)                                         (44)       428             507        658
                                                            ==================================================
</TABLE>

                                      24
<PAGE>

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

                                                                                   September 30    December 31
(Cdn$ millions)                                                                            2006           2005
---------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>             <C>
Translation Adjustment (iii)                                                              (232)           (161)
Unrealized Mark-to-Market Gains (Losses) - Cash Flow Hedges (ii)                            50             (16)
Minimum Pension Liability Adjustment (vi)                                                  (14)            (14)
                                                                                -------------------------------
Accumulated Other Comprehensive Income (AOCI)                                             (196)           (191)
                                                                                ===============================
</TABLE>
NOTES:
i.     Under US GAAP,  the liability  method of accounting for income taxes was
       adopted in 1993. In Canada, the liability method was adopted in 2000. In
       1997,  we  acquired  certain  oil and gas assets and the amount paid for
       these assets differed from the tax basis acquired.  Under US principles,
       this  difference  was  recorded  as a  deferred  tax  liability  with an
       increase  to  property,  plant  and  equipment  rather  than a charge to
       retained  earnings.  As a result,  additional  depreciation,  depletion,
       amortization  and impairment  expense of $10 million and $20 million was
       included in net income for the three and nine months ended September 30,
       2005 respectively. The difference was fully amortized during 2005.

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

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

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

       At September  30, 2006,  gains of $85 million were  included in accounts
       receivable with respect to futures  contracts and swaps we used to hedge
       commodity  price  risk  on the  future  sale  of our  gas  inventory  as
       described in Note 11. Gains of $74 million ($50  million,  net of income
       taxes) related to the effective portion have been deferred in AOCI until
       the underlying gas inventory is sold.  These gains will be  reclassified
       to marketing and other as the contracts  settle over the next 12 months.
       The ineffective portion of the gains of $11 million ($7 million,  net of
       income taxes) was recognized in net income during the quarter.

       FAIR VALUE HEDGES
       Both  the  derivative  instrument  and  the  underlying  commitment  are
       recognized on the balance sheet at their fair value.  The change in fair
       value of both is  reflected in  earnings.  At September  30, 2006 and at
       December 31, 2005, we had no fair value hedges in place.

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

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

       o   operating expenses include  pre-operating costs of $2 million and $6
           million  for the three and nine months  ended  September  30,  2006,
           respectively ($1 million and $4 million, respectively, net of income
           taxes) (2005 - $1 million and $5 million,  respectively  ($1 million
           and $4 million, respectively, net of income taxes)); and

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

v.     Under US GAAP, discounts on long-term debt are classified as a reduction
       of  long-term  debt rather than as  deferred  charges and other  assets.
       Discounts  of  $55  million  (December  31,  2005  - $57  million)  were
       re-classed and included in long-term debt.

                                      25
<PAGE>

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

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

viii.  Under Canadian  principles,  we record  obligations for  liability-based
       stock compensation plans using the intrinsic-value method of accounting.
       Under US principles,  obligations for liability-based stock compensation
       plans are  recorded  using the  fair-value  method of  accounting.  As a
       result, general and administrative expense is higher under US GAAP by $9
       million and $27 million  for the three and nine months  ended  September
       30, 2006, respectively ($6 million and $18 million, respectively, net of
       income  taxes) and accounts  payable and accrued  liabilities  is higher
       under US GAAP by $27 million as at September 30, 2006.

ix.    Under US GAAP,  enacted tax rates are used to calculate  deferred income
       taxes,  whereas under  Canadian  GAAP,  substantively  enacted rates are
       used. During the first quarter of 2006, the UK government  substantively
       enacted  increases to the  supplementary  tax on oil and gas  activities
       from 10% to 20%,  effective January 1, 2006. This created a $277 million
       future  income  tax  expense  during  the first  quarter  of 2006  under
       Canadian GAAP. During the third quarter,  the UK government  enacted the
       revised tax rates and we recognized the $277 million deferred income tax
       expense during the three months ended  September 30, 2006 in our US GAAP
       net income.


(e)  STOCK-BASED COMPENSATION

CHANGE IN ACCOUNTING POLICY - US GAAP

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

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

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

The impact of adopting  Statement  123(R) on our  results for the three  months
ended September 30, 2006 is as follows:

<TABLE>
<CAPTION>
                                                                        Prior to adoption    After adoption    Increase /
(Cdn$ millions, except per share amounts)                                 of FAS 123(R)       of FAS 123(R)    (Decrease)
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                 <C>             <C>
Income from Continuing Operations before Income Taxes - US GAAP                  330                 321              (9)
Net Loss- US GAAP                                                                (78)                (84)             (6)
Basic Loss per Common Share - US GAAP ($/share)                                (0.30)              (0.33)          (0.03)
Diluted Loss per Common Share - US GAAP ($/share)                              (0.30)              (0.33)          (0.03)
                                                                        --------------------------------------------------

The impact of adopting Statement 123(R) on our results for the nine months
ended September 30, 2006 is as follows:

                                                                        Prior to adoption    After adoption    Increase /
(Cdn$ millions, except per share amounts)                                 of FAS 123(R)       of FAS 123(R)    (Decrease)
--------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Income Taxes - US GAAP                1,202               1,175             (27)
Net Income - US GAAP                                                             530                 512             (18)
Basic Earnings per Common Share - US GAAP ($/share)                             2.02                1.95           (0.07)
Diluted Earnings per Common Share - US GAAP ($/share)                           1.97                1.91           (0.06)
                                                                        --------------------------------------------------
</TABLE>

                                      26
<PAGE>

We   recognize   stock-based   compensation   expense   for  our   retired  and
retirement-eligible  employees over an accelerated vesting period in accordance
with the  provisions  of Statement  123(R) for  stock-based  awards  granted to
employees after December 31, 2005. For stock-based  awards granted prior to the
adoption of Statement 123(R),  stock-based compensation expense for our retired
and  retirement-eligible  employees is recognized over a graded vesting period.
If we  applied  the  accelerated  vesting  provisions  of  Statement  123(R) to
stock-based  awards  granted to our retired and  retirement-eligible  employees
prior to the adoption of Statement 123(R), our stock-based compensation expense
would  decrease by $9 million for the three  months  ended  September  30, 2006
(2005 - increase by $6 million)  and decrease by $5 million for the nine months
ended September 30, 2006 (2005 - increase by $11 million).

NEW ACCOUNTING PRONOUNCEMENTS

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

In July 2006,  FASB issued FIN 48 ACCOUNTING  FOR  UNCERTAINTY  IN INCOME TAXES
with respect to FAS 109  ACCOUNTING FOR INCOME TAXES  regarding  accounting for
and  disclosure of uncertain tax  positions.  This guidance seeks to reduce the
diversity in practice  associated  with certain  aspects of the recognition and
measurement  related to accounting  for income taxes.  This  interpretation  is
effective for fiscal years  beginning  after December 15, 2006. We have not yet
determined  the  impact  this  interpretation  will  have on our  results  from
operations or financial position.

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

In September 2006, FASB issued Statement 158, EMPLOYERS' ACCOUNTING FOR DEFINED
BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS, AN AMENDMENT OF FASB STATEMENTS
NO. 87, 88, 106,  AND 132(R).  Statement  158 requires an employer to recognize
the over-funded or under-funded status of a defined benefit postretirement plan
on the balance sheet as an asset or liability  and to recognize  changes in the
funded  status  through  comprehensive  income.  This  statement  also requires
measurement  of the funded status of a plan as of the balance  sheet date.  The
recognition and  disclosures  under Statement 158 are required for fiscal years
ending after December 15, 2006 while the new measurement  date is effective for
fiscal years ending 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.


                                      27
<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 21 TO THE UNAUDITED  CONSOLIDATED
FINANCIAL STATEMENTS. THE DATE OF THIS DISCUSSION IS OCTOBER 24, 2006.

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

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

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

<TABLE>
<CAPTION>
EXECUTIVE SUMMARY OF THIRD QUARTER RESULTS

                                                                      Three Months               Nine Months
                                                                   Ended September 30         Ended September 30
(Cdn$ millions)                                                     2006         2005          2006        2005
----------------------------------------------------------------------------------------------------------------
<S>                                                               <C>          <C>           <C>         <C>
Net Income                                                           193          615           520         852
Earnings per Common Share ($/share)                                 0.74         2.36          1.98        3.28
Cash Flow from Operating Activities                                  676          642         1,784       1,675

Production, before Royalties (mboe/d)                                203          232           213         247
Production, after Royalties (mboe/d)                                 148          164           155         176
Nexen's Average Realized Oil and Gas Price (Cdn$/boe)              66.82        67.09         64.83       56.44

Capital Expenditures                                                 879          648         2,430       1,923
Net Debt (1)                                                       4,151        3,585         4,151       3,585
                                                             ---------------------------------------------------
</TABLE>

Note:
(1)  Net debt is defined as long-term debt less net working capital (excluding
     future income tax assets).

Commodity prices remained strong, with WTI averaging  US$70.48/bbl in the third
quarter.  Strong  reference crude oil prices,  together with narrowing  quality
differentials, allowed us to realize strong prices for our crude oil sales. The
impact of these strong prices was,  however,  offset by the weakening US dollar
since the majority of our oil and gas sales are denominated in or referenced to
US  dollars.  This is  mitigated  to some extent as our  US-dollar  denominated
expenses and capital  expenditures are also reduced when translated to Canadian
dollars.  Overall,  the  higher  Canadian  dollar  reduced  our cash  flow from
operating  activities by $188 million and our net income by $85 million  during
the first nine months of the year compared to 2005.

Our third  quarter  production  averaged 203 mboe/d,  29 mboe/d below the third
quarter of 2005.  Of this  decrease,  7 mboe/d  relates to Canadian oil and gas
properties we sold in the third quarter of 2005.  The remainder of the decrease
relates to reduced volumes in Yemen and the United States.  These lower volumes
result from natural  declines and downtime caused by the hurricanes in the Gulf
of Mexico in 2005, partially offset by new production from the Syncrude Stage 3
expansion.

Earlier  this  year,  a court of  arbitration  concluded  that we  breached  an
obligation  with  respect to Block 51 in Yemen.  While the amount of damages is
yet to be  determined,  we have  reduced  our third  quarter  net  income by an
accrual of $134 million to reflect our estimate of this  liability.  During the
quarter,  we also  received  an  interim  payment of $50  million  on  business
interruption  insurance  claims  relating to  production  losses  caused by the
hurricanes in the Gulf of Mexico. Our net income  year-to-date  includes strong
results  from our  marketing  group as we used our storage  and  transportation
infrastructure  to move gas to markets and took  advantage of location and time
spreads.  Our marketing group recognized over $275 million of net income before
tax in the first  nine  months of the year.  These  gains  were  offset by $277
million of future income tax expense recognized in the first quarter related to
an increase in the supplemental tax rate applicable to our North Sea operations

                                      28
<PAGE>

in the United Kingdom. Our quarterly net income last year included $418 million
of gains  from our  asset  disposition  programs,  offset  by $260  million  of
stock-based compensation expense.

Significant  progress  was made on our major  development  projects  during the
quarter. At Buzzard, we are in the process of completing the final hook-ups and
commissioning  before first production is scheduled to start prior to year end.
The  project is on  schedule  and on budget and is  expected  to  significantly
increase our production volumes in 2007, adding  approximately  85,000 boe/d to
our volumes when peak rates are  achieved.  At Syncrude,  the Stage 3 expansion
has returned to  production,  increasing  our share of Syncrude  production  to
approximately  25,000 bbls/d.  Site construction at Long Lake is progressing on
schedule, with steam injection scheduled to commence in early 2007 and followed
by start-up of the upgrader in the second half of 2007.

CAPITAL INVESTMENT

A large portion of our capital  investment  through 2007 is focused on bringing
our major development  projects on-stream.  To date, we have invested over $4.7
billion in Buzzard and Long Lake. These projects are expected to come on-stream
later this year and next, and should contribute to significant growth in 2007.

In  addition  to  developing  these  projects,   we  are  also  pursuing  other
opportunities  through  on-going  exploration,  appraisal  and  development  of
discoveries,  exploitation  of  existing  assets  and  the  application  of new
technologies. Details of our capital programs are set out below.

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2006

                                                          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)                             286                7               6                -         299
   United Kingdom                                           123                -              10                8         141
   United States                                              9                -              43              122         174
   Canada                                                    31                4              83               43         161
   Yemen                                                      -                -              13               35          48
   Other Countries                                            -                5               6                2          13
Syncrude                                                      6                -               -               11          17
                                                 -----------------------------------------------------------------------------
                                                            455               16             161              221         853

Chemicals, Marketing, Corporate and Other                     -                -               -               26          26
                                                 -----------------------------------------------------------------------------
Total Capital                                               455               16             161              247         879
                                                 =============================================================================
As a % of Total Capital                                     52%               2%             18%              28%        100%
                                                 -----------------------------------------------------------------------------

<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2006

                                                          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)                             780               60              45                -         885
   United Kingdom                                           373               12              35               26         446
   United States                                             18                -             155              257         430
   Canada                                                    60               14             161               93         328
   Yemen                                                      -                -              28              110         138
   Other Countries                                            -               14              21                6          41
Syncrude                                                     49                -               -               25          74
                                                 -----------------------------------------------------------------------------
                                                          1,280              100             445              517       2,342

Chemicals, Marketing, Corporate and Other                     -                -               -               88          88
                                                 -----------------------------------------------------------------------------
Total Capital                                             1,280              100             445              605       2,430
                                                 =============================================================================
As a % of Total Capital                                     53%               4%             18%              25%        100%
                                                 -----------------------------------------------------------------------------
</TABLE>

                                      29
<PAGE>

MAJOR AND EARLY STAGE DEVELOPMENT PROJECTS

SYNTHETIC
Our Long Lake  project  continues  to progress  well.  All SAGD wells have been
drilled and completed.  SAGD module fabrication is complete, all modules are on
site and  construction  is  approximately  90%  complete.  We  expect  our SAGD
operations to be  mechanically  complete near  year-end,  with steam  injection
commencing in the first quarter of 2007. Bitumen production is expected to ramp
up to peak rates over a 12 to 24 month period.  Upgrader module  fabrication is
largely  complete and over 90% of the modules are on site.  Construction of the
upgrader is approximately  60% complete and start up remains  scheduled for the
second  half of 2007.  Peak output of premium  synthetic  crude oil is expected
within 6 to 18 months of start up.

While  construction  progress has been  significant,  high  activity in the oil
sands is  placing  ongoing  pressure  on the costs of labour and  services.  In
addition,  labour  productivity  has been lower than  anticipated,  requiring a
larger  workforce  to  maintain  progress.  After a review of all  trends,  the
projected  cost of Long Lake has  increased  from $3.8  billion to $4.6 billion
($1.9 billion to $2.3 billion, net to us).

Production  capacity for the first phase of Long Lake is  approximately  60,000
bbls/d (30,000  bbls/d net to us) of premium  synthetic  crude.  Our plan is to
expand oil sands production to approximately 240,000 bbls/d (120,000 bbls/d net
to us) over the next 10 years. Three additional phases of 60,000 bbls/d (30,000
bbls/d  net to us) are  planned  using the same  technology  and design as Long
Lake. We are currently  progressing Phase 2 development.  We have completed the
seismic and core hole drilling programs,  ordered several major vessels and are
finalizing  regulatory  applications.   We  continue  to  develop  our  overall
execution strategy, cost estimate and project schedule.

UNITED KINGDOM
Our Buzzard  project  remains on schedule  and on budget.  Final  hook-ups  and
commissioning  are nearing  completion.  We expect  production to ramp up as we
tie-in  the  initial   eight   development   wells,   reaching  peak  rates  of
approximately  85,000  boe/d,  net to us, in the first half of 2007.  We have a
43.2% operated working interest in Buzzard.

The  facility is designed to process up to 200,000  bbls/d of oil and 60 mmcf/d
of gas, including the removal of hydrogen sulphide.  Based upon recent drilling
results, we have experienced more well-to-well variability in the concentration
of hydrogen  sulphide than  previously  seen.  We are  confident  that existing
equipment and processes will allow us to manage this  variability  for at least
the first  two to three  years of  production.  Over the next 6 to 12 months we
will acquire additional  reservoir  information to determine whether additional
equipment is required. If required,  our preliminary analysis indicates maximum
additional capital of approximately $250 million ($110 million net to us).

CANADA
In Canada,  we continue to develop  coalbed methane from Mannville coals in the
Fort  Assiniboine  area. At the end of the third quarter,  our production  from
this area was 13 mmcf/d and we expect  this to  increase to over 30 mmcf/d this
winter.

During the quarter,  we added to our unconventional  gas resource.  We acquired
over 100 sections of land in an emerging shale gas play in western  Canada.  We
plan to initiate a drilling and evaluation  program in 2007 to demonstrate  the
feasibility of this opportunity.

OTHER COUNTRIES
On Nigeria block OPL-222, basic engineering for the Usan field development plan
is complete and tendering of contracts for all major  components is proceeding.
The current  plan  consists of a floating  production,  storage and  offloading
vessel with a storage capacity to two million barrels, capable of handling peak
production rates of 160,000 bbls/d of oil. The co-venturers  expect to formally
sanction  the project  following  evaluation  of  commercial  bids.  Government
approval for contract award is expected to follow  thereafter.  Exploration and
appraisal of additional  opportunities  on the block  continues.  We have a 20%
interest in this exploration and development program.

NEW GROWTH EXPLORATION
In the Gulf of Mexico,  our Ringo exploration well on Mississippi  Canyon Block
546 encountered gas accumulations.  We are evaluating a single well development
tie-back to nearby facilities which could be on stream in early 2008. We have a
50% operated working interest.

Elsewhere  in the Gulf,  we expect to complete  development  of our Wrigley gas
discovery on Mississippi  Canyon Block 506 and expect to have this on stream in
early 2007. At Alaminos Canyon Block 856, we are evaluating development options
after  completing a two-well  exploration  drilling  program earlier this year.
This  block  is  located  approximately  240  miles  south  of  Houston  and is
immediately  west of the  Great  White  discovery.  We have a 30%  non-operated
interest in the block.  At Knotty Head on Green  Canyon 512, we are  proceeding
with facility and  subsurface  studies.  Access to rigs remains  limited in the
Gulf and we  continue  to work  with  partners  to find a rig to  complete  the
appraisal of the field.

                                      30
<PAGE>

In the fourth quarter,  we plan to continue our exploration  program,  drilling
one well in the Gulf of Mexico,  three to five in the North Sea,  one to two in
Yemen and two in Colombia.

OTHER
During the quarter,  we commenced power  production at the Soderglen wind farm.
The 70 megawatt wind farm is located  southwest of Fort Macleod,  Alberta.  The
project consists of 47 wind towers each with a 1.5 megawatt turbine.  We have a
50% non-operated interest in the project.

<TABLE>
<CAPTION>
FINANCIAL RESULTS
CHANGE IN NET INCOME
                                                                                                  2006 VS. 2005
                                                                                      Three Months             Nine Months
(Cdn$ millions)                                                                     Ended September 30     Ended September 30
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                    <C>
NET INCOME AT SEPTEMBER 30, 2005 (1)                                                          615                    852
                                                                                 =============================================
    Favourable (Unfavourable) Variances:

     Cash Items:
       Production Volumes, after Royalties:
         Crude Oil                                                                            (79)                  (264)
         Natural Gas                                                                          (20)                   (51)
         Change in Crude Oil Inventory                                                        (17)                   (32)
                                                                                 ---------------------------------------------
           Total Volume Variance                                                             (116)                  (347)

       Realized Commodity Prices:
         Crude Oil                                                                             43                    368
         Natural Gas                                                                          (57)                   (37)
                                                                                 ---------------------------------------------
           Total Price Variance                                                               (14)                   331

       Oil and Gas Operating Expense:
         Conventional                                                                          (3)                    13
         Syncrude                                                                              (5)                   (29)
                                                                                 ---------------------------------------------
           Total Operating Expense Variance                                                    (8)                   (16)

       Marketing                                                                              182                    374
       Chemicals                                                                              (14)                    (7)
       General and Administrative                                                               8                    (49)
       General and Administrative - Stock-Based Compensation Paid                             (12)                   (29)
       Interest Expense                                                                         4                     49
       Current Income Taxes                                                                   (17)                  (102)
       Business Interruption Insurance Proceeds                                                50                    124
       Other                                                                                   46                     43
                                                                                 ---------------------------------------------
     Total Cash Variance                                                                      109                    371

     Non-Cash Items:
       Depreciation, Depletion, Amortization and Impairment
           Oil and Gas                                                                         13                     (3)
           Other                                                                               (1)                     9
       Exploration Expense                                                                    (50)                   (66)
       General and Administrative - Stock-Based Compensation Accrual                          286                    340
       Future Income Taxes                                                                   (240)                  (567)
       Change in Fair Value of Crude Oil Put Options                                           (4)                   178
       Gains from Divestiture Programs                                                       (418)                  (418)
       Block 51 Arbitration Accrual                                                          (134)                  (134)
       Other                                                                                   17                    (42)
                                                                                 ---------------------------------------------
     Total Non-Cash Variance                                                                 (531)                  (703)
                                                                                 ---------------------------------------------

NET INCOME AT SEPTEMBER 30, 2006                                                              193                    520
                                                                                 =============================================
</TABLE>

Note:
(1) Includes results of discontinued operations (see Note 16 to our Unaudited
   Consolidated Financial Statements).

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

                                      31
<PAGE>

<TABLE>
<CAPTION>
OIL & GAS AND SYNCRUDE

PRODUCTION (BEFORE ROYALTIES) (1)

                                                                                    Three Months               Nine Months
                                                                                 Ended September 30        Ended September 30
                                                                                 2006         2005          2006        2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>          <C>           <C>         <C>
Crude Oil and NGLs (mbbls/d)
    Yemen                                                                        90.5        113.7          96.0       114.4
    Canada (2)                                                                   19.2         26.3          20.7        31.8
    United States                                                                16.7         18.5          17.9        23.3
    United Kingdom                                                               12.8          9.4          15.2        11.3
    Other Countries                                                               6.7          5.3           6.4         5.5
Syncrude (3) (mbbls/d)                                                           20.5         17.2          17.6        15.2
                                                                          ---------------------------------------------------
                                                                                 166.4       190.4         173.8       201.5
                                                                          ---------------------------------------------------
Natural Gas (mmcf/d)
    Canada (2)                                                                    106          112           105         132
    United States                                                                 105          122           111         123
    United Kingdom                                                                 11           14            22          19
                                                                          ---------------------------------------------------
                                                                                  222          248           238         274
                                                                          ---------------------------------------------------
Total (mboe/d)                                                                    203          232           213         247
                                                                          ===================================================

<CAPTION>
PRODUCTION (AFTER ROYALTIES)

                                                                                   Three Months              Nine Months
                                                                                Ended September 30      Ended September 30
                                                                                 2006         2005          2006        2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>          <C>           <C>         <C>
Crude Oil and NGLs (mbbls/d)
    Yemen                                                                        49.5         61.2          51.8        60.9
    Canada (2)                                                                   14.6         19.7          16.2        24.5
    United States                                                                14.6         16.2          15.7        20.6
    United Kingdom                                                               12.8          9.4          15.2        11.3
    Other Countries                                                               6.2          4.9           5.8         5.2
Syncrude (3) (mbbls/d)                                                           18.2         17.0          15.8        15.0
                                                                          ---------------------------------------------------
                                                                                115.9        128.4         120.5       137.5
                                                                          ---------------------------------------------------

Natural Gas (mmcf/d)
    Canada (2)                                                                     90           95            89         105
    United States                                                                  89          103            94         104
    United Kingdom                                                                 11           14            22          19
                                                                          ---------------------------------------------------
                                                                                  190          212           205         228
                                                                          ---------------------------------------------------

Total (mboe/d)                                                                    148          164           155         176
                                                                          ===================================================
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                   Three Months              Nine Months
                                                                               Ended September 30        Ended September 30
                                                                                2006         2005         2006        2005
   ------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>         <C>           <C>         <C>
   Before Royalties
     Crude Oil and NGLs (mbbls/d)                                                  -          4.3            -         9.0
     Natural Gas (mmcf/d)                                                          -           13            -          32
   After Royalties
     Crude Oil and NGLs (mbbls/d)                                                  -          3.3            -         7.0
     Natural Gas (mmcf/d)                                                          -            9            -          22
                                                                         --------------------------------------------------
</TABLE>

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

                                      32
<PAGE>

LOWER PRODUCTION DECREASED NET INCOME FOR THE QUARTER BY $116 MILLION
Production  before  royalties  decreased 12% from the third quarter in 2005 and
was 6% below the  second  quarter of this year.  Our 2006  production  excludes
volumes from our Canadian  oil and gas  properties  that were sold in the third
quarter of 2005. Removing the impact of these property dispositions, production
declined 10% from the third quarter of 2005.

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

                                                            Before       After
(mboe/d)                                                 Royalties   Royalties
-------------------------------------------------------------------------------
Production, Second Quarter 2006                               215          158
    Production changes:
      Yemen                                                    (5)          (3)
      Canada                                                   (1)          (1)
      United States                                            (1)          (1)
      United Kingdom                                           (8)          (8)
      Syncrude                                                  3            3
                                                         ----------------------
Production, Third Quarter 2006                                203          148
                                                         ======================

We expect  production  increases  in the fourth  quarter to come from our major
development  project at Buzzard in the North Sea, higher  production rates from
the Syncrude Stage 3 expansion and from additional  Gulf of Mexico  production.
At Long  Lake,  steam  injection  is  expected  to begin in early  2007 and the
upgrader is scheduled to commence  synthetic crude oil production in the second
half  of  2007.   Production   volumes  discussed  in  this  section  represent
before-royalties volumes, net to our working interest.

YEMEN
Production  from  Yemen  decreased  5% from the  previous  quarter.  Production
declines at Masila  reflect the maturity of the field.  Base declines at Masila
are expected to continue as we maximize  recovery of the remaining  reserves on
the block. We have drilled 22 wells and three sidetracks on the Masila block to
date this year and expect to drill a total of 31 wells and four  sidetracks  in
2006.  Strong initial rates from new wells,  combined with well  optimizations,
have helped to minimize the production declines.

Block 51 production was 4% less than the second quarter and reflects lower than
expected  initial rates on new wells and higher natural  decline rates. We have
drilled 19 wells in 2006 and expect to drill another four by year end.

CANADA
Production  in Canada  decreased  3% from the  previous  quarter,  largely as a
result of natural  declines.  Canadian  production was 18% lower than the third
quarter of 2005 primarily as a result of the sale of certain  conventional  oil
and gas properties in the third quarter of last year. These properties produced
approximately 6,500 boe/d in the third quarter of last year. Production volumes
in Canada  are  expected  to  increase  later  this year  with  increasing  gas
production  from our  coalbed  methane  projects as the wells  de-water  and we
complete  more wells.  We expect  further  increases in Canada in 2007 with the
commencement  of  production  of premium  synthetic  crude oil at Long Lake and
additional coalbed methane volumes.

UNITED STATES
Gulf of Mexico  production was 4% lower than the previous quarter and 12% lower
than the third quarter of 2005.  Production  from Vermilion 321 was restored in
late  September,  while three other  fields  remain  shut-in due to damage from
Hurricane Rita last year,  reducing our volumes by 4,000 boe/d.  We expect most
of this  production  will be  restored  in the  fourth  quarter.  In the  third
quarter,  we received a $50 million  interim  payment on business  interruption
insurance claims related to these storms. We continue to work with our insurers
to settle our outstanding property damage and business  interruption  insurance
claims.

Production from Aspen has decreased 10% from the previous  quarter and 12% from
the third  quarter of 2005 due to natural  declines.  We are in the  process of
completing another development well drilled at Aspen in the third quarter. This
well is expected  to come on stream  before  year-end at an initial  production
rate of between 12,000 and 15,000 boe/d.  Gunnison  production  remains strong,
accounting  for 30% of our production  from the Gulf of Mexico.  Development of
the Dawson Deep  discovery was completed in July while the Wrigley  development
has been  delayed by the tight rig market in the Gulf.  A rig has been  secured
and production is expected in early 2007.

UNITED KINGDOM
North Sea production was 35% lower than the previous quarter,  primarily due to
an extended maintenance turnaround on the Scott platform in August. Work on the
flare tip and Sage pipeline  inspection and maintenance  activities shut-in the
Scott and Telford fields for the entire month.  Production has resumed from the
Scott and Telford  fields with no downtime  expected  for the  remainder of the
year. Quarterly production increased relative to the third quarter of last year
with the addition of new  production  from the Farragon field in late 2005. Our
2005 production was reduced by two generator failures on the Scott platform.

                                      33
<PAGE>

Our Buzzard development remains on schedule and on budget with first production
expected in the fourth quarter of 2006.  Final hook-ups and  commissioning  are
nearing  completion.  We expect  production to ramp up as we tie-in the initial
eight development wells,  reaching peak rates of approximately  85,000 boe/d by
mid 2007.

OTHER COUNTRIES
Production  from our Guando field in Colombia  averaged 6,700 bbls/d during the
quarter,  26% higher than the third  quarter of 2005. In 2006, we completed two
infill drilling  programs,  bringing 15 additional  wells online.  We expect to
maintain current production rates for the remainder of the year.

SYNCRUDE
At Syncrude,  the start-up of the Stage 3 expansion was delayed by the emission
of odours from the flue gas  desulphurizer  plant.  Production from the Stage 3
expansion started in early May and was approaching  design capacity rates prior
to shutting in as a result of the odour  emissions.  Modifications to eliminate
the odour  emissions were completed and the expansion  restarted  operations in
late August.  The expansion is now operating at capacity,  increasing our share
of production to approximately 25,000 bbls/d.

Strong  realized  prices from base  production have enabled us to fully recover
capital costs associated with the Stage 3 expansion. Consequently, our Syncrude
royalty in 2006 increased from a 1% gross revenue  royalty to a 25% net revenue
royalty.  As a result of the  increased  royalty  rates,  we receive  lower net
production relative to our working interest production volumes.

<TABLE>
<CAPTION>
COMMODITY PRICES
                                                                                   Three Months                Nine Months
                                                                                 Ended September 30         Ended September 30
                                                                                 2006         2005          2006         2005
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>          <C>           <C>          <C>
CRUDE OIL AND NGLS
    West Texas Intermediate (WTI) (US$/bbl)                                     70.48        63.52         68.22        55.51
                                                                          ----------------------------------------------------

    Differentials (1) (US$/bbl)
      Masila (Yemen)                                                             2.96         5.00          3.14         5.59
      Heavy Oil (Canada)                                                        19.17        19.17         21.98        19.88
      Mars (US)                                                                  7.61         6.58          7.49         6.49
      Dated Brent (UK)                                                           0.99         1.98          1.26         1.97

    Producing Assets (Cdn$/bbl)
      Yemen                                                                     76.08        72.04         73.58        61.64
      Canada                                                                    52.95        51.05         44.37        41.80
      United States                                                             70.23        68.30         67.92        56.89
      United Kingdom                                                            77.73        65.87         73.02        58.88
      Other Countries                                                           74.05        65.82         67.96        55.22
      Syncrude                                                                  77.53        78.93         76.08        71.08

    Corporate Average (Cdn$/bbl)                                                73.06        68.99         69.57        58.39
                                                                          ----------------------------------------------------

NATURAL GAS
    New York Mercantile Exchange (NYMEX) (US$/mmbtu)                             6.14         9.69          6.89         7.71
    AECO (Cdn$/mcf)                                                              5.72         7.75          6.82         7.03
                                                                          ----------------------------------------------------

    Producing Assets (Cdn$/mcf)
      Canada                                                                     5.78         8.19          6.54         6.66
      United States                                                              7.18        11.57          7.96         9.63
      United Kingdom                                                             5.57         4.84          7.88         6.00

    Corporate Average (Cdn$/mcf)                                                 6.39         9.68          7.29         7.95
                                                                          ----------------------------------------------------

NEXEN'S AVERAGE REALIZED OIL AND GAS PRICE (Cdn$/boe)                           66.82        67.09         64.83        56.44
                                                                          ----------------------------------------------------

AVERAGE FOREIGN EXCHANGE RATE
    Canadian to US Dollar (US$)                                                0.8920       0.8325        0.8829       0.8170
                                                                          ----------------------------------------------------
</TABLE>

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

                                      34
<PAGE>

LOWER REALIZED COMMODITY PRICES REDUCED QUARTERLY NET INCOME BY $14 MILLION
Average WTI remained  constant with the previous  quarter and strong  benchmark
commodity  prices  allowed  us to  realize  solid  prices  for our  crude  oil,
averaging  $73.06/bbl in the quarter. Our realized gas price decreased 34% from
the third quarter of 2005 averaging  $6.39/mcf while NYMEX decreased 37% in the
same period averaging US$6.14/mmbtu.

Compared  with  the  third  quarter  of 2005 WTI has  increased  by 11% yet our
Canadian dollar realized crude oil price has only increased by 6%.This reflects
the impact of a weaker US dollar  offset to some extent by  narrower  crude oil
differentials.  All of our oil sales and most of our gas sales are  denominated
in or referenced to US dollars.  As a result, the weakening US dollar decreased
net sales for the quarter by  approximately  $63 million  ($221 million year to
date),   and  reduced  our  realized  crude  oil  and  natural  gas  prices  by
approximately  $5.22/bbl  and  $0.46/mcf,  respectively,  compared to the third
quarter of 2005.

CRUDE OIL REFERENCE PRICES
Crude oil prices remained strong throughout the third quarter of 2006, with WTI
averaging US$70.48/bbl for the quarter.  Prices weakened towards the end of the
quarter with WTI averaging  US$63.90/bbl in September  compared to US$74.46/bbl
and US$73.08/bbl for the months of July and August,  respectively.  The decline
in crude prices was largely driven by reduced geopolitical  tensions,  the lack
of hurricanes in the Gulf of Mexico,  weakening demand for gasoline products in
North America and above average crude oil inventories.

At the beginning of the third quarter,  geopolitical  tensions were high in the
Middle  East as a result of the Iranian  nuclear  situation,  fighting  between
Israel and Hezbollah and continuing  violence in Iraq.  Ongoing pipeline issues
which caused supply outages in Nigeria also  contributed to price volatility in
the market. The ceasefire  announced between Israel and Hezbollah in mid-August
and Iran's  decision to work with the United Nations for a peaceful  resolution
to their nuclear  enrichment program were bearish influences on WTI towards the
end of the quarter.

In the US, the end of the summer driving season  combined with a mild hurricane
season and crude oil inventory levels higher than the five-year average for the
seventh  consecutive  month  contributed to the late-quarter  weakening of WTI.
Concerns have now arisen that winter may be milder than  previous  years due to
the warming  effect of El Nino.  These  factors  caused hedge funds to sell off
long positions in September putting further downward pressure on WTI.

The bearish  sentiments  for crude oil in September  were  heightened by OPEC's
decision not to cut existing production quotas. In mid-October,  however,  OPEC
agreed to trim global oil  production  by 1.2 million  barrels a day  effective
November 1, 2006 to provide support to falling prices.

CRUDE OIL DIFFERENTIALS
In  Canada,   heavy  crude  oil   differentials   widened  slightly   averaging
US$19.17/bbl (27% of WTI) in the third quarter compared to US$17.88/bbl (25% of
WTI) in the second quarter.  With average crude oil reference prices relatively
unchanged for both the second and third  quarters,  this widening  reflects the
lower seasonal demand for asphalt.

On the US Gulf Coast,  the Mars  differential  for the third  quarter  averaged
US$7.61/bbl  (11% of WTI),  up slightly  from  US$6.97/bbl  (10% of WTI) in the
second quarter.

The Brent/WTI  differential  maintained  its strength  from the second  quarter
averaging  US$0.99/bbl  during the third quarter compared to US$1.08/bbl in the
second quarter.  Historically,  WTI has traded at a premium of US$1.50 to $2.00
relative to Brent for the summer months. In April and August,  however,  we saw
WTI trade at a discount  to Brent.  This was caused by weak US demand  during a
heavier than usual  maintenance  season,  coupled with high US crude  inventory
levels. On-going production outages in Nigeria and strong demand from Asia also
helped push Brent up relative to WTI. This stronger  Brent pricing  resulted in
higher  pricing  for  our  North  Sea  barrels.  In  September,  the  Brent/WTI
differential  widened to  US$2.19/bbl,  which is more in line with  traditional
levels.

Our Yemen Masila  differential has also narrowed relative to WTI on the back of
stronger  Brent  pricing  since Masila crude is priced off Brent.  In the third
quarter,  the  Masila/WTI  differential  averaged  US$2.96/bbl  compared to the
second quarter  differential  of  US$2.71/bbl.  The strong Masila crude pricing
also reflects continued strong Asian demand.

NATURAL GAS REFERENCE PRICES
Natural gas prices have weakened  considerably  from their record highs in late
2005 when prices peaked above US$15.00/mmbtu. NYMEX natural gas prices averaged
US$6.14/mmbtu  for the third  quarter.  The  softening  in both  near-term  and
longer-term  natural gas prices can be attributed  to storage  levels which are
near full and well above the five year average,  the lack of supply disruptions
in the Gulf of Mexico  following  a mild  hurricane  season,  predictions  of a
warmer than normal winter in North America due to the effect of El-Nino and the
third  quarter  liquidation  of  Amaranth,   a  large  hedge  fund,  which  had
accumulated significant 2007 time-spread positions.

                                      35
<PAGE>

<TABLE>
<CAPTION>
OPERATING COSTS

                                                                                   Three Months               Nine Months
                                                                                 Ended September 30        Ended September 30
(Cdn$/boe)                                                                        2006        2005          2006        2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>         <C>           <C>         <C>
Operating costs based on our working interest production before
royalties (1)
     Conventional Oil and Gas (2)                                                 7.25        5.94          6.75        5.85
     Synthetic Crude Oil
       Syncrude                                                                  21.69       23.22         28.84       26.44
     Corporate Average (2)                                                        8.72        7.21          8.57        7.11
                                                                           --------------------------------------------------

Operating costs based on our net production after royalties
     Conventional Oil and Gas (2)                                                10.26        8.69          9.50        8.45
     Synthetic Crude Oil
       Syncrude                                                                  24.38       23.46         32.14       26.70
     Corporate Average (2)                                                       12.01       10.21         11.81       10.00
                                                                           --------------------------------------------------
</TABLE>

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

HIGHER OIL AND GAS OPERATING COSTS DECREASED NET INCOME FOR THE QUARTER BY
$8 MILLION
During the  quarter,  higher costs and lower  production  rates at our Block 51
field in Yemen  increased our corporate  average by $0.40/boe.  Higher Block 51
operating costs reflect increased employee headcount, increased water handling,
and increased fuel consumption and fuel prices.

Operating  costs in the Gulf of Mexico and Canada have increased from last year
due  to  industry  cost  pressures   caused  by  the  strong   commodity  price
environment.  Higher  costs in the Gulf of  Mexico  and  Canada  increased  our
corporate average by $0.75/boe from the prior year.

Following the sale of Canadian  production in 2005,  barrels from the North Sea
are contributing a higher percentage of our total production.  As the North Sea
has higher  operating  costs than our average  cost per  barrel,  the change in
production  mix has  increased our  corporate  average by  $0.45/boe.  This was
offset  by  reduced  operating  costs in the North Sea  relative  to 2005.  Our
operating expense in 2005 included repair costs related to the turbine failures
and  pipeline  tariff  costs on our  Telford  gas  production.  The  tariff was
eliminated in late 2005 and repairs to the turbines were  completed  last year.
The reduction in these costs reduced our corporate average by $0.20/boe.

US-dollar  denominated  operating  costs were lower when translated to Canadian
dollars as a result of the weak US dollar. Our corporate average was reduced by
$0.40/boe as a result.

Syncrude  increased our corporate  average operating cost by $0.65/boe from the
third  quarter  of 2005.  This  reflects  the impact of  increased  higher-cost
Syncrude  production  volumes to our production  mix.  Third quarter  operating
costs at  Syncrude  were  lower  from  reduced  energy  input  costs  and lower
incentive program costs, reducing our quarterly corporate average by $0.15/boe.



                                      36
<PAGE>

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

                                                                                   Three Months               Nine Months
                                                                                Ended September 30         Ended September 30
(Cdn$/boe)                                                                       2006         2005          2006        2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>         <C>           <C>         <C>
DD&A based on our working interest production before royalties (1)
     Conventional Oil and Gas (2)                                               12.90        11.65         12.97       10.92
     Synthetic Crude Oil
       Syncrude                                                                  4.73         2.85          4.05        3.19
     Corporate Average (2)                                                      12.08        11.01         12.24       10.44
                                                                          ---------------------------------------------------

DD&A based on our net production after royalties
     Conventional Oil and Gas (2)                                               18.25        17.05         18.27       15.76
     Synthetic Crude Oil
       Syncrude                                                                  5.32         2.88          4.51        3.22
     Corporate Average (2)                                                      16.64        15.59         16.86       14.70
                                                                          ---------------------------------------------------
</TABLE>

Notes:
(1)  DD&A per boe is our DD&A for oil and gas operations divided by our working
     interest  production before royalties.  We use production before royalties
     to monitor our  performance  consistent  with other  Canadian  oil and gas
     companies.
(2)  2005 DD&A includes results of discontinued  operations (see Note 16 to our
     Unaudited Consolidated Financial Statements).


LOWER OIL AND GAS DD&A INCREASED NET INCOME FOR THE QUARTER BY $13 MILLION
In Yemen,  Block 51 depletion  rates were higher than the third quarter of 2005
as more costs  were  included  in our  depletion  pool  during  2006  following
completion of the permanent  production  facilities.  Depleting the  additional
costs  increased our corporate  average by $0.44/boe  during the quarter.  This
increase was offset by lower amortization of the government's  carried interest
driven  mostly by lower  production  at Block 51. This  reduced  our  corporate
average by $0.70/boe as compared to the third quarter of 2005.

The sale of Canadian production in 2005 has effectively increased our corporate
depletion rate since a greater  proportion of our production now comes from the
North Sea. Our North Sea assets have higher than our average  depletion  rates.
This change in production mix has increased our corporate average by $1.00/boe.
During the first  quarter of the year, we expensed $15 million of our North Sea
purchase  price  that  was  allocated  to  unproved  properties  where  we  had
unsuccessful exploration results.

Depletion  rates for our  deep-water  assets  in the Gulf of  Mexico  increased
relative  to the prior  year as a result  of  reserve  revisions  late in 2005.
Consequently,  our  corporate  average was higher by $0.30/boe  compared to the
third quarter of 2005.  Higher  depletion  rates at our heavy oil properties in
Canada  increased our  quarterly  corporate  average by $0.60/boe.  The Stage 3
expansion at Syncrude began producing  during the quarter and our Syncrude DD&A
rate  increased  $1.88/boe  from  amortizing  the  costs  associated  with  the
expansion. Our corporate average increased $0.30/boe as a result of the Stage 3
expansion.

The  strengthening  Canadian  dollar offset these increases as the depletion of
our international and US assets is denominated in US dollars.  This lowered our
corporate  average by  $0.85/boe  compared  to the third  quarter of 2005.  Our
corporate  average depletion rate is expected to increase in the fourth quarter
with the addition of new production  from Buzzard in the North Sea. The Buzzard
depletion rate will include an allocation of the  acquisition  costs we paid to
acquire the property in late 2004.

<TABLE>
<CAPTION>
EXPLORATION EXPENSE

                                                                                   Three Months               Nine Months
                                                                                Ended September 30         Ended September 30
(Cdn$ millions)                                                                  2006         2005          2006        2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>         <C>            <C>       <C>
Seismic                                                                              30          17             77        37
Unsuccessful Exploration Drilling                                                    39           3            110        87
Other                                                                                13          12             44        41
                                                                          ---------------------------------------------------
Total Exploration Expense (1)                                                        82          32            231       165
                                                                          ---------------------------------------------------

New Growth Exploration                                                              161         133            445       357
Geological and Geophysical Costs                                                     30          17             77        37
                                                                          ---------------------------------------------------
Total Exploration Expenditures                                                      191         150            522       394
                                                                          ===================================================
</TABLE>

Note:
(1)  Includes exploration expense from discontinued  operations (see Note 16 to
     our Unaudited Consolidated Financial Statements).

                                      37
<PAGE>

HIGHER EXPLORATION EXPENSE DECREASED NET INCOME FOR THE QUARTER BY $50 MILLION
Exploration activity in the quarter included drilling a successful  exploratory
well  at  Ringo  in the  Gulf  of  Mexico.  We  are  currently  evaluating  our
development  options for the discovery.  At the end of the quarter, we have one
exploration  well  drilling  in the Gulf of  Mexico  (West  Cameron  109 on the
shelf). In the fourth quarter,  we plan to drill four to five exploration wells
in the North Sea, one to two in Yemen and two in Colombia.

During  the  quarter,   we  expensed  $33  million  of  costs  related  to  two
unsuccessful  exploratory  wells  on the  shelf  in the  Gulf  of  Mexico.  Our
year-to-date  exploration  expense includes costs related to unsuccessful wells
at  Pathfinder,  Vermilion  65 and  West  Cameron  135 in the  Gulf of  Mexico,
Zanzibar and Black Cat in the North Sea, and Ukot South,  offshore Nigeria.  We
have been  acquiring  seismic  data  during  the year and  during  the  quarter
expensed $24 million of seismic costs in the Gulf of Mexico.

<TABLE>
<CAPTION>
OIL AND GAS MARKETING
                                                                                   Three Months               Nine Months
                                                                                Ended September 30         Ended September 30
(Cdn$ millions)                                                                  2006         2005          2006        2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>          <C>         <C>
    Marketing Revenue, net                                                        229           25           959         467
    Transportation                                                               (173)        (143)         (591)       (461)
    Other                                                                           6           (2)            8          (4)
                                                                          ---------------------------------------------------
Net Revenue                                                                        62         (120)          376           2
                                                                          ===================================================

Physical Sales Volumes (excluding intra-segment transactions)
    Crude Oil (mboe/d)                                                            712          470           654         475
    Natural Gas (bcf/d)                                                           5.3          5.0           5.4         4.9

Value-at-Risk
    Quarter-end                                                                    23           26            23          26
    High                                                                           32           30            32          30
    Low                                                                            21           14            17          14
    Average                                                                        26           21            22          23
                                                                          ---------------------------------------------------
</TABLE>

HIGHER CONTRIBUTION FROM MARKETING INCREASED NET INCOME BY $182 MILLION
As part of our gas  marketing  strategy,  we hold physical  transportation  and
storage  capacity  contracts  that  allow  us  to  take  advantage  of  pricing
differences  between  locations  (i.e. west versus east) and time periods (i.e.
summer versus winter).  These capacity contracts have market value,  similar to
financial  commodity  contracts,  as future margins  realized  depend on future
prices and, more importantly,  pricing  differences.  Like financial  commodity
contracts,  the market value of our capacity  contracts  varies with changes in
prices and pricing relationships.  We routinely hedge the economic value of our
capacity  contracts  using  various  financial  derivative  contracts,  thereby
limiting  volatility  in  our  economic  results.  Accounting  rules,  however,
increase  volatility  in our reported  results  since these rules require us to
recognize the change in fair value of financial  derivative  contracts  hedging
our capacity  contracts,  but do not allow us to  recognize  the change in fair
value of the capacity contracts themselves. As a result, when prices or pricing
relationships  change,  we may be  required  to include  gains or losses in our
reported  results in  different  periods  even though our  underlying  economic
results may be largely unchanged.

Our  results  in the third  quarter of 2005 were  impacted  by  volatile  North
American  gas markets  caused by hurricane  activity in the Gulf of Mexico.  At
that time, we were unable to recognize  increases in the economic  value of our
storage and transportation  capacity contracts,  yet were required to recognize
losses on the  financial  contracts  we held  that  economically  hedged  those
assets.  Earlier  in 2006,  we  generated  unrecognized  economic  gains on our
transportation  and  storage  capacity  contracts,  primarily  as a  result  of
widening  locational and seasonal pricing  spreads.  Late in the third quarter,
these pricing spreads narrowed and we lost some of these unrecognized  economic
gains.

We are continuing to expand our marketing  operation into the US and the UK. In
the UK, we are positioning our marketing group to support the sale of our North
Sea production including the production expected from Buzzard later this year.

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.

                                      38
<PAGE>

<TABLE>
<CAPTION>
COMPOSITION OF NET MARKETING REVENUE

                                                                                    Three Months               Nine Months
                                                                                 Ended September 30        Ended September 30
(Cdn$ millions)                                                                  2006         2005          2006        2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>       <C>               <C>        <C>
Trading Activities                                                                 58        (121)             367        (2)
Non-Trading Activities                                                              4           1                9        4
                                                                          ---------------------------------------------------
                                                                                   62        (120)             376        2
                                                                          ===================================================
</TABLE>

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

FAIR VALUE OF DERIVATIVE CONTRACTS
At September 30, 2006, the fair value of our derivative contracts not
designated as accounting hedges totalled $284 million. The following table
shows the valuation methods underlying these contracts together with details of
contract maturity:

<TABLE>
<CAPTION>
(Cdn$ millions)                                                                       MATURITY
--------------------------------------------------------------------------------------------------------------------------
                                                           less than                                more than
                                                              1 year     1-3 years     4-5 years      5 years       Total
                                                        ------------------------------------------------------------------
<S>                                                       <C>            <C>           <C>          <C>             <C>
Prices
    Actively Quoted Markets                                     128            (46)          (28)           -          54
    From Other External Sources                                 125             82            29           (6)        230
    Based on Models and Other Valuation Methods                   -              -             -            -           -
                                                        -------------------------------------------------------------------
Total                                                           253             36             1           (6)        284
                                                        ===================================================================
</TABLE>

At  September  30,  2006,  we had $85  million  of  unrecognized  gains  on our
derivative  contracts designated as accounting hedges of the future sale of our
gas  inventory.  These gains will be recognized in income when the inventory is
sold.  These  contracts  were valued from  actively  quoted  markets and settle
within 12 months.

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

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

(Cdn$ millions)
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                         <C>
Fair Value at December 31, 2005                                                                                       169
    Change in Fair Value of Contracts                                                                                 370
    Net Losses (Gains) on Contracts Closed                                                                           (255)
    Changes in Valuation Techniques and Assumptions (1)                                                                 -
                                                                                                           ---------------
Fair Value at September 30, 2006                                                                                      284
Unrecognized Gains on Hedges of Future Sale of Gas Inventory
    at September 30, 2006                                                                                              85
                                                                                                           ---------------
Total Outstanding at September 30, 2006                                                                               369
                                                                                                           ===============
</TABLE>

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

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

                                                                                             September 30     December 31
(Cdn$ millions)                                                                                      2006            2005
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>              <C>
Current Assets                                                                                         718           382
Non Current Assets                                                                                     124           232
                                                                                         ----------------- ---------------
   Total Derivative Contract Assets                                                                    842           614
                                                                                         ================= ===============

Current Liabilities                                                                                    465           321
Non Current Liabilities                                                                                 93           124
                                                                                         ----------------- ---------------
   Total Derivative Contract Liabilities                                                               558           445
                                                                                         ================= ===============

   Total Derivative Contract Net Assets (1)                                                            284           169
                                                                                         ================= ===============
</TABLE>

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

                                      39
<PAGE>

NON-TRADING ACTIVITIES
We enter into  fee-for-service  contracts related to transportation and storage
of  third  party  oil and gas.  In  addition,  we earn  income  from our  power
generation facilities at Balzac and Soderglen.  We earned $4 million from these
activities in the third quarter (2005 - $1 million) and $9 million year to date
(2005 - $4 million).

CHEMICALS

LOWER CHEMICALS CONTRIBUTION DECREASED NET INCOME BY $14 MILLION
In North America,  stronger  chlor-alkali volumes in the quarter were offset by
slightly lower sodium chlorate  volumes  resulting from pulp mill outages.  The
benefit of improved  sodium  chlorate market prices was offset by the impact of
the stronger Canadian dollar versus the US dollar.  This translated into higher
US dollar  pricing but lower Canadian  dollar  realizations.  In Brazil,  sales
remained  strong as a result of  continued  strong  demand  from  Aracruz,  our
primary customer in Brazil, and from higher merchant market demand.

Net income in the third quarter of 2005 included $9 million of foreign exchange
gains on Canexus US-dollar  denominated debt and $4 million of gains related to
the change in mark-to-market value of Canadian dollar call options.  During the
third  quarter  of 2006,  we  recorded  losses of $3  million  on the change in
mark-to-market value of these options.

<TABLE>
<CAPTION>
CORPORATE EXPENSES

GENERAL AND ADMINISTRATIVE (G&A)

                                                                                   Three Months               Nine Months
                                                                                Ended September 30         Ended September 30
(Cdn$ millions)                                                                  2006         2005          2006        2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>          <C>          <C>         <C>
General and Administrative Expense before Stock-Based Compensation                 74           82           246         197
Stock-Based Compensation (1)                                                      (14)         260           139         450
                                                                          ---------------------------------------------------
Total General and Administrative Expense                                           60          342           385         647
                                                                          ===================================================
</TABLE>

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

LOWER COSTS INCREASED QUARTERLY NET INCOME BY $282 MILLION
Year-to-date,  our G&A expense before  stock-based  compensation  has increased
reflecting  higher  employee  levels as we  continue to develop our oil and gas
operations  internationally  and expand our  marketing  operations.  Quarter on
quarter,  higher costs in 2005 were  attributable to costs  associated with our
2005  disposition  program  and higher  employee  incentive-based  compensation
driven by our strong results.

Changes in our share price  create  volatility  in our net income as we account
for stock-based compensation using the intrinsic-value method. This method uses
our  share  price  at the end of each  quarter  to  determine  our  stock-based
compensation expense and related  obligations.  In the third quarter, our share
price  decreased  5%. This resulted in a recovery of  stock-based  compensation
expense.

<TABLE>
<CAPTION>
INTEREST AND FINANCING COSTS

                                                                                  Three Months                 Nine Months
                                                                                Ended September 30         Ended September 30
(Cdn$ millions)                                                                  2006         2005          2006        2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>          <C>          <C>         <C>
Interest                                                                           77           68           214         209
    Less: Capitalized Interest                                                    (62)         (49)         (179)       (125)
                                                                          ---------------------------------------------------
Net Interest Expense                                                               15           19            35          84
                                                                          ===================================================
</TABLE>

LOWER INTEREST EXPENSE INCREASED QUARTERLY NET INCOME BY $4 MILLION
Our quarterly financing costs were higher than the third quarter of 2005 by $10
million  primarily  as a result of  additional  borrowings  on our term  credit
facilities used to finance our 2006 capital  program.  During the quarter,  the
stronger  Canadian  dollar  lowered  the  Canadian  dollar  equivalent  of  our
US-dollar denominated interest by $4 million. Interest on the credit facilities
of Canexus is  included  with our  results.  This  increased  our expense by $2
million in the quarter.

We are capitalizing interest on our major development projects in the North Sea
and at Long Lake until  they are ready for use.  Capitalized  interest  in 2006
increased  primarily  from higher  cumulative  investment in these projects and
from  interest  capitalized  on the  Stage 3  expansion  at  Syncrude  prior to
start-up.  We expect that capitalized  interest will continue to increase as we
spend  additional  capital  on  major  development   projects  prior  to  their
completion later this year and in 2007. Our net interest expense is expected to
increase  once these  projects are  completed  and we have ceased  capitalizing
interest.

                                      40
<PAGE>

<TABLE>
<CAPTION>
INCOME TAXES

                                                                                  Three Months                Nine Months
                                                                                 Ended September 30        Ended September 30
(Cdn$ millions)                                                                  2006         2005          2006        2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>          <C>         <C>
Current                                                                           112           95           357         255
Future                                                                             13         (227)          297        (270)
                                                                          ---------------------------------------------------
Total Provision for Income Taxes                                                  125         (132)          654         (15)
                                                                          ===================================================

Disclosed as:
Provision for Income Taxes - Continuing Operations                                125           24           654         114
Provision for Income Taxes - Discontinued Operations (1)                            -         (156)            -        (129)
                                                                          ---------------------------------------------------
Total Provision for Income Taxes                                                  125         (132)          654         (15)
                                                                          ===================================================

Effective Tax Rate (%)                                                             39%         (27)%          55%         (2)%
                                                                          ---------------------------------------------------
</TABLE>

Note:
(1)  See Note 16 to our Unaudited Consolidated Financial Statements.

EFFECTIVE TAX RATE FOR THE QUARTER INCREASED TO 39%
In the first quarter, the UK government  substantively enacted increases to the
supplementary tax rate on our North Sea oil and gas activities from 10% to 20%,
effective   January  1,  2006.   This  has  increased  our  future  income  tax
liabilities,  resulting in a charge of $277 million  during the first  quarter.
During the second quarter, federal and certain provincial governments in Canada
reduced  corporate income tax rates.  These rate reductions  lowered our future
income tax liabilities by $32 million.

Current  income taxes  include  cash taxes in Yemen of $76 million  (2005 - $93
million) for the quarter and $224 million  (2005 - $222  million) year to date.
Our current  income tax  provision  also  includes  current  taxes in Colombia,
federal and state taxes in the US and provincial capital taxes in Canada.

<TABLE>
<CAPTION>
OTHER

                                                                                   Three Months                Nine Months
                                                                                Ended September 30         Ended September 30
(Cdn$ millions)                                                                  2006         2005          2006        2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>         <C>            <C>         <C>
Change in Fair Value of Crude Oil Put Options                                      (5)          (1)           (6)       (184)
Block 51 Arbitration Accrual                                                      134            -           134           -
Gain on Dilution of Interest in Chemicals Business                                  -          193             -         193
Gain on Disposition of Oil and Gas Assets Included as Discontinued
    Operations                                                                      -          225             -         225
                                                                          ---------------------------------------------------
</TABLE>

Following our North Sea  acquisition  in late 2004, we purchased put options on
60,000 bbls/d of oil production for 2005 and 2006 to ensure a minimum price for
a  portion  of our  production  in those  years  while we  invest  in our major
development projects. These options created an average WTI floor price for this
production of US$43.17/bbl in 2005 and  US$38.17/bbl in 2006.  Accounting rules
require that these options be recorded at fair value  throughout their term. As
a result,  changes in  forward  crude oil  prices  cause  gains or losses to be
recorded on these  options at each period end.  During the first nine months of
2005, a significant  increase in forward crude prices  resulted in a value loss
of $184  million.  Strong WTI prices in 2006  reduced the market value of these
remaining  options to nil and we expensed $4 million in the first  quarter as a
result.

Late in the second  quarter of 2006, we purchased put options on  approximately
105,000 bbls/d of our 2007 crude oil production.  These options establish a WTI
floor  price of  US$50/bbl  on these  volumes and provide a base level of price
protection  without limiting our upside to higher prices.  The put options were
purchased for $26 million and are carried at fair value.  We recorded a gain of
$3 million for the  increase in fair value in the second  quarter and a loss of
$5 million in the third quarter.

Earlier  this  year,  a court of  arbitration  concluded  that we  breached  an
obligation  with  respect to Block 51 in Yemen.  While the amount of damages is
yet to be  determined,  we have  reduced  our third  quarter  net  income by an
accrual  of $134  million  based  on  ongoing  analysis  and  discussions  with
Occidental.

Following the sale of our chemicals  operations to Canexus Limited  Partnership
in the  third  quarter  of 2005,  we  recorded  a gain on the  dilution  of our
interest in 100% to 61.4% of $193 million. The sale of our Canadian oil and gas
properties in Alberta, British Columbia and Saskatchewan in 2005 gave rise to a
gain on sale of $225 million.

                                      41
<PAGE>

<TABLE>
<CAPTION>
LIQUIDITY

CAPITAL STRUCTURE

                                                                                                September 30     December 31
(Cdn$ millions)                                                                                         2006            2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>              <C>
NET DEBT (1)
   Bank Debt                                                                                             815            171
   Public Senior Notes                                                                                 2,864          2,980
                                                                                              -------------------------------
     Senior Debt                                                                                       3,679          3,151
   Subordinated Debt                                                                                     513            536
                                                                                              -------------------------------
     Total Debt                                                                                        4,192          3,687
   Less: Cash and Cash Equivalents                                                                       (31)           (48)
                                                                                              -------------------------------
                                                                                                       4,161          3,639
   Less: Net Working Capital, excluding Cash and Cash Equivalents (2)                                    (10)             2
                                                                                              -------------------------------
TOTAL NET DEBT                                                                                         4,151          3,641
                                                                                              ===============================

SHAREHOLDERS' EQUITY (3)                                                                               4,496          4,008
                                                                                              ===============================
</TABLE>

Notes:
(1)  Includes  all of our debt and is  calculated  as  long-term  debt less net
     working capital (excluding future income tax assets).
(2)  Excludes short-term  borrowings since these are included in bank debt, and
     excludes future income tax assets.
(3)  At September  30, 2006,  there were  262,306,663  common shares and US$460
     million  of   unsecured   subordinated   securities   outstanding.   These
     subordinated  securities  may be redeemed by issuing  common shares at our
     option after  November 8, 2008. The number of shares  issuable  depends on
     the common share price on the redemption date.

<TABLE>
<CAPTION>
CHANGES IN WORKING CAPITAL

                                                                                September 30     December 31       Increase/
(Cdn$ millions)                                                                         2006            2005      (Decrease)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>             <C>               <C>
Cash and Cash Equivalents                                                                 31              48            (17)
Restricted Cash and Margin Deposits                                                      110              70             40
Accounts Receivable                                                                    2,667           3,151           (484)
Inventories and Supplies                                                                 736             504            232
Future Income Tax Assets                                                                 512               -            512
Accounts Payable and Accrued Liabilities                                              (3,532)         (3,710)           178
Other                                                                                     29             (17)            46
                                                                             ------------------------------------------------
                                                                                         553              46            507
                                                                             ================================================
</TABLE>

Accounts  receivable and payable related to our marketing  operation  decreased
from year end as a result of lower  natural  gas  prices.  Natural  gas  prices
spiked in December 2005, which increased our accrued gas sales and purchases at
the end of the year.  Natural gas prices have fallen since the beginning of the
year,  lowering our accruals at the end of the quarter.  We also took advantage
of low gas prices during the year and increased our gas storage  inventories to
43 bcf at the end of the quarter.  Volatile gas markets in September  increased
the value of our derivative contracts.  This has partially offset the decreases
in our marketing accounts receivable and payable.  Also offsetting the decrease
in  marketing  payables  was an  increase in accrued  stock-based  compensation
obligations  since the  beginning  of the year as a result of our strong  share
price,  higher  accruals  related to our  capital  investment  program  and our
accrual related to the Block 51 arbitration.  We have reclassed $512 million of
future  income  tax  assets  as  current  assets.   This  represents  tax  loss
carry-forward  balances in our UK operations  that we expect to use in the next
twelve months once Buzzard comes on-stream.



                                      42
<PAGE>

NET DEBT
Our net debt levels are directly  related to our  operating  cash flows and our
capital expenditure activities.  Changes in net debt since the beginning of the
year are related to:

(Cdn$ millions)
--------------------------------------------------------------------------------
Capital Expenditures                                                     2,430
Cash Flow from Operating Activities                                     (1,784)
Changes in Non-Cash Working Capital                                        (92)
                                                                      ----------
   Excess                                                                  554

Dividends on Common Shares                                                  39
Issue of Common Shares and Exercise of Stock Options                       (41)
Foreign Exchange Translation of US-dollar Debt and Cash                   (135)
Increase in Current Obligation Related to Stock-Based Compensation          52
Other                                                                       41
                                                                      ----------
   Increase in Net Debt                                                    510
                                                                      ==========

OUTLOOK FOR REMAINDER OF 2006

We expect our 2006 full year production to average  approximately 220,000 boe/d
before  royalties  (165,000 boe/d after  royalties).  Production is expected to
increase later in the fourth quarter as we plan to bring on another development
well at Aspen in the Gulf of Mexico and  commence  production  at Buzzard.  Our
annual average  production is largely dependent on the timing of first oil from
the Aspen  development  well and Buzzard.  We expect to generate  approximately
$2.7 billion in cash flow (before  remediation  and geological and  geophysical
expenditures) in 2006, assuming the following for the remainder of the year:

--------------------------------------------------------------------------------
WTI (US$/bbl)                                                             65.00
NYMEX Natural Gas (US$/mmbtu)                                              7.25
US to Canadian Dollar Exchange Rate                                        0.90
                                                                     -----------

To date,  we have  incurred  over $2.4  billion of our  expected  2006  capital
investment  of  between  $3.2 and $3.4  billion.  Our 2006  capital  program is
largely targeted towards  completion of our major  development  projects in the
North Sea and Long Lake,  both  planned to come  on-stream  within the next two
years.  Our capital  budget has  increased  from our original  estimate of $2.9
billion due to additional  spending at Long Lake,  drilling of a sidetrack well
at Aspen and investing in unconventional gas acreage.

Our future  liquidity is primarily  dependent on cash flows  generated from our
operations, existing committed credit facilities and our ability to access debt
and  equity  markets.  We are well  advanced  in  developing  a number of major
projects and we have additional  capital  requirements to bring them on-stream.
Based on the  assumptions  noted  above,  our  capital  investment  program and
dividend  requirements  could exceed our cash flow in 2006 by $540 million.  We
are  funding  this  shortfall  by  drawing  on  our  unused   committed  credit
facilities.  In the  fourth  quarter  of 2006,  we will  repay $91  million  in
connection  with medium term notes that become due using our  committed  credit
facilities.  At September 30, 2006, we had committed term credit  facilities of
$3.4 billion that are available until 2011, of which $530 million was drawn and
$199 million was  utilized to support  outstanding  letters of credit.  We also
have $631 million of uncommitted,  unsecured credit  facilities,  of which $117
million was drawn and $149 million was utilized to support  outstanding letters
of credit as at September 30, 2006.

Late in the second quarter of 2006, we implemented a crude oil price protection
strategy on a portion of our 2007 crude oil  production.  We purchased  WTI put
options on 105,000 bbls/d for $26 million.  These options establish a WTI floor
price of US$50/bbl on these volumes in 2007.

During the year,  we declared  common  share  dividends of $0.05 per share each
quarter.

CONTRACTUAL OBLIGATIONS, COMMITMENTS AND GUARANTEES
We have assumed various  contractual  obligations and commitments in the normal
course of our  operations  and financing  activities.  We have  included  these
obligations and commitments in our MD&A in our 2005 Annual Report on Form 10-K.
During the nine months ended  September  30, 2006,  we entered into  additional
operating leases and work commitments totaling $490 million, mainly relating to
the signing of contracts for our Ettrick  development  in the North Sea. Of the
increase,  we expect to incur  approximately  $72 million in one to three years
time,  $250  million  in four to five years  time and $168  million  after five
years.

                                      43
<PAGE>

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

In June 2003, a subsidiary of  Occidental  Petroleum  Corporation  (Occidental)
initiated an arbitration  against us at the International  Court of Arbitration
of the  International  Chamber of  Commerce  (ICC Court)  regarding  an Area of
Mutual  Interest  agreement  relating  to certain  portions  of Block 51 in the
Republic of Yemen. In April 2006, the ICC Court released its tribunal's partial
award that held we were obliged to offer Occidental the right to acquire 50% of
our interest in those areas and that we breached that obligation. The result of
this award is that Occidental is entitled to monetary damages. The ICC tribunal
did not  determine  the amount of damages  due to  Occidental  in this  partial
award.  These damages will be  determined  at the  conclusion of the second and
final phase of the arbitration  which will likely occur in late 2007.  Based on
ongoing  analysis  and  discussions  with  Occidental,  we have  accrued  other
expenses  of  $134  million  with  respect  to  this  arbitration.  The  amount
ultimately payable may differ from this accrual.

NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

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

o    financial  assets held for sale, for which unrealized gains and losses are
     deferred in other comprehensive income until sold or impaired; and
o    certain financial instruments that qualify for hedge accounting.

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

These new  standards  are  effective  for fiscal  years  beginning  on or after
October 1, 2006 and early adoption is permitted. Adoption of these standards as
at September  30, 2006 would  increase our accounts  receivable by $85 million,
increase  our  future  income  tax  liabilities  by $28  million  and  increase
shareholders' equity by $57 million.

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

In July  2006,  the EIC  issued  Abstract  162,  STOCK-BASED  COMPENSATION  FOR
EMPLOYEES  ELIGIBLE  TO RETIRE  BEFORE  THE  VESTING  DATE  (EIC-162).  EIC-162
clarifies the  accounting  for  stock-based  compensation  plans that allow for
vesting of stock-based awards after an employee's  retirement.  If the employee
is eligible to retire on the grant date of an award,  related compensation cost
is to be  recognized  in full  at that  date as  there  is no  ongoing  service
requirement  to earn the award.  If the  employee  becomes  eligible  to retire
during the vesting period,  the compensation  cost is to be recognized over the
period  from the grant  date to the  retirement  eligibility  date.  EIC-162 is
effective for interim and annual  periods ending on or after December 31, 2006.
Adoption of EIC-162 as at September 30, 2006 would have  decreased  stock-based
compensation  expense for the three and nine months ended September 30, 2006 by
$9 million and $5 million, respectively.

                                      44
<PAGE>

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

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

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

The impact of adopting  Statement  123(R) on our  results for the three  months
ended September 30, 2006 is as follows:

<TABLE>
<CAPTION>
                                                                        Prior to adoption    After adoption      Increase /
(Cdn$ millions, except per share amounts)                                 of FAS 123(R)       of FAS 123(R)      (Decrease)
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                  <C>                 <C>
Income from Continuing Operations before Income Taxes - US GAAP                330                321                 (9)
Net Loss - US GAAP                                                             (78)               (84)                (6)
Basic Loss per Common Share - US GAAP ($/share)                              (0.30)             (0.33)             (0.03)
Diluted Loss per Common Share - US GAAP ($/share)                            (0.30)             (0.33)             (0.03)
                                                                        ------------------------------------------------------
</TABLE>

The impact of adopting Statement 123(R) on our results for the nine months
ended September 30, 2006 is as follows:

<TABLE>
<CAPTION>
                                                                        Prior to adoption    After adoption      Increase /
(Cdn$ millions, except per share amounts)                                 of FAS 123(R)       of FAS 123(R)      (Decrease)
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                  <C>                 <C>   <C>
Income from Continuing Operations before Income Taxes - US GAAP              1,202              1,175                (27)
Net Income - US GAAP                                                           530                512                (18)
Basic Earnings per Common Share - US GAAP ($/share)                           2.02               1.95              (0.07)
Diluted Earnings per Common Share - US GAAP ($/share)                         1.97               1.91              (0.06)
                                                                        ------------------------------------------------------
</TABLE>

We   recognize   stock-based   compensation   expense   for  our   retired  and
retirement-eligible  employees over an accelerated vesting period in accordance
with the  provisions  of Statement  123(R) for  stock-based  awards  granted to
employees after December 31, 2005. For stock-based  awards granted prior to the
adoption of Statement 123(R),  stock-based compensation expense for our retired
and  retirement-eligible  employees is recognized over a graded vesting period.
If we  applied  the  accelerated  vesting  provisions  of  Statement  123(R) to
stock-based  awards  granted to our retired and  retirement-eligible  employees
prior to the adoption of Statement 123(R), our stock-based compensation expense
would  decrease by $9 million for the three  months  ended  September  30, 2006
(2005 - increase by $6 million)  and decrease by $5 million for the nine months
ended September 30, 2006 (2005 - increase by $11 million).

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

In July 2006,  FASB issued FIN 48 ACCOUNTING  FOR  UNCERTAINTY  IN INCOME TAXES
with respect to FAS 109  ACCOUNTING FOR INCOME TAXES  regarding  accounting for
and  disclosure of uncertain tax  positions.  This guidance seeks to reduce the
diversity in practice  associated  with certain  aspects of the recognition and
measurement  related to accounting  for income taxes.  This  interpretation  is
effective for fiscal years  beginning after December 15, 2006. We are currently
evaluating the provisions of FIN 48 and have not yet determined the impact this
interpretation will have on our results from operations or financial position.

                                      45
<PAGE>

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

In September 2006, FASB issued Statement 158, EMPLOYERS' ACCOUNTING FOR DEFINED
BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS, AN AMENDMENT OF FASB STATEMENTS
NO. 87, 88, 106,  AND 132(R).  Statement  158 requires an employer to recognize
the over-funded or under-funded status of a defined benefit postretirement plan
on the balance sheet as an asset or liability  and to recognize  changes in the
funded  status  through  comprehensive  income.  This  statement  also requires
measurement  of the funded status of a plan as of the balance  sheet date.  The
recognition and  disclosures  under Statement 158 are required for fiscal years
ending after December 15, 2006 while the new measurement  date is effective for
fiscal years ending 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.

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

<TABLE>
<CAPTION>
SUMMARY OF QUARTERLY RESULTS
                                                                                    Three Months Ended
                                                           2004  |               2005               |           2006
(Cdn$ millions, except per share amounts)                   Dec  |   Mar     Jun      Sep      Dec  |   Mar      Jun      Sep
-----------------------------------------------------------------|----------------------------------|-------------------------
<S>                                                        <C>     <C>     <C>     <C>       <C>       <C>    <C>       <C>
Net Sales from Continuing Operations                         805 |   856     909    1,094     1,073 |   980    1,039      997
Net Income (Loss) from Continuing Operations                 226 |    19     170      211       300 |   (79)     406      193
Net Income from Discontinued Operations                       20 |    18      30      404         - |      -       -        -
                                                           ------|------- --------------------------|-------------------------
Net Income (Loss)                                            246 |    37     200      615       300 |   (79)     406      193
                                                           ------|------- --------------------------|-------------------------
                                                                 |                                  |
Earnings (Loss) per Common Share from                            |                                  |
     Continuing Operations ($/share)                             |                                  |
   Basic                                                    0.87 |  0.07    0.65     0.81      1.15 | (0.30)    1.55     0.74
   Diluted                                                  0.86 |  0.07    0.64     0.79      1.12 | (0.30)    1.52     0.72
                                                                 |                                  |
Earnings (Loss) per Common Share ($/share)                       |                                  |
   Basic                                                    0.95 |  0.14    0.77     2.36      1.15 | (0.30)    1.55     0.74
   Diluted                                                  0.94 |  0.14    0.76     2.30      1.12 | (0.30)    1.52     0.72
                                                           ------|------- --------------------------|-------------------------
</TABLE>

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

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

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

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

                                      46
<PAGE>

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

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

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

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4.  CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our Chief  Executive  Officer and Chief  Financial  Officer have  evaluated the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this
report.  They  concluded  that,  as of the end of the  period  covered  by this
report,  our disclosure  controls and  procedures  were designed to be and were
adequate and effective in ensuring that  material  information  relating to the
Company and its consolidated subsidiaries would be made known to them by others
within those entities and that the information  required to be disclosed by the
Company in the reports that it files or submits under the  Securities  Exchange
Act is recorded,  processed,  summarized  and reported  within the time periods
specified in the SEC's rules and forms. Management recognizes that any controls
and  procedures,  no matter how well  designed and  operated,  can provide only
reasonable  assurance of achieving the desired  control  objectives and they do
not expect that the Company's  disclosure  controls and  procedures or internal
controls over financial reporting will prevent all errors or fraud. In reaching
a reasonable  level of assurance,  management  necessarily is required to apply
its judgment in evaluating the cost-benefit  relationship of possible  controls
and procedures.

CHANGES IN INTERNAL CONTROLS

We have  continually  had in place  systems  relating to internal  control over
financial  reporting.  To keep pace with  growth in our US  operations,  we are
implementing additional inventory tracking and procure-to-pay process controls.
We have evaluated  these changes and confirm that there has not been any change
in the Company's  internal  control over financial  reporting  during the third
quarter  of 2006  that has  materially  affected,  or is  reasonably  likely to
materially affect, the Company's internal control over financial reporting.  As
well, based on these  evaluations,  there were no material  weaknesses in these
internal controls requiring  corrective action. As a result, no such corrective
actions were taken.

                                      47
<PAGE>

                                    PART II

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

None


ITEM 6.  EXHIBITS

10.46    Indemnification Agreement dated July 5, 2006 between Nexen Inc. and A.
         Anne McLellan (filed as Exhibit 10.2 to Form 8-K dated July 20, 2006).

10.47    Second Amending Agreement dated July 14, 2006 to the Credit Agreement,
         dated as of July 22,  2005,  by and among Nexen Inc.,  Nexen  Holdings
         U.S.A.  Inc.  and Nexen  Petroleum  U.K.  Limited  as  borrowers,  the
         financial  institutions named therein and other institutions from time
         to time  party  thereto  as  lenders  and The  Toronto-Dominion  Bank,
         Toronto  Dominion (Texas) LLC and The  Toronto-Dominion  Bank , London
         Branch as agents of the  lenders  (filed as  Exhibit  10.1 to Form 8-K
         dated July 20, 2006).

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 October 27, 2006.

                                         NEXEN INC.


                                         /s/ Marvin F. Romanow
                                         -----------------------------
                                         Marvin F. Romanow
                                         Executive Vice President and
                                         Chief Financial Officer
                                         (Principal Financial Officer)



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





                                      48