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

                                   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, 2009

|_|  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]


                                   NEXEN INC.

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

                              801 - 7th Avenue S.W.
                        Calgary, Alberta, Canada T2P 3P7
                            Telephone (403) 699-4000
                           Web site - WWW.NEXENINC.COM


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

                  Yes     [X]               No     [_]

Indicate by check mark whether the registrant has submitted  electronically  and
posted on its corporate Web site, if any, every  Interactive  Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter)  during the  preceding 12 months (or for such shorter  period that
the registrant was required to submit and post such files).

                  Yes     [_]               No     [_]

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

Large accelerated filer  [X]   Accelerated filer              [_]
Non-Accelerated filer    [_]   Smaller reporting company      [_]


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

                  Yes     [_]               No     [X]

On  September  30,  2009,  there  were  521,846,559  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 (MD&A) ..................30
    Item 3.     Quantitative and Qualitative Disclosures about
                Market Risk .................................................50
    Item 4.     Controls and Procedures .....................................50

PART II         OTHER INFORMATION
    Item 1.     Legal Proceedings ...........................................52
    Item 6.     Exhibits ....................................................52

This report  should be read in  conjunction  with our 2008 Annual Report on Form
10-K (2008 Form 10-K) and with our  current  reports on Forms 10-Q and 8-K filed
or furnished during the year.

SPECIAL NOTE TO CANADIAN INVESTORS

Nexen is a US Securities  and Exchange  Commission  (SEC)  registrant and a Form
10-K and related forms filer.  Therefore,  our reserves estimates and securities
regulatory  disclosures  generally  follow SEC  requirements.  In 2004,  certain
Canadian  regulatory  authorities adopted NATIONAL INSTRUMENT 51-101 - STANDARDS
OF  DISCLOSURE  FOR OIL AND GAS  ACTIVITIES  (NI 51-101)  which  prescribe  that
Canadian  companies follow certain  standards for the preparation and disclosure
of reserves and related  information.  We have been granted  certain  exemptions
from NI 51-101.  Please refer to the SPECIAL NOTE TO CANADIAN  INVESTORS on page
79 of our 2008 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 ALSO  PRESENTED.  VOLUMES  AND  RESERVES  INCLUDE
SYNCRUDE MINING 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>
/d        =     per day                                         mcf     =    thousand cubic feet
bbl       =     barrel                                          mmcf    =    million cubic feet
mbbls     =     thousand barrels                                bcf     =    billion cubic feet
mmbbls    =     million barrels                                 NGL     =    natural gas liquid
mmbtu     =     million British thermal units                   WTI     =    West Texas Intermediate
boe       =     barrel of oil equivalent                        MW      =    megawatt
mboe      =     thousand barrels of oil equivalent              GWh     =    gigawatt hours
mmboe     =     million barrels of oil equivalent               Brent   =    Dated Brent
PSC(TM)   =     Premium Synthetic Crude(TM)                     NYMEX   =    New York Mercantile Exchange
</TABLE>

In this Form 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 per 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, 2009, the noon-day exchange rate was US$0.9327 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, 2009 and 2008.............4

Unaudited Consolidated Balance Sheet
as at September 30, 2009 and December 31, 2008..............................5

Unaudited Consolidated Statement of Cash Flows
for the Three and Nine Months Ended September 30, 2009 and 2008.............6

Unaudited Consolidated Statement of Shareholders' Equity
for the Three and Nine Months Ended September 30, 2009 and 2008.............7

Unaudited Consolidated Statement of Comprehensive Income
for the Three and Nine Months Ended September 30, 2009 and 2008.............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

                                                                               Three Months            Nine Months
                                                                            Ended September 30       Ended September 30
(Cdn$ millions, except per share amounts)                                    2009         2008        2009       2008
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>          <C>         <C>        <C>
REVENUES AND OTHER INCOME
     Net Sales                                                              1,097        2,213       3,345      6,154
     Marketing and Other (Note 14)                                            296          131         635        387
                                                                         ----------------------------------------------
                                                                            1,393        2,344       3,980      6,541
                                                                         ----------------------------------------------
EXPENSES
     Operating                                                                321          341         946        998
     Depreciation, Depletion, Amortization and Impairment                     358          386       1,180      1,084
     Transportation and Other                                                 185          291         618        691
     General and Administrative                                               113         (308)        380        165
     Exploration                                                               89          112         219        245
     Interest (Note 9)                                                         84           16         226         59
                                                                         ----------------------------------------------
                                                                            1,150          838       3,569      3,242
                                                                         ----------------------------------------------

INCOME BEFORE PROVISION FOR INCOME TAXES                                      243        1,506         411      3,299
                                                                         ----------------------------------------------

PROVISION FOR (RECOVERY OF) INCOME TAXES
     Current                                                                  190          (26)        514        817
     Future                                                                   (81)         645        (397)       583
                                                                         ----------------------------------------------
                                                                              109          619         117      1,400
                                                                         ----------------------------------------------

NET INCOME                                                                    134          887         294      1,899
     Less: Net Income Attributable to Canexus Non-Controlling Interests       (12)          (1)        (17)        (3)
                                                                         ----------------------------------------------

NET INCOME ATTRIBUTABLE TO NEXEN INC.                                         122          886         277      1,896
                                                                         ==============================================

EARNINGS PER COMMON SHARE ($/share) (Note 15)
     Basic                                                                   0.23        1.68        0.53        3.59
                                                                         ==============================================

     Diluted                                                                 0.23        1.66        0.53        3.53
                                                                         ==============================================
</TABLE>

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.


                                       4
<PAGE>

<TABLE>
<CAPTION>
NEXEN INC.
UNAUDITED CONSOLIDATED BALANCE SHEET

                                                                               September 30       December 31
(Cdn$ millions, except share amounts)                                                  2009              2008
--------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                <C>
ASSETS
   CURRENT ASSETS
      Cash and Cash Equivalents                                                       1,897             2,003
      Restricted Cash (Note 7)                                                          216               103
      Accounts Receivable (Note 2)                                                    2,877             3,163
      Inventories and Supplies (Note 3)                                                 590               484
      Other                                                                             199               169
                                                                          ------------------------------------
         Total Current Assets                                                         5,779             5,922
                                                                          ------------------------------------

   PROPERTY, PLANT AND EQUIPMENT
      Net of Accumulated Depreciation, Depletion, Amortization and
         Impairment of $10,452 (December 31, 2008 - $10,393)                         15,642            14,922
   GOODWILL                                                                             346               390
   FUTURE INCOME TAX ASSETS                                                             916               351
   DEFERRED CHARGES AND OTHER ASSETS (Note 5)                                           386               570
                                                                          ------------------------------------
TOTAL ASSETS                                                                         23,069            22,155
                                                                          ====================================

LIABILITIES
   CURRENT LIABILITIES
      Accounts Payable and Accrued Liabilities (Note 8)                               3,358             3,326
      Accrued Interest Payable                                                           81                67
      Dividends Payable                                                                  26                26
                                                                          ------------------------------------
         Total Current Liabilities                                                    3,465             3,419
                                                                          ------------------------------------

   LONG-TERM DEBT (Note 9)                                                            7,429             6,578
   FUTURE INCOME TAX LIABILITIES                                                      2,698             2,619
   ASSET RETIREMENT OBLIGATIONS (Note 11)                                               992             1,024
   DEFERRED CREDITS AND OTHER LIABILITIES (Note 12)                                   1,084             1,324

SHAREHOLDERS' EQUITY (Note 13)
   Nexen Inc. Shareholders' Equity
      Common Shares, no par value
         Authorized:   Unlimited
         Outstanding:  2009 - 521,846,559 shares
                       2008 - 519,448,590 shares                                      1,025               981
      Contributed Surplus                                                                 1                 2
      Retained Earnings                                                               6,489             6,290
      Accumulated Other Comprehensive Loss                                             (183)             (134)
                                                                          ------------------------------------
   Total Nexen Inc. Shareholders' Equity                                              7,332             7,139
      Canexus Non-Controlling Interests                                                  69                52
                                                                          ------------------------------------
   TOTAL SHAREHOLDERS' EQUITY                                                         7,401             7,191
   COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 16)
                                                                          ------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                           23,069            22,155
                                                                          ====================================
</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

                                                                                  Three Months             Nine Months
                                                                               Ended September 30       Ended September 30
(Cdn$ millions)                                                                 2009         2008         2009        2008
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>          <C>          <C>        <C>
OPERATING ACTIVITIES
   Net Income                                                                    134          887          294       1,899
   Charges and Credits to Income not Involving Cash (Note 17)                    174          692          887       1,544
   Exploration Expense                                                            89          112          219         245
   Changes in Non-Cash Working Capital (Note 17)                                 113         (840)         193        (468)
   Other                                                                         (49)         117         (234)         79
                                                                           ------------------------------------------------
                                                                                 461          968        1,359       3,299

FINANCING ACTIVITIES
   Proceeds from Long-Term Notes                                               1,081            -        1,081           -
   Proceeds from (Repayment of) Term Credit Facilities, Net                     (915)       1,031          728         803
   Proceeds from (Repayment of) Canexus Term Credit Facilities, Net               (4)          (9)          48         (19)
   Proceeds from Canexus Debentures                                               46            -           46           -
   Proceeds from Canexus Notes                                                     -            -           -           51
   Repayment of Medium-Term Notes                                                  -            -           -         (125)
   Repayment of Short-Term Borrowings                                             (1)          (4)          (1)         (4)
   Dividends on Common Shares                                                    (26)         (26)         (78)        (66)
   Distributions Paid to Canexus Non-Controlling Interests                        (4)          (4)         (11)        (11)
   Issue of Common Shares and Exercise of Tandem Options for Shares               12            8           42          48
   Repurchase of Common Shares for Cancellation                                    -         (300)           -        (300)
   Changes in Non-Cash Working Capital (Note 17)                                   -           10            -          10
   Other                                                                         (18)           2          (19)          -
                                                                           ------------------------------------------------
                                                                                 171          708        1,836         387

INVESTING ACTIVITIES
   Capital Expenditures
       Exploration and Development                                              (586)        (689)      (1,921)     (2,064)
       Proved Property Acquisitions                                                -            -         (755)         (2)
       Energy Marketing, Chemicals, Corporate and Other                          (69)         (36)        (198)        (83)
   Proceeds on Disposition of Assets                                               2            -           17           -
   Changes in Restricted Cash                                                     93          196         (154)        143
   Changes in Non-Cash Working Capital (Note 17)                                  14          (66)         (41)       (120)
   Other                                                                         (15)          36          (16)        (61)
                                                                           ------------------------------------------------
                                                                                (561)        (559)      (3,068)     (2,187)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                    (148)          41         (233)         67
                                                                           ------------------------------------------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                 (77)       1,158         (106)      1,566

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                                1,974          614        2,003         206
                                                                           ------------------------------------------------

CASH AND CASH EQUIVALENTS - END OF PERIOD (1)                                  1,897        1,772        1,897       1,772
                                                                           ================================================
</TABLE>
(1)  Cash and cash  equivalents  at  September  30, 2009 consist of cash of $376
     million and short-term  investments of $1,521 million (September 30, 2008 -
     cash of $26 million and short-term investments of $1,746 million).


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

                                                                                   Three Months            Nine Months
                                                                                Ended September 30     Ended September 30
(Cdn$ millions)                                                                  2009        2008        2009       2008
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>         <C>         <C>        <C>
COMMON SHARES, Beginning of Period                                              1,011         972         981        917
      Issue of Common Shares                                                        8           8          37         32
      Exercise of Tandem Options for Shares                                         4           -           5         16
      Accrued Liability Relating to Tandem Options Exercised for Common
         Shares                                                                     2           1           2         16
      Repurchased Under Normal Course Issuer Bid                                    -         (18)          -        (18)
                                                                             ----------------------------------------------
   Balance at End of Period                                                     1,025         963       1,025        963
                                                                             ==============================================

CONTRIBUTED SURPLUS, Beginning of Period                                            2           2           2          3
      Exercise of Tandem Options                                                   (1)          -          (1)        (1)
                                                                             ----------------------------------------------
   Balance at End of Period                                                         1           2           1          2
                                                                             ==============================================

RETAINED EARNINGS, Beginning of Period                                          6,393       5,953       6,290      4,983
      Net Income Attributable to Nexen Inc.                                       122         886         277      1,896
      Dividends on Common Shares (Note 13)                                        (26)        (26)        (78)       (66)
      Repurchase of Common Shares for Cancellation                                  -        (282)          -       (282)
                                                                             ----------------------------------------------
   Balance at End of Period                                                     6,489       6,531       6,489      6,531
                                                                             ==============================================

ACCUMULATED OTHER COMPREHENSIVE LOSS, Beginning of Period                        (157)       (274)       (134)      (293)
      Other Comprehensive Income (Loss)                                           (26)         41         (49)        60
                                                                             ----------------------------------------------
   Balance at End of Period                                                      (183)       (233)       (183)      (233)
                                                                             ==============================================

CANEXUS NON-CONTROLLING INTERESTS, Beginning of Period                             54          62          52         67
      Net Income Attributable to Non-Controlling Interests                         15           1          24          3
      Distributions Declared to Non-Controlling Interests                          (5)         (5)        (14)       (13)
      Issue of Partnership Units to Non-Controlling Interests under
         Distribution Reinvestment Plan                                             1           1           3          2
      Estimated Fair Value of Conversion Feature of Convertible Debenture
         Issue Attributable to Non-Controlling Interests                            4           -           4          -
                                                                             ----------------------------------------------
   Balance at End of Period                                                        69          59          69         59
                                                                             ==============================================
</TABLE>

<TABLE>
<CAPTION>
NEXEN INC.
UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30

                                                                                    Three Months           Nine Months
                                                                                 Ended September 30      Ended September 30
(Cdn$ millions)                                                                     2009      2008        2009        2008
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>       <C>         <C>        <C>
NET INCOME ATTRIBUTABLE TO NEXEN INC.                                                122       886         277       1,896
   Other Comprehensive Income (Loss), Net of Income Taxes:
      Foreign Currency Translation Adjustment
         Net Gains (Losses) on Investment in Self-Sustaining Foreign
              Operations                                                            (408)      221        (693)        365
         Net Gains (Losses) on Foreign-Denominated Debt Hedging Self-
             Sustaining Foreign Operations(1)                                        384      (180)        646        (305)
         Realized Translation Adjustments Recognized in Net Income                    (2)        -          (2)          -
                                                                               ----------------------------------------------
      Other Comprehensive Income (Loss)                                              (26)       41         (49)         60
                                                                               ----------------------------------------------
COMPREHENSIVE INCOME ATTRIBUTABLE TO NEXEN INC.                                       96       927         228       1,956
                                                                               ==============================================
</TABLE>

(1)  Net of income tax expense for the three months ended  September 30, 2009 of
     $55 million (2008 - $26 million recovery) and net of income tax expense for
     the nine months ended September 30, 2009 of $93 million (2008 - $45 million
     recovery).

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 GAAP on the Unaudited
Consolidated  Financial  Statements  is  disclosed in Note 19. In the opinion of
management,   the  Unaudited   Consolidated  Financial  Statements  contain  all
adjustments of a normal and recurring  nature  necessary to present fairly Nexen
Inc.'s (Nexen, we or our) financial  position at September 30, 2009 and December
31, 2008 and the results of our  operations and our cash flows for the three and
nine months ended September 30, 2009 and 2008.

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 on an
ongoing basis,  including those related to accruals,  litigation,  environmental
and asset retirement  obligations,  recoverability of assets, income taxes, fair
values of derivative assets and liabilities,  capital adequacy and determination
of proved  reserves.  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, 2009
are not necessarily  indicative of the results of operations or cash flows to be
expected for the year ending  December 31, 2009.  As at October 27, 2009,  there
are  no  material  subsequent  events  requiring  additional  disclosure  in  or
amendment to these financial statements.

These Unaudited  Consolidated Financial Statements should be read in conjunction
with our Audited  Consolidated  Financial  Statements  included in our 2008 Form
10-K. Except as described below, the accounting policies we follow are described
in Note 1 of the Audited Consolidated  Financial Statements included in our 2008
Form 10-K.


CHANGES IN ACCOUNTING POLICIES
GOODWILL AND INTANGIBLE ASSETS
On January  1, 2009,  we  retrospectively  adopted  the  Canadian  Institute  of
Chartered Accountants (CICA) Section 3064, GOODWILL AND INTANGIBLE ASSETS issued
by the AcSB. This section  clarifies the criteria for the recognition of assets,
intangible assets and internally developed  intangible assets.  Adoption of this
standard  did not  have a  material  impact  on our  results  of  operations  or
financial position.

BUSINESS COMBINATIONS
On January  1, 2009,  we  prospectively  adopted  CICA  Section  1582,  BUSINESS
COMBINATIONS  issued  by the  AcSB.  This  section  establishes  principles  and
requirements of the  acquisition  method for business  combinations  and related
disclosures.  Adoption of this  statement did not have a material  impact on our
results of operations or financial position.

CONSOLIDATED FINANCIAL STATEMENTS AND NON-CONTROLLING INTERESTS
On January 1,  2009,  we adopted  CICA  Sections  1601,  CONSOLIDATED  FINANCIAL
STATEMENTS, and 1602, NON-CONTROLLING INTERESTS issued by the AcSB. Section 1601
establishes standards for the preparation of consolidated  financial statements.
Section 1602 provides  guidance on accounting for  non-controlling  interests in
consolidated financial statements subsequent to a business combination. Adoption
of these  statements did not have a material impact on our results of operations
or  financial  position.  The  presentation  changes  have been  included in the
Unaudited Consolidated Financial Statements as applicable.

<TABLE>
<CAPTION>
2.   ACCOUNTS RECEIVABLE
                                                                                          September 30         December 31
                                                                                                  2009                2008
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                  <C>
Trade
     Energy Marketing                                                                            1,489               1,501
     Energy Marketing Derivative Contracts (Note 6)                                                552                 755
     Oil and Gas                                                                                   657                 639
     Chemicals and Other                                                                            47                  68
                                                                                   ------------------------------------------
                                                                                                 2,745               2,963
Non-Trade                                                                                          186                 270
                                                                                   ------------------------------------------
                                                                                                 2,931               3,233
Allowance for Doubtful Receivables                                                                 (54)                (70)
                                                                                   ------------------------------------------
Total                                                                                            2,877               3,163
                                                                                   ==========================================
</TABLE>

                                        8
<PAGE>

<TABLE>
<CAPTION>
3.   INVENTORIES AND SUPPLIES

                                                                                          September 30         December 31
                                                                                                  2009                2008
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                  <C>
Finished Products
     Energy Marketing                                                                              449                 384
     Oil and Gas                                                                                    32                  17
     Chemicals and Other                                                                            11                  16
                                                                                   ------------------------------------------
                                                                                                   492                 417
Work in Process                                                                                      8                   6
Field Supplies                                                                                      90                  61
                                                                                   ------------------------------------------
Total                                                                                              590                 484
                                                                                   ==========================================
</TABLE>

4.   SUSPENDED EXPLORATION WELL COSTS

The  following  table shows the changes in  capitalized  exploratory  well costs
during the nine months ended  September 30, 2009 and the year ended December 31,
2008,  and  does  not  include  amounts  that  were  initially  capitalized  and
subsequently  expensed in the same period.  Suspended exploration well costs are
included in property, plant and equipment.

<TABLE>
<CAPTION>
                                                                                     Nine Months Ended           Year Ended
                                                                                          September 30          December 31
                                                                                                  2009                 2008
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                   <C>
Beginning of Period                                                                                518                  326
     Exploratory Well Costs Capitalized Pending the Determination of
       Proved Reserves                                                                             186                  254
     Capitalized Exploratory Well Costs Charged to Expense                                         (32)                 (81)
     Transfers to Wells, Facilities and Equipment Based on
       Determination of Proved Reserves                                                            (17)                 (29)
     Effects of Foreign Exchange Rate Changes                                                      (37)                  48
                                                                                   ------------------------------------------
End of Period                                                                                      618                  518
                                                                                   ==========================================
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                          September 30          December 31
                                                                                                  2009                 2008
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                   <C>
Capitalized for a Period of One Year or Less                                                       189                  239
Capitalized for a Period of Greater than One Year                                                  429                  279
                                                                                   ------------------------------------------
Total                                                                                              618                  518
                                                                                   ==========================================

Number of Projects that have Exploratory Well Costs Capitalized for a Period
     Greater than One Year                                                                          11                    7
                                                                                   ------------------------------------------
</TABLE>

As at September 30, 2009, we have  exploratory  costs that have been capitalized
for more than one year  relating to our interests in six  exploratory  blocks in
the North Sea ($178 million),  certain coalbed methane and shale gas exploratory
activities  in Canada  ($120  million),  two  exploratory  blocks in the Gulf of
Mexico ($112 million), and our interest in an exploratory block offshore Nigeria
($19 million).  These costs relate to projects with successful exploration wells
for which we have not been able to recognize proved  reserves.  We are assessing
all of these wells and  projects,  and are working  with our partners to prepare
development  plans,  drill  additional  appraisal wells or to assess  commercial
viability.


                                        9
<PAGE>

<TABLE>
<CAPTION>
5.   DEFERRED CHARGES AND OTHER ASSETS

                                                                                          September 30          December 31
                                                                                                  2009                 2008
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                   <C>
Crude Oil Put Options and Natural Gas Swaps (Note 6) (1)                                             -                  234
Long-Term Energy Marketing Derivative Contracts (Note 6)                                           241                  217
Long-Term Capital Prepayments                                                                       42                   61
Asset Retirement Remediation Fund                                                                    9                    9
Defined Benefit Pension Assets                                                                      46                    3
Other                                                                                               48                   46
                                                                                   ------------------------------------------
Total                                                                                              386                  570
                                                                                   ==========================================
</TABLE>
(1)  The crude oil put options were  reclassified to other current assets in the
     first quarter as they settle within 12 months.


6.   FINANCIAL INSTRUMENTS

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

In our energy  marketing  group,  we enter into  contracts  to purchase and sell
crude  oil,  natural  gas and  other  energy  commodities,  and  use  derivative
contracts,  including  futures,  forwards,  swaps and  options,  for hedging and
trading purposes (collectively  derivatives).  We also use derivatives to manage
commodity  price risk and foreign  currency risk for  non-trading  purposes.  We
categorize our derivative  instruments as trading or non-trading  activities and
carry the  instruments  at fair  value on our  balance  sheet.  The  derivatives
section below details our  derivatives and fair values as at September 30, 2009.
The fair  values are  included  with  accounts  receivable  or  payable  and are
classified as long-term or short-term based on anticipated  settlement date. Any
change in fair value is included in marketing and other income.

We carry our long-term debt at amortized cost using the effective  interest rate
method.  At September 30, 2009,  the estimated  fair value of our long-term debt
was $7,531  million  (December  31,  2008 - $5,686  million)  as compared to the
carrying value of $7,429 million (December 31, 2008 - $6,578 million).  The fair
value of long-term debt is estimated  based on prices provided by quoted markets
and third-party brokers.


                                       10
<PAGE>

DERIVATIVES

(a)  DERIVATIVE CONTRACTS RELATED TO TRADING ACTIVITIES

Our energy marketing group engages in various activities  including the purchase
and sale of physical  commodities and the use of financial  instruments  such as
commodity and foreign exchange futures, forwards and swaps to economically hedge
exposures and generate revenue. These contracts are accounted for as derivatives
and, where applicable, are presented net on the balance sheet in accordance with
netting arrangements.  The fair value and carrying amounts related to derivative
instruments held by our energy marketing operations are as follows:

<TABLE>
<CAPTION>
                                                                                         September 30           December 31
                                                                                                 2009                  2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                    <C>
  Commodity Contracts                                                                             537                   742
  Foreign Exchange Contracts                                                                       15                    13
                                                                                  ------------------------------------------
Accounts Receivable (Note 2)                                                                      552                   755
                                                                                  ------------------------------------------

  Commodity Contracts                                                                             241                   213
  Foreign Exchange Contracts                                                                        -                     4
                                                                                  ------------------------------------------
Deferred Charges and Other Assets (Note 5) (1)                                                    241                   217
                                                                                  ------------------------------------------

  Total Trading Derivative Assets                                                                 793                   972
                                                                                  ==========================================

  Commodity Contracts                                                                             516                   585
  Foreign Exchange Contracts                                                                       56                    30
                                                                                  ------------------------------------------
Accounts Payable and Accrued Liabilities (Note 8)                                                 572                   615
                                                                                  ------------------------------------------

  Commodity Contracts                                                                             228                   248
  Foreign Exchange Contracts                                                                        -                    46
                                                                                  ------------------------------------------
Deferred Credits and Other Liabilities (Note 12) (1)                                              228                   294
                                                                                  ------------------------------------------

  Total Trading Derivative Liabilities                                                            800                   909
                                                                                  ==========================================

  Total Net Trading Derivative Contracts                                                           (7)                   63
                                                                                  ==========================================
</TABLE>

(1)  These  derivative  contracts  settle  beyond 12 months  and are  considered
     non-current;  once  settlement  is within 12 months,  they are  included in
     accounts receivable or accounts payable.

Excluding  the impact of  netting  arrangements,  the fair  value of  derivative
instruments is as follows:

<TABLE>
<CAPTION>
                                                                                                            September 30
                                                                                                                    2009
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                         <C>
Current Trading Assets                                                                                             3,608
Non-Current Trading Assets                                                                                         1,031
                                                                                                        ---------------------
  Total Trading Derivative Assets                                                                                  4,639
                                                                                                        =====================

Current Trading Liabilities                                                                                        3,628
Non-Current Trading Liabilities                                                                                    1,018
                                                                                                        ---------------------
  Total Trading Derivative Liabilities                                                                             4,646
                                                                                                        =====================

                                                                                                        ---------------------
  Total Net Trading Derivative Contracts                                                                              (7)
                                                                                                        =====================
</TABLE>

Trading  revenues  generated by our energy  marketing  group  include  gains and
losses on derivative instruments and non-derivative instruments such as physical
inventory.  During the three and nine  months  ended  September  30,  2009,  the
following trading revenues were recognized in marketing and other income:

<TABLE>
<CAPTION>
                                                                                         Three Months            Nine Months
                                                                                   Ended September 30     Ended September 30
                                                                                                 2009                   2009
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                    <C>
Commodity                                                                                         177                    748
Foreign Exchange                                                                                   11                    (72)
                                                                                  --------------------------------------------
  Marketing Revenue (Note 14)                                                                     188                    676
                                                                                  ============================================
</TABLE>

                                       11
<PAGE>

As an energy marketer,  we may undertake several transactions during a period to
execute a single sale of physical  product.  Each transaction may be represented
by one or more derivative  instruments  including a physical buy, physical sell,
and in many cases,  numerous financial  instruments for economically hedging and
trading purposes.  The absolute notional volumes  associated with our derivative
instrument transactions are as follows:

<TABLE>
<CAPTION>
                                                                                       Three Months              Nine Months
                                                                                 Ended September 30       Ended September 30
                                                                                               2009                     2009
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>               <C>                      <C>
Natural Gas                                                            bcf/d                   19.3                     22.2
Crude Oil                                                           mmbbls/d                    3.1                      3.6
Power                                                                  GWh/d                  236.1                    231.0
Foreign Exchange                                                USD millions                    742                    1,973
Foreign Exchange                                               Euro millions                     48                      308
                                                                             -----------------------------------------------
</TABLE>

(b)  DERIVATIVE CONTRACTS RELATED TO NON-TRADING ACTIVITIES

The fair  value and  carrying  amounts  of  derivative  instruments  related  to
non-trading activities are as follows:

<TABLE>
<CAPTION>
                                                                                         September 30           December 31
                                                                                                 2009                  2008
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                    <C>
Accounts Receivable                                                                                12                     6
Deferred Charges and Other Assets (Note 5) (1)                                                      -                   234
                                                                                  --------------------------------------------
  Total Non-Trading Derivative Assets                                                              12                   240
                                                                                  ============================================

Accounts Payable and Accrued Liabilities                                                           27                    21
Deferred Credits and Other Liabilities (1)                                                          7                    26
                                                                                  --------------------------------------------
  Total Non-Trading Derivative Liabilities                                                         34                    47
                                                                                  ============================================

  Total Net Non-Trading Derivative Contracts (2)                                                  (22)                  193
                                                                                  ============================================
</TABLE>
(1)  These  derivative  contracts  settle  beyond 12 months  and are  considered
     non-current.
(2)  The net fair  value of these  derivatives  is equal to the gross fair value
     before  consideration  of netting  arrangements  and  collateral  posted or
     received with counterparties.

CRUDE OIL PUT OPTIONS
In 2008,  we purchased  put options on  approximately  70,000 bbls/d of our 2009
crude oil production for $14 million.  These options establish an annual average
Dated Brent floor price of US$60/bbl on these volumes. In September 2008, Lehman
Brothers  filed for bankruptcy  protection.  This impacts  approximately  25,000
bbls/d of our 2009 put options and the  carrying  value of these put options has
been reduced to nil. The crude oil put options are carried at fair value and are
classified  as long-term or  short-term  based on their  anticipated  settlement
date.  Fair value of the put options is  supported by multiple  quotes  obtained
from third party brokers,  which were validated with  observable  market data to
the extent possible.  With the rise in Dated Brent oil price since the beginning
of the  year,  the fair  value of the  crude  oil put  options  decreased.  This
decrease is included in marketing and other income.

<TABLE>
<CAPTION>
                                                                                                    Change in Fair Value
                                                                                            -----------------------------------
                                                                                               Three Months        Nine Months
                                                                                                      Ended              Ended
                                            Notional                 Average          Fair     September 30       September 30
                                             Volumes     Term    Floor Price         Value             2009               2009
-------------------------------------------------------------------------------------------------------------------------------
                                             (bbls/d)               (US$/bbl)
<S>                                         <C>          <C>     <C>                 <C>       <C>                <C>
Dated Brent Crude Oil Put Options             45,000     2009             60            12              (23)              (218)
Dated Brent Crude Oil Put Options             25,000     2009             60             -                -                  -
                                                                              -------------------------------------------------
                                                                                        12              (23)              (218)
                                                                              =================================================
</TABLE>

                                       12

<PAGE>

FIXED-PRICE NATURAL GAS CONTRACTS AND NATURAL GAS SWAPS
We have fixed-price natural gas sales contracts and offsetting natural gas swaps
that are not part of our trading activities. These sales contracts and swaps are
carried at fair value and are  classified  as long-term or  short-term  based on
their  anticipated  settlement date. The change in fair value of the fixed price
natural gas  contracts  and natural gas swaps is included in marketing and other
income.

<TABLE>
<CAPTION>
                                                                                                    Change in Fair Value
                                                                                            -----------------------------------
                                                                                               Three Months        Nine Months
                                                                                                      Ended              Ended
                                            Notional                 Average          Fair     September 30       September 30
                                             Volumes     Term          Price         Value             2009               2009
-------------------------------------------------------------------------------------------------------------------------------
                                               (Gj/d)                  ($/Gj)
<S>                                         <C>          <C>         <C>             <C>       <C>                <C>
Fixed-Price Natural Gas Contracts             15,514     2009           2.28          (14)               (2)                 7
                                              15,514     2010           2.28           (5)                4                 21
Natural Gas Swaps                             15,514     2009           7.60          (13)                3                (19)
                                              15,514     2010           7.60           (2)                2                 (3)
                                                                                 ----------------------------------------------
                                                                                      (34)                7                  6
                                                                                 ==============================================
</TABLE>

(c)  FAIR VALUE OF DERIVATIVES

Our processes for  estimating and  classifying  the fair value of our derivative
contracts are consistent with those in place at December 31, 2008. The following
table  includes  our  derivatives  carried  at fair  value for our  trading  and
non-trading   activities  as  at  September  30,  2009.   Financial  assets  and
liabilities  are classified in the fair value  hierarchy in their entirety based
on the lowest level of input that is significant to the fair value  measurement.
Assessment  of  the  significance  of a  particular  input  to  the  fair  value
measurement  requires  judgment and may affect  placement  within the fair value
hierarchy levels.

<TABLE>
<CAPTION>
Net Derivatives                                                           Level 1       Level 2       Level 3           Total
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>           <C>           <C>               <C>
  Trading Derivatives                                                        (180)          151            22              (7)
  Non-Trading Derivatives                                                       -           (22)            -             (22)
                                                                     ---------------------------------------------------------
  Total                                                                      (180)          129            22             (29)
                                                                     =========================================================
</TABLE>

A reconciliation  of changes in the fair value of our derivatives  classified as
Level 3 for the nine months ended September 30, 2009 is provided below:

<TABLE>
<CAPTION>
                                                                                                                      Level 3
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                                   <C>
Beginning of Period                                                                                                       (82)
  Realized and Unrealized Gains (Losses)                                                                                   57
  Purchases, Issuances and Settlements                                                                                     55
  Transfers In and/or Out of Level 3                                                                                       (8)
                                                                                                               ---------------
End of Period                                                                                                              22
                                                                                                               ===============

Unsettled Gains (Losses) Relating to Instruments Still Held as of September 30, 2009                                       49
                                                                                                               ===============
</TABLE>

Trading derivatives classified in Level 3 are generally economically hedged such
that  gains or losses on  positions  classified  in Level 3 are often  offset by
gains or losses on positions  classified in Level 1 or 2.  Transfers into or out
of Level 3 represent existing assets and liabilities that were either previously
categorized as a higher level for which the inputs became unobservable or assets
and liabilities that were previously  classified as Level 3 for which the lowest
significant input became observable during the period.


7.   RISK MANAGEMENT

(a)  MARKET RISK

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

The following  market risk  discussion  focuses on the commodity  price risk and
foreign  currency risk related to our financial  instruments  as our exposure to
interest rate risk is immaterial as substantially all of our debt is fixed rate.


                                       13
<PAGE>

COMMODITY PRICE RISK

We are exposed to  commodity  price  movements as part of our normal oil and gas
operations,  particularly  in relation to the prices  received for our crude oil
and natural gas.  Commodity  price risk related to  conventional  and  synthetic
crude oil prices is our most  significant  market risk  exposure.  Crude oil and
natural gas are sensitive to numerous  worldwide  factors and are generally sold
at  contract  or  posted  prices.  Changes  in  the  global  supply  and  demand
fundamentals in the crude oil market and geopolitical  events can  significantly
affect  crude oil prices,  while  natural gas prices are  affected  primarily by
North American supply and demand fundamentals.  Changes in crude oil and natural
gas prices may significantly affect our results of operations and cash generated
from operating activities. Consequently, these changes may also affect the value
of our oil and gas  properties,  our  level  of  spending  for  exploration  and
development, and our ability to meet our obligations as they come due.

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

Our energy marketing business is focused on providing services for our customers
and suppliers to meet their energy commodity needs. We market and trade physical
energy  commodities  including  crude oil,  natural gas,  electricity  and other
commodities in selected  regions of the world.  We accomplish this by buying and
selling  physical  commodities,  by  acquiring  and  holding  rights to physical
transportation and storage assets for these commodities,  and by building strong
relationships with our customers and suppliers. In order to manage the commodity
and foreign  exchange price risks that are generated by this physical  business,
we  use  financial  derivative  contracts  including   energy-related   futures,
forwards, swaps and options, as well as foreign currency swaps or forwards.

We also seek to profit from our views on the future movement of energy commodity
pricing  relationships,  primarily between different locations,  time periods or
product  qualities.  We do this by holding  open  positions,  where the terms of
physical  or  financial  contracts  are not  completely  matched  to  offsetting
positions.  We may also carry  exposures  to the  absolute  change in  commodity
prices  based on our market views or as a  consequence  of managing our physical
and financial positions on a daily basis.

Our risk management  activities include prescribed capital limits and the use of
tools  such as  Value-at-Risk  (VaR)  and  stress  testing  consistent  with the
methodology used at December 31, 2008. Our period end, high, low and average VaR
amounts for the three and nine months ended September 30, 2009 are as follows:

<TABLE>
<CAPTION>
                                                                                 Three Months              Nine Months
                                                                              Ended September 30         Ended September 30
Value-at-Risk                                                                 2009          2008         2009          2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>           <C>          <C>           <C>
Period End                                                                      13            27           13            27
High                                                                            15            33           24            40
Low                                                                             11            19           11            19
Average                                                                         12            29           16            31
                                                                         ---------------------------------------------------
</TABLE>

If  market  shocks  occur  in 2009  as they  did in  2008,  the key  assumptions
underlying  our VaR estimate  could be exceeded and the potential  loss could be
greater  than our  estimate.  We  perform  stress  tests on a  regular  basis to
complement  VaR and  assess the  impact of  non-normal  changes in prices on our
positions.

FOREIGN CURRENCY RISK

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

o    sales of crude oil, natural gas and certain chemicals products;
o    capital  spending and expenses for our oil and gas,  Syncrude and chemicals
     operations;
o    commodity  derivative  contracts  used  primarily  by our energy  marketing
     group; and
o    short-term borrowings and long-term debt.

In our oil and gas operations,  we manage our exposure to  fluctuations  between
the US and  Canadian  dollar  by  matching  our  expected  net  cash  flows  and
borrowings in the same currency. Net revenue from our foreign operations and our
US-dollar  borrowings are generally used to fund US-dollar capital  expenditures
and debt  repayments.  We maintain  revolving  Canadian and US-dollar  borrowing
facilities  that can be used or repaid  depending  on expected  cash  flows.  We
designate a portion of our US-dollar borrowings as a hedge against our US-dollar
net investment in self-sustaining foreign operations.


                                       14
<PAGE>

The foreign  exchange  gains or losses  related to the effective  portion of our
designated US-dollar debt are included in accumulated other comprehensive income
in  shareholders'   equity.  Our  net  investment  in  self-sustaining   foreign
operations and our designated  US-dollar debt at September 30, 2009 and December
31, 2008 are as follows:

<TABLE>
<CAPTION>
                                                                                          September 30            December 31
(US$ millions)                                                                                    2009                   2008
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                     <C>
Net Investment in Self-Sustaining Foreign Operations                                             4,272                  4,662
Designated US-Dollar Debt                                                                        4,272                  4,545
                                                                                   -------------------------------------------
</TABLE>

For the three and nine month periods ended  September 30, 2009, the  ineffective
portion of our  US-dollar  debt  resulted in a net foreign  exchange gain of $78
million  and  $135  million,   respectively   ($68  million  and  $118  million,
respectively,  net of income tax expense) and is included in marketing and other
income.  A one cent change in the US dollar to  Canadian  dollar  exchange  rate
would  increase  or  decrease  our  accumulated  other  comprehensive  income by
approximately $43 million, net of income tax, and would increase or decrease our
net income by approximately $8 million, net of income tax.

We also have modest exposures to currencies other than the US dollar including a
portion  of our  UK  operating  expenses,  capital  spending  and  future  asset
retirement  obligations which are denominated in British Pounds and Euros. We do
not have any material exposure to highly inflationary foreign currencies. In our
energy  marketing  group,  we enter  into  transactions  in  various  currencies
including  Canadian and US dollars,  British  Pounds and Euros.  We may actively
manage significant currency exposures using forward contracts and swaps.

(b)  CREDIT RISK

Credit  risk  affects  our oil,  gas and  chemicals  operations  and trading and
non-trading  derivative  activities is the risk of loss if counterparties do not
fulfill  their  contractual  obligations.  Most of our credit  exposure  is with
counterparties in the energy industry, including integrated oil companies, crude
oil  refiners and  utilities,  and are subject to normal  industry  credit risk.
Approximately  74% of our  exposure is with these large energy  companies.  This
concentration of risk within the energy industry is reduced because of our broad
base of domestic and international counterparties.  Our processes to manage this
risk are consistent with those in place at December 31, 2008.

At September 30, 2009, only one counterparty  individually made up more than 10%
of our credit exposure. This counterparty is a major integrated oil company with
a strong  investment grade credit rating. No other  counterparties  made up more
than 5% of our credit exposure.  The following table illustrates the composition
of credit exposure by credit rating.

<TABLE>
<CAPTION>
                                                                                          September 30           December 31
CREDIT RATING                                                                                     2009                  2008
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                    <C>
A or higher                                                                                        71%                   65%
BBB                                                                                                22%                   29%
Non-Investment Grade                                                                                7%                    6%
                                                                                   ------------------------------------------
TOTAL                                                                                             100%                  100%
                                                                                   ==========================================
</TABLE>

Our maximum  counterparty  credit  exposure at the balance  sheet date  consists
primarily of the carrying  amounts on  non-derivative  financial  assets such as
cash and cash equivalents,  restricted cash, accounts receivable, as well as the
fair value of  derivative  financial  assets.  We provided an  allowance  of $54
million for credit risk with our counterparties. In addition, we incorporate the
credit risk associated with counterparty  default, as well as Nexen's own credit
risk, into our estimates of fair value.

Collateral received from customers at September 30, 2009 includes $51 million of
cash and $506 million of letters of credit.  The cash received reflects customer
deposits  that are  included in accounts  payable and accrued  liabilities.

(c)  LIQUIDITY RISK

Liquidity  risk  is the  risk  that we will  not be able to meet  our  financial
obligations  as they  become  due.  We require  liquidity  specifically  to fund
capital  requirements,  satisfy financial obligations as they become due, and to
operate our energy marketing business. We generally rely on operating cash flows
to provide liquidity and we also maintain  significant  undrawn committed credit
facilities. At September 30, 2009, we had approximately $3.2 billion of cash and
available committed lines of credit. This includes $1.9 billion of cash and cash
equivalents on hand. In addition, we have undrawn term credit facilities of $1.7
billion, of which $427 million was supporting letters of credit at September 30,
2009. These facilities are available until 2012. We also have about $493 million
of undrawn, uncommitted credit facilities at September 30, 2009.


                                       15
<PAGE>

The following  table details the contractual  maturities for our  non-derivative
financial  liabilities,  including both the principal and interest cash flows at
September 30, 2009:

<TABLE>
<CAPTION>
                                                                less than                                           more than
                                                Total              1 Year           1-3 Years        4-5 Years        5 Years
------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>                 <C>              <C>             <C>
Long-Term Debt (1)                              7,522                   -            1,847               590            5,085
Interest on Long-Term Debt (2)                  8,340                 369              739               712            6,520
                                       ---------------------------------------------------------------------------------------
Total                                          15,862                 369            2,586             1,302           11,605
                                       =======================================================================================
</TABLE>
(1)  Excludes cash and cash equivalents currently available.
(2)  Excludes  interest on term credit  facilities  of $3.3  billion and Canexus
     term  credit  facilities  of  $452  million  as the  amounts  drawn  on the
     facilities  fluctuate.  Based on amounts  drawn at  September  30, 2009 and
     current  interest  rates,  we would be required to pay $20 million per year
     until the outstanding amounts on the term credit facilities are repaid.

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

<TABLE>
<CAPTION>
                                                                less than                                           more than
                                                Total              1 Year           1-3 Years        4-5 Years        5 Years
------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>                 <C>              <C>            <C>
Trading Derivatives (Note 6)                      800                 572              189                39                -
Non-Trading Derivatives (Note 6)                   34                  27                7                 -                -
                                       ---------------------------------------------------------------------------------------
Total                                             834                 599              196                39                -
                                       =======================================================================================
</TABLE>

The commercial  agreements our energy  marketing  group enter into often include
financial  assurance   provisions  that  allow  us  and  our  counterparties  to
effectively manage credit risk. The agreements normally require collateral to be
posted  if an  adverse  credit-related  event  occurs,  such as a drop in credit
rating.  Based on contracts in place and commodity prices at September 30, 2009,
we  could  be  required  to post  collateral  of up to $975  million  if we were
downgraded  to  non-investment  grade.  This  represents  the maximum  amount of
collateral that we would be required to post assuming a severe event that causes
all rating agencies to  simultaneously  downgrade us and no actions are taken by
us to mitigate our exposure. This amount includes trade payables of $686 million
and  derivative  contracts  with a fair  value  of $289  million.  All of  these
obligations  are included on our September 30, 2009 balance sheet.  In the event
of  a  ratings  downgrade,   we  could  monetize  our  trading  inventories  and
receivables  and draw on our existing  credit  facilities to meet our collateral
obligations.  Further  various  actions  can  be  taken,  in  anticipation  of a
downgrade  that would reduce the maximum  amount of  collateral we would need to
provide.

At  September  30,  2009,  collateral  posted with  counterparties  includes $14
million of cash and $330  million of  letters of credit  related to our  trading
activities.   Cash  posted  is  included  with  our  accounts  receivable.  Cash
collateral is not normally applied to contract  settlement.  Once a contract has
been settled,  the collateral amounts are refunded.  If there is a default,  the
cash is retained.  Our exchange-traded  derivative contracts are also subject to
margin requirements.  We have margin deposits of $216 million (December 31, 2008
- $103 million), which have been included in restricted cash.

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

                                                                                          September 30          December 31
                                                                                                  2009                 2008
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                   <C>
Energy Marketing                                                                                 1,437                1,286
Accrued Payables                                                                                   699                  887
Energy Marketing Derivative Contracts (Note 6)                                                     572                  615
Income Taxes Payable                                                                               209                   69
Trade Payables                                                                                     208                  251
Stock-Based Compensation                                                                           109                   97
Other                                                                                              124                  121
                                                                                   ------------------------------------------
Total                                                                                            3,358                3,326
                                                                                   ==========================================
</TABLE>


                                       16
<PAGE>

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

                                                                                          September 30           December 31
                                                                                                  2009                  2008
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                    <C>
Canexus Term Credit Facilities, due 2011 (US$223 million drawn) (a)                                239                   223
Term Credit Facilities, due 2012 (US$1.5 billion drawn) (b)                                      1,608                 1,225
Canexus Notes, due 2013 (US$50 million)                                                             54                    61
Notes, due 2013 (US$500 million)                                                                   536                   612
Canexus Convertible Debentures, due 2014 (c)                                                        46                     -
Notes, due 2015 (US$250 million)                                                                   268                   306
Notes, due 2017 (US$250 million)                                                                   268                   306
Notes, due 2019 (US$300 million) (d)                                                               322                     -
Notes, due 2028 (US$200 million)                                                                   214                   245
Notes, due 2032 (US$500 million)                                                                   536                   612
Notes, due 2035 (US$790 million)                                                                   847                   968
Notes, due 2037 (US$1,250 million)                                                               1,340                 1,531
Notes, due 2039 (US$700 million) (e)                                                               751                     -
Subordinated Debentures, due 2043 (US$460 million)                                                 493                   563
                                                                                   -------------------------------------------
                                                                                                 7,522                 6,652
Unamortized Debt Issue Costs                                                                       (93)                  (74)
                                                                                   -------------------------------------------
Total                                                                                            7,429                 6,578
                                                                                   ===========================================
</TABLE>

(a)  CANEXUS TERM CREDIT FACILITIES

Canexus has $452  million  (US$422  million) of  committed,  secured term credit
facilities, $431 million (US$402 million) of which is available until 2011, with
the balance due 2013. At September 30, 2009, $239 million  (US$223  million) was
drawn on these facilities  (December 31, 2008 - $223 million (US$182  million)).
Borrowings are available as Canadian bankers'  acceptances,  LIBOR-based  loans,
Canadian  prime rate loans or  US-dollar  base rate  loans.  Interest is payable
monthly at floating rates. The term credit  facilities are secured by a floating
charge debenture over all of Canexus' assets.  The credit facility also contains
covenants   with   respect  to  certain   financial   ratios  of  Canexus.   The
weighted-average  interest rate on the Canexus term credit  facilities  was 2.0%
for the three months ended  September 30, 2009 (three months ended September 30,
2008 - 4.6%) and 2.3% for the nine months ended  September 30, 2009 (nine months
ended September 30, 2008 - 4.5%).

(b)  TERM CREDIT FACILITIES

We have  unsecured  term credit  facilities  of $3.3  billion  (US$3.1  billion)
available until 2012. At September 30, 2009,  $1.6 billion (US$1.5  billion) was
drawn on these  facilities  (December 31, 2008 - $1.2 billion  (US$1  billion)).
Borrowings are available as Canadian bankers'  acceptances,  LIBOR-based  loans,
Canadian prime rate loans,  US-dollar base rate loans or British pound call-rate
loans. Interest is payable at floating rates. The weighted-average interest rate
on our term credit  facilities was 0.9% for the three months ended September 30,
2009 (three months ended September 30, 2008 - 3.5%) and 1.0% for the nine months
ended  September  30, 2009 (nine months  ended  September  30, 2008 - 3.6%).  At
September  30, 2009,  $427 million  (US$398  million) of these  facilities  were
utilized  to support  outstanding  letters of credit  (December  31, 2008 - $381
million (US$311 million)).

(c)  CANEXUS CONVERTIBLE DEBENTURES

In August 2009, Canexus issued $46 million of convertible unsecured subordinated
debentures to non-controlling interests.  Interest is payable semi-annually at a
rate of 8.00%.  These debentures mature on December 31, 2014 and are convertible
at the holder's option at any time prior to the close of business on the earlier
of i) the maturity date and ii) the business day immediately  preceding the date
specified by Canexus for  redemption  of the  debentures  into trust units.  The
conversion price is $5.10 per trust unit.

Canexus has the option to redeem the debentures in whole or in part from time to
time subject to the satisfaction of certain conditions,  after December 31, 2012
but before  maturity,  at a redemption  price equal to the principal  amount and
unpaid interest.  Canexus may elect to satisfy its obligation to pay interest or
repay the principal by issuing trust units at market value.

The estimated fair value of the conversion feature of the convertible debentures
amounted  to $4  million  and was  included  in  non-controlling  interests,  in
shareholders'  equity.  The amount of the  convertible  debentures  allocated to
long-term debt is being  amortized over the term of the debt using the effective
interest  rate method.

Concurrent with the issuance, we acquired $40 million of debentures from Canexus
with  substantially the same terms which allow us to protect against dilution of
our  ownership  interest at our  option.  These  debentures  are  eliminated  on
consolidation.


                                       17
<PAGE>


(d)   NOTES, DUE 2019

In  July  2009,  we  issued  US$300  million  of  notes.   Interest  is  payable
semi-annually  at a rate of  6.20%,  and the  principal  is to be repaid in July
2019. We may redeem part or all of the notes at any time. The  redemption  price
will be the  greater of par and an amount that  provides  the same yield as a US
Treasury security having a  term-to-maturity  equal to the remaining term of the
notes plus 0.40%.

(e)   NOTES, DUE 2039

In  July  2009,  we  issued  US$700  million  of  notes.   Interest  is  payable
semi-annually  at a rate of  7.50%,  and the  principal  is to be repaid in July
2039. We may redeem part or all of the notes at any time. The  redemption  price
will be the  greater of par and an amount that  provides  the same yield as a US
Treasury security having a  term-to-maturity  equal to the remaining term of the
notes plus 0.45%.

<TABLE>
<CAPTION>
(f)  INTEREST EXPENSE

                                                                                 Three Months                Nine Months
                                                                              Ended September 30         Ended September 30
                                                                              2009          2008         2009          2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>           <C>          <C>           <C>
Long-Term Debt                                                                  96            75          274           220
Other                                                                            4             5           12            15
                                                                         ---------------------------------------------------
Total                                                                          100            80          286           235
   Less: Capitalized                                                           (16)          (64)         (60)         (176)
                                                                         ---------------------------------------------------
Total                                                                           84            16          226            59
                                                                         ===================================================
</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.

(g)  SHORT-TERM BORROWINGS

Nexen has uncommitted, unsecured credit facilities of approximately $493 million
(US$459  million),  none of which were drawn at September 30, 2009 (December 31,
2008 - nil). We utilized $119 million  (US$111  million) of these  facilities to
support outstanding letters of credit at September 30, 2009 (December 31, 2008 -
$29  million  (US$24  million)).  Interest  is payable at  floating  rates.  The
weighted-average  interest  rate on our  short-term  borrowings  was nil for the
three months ended  September 30, 2009 (three months ended  September 30, 2008 -
3.6%) and 2.1% for the nine months ended  September  30, 2009 (nine months ended
September 30, 2008 - 3.2%).

10.  CAPITAL MANAGEMENT

Our objectives  and processes for managing our capital  structure are consistent
with those in place at December 31, 2008. Our capital  consists of shareholders'
equity,  short-term borrowings,  long-term debt and cash and cash equivalents as
follows:

<TABLE>
<CAPTION>
                                                                                              September 30        December 31
                                                                                                      2009               2008
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>                 <C>
NET DEBT (1)
  Long-Term Debt                                                                                     7,429              6,578
     Less: Cash and Cash Equivalents                                                                (1,897)            (2,003)
                                                                                          ------------------------------------
Total                                                                                                5,532              4,575
                                                                                          ====================================

SHAREHOLDERS' EQUITY                                                                                 7,401              7,191
                                                                                          ====================================
</TABLE>
(1)  Includes all of our  borrowings  and is  calculated  as long-term  debt and
     short-term borrowings less cash and cash equivalents.

We monitor the leverage in our capital  structure by reviewing  the ratio of net
debt to cash flow from  operating  activities  and interest  coverage  ratios at
various commodity prices.

We use the  ratio of net debt to cash flow from  operating  activities  as a key
indicator of our leverage and to monitor the strength of our balance sheet.  Net
debt is a non-GAAP measure that does not have any standard meaning prescribed by
GAAP and  therefore  may not be  comparable  to similar  measures  presented  by
others.  We calculate  net debt using the GAAP  measures of  long-term  debt and
short-term  borrowings  less  cash and cash  equivalents  (excluding  restricted
cash).

For the twelve months ended  September 30, 2009,  our net debt to cash flow from
operating  activities  ratio was 2.3 times compared to 1.1 times at December 31,
2008.  While we typically  expect the target ratio to fluctuate  between 1.0 and


                                       18
<PAGE>

2.0  times  under  normalized  commodity  prices,  this can be  higher  or lower
depending  on  commodity  price   volatility  or  when  we  identify   strategic
opportunities  requiring  additional  investment.  Whenever we exceed our target
ratio,  we assess  whether we need to develop a strategy to reduce our  leverage
and lower this ratio back to target levels over time.

Our  interest   coverage  ratio  monitors  our  ability  to  fund  the  interest
requirements  associated  with our debt. Our interest  coverage was 7.2 times at
September  30, 2009  (December  31,  2008 - 15.6  times).  Interest  coverage is
calculated by dividing our  twelve-month  trailing  adjusted  EBITDA by interest
expense before capitalized interest.  Adjusted EBITDA is a non-GAAP measure. The
calculation of adjusted EBITDA is set out in the following table and is unlikely
to be comparable to similar measures presented by others.

<TABLE>
<CAPTION>
                                                                                     Twelve Months Ended           Year Ended
                                                                                            September 30          December 31
                                                                                                    2009                 2008
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                          <C>
Net Income Attributable to Nexen Inc.                                                                 96                1,715
  Add:
     Interest Expense                                                                                261                   94
     Provision for Income Taxes                                                                      174                1,457
     Depreciation, Depletion, Amortization and Impairment                                          2,110                2,014
     Exploration Expense                                                                             376                  402
     Recovery of Non-Cash Stock-Based Compensation                                                   (39)                (272)
     Change in Fair Value of Crude Oil Put Options                                                    14                 (203)
     Other Non-Cash Expenses                                                                        (210)                  (1)
                                                                                ----------------------------------------------
Adjusted EBITDA                                                                                    2,782                5,206
                                                                                ==============================================
</TABLE>

11.  ASSET RETIREMENT OBLIGATIONS

Changes in carrying amounts of the asset retirement  obligations associated with
our Property, Plant & Equipment (PP&E) are as follows:

<TABLE>
<CAPTION>
                                                                                       Nine Months Ended           Year Ended
                                                                                            September 30          December 31
                                                                                                    2009                 2008
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                        <C>
Balance at Beginning of Period                                                                     1,059                  832
  Obligations Incurred with Development Activities                                                    25                   32
  Obligations Discharged with Disposed Properties                                                     (2)                   -
  Obligations Settled                                                                                (25)                 (45)
  Accretion Expense                                                                                   51                   58
  Revisions to Estimates                                                                             (19)                 159
  Effects of Changes in Foreign Exchange Rate                                                        (62)                  23
                                                                                ----------------------------------------------
Balance at End of Period (1)(2)                                                                    1,027                1,059
                                                                                ==============================================
</TABLE>
(1)  Obligations  due within 12 months of $35 million  (December  31, 2008 - $35
     million) have been included in accounts payable and accrued liabilities.
(2)  Obligations  relating to our oil and gas activities  amount to $979 million
     (December  31,  2008 - $1,009  million)  and  obligations  relating  to our
     chemicals business amount to $48 million (December 31, 2008 - $50 million).

Our total estimated undiscounted inflated asset retirement obligations amount to
$2,353  million  (December 31, 2008 - $2,393  million).  We have  discounted the
total  estimated  asset  retirement   obligations   using  a   weighted-average,
credit-adjusted,  risk-free rate of 5.9%. Approximately $367 million included in
our asset  retirement  obligations  is expected to be settled over the next five
years. The remaining obligations settle beyond five years and are expected to be
funded by future cash flows from our operations.

<TABLE>
<CAPTION>
12.  DEFERRED CREDITS AND OTHER LIABILITIES
                                                                                            September 30          December 31
                                                                                                    2009                 2008
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                   <C>
Deferred Tax Credit                                                                                  542                  709
Long-Term Energy Marketing Derivative Contracts (Note 6)                                             228                  294
Defined Benefit Pension Obligations                                                                   71                   67
Capital Lease Obligations                                                                             61                   53
Deferred Transportation Revenue                                                                       57                   69
Other                                                                                                125                  132
                                                                                ----------------------------------------------
Total                                                                                              1,084                1,324
                                                                                ==============================================
</TABLE>

                                       19
<PAGE>

13.  SHAREHOLDERS' EQUITY

DIVIDENDS

Dividends  per common share for the three months ended  September  30, 2009 were
$0.05 per common share (2008 - $0.05).  Dividends  per common share for the nine
months  ended  September  30, 2009 were $0.15 per common  share (2008 - $0.125).
Dividends  paid to holders of common  shares have been  designated  as "eligible
dividends" for Canadian tax purposes.

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

                                                                                 Three Months                Nine Months
                                                                              Ended September 30         Ended September 30
                                                                              2009          2008         2009          2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>           <C>          <C>           <C>
Marketing Revenue, Net (Note 6)                                                188           149          676           381
Change in Fair Value of Crude Oil Put Options (Note 6)                         (23)            9         (218)           (1)
Interest                                                                         1             7            4            20
Foreign Exchange Gains (Losses)                                                 93           (33)         112           (34)
Other                                                                           37            (1)          61            21
                                                                         ---------------------------------------------------
Total                                                                          296           131          635           387
                                                                         ===================================================
</TABLE>

15.  EARNINGS PER COMMON SHARE

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

<TABLE>
<CAPTION>
                                                                                 Three Months                Nine Months
                                                                              Ended September 30         Ended September 30
(millions of shares)                                                          2009          2008         2009          2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>          <C>           <C>          <C>
Weighted-average number of common shares outstanding                           521.7       525.9         521.0        528.3
Shares issuable pursuant to tandem options                                      10.3        19.6          10.7         24.9
Shares notionally purchased from proceeds of tandem options                     (7.0)      (13.0)         (7.5)       (16.2)
                                                                         ---------------------------------------------------
Weighted-average number of diluted common shares outstanding                   525.0       532.5         524.2        537.0
                                                                         ===================================================
</TABLE>

In calculating the weighted-average  number of diluted common shares outstanding
for the three and nine months ended  September 30, 2009, we excluded  13,077,285
and 13,236,034  tandem options,  respectively,  because their exercise price was
greater than the average common share market price in the period. In calculating
the  weighted-average  number of diluted common shares outstanding for the three
and nine months ended  September  30,  2008,  we excluded  4,019,880  and 40,000
tandem options, respectively,  because their exercise price was greater than the
average common share market price in the period.  During the periods  presented,
outstanding tandem options were the only potential dilutive instruments.

16.  COMMITMENTS, CONTINGENCIES AND GUARANTEES

As  described  in  Note  16 to the  Audited  Consolidated  Financial  Statements
included  in our 2008  Form  10-K,  there are a number of  lawsuits  and  claims
pending,  the ultimate  results of which cannot be  ascertained at this time. We
record costs as they are incurred or become determinable. We continue to believe
the resolution of these matters would not have a material  adverse effect on our
liquidity,  consolidated financial position or results of operations. There have
been no significant developments since year-end.


                                       20

<PAGE>

17.  CASH FLOWS

(a)  CHARGES AND CREDITS TO INCOME NOT INVOLVING CASH

<TABLE>
<CAPTION>
                                                                                  Three Months              Nine Months
                                                                               Ended September 30        Ended September 30
                                                                                2009        2008          2009        2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>         <C>           <C>         <C>
Depreciation, Depletion, Amortization and Impairment                             358         386         1,180       1,084
Stock-Based Compensation                                                         (19)       (410)           23        (210)
Provision for (Recovery of) Future Income Taxes                                  (81)        645          (397)        583
Change in Fair Value of Crude Oil Put Options                                     23          (9)          218           1
Allowance for Doubtful Accounts                                                   (4)         38            (5)         34
Foreign Exchange                                                                (117)         43          (154)         48
Other                                                                             14          (1)           22           4
                                                                         ---------------------------------------------------
Total                                                                            174         692           887       1,544
                                                                         ===================================================

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

                                                                                  Three Months              Nine Months
                                                                               Ended September 30        Ended September 30
                                                                                2009        2008          2009        2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>       <C>             <C>         <C>
   Accounts Receivable                                                           212         503            39        (821)
   Inventories and Supplies                                                      (13)        260          (142)       (128)
   Other Current Assets                                                          (24)        (64)          (12)        (80)
   Accounts Payable and Accrued Liabilities                                      (68)     (1,607)          251         425
   Other Current Liabilities                                                      20          12            16          26
                                                                         ---------------------------------------------------
Total                                                                            127        (896)          152        (578)
                                                                         ===================================================

Relating to:
   Operating Activities                                                          113        (840)          193        (468)
   Financing Activities                                                            -          10             -          10
   Investing Activities                                                           14         (66)          (41)       (120)
                                                                         ---------------------------------------------------
Total                                                                            127        (896)          152        (578)
                                                                         ===================================================

<CAPTION>
(c)  OTHER CASH FLOW INFORMATION

                                                                                  Three Months              Nine Months
                                                                               Ended September 30        Ended September 30
                                                                                2009        2008          2009        2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>         <C>           <C>         <C>
Interest Paid                                                                     70          64           248         212
Income Taxes Paid                                                                179         655           247         816
                                                                         ---------------------------------------------------
</TABLE>

Cash flow from other  operating  activities  includes cash  outflows  related to
geological  and  geophysical  expenditures  of $16 million for the three  months
ended  September  30,  2009 (2008 - $38  million)  and $59  million for the nine
months ended September 30, 2009 (2008 - $72 million).


                                       21
<PAGE>

18.  OPERATING SEGMENTS AND RELATED INFORMATION

Nexen is  involved  in  activities  relating  to Oil and Gas,  Syncrude,  Energy
Marketing and Chemicals in various geographic  locations as described in Note 22
to the Audited Consolidated Financial Statements included in our 2008 Form 10-K.

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2009

                                                                                            Energy             Corporate
                                              Oil and Gas                      Syncrude  Marketing  Chemicals  and Other      Total
                           ---------------------------------------------------------------------------------------------------------
                                               United    United        Other
                           Yemen  Canada       States   Kingdom    Countries (1)
                           --------------------------------------------------
<S>                        <C>     <C>        <C>        <C>            <C>      <C>          <C>      <C>          <C>     <C>
Net Sales                    176      92           74       478           16        137          9        115          -      1,097
Marketing and Other            3      (6)           -         5            6          -        188         29         71 (2)    296
                           ---------------------------------------------------------------------------------------------------------
Total Revenues               179      86           74       483           22        137        197        144         71      1,393

Less: Expenses
  Operating                   49      42           23        71            2         62          5         67          -        321
  Depreciation, Depletion,
   Amortization and
     Impairment               19      59           67       162            2         13         14         12         10        358
  Transportation and Other     7       8            2         3            -          5        141         13          6        185
  General and
  Administrative (3)           4      16           13         8            5          -         19          9         39        113
  Exploration                  -      24           40         7           18 (4)      -          -          -          -         89
  Interest                     -       -            -         -            -          -          -          2         82         84
                           ---------------------------------------------------------------------------------------------------------
Income (Loss)
  before Income Taxes        100     (63)         (71)      232           (5)        57         18         41        (66)       243
Less: Provisions for
(Recovery
  of) Income Taxes            35     (15)         (30)      102           (5)        14          8          9         (9)       109
Less: Non-Controlling
  Interests                    -       -            -         -            -          -          -         12          -         12
                           ---------------------------------------------------------------------------------------------------------
Net Income (Loss)             65     (48)         (41)      130            -         43         10         20        (57)       122
                           =========================================================================================================

Identifiable Assets          241   7,756 (5)    1,880     5,157          976      1,244      3,114 (6)    704      1,997     23,069
                           =========================================================================================================

Capital Expenditures
  Development and Other       11     135           31       133          130         17          9         53          7        526
  Exploration                  -      42           46        32            9          -          -          -          -        129
                           ---------------------------------------------------------------------------------------------------------
                              11     177           77       165          139         17          9         53          7        655
                           =========================================================================================================

Property, Plant and
Equipment
  Cost                     2,516   9,558        3,957     6,165          782      1,424        250      1,086        356     26,094
  Less: Accumulated DD&A   2,369   1,955        2,507     2,396           97        264         78        552        234     10,452
                           ---------------------------------------------------------------------------------------------------------
Net Book Value               147   7,603 (5)    1,450     3,769          685      1,160        172        534        122     15,642
                           =========================================================================================================
</TABLE>
(1)  Includes results of operations from producing activities in Colombia.
(2)  Includes  interest  income of $1  million,  foreign  exchange  gains of $93
     million  and  decrease  in the fair  value of crude oil put  options of $23
     million.
(3)  Includes recovery of stock-based compensation expense of $5 million.
(4)  Includes exploration activities primarily in Norway, Nigeria and Colombia.
(5)  Includes costs of $5,946  million  related to our insitu oil sands projects
     (Long Lake and future phases).
(6)  Approximately   80%  of  Marketing's   identifiable   assets  are  accounts
     receivable and inventories.


                                       22
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2008
                                                                                            Energy             Corporate
                                              Oil and Gas                      Syncrude  Marketing  Chemicals  and Other      Total
                           ---------------------------------------------------------------------------------------------------------
                                               United    United        Other
                           Yemen  Canada       States   Kingdom    Countries (1)
                           --------------------------------------------------
<S>                        <C>     <C>        <C>        <C>            <C>      <C>         <C>      <C>          <C>    <C>
Net Sales                    317     192          139     1,141           56        220         17        131          -      2,213
Marketing and Other            2       1            -         6            1          3        149        (12)       (19) (2)   131
                           ---------------------------------------------------------------------------------------------------------
Total Revenues               319     193          139     1,147           57        223        166        119        (19)     2,344

Less: Expenses
  Operating                   39      48           29        66            2         68         10         79          -        341
  Depreciation, Depletion,
   Amortization and
     Impairment               46      50           56       192            4         12          4         11         11        386
  Transportation and Other     3       -            1        21            -          4        235         12         15        291
  General and
     Administrative (3)      (20)    (66)         (28)      (19)         (45)         -         (4)         9       (135)      (308)
  Exploration                  2       5           41        18           46 (4)      -          -          -          -        112
  Interest                     -       -            -         -            -          -          -          3         13         16
                           ---------------------------------------------------------------------------------------------------------
Income (Loss)
  before Income Taxes        249     156           40       869           50        139        (79)         5         77      1,506
Less: Provisions for
(Recovery of) Income Taxes    86      44           13       444           (3)        40        (20)         2         13        619
Less: Non-Controlling
  Interests                    -       -            -         -            -          -          -          1          -          1
                           ---------------------------------------------------------------------------------------------------------
Net Income (Loss)            163     112           27       425           53         99        (59)         2         64        886
                           =========================================================================================================

Identifiable Assets          365   6,301 (5)    1,951     6,502          536      1,218      4,468 (6)    541        333     22,215
                           =========================================================================================================

Capital Expenditures
  Development and Other       29     245           46       189           35         19          2         24         10        599
  Exploration                  -      34           38        43           11          -          -          -          -        126
                           ---------------------------------------------------------------------------------------------------------
                              29     279           84       232           46         19          2         24         10        725
                           =========================================================================================================

Property, Plant and
Equipment
  Cost                     2,402   7,697        3,670     5,558          358      1,363        268        896       322      22,534
  Less: Accumulated DD&A   2,220   1,725        2,072     1,456           95        232         72        495       199       8,566
                           ---------------------------------------------------------------------------------------------------------
Net Book Value               182   5,972 (5)    1,598     4,102          263      1,131        196        401       123      13,968
                           =========================================================================================================
</TABLE>
(1)  Includes results of operations from producing activities in Colombia.
(2)  Includes  interest  income of $7 million,  foreign  exchange  losses of $33
     million,  increase in the fair value of crude oil put options of $9 million
     and other losses of $2 million.
(3)  Includes recovery of stock-based compensation expense of $408 million.
(4)  Includes exploration activities primarily in Norway and Colombia.
(5)  Includes costs of $4,432  million  related to our insitu oil sands projects
     (Long Lake and future phases).
(6)  Approximately   85%  of  Marketing's   identifiable   assets  are  accounts
     receivable and inventories.


                                       23
<PAGE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2009
                                                                                            Energy             Corporate
                                              Oil and Gas                      Syncrude  Marketing  Chemicals  and Other      Total
                           ---------------------------------------------------------------------------------------------------------
                                               United    United        Other
                           Yemen  Canada       States   Kingdom    Countries (1)
                           --------------------------------------------------
<S>                        <C>     <C>        <C>        <C>            <C>      <C>         <C>      <C>          <C>    <C>
Net Sales                    513     281          225     1,574           55        320         29        348          -      3,345
Marketing and Other           10       2            -        13            6          1        676         44       (117) (2)   635
                           ---------------------------------------------------------------------------------------------------------
Total Revenues               523     283          225     1,587           61        321        705        392       (117)     3,980

Less: Expenses
  Operating                  145     125           73       175            6        205         21        196          -        946
  Depreciation, Depletion,
   Amortization and
     Impairment               92     184          215       537           11         33         21         53         34      1,180
  Transportation and Other    25      19           18        14            -         17        469         37         19        618
   General and
     Administrative (3)        5      58           51        15           29          1         68         34        119        380
  Exploration                  -      53           87        26           53 (4)      -          -          -          -        219
  Interest                     -       -            -         -            -          -          -          6        220        226
                           ---------------------------------------------------------------------------------------------------------
Income (Loss)
  before Income Taxes        256    (156)        (219)      820          (38)        65        126         66       (509)       411
Less: Provisions for
(Recovery
  of) Income Taxes            89     (39)         (81)      358          (29)        16         52         15       (264)       117
Less: Non-Controlling
  Interests                    -       -            -         -            -          -          -         17          -         17
                           ---------------------------------------------------------------------------------------------------------
Net Income (Loss)            167    (117)        (138)      462           (9)        49         74         34       (245)       277
                           =========================================================================================================

Identifiable Assets          241   7,756 (5)    1,880     5,157          976      1,244      3,114 (6)    704      1,997     23,069
                           =========================================================================================================

Capital Expenditures
  Development and Other       62     519          106       391          328         56         20        161         17      1,660
  Exploration                  -     189          111       109           50          -          -          -          -        459
  Proved Property
    Acquisitions               -     755            -         -            -          -          -          -          -        755
                           ---------------------------------------------------------------------------------------------------------
                              62   1,463          217       500          378         56         20        161         17      2,874
                           =========================================================================================================

Property, Plant and
Equipment
  Cost                     2,516   9,558        3,957     6,165          782      1,424        250      1,086        356     26,094
  Less: Accumulated DD&A   2,369   1,955        2,507     2,396           97        264         78        552        234     10,452
                           ---------------------------------------------------------------------------------------------------------
Net Book Value               147   7,603 (5)    1,450     3,769          685      1,160        172        534        122     15,642
                           =========================================================================================================
</TABLE>
(1)  Includes results of operations from producing activities in Colombia.
(2)  Includes  interest  income of $4 million,  foreign  exchange  gains of $112
     million,  decrease  in the  fair  value of crude  oil put  options  of $218
     million and other losses of $15 million.
(3)  Includes stock-based compensation expense of $51 million.
(4)  Includes exploration activities primarily in Norway, Nigeria and Colombia.
(5)  Includes costs of $5,946  million  related to our insitu oil sands projects
     (Long Lake and future phases).
(6)  Approximately   80%  of  Marketing's   identifiable   assets  are  accounts
     receivable and inventories.


                                       24
<PAGE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2008

                                                                                            Energy             Corporate
                                              Oil and Gas                      Syncrude  Marketing  Chemicals  and Other      Total
                           ---------------------------------------------------------------------------------------------------------
                                               United    United        Other
                            Yemen  Canada      States   Kingdom    Countries (1)
                           --------------------------------------------------
<S>                        <C>     <C>        <C>        <C>            <C>      <C>         <C>      <C>          <C>    <C>
Net Sales                     912     545         518     3,053          156        567         52        351          -      6,154
Marketing and Other             9       2           4        17            2          3        381        (13)       (18) (2)   387
                           ---------------------------------------------------------------------------------------------------------
Total Revenues                921     547         522     3,070          158        570        433        338        (18)     6,541

Less: Expenses
  Operating                   129     137          77       186            7        208         33        221          -        998
  Depreciation, Depletion,
   Amortization and
     Impairment               120     144         192       505           12         36         11         32         32      1,084
  Transportation and Other      7      10           2        21            -         11        574         41         25        691
   General and
     Administrative (3) (4)    (9)     13          23        (7)          14          1         63         24         43        165
  Exploration                   2      41          70        42           90 (5)      -          -          -          -        245
  Interest                      -       -           -         -            -          -          -          8         51         59
                           ---------------------------------------------------------------------------------------------------------
Income (Loss)
  before Income Taxes         672     202         158     2,323           35        314       (248)        12       (169)     3,299
Less: Provisions for
(Recovery of) Income Taxes    234      57          55     1,181           (3)        89        (72)         5       (146)     1,400
Less: Non-Controlling
  Interests                     -       -           -         -            -          -          -          3          -          3
                           ---------------------------------------------------------------------------------------------------------
Net Income (Loss)             438     145         103     1,142           38        225       (176)         4        (23)     1,896
                           =========================================================================================================

Identifiable Assets           365   6,301 (6)   1,951     6,502          536      1,218      4,468 (7)    541        333     22,215
                           =========================================================================================================

Capital Expenditures
  Development and Other        61     855         180       410           73         39          3         57         23      1,701
  Exploration                   9     146         147       114           30          -          -          -          -        446
  Proved Property
    Acquisitions                -       2           -         -            -          -          -          -          -          2
                           ---------------------------------------------------------------------------------------------------------
                               70   1,003         327       524          103         39          3         57         23      2,149
                           =========================================================================================================

Property, Plant and
Equipment
  Cost                      2,402   7,697       3,670     5,558          358      1,363        268        896        322     22,534
  Less: Accumulated DD&A    2,220   1,725       2,072     1,456           95        232         72        495        199      8,566
                           ---------------------------------------------------------------------------------------------------------
Net Book Value                182   5,972 (6)   1,598     4,102          263      1,131        196        401        123     13,968
                           =========================================================================================================
</TABLE>
(1)  Includes results of operations from producing activities in Colombia.
(2)  Includes  interest  income of $20 million,  foreign  exchange losses of $34
     million,  decrease in the fair value of crude oil put options of $1 million
     and other losses of $3 million.
(3)  Includes severance accrual of $7 million in connection with North Vancouver
     technology conversion project.
(4)  Includes a recovery of stock-based compensation expense of $121 million.
(5)  Includes exploration activities primarily in Norway and Colombia.
(6)  Includes costs of $4,432  million  related to our insitu oil sands projects
     (Long Lake and future phases).
(7)  Approximately   85%  of  Marketing's   identifiable   assets  are  accounts
     receivable and inventories.


                                       25
<PAGE>

19.  DIFFERENCES BETWEEN CANADIAN AND US GENERALLY ACCEPTED ACCOUNTING
     PRINCIPLES

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

<TABLE>
<CAPTION>
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)                                     2009          2008         2009          2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>           <C>         <C>            <C>
REVENUES AND OTHER INCOME
   Net Sales                                                                 1,097         2,213       3,345          6,154
   Marketing and Other (v); (vi)                                               344           366         702            470
                                                                         ---------------------------------------------------
                                                                             1,441         2,579       4,047          6,624
                                                                         ---------------------------------------------------
EXPENSES
   Operating                                                                   321           341         946            998
   Depreciation, Depletion, Amortization and Impairment                        358           386       1,180          1,084
   Transportation and Other (v)                                                191           291         616            687
   General and Administrative (iv)                                              89          (272)        394            180
   Exploration                                                                  89           112         219            245
   Interest                                                                     84            16         226             59
                                                                         ---------------------------------------------------
                                                                             1,132           874       3,581          3,253
                                                                         ---------------------------------------------------

INCOME BEFORE PROVISION FOR INCOME TAXES                                       309         1,705         466          3,371
                                                                         ---------------------------------------------------

PROVISION FOR (RECOVERY OF) INCOME TAXES
   Current                                                                     190           (26)        514            817
   Deferred (iv); (vi); (vii)                                                  (68)          724        (384)           610
                                                                         ---------------------------------------------------
                                                                               122           698         130          1,427
                                                                         ---------------------------------------------------

NET INCOME                                                                     187         1,007         336          1,944
   Less: Net Income Attributable to Non-Controlling Interests                  (12)           (1)        (17)            (3)
                                                                         ---------------------------------------------------

NET INCOME ATTRIBUTABLE TO NEXEN INC. - US GAAP (1)                            175         1,006         319          1,941
                                                                         ===================================================

EARNINGS PER COMMON SHARE ($/share) (Note 15)
   Basic                                                                       0.34         1.91        0.61           3.67
                                                                         ===================================================

   Diluted                                                                     0.33         1.89        0.61           3.61
                                                                         ===================================================
</TABLE>

(1)  RECONCILIATION OF CANADIAN AND US GAAP NET INCOME

<TABLE>
<CAPTION>
                                                                                 Three Months               Nine Months
                                                                              Ended September 30        Ended September 30
                                                                              2009          2008        2009          2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>          <C>          <C>          <C>
Net Income Attributable to Nexen Inc - Canadian GAAP                           122           886         277         1,896
Impact of US Principles, Net of Income Taxes:
   Stock-based Compensation (iv)                                                17           (26)        (11)          (11)
   Inventory Valuation (vi)                                                     29           146          46            56
   Deferred Taxes (vii)                                                          7             -           7             -
                                                                         ---------------------------------------------------
Net Income Attributable to Nexen Inc - US GAAP                                 175         1,006         319         1,941
                                                                         ===================================================

</TABLE>


                                       26
<PAGE>

<TABLE>
<CAPTION>
UNAUDITED CONSOLIDATED BALANCE SHEET - US GAAP
                                                                                                  September 30      December 31
(Cdn$ millions, except share amounts)                                                                     2009             2008
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                      <C>              <C>
ASSETS
   CURRENT ASSETS
      Cash and Cash Equivalents                                                                          1,897            2,003
      Restricted Cash                                                                                      216              103
      Accounts Receivable                                                                                2,877            3,163
      Inventories and Supplies (vi)                                                                        601              426
      Other                                                                                                199              169
                                                                                          --------------------------------------
         Total Current Assets                                                                            5,790            5,864
                                                                                          --------------------------------------

   PROPERTY, PLANT AND EQUIPMENT
      Net of Accumulated Depreciation, Depletion, Amortization and
         Impairment of $10,845 (December 31, 2008 - $10,786) (i); (iii)                                 15,593           14,873
   GOODWILL                                                                                                346              390
   DEFERRED INCOME TAX ASSETS                                                                              916              351
   DEFERRED CHARGES AND OTHER ASSETS                                                                       386              570
                                                                                          --------------------------------------
TOTAL ASSETS                                                                                            23,031           22,048
                                                                                          ======================================

LIABILITIES
   CURRENT LIABILITIES
      Accounts Payable and Accrued Liabilities (iv)                                                      3,430            3,384
      Accrued Interest Payable                                                                              81               67
      Dividends Payable                                                                                     26               26
                                                                                          --------------------------------------
         Total Current Liabilities                                                                       3,537            3,477
                                                                                          --------------------------------------

   LONG-TERM DEBT                                                                                        7,429            6,578
   DEFERRED INCOME TAX LIABILITIES (i); (ii); (iv); (vi); (vii)                                          2,635            2,543
   ASSET RETIREMENT OBLIGATIONS                                                                            992            1,024
   DEFERRED CREDITS AND OTHER LIABILITIES (ii)                                                           1,188            1,428

SHAREHOLDERS' EQUITY
   Nexen Inc. Shareholders' Equity
      Common Shares, no par value
         Authorized:   Unlimited
         Outstanding:  2009 - 521,846,559 shares
                       2008 - 519,448,590 shares                                                         1,025              981
      Contributed Surplus                                                                                    1                2
      Retained Earnings (i) - (vii)                                                                      6,413            6,172
      Accumulated Other Comprehensive Loss (ii)                                                           (258)            (209)
                                                                                          --------------------------------------
   Total Nexen Inc. Shareholders' Equity                                                                 7,181            6,946
      Canexus Non-Controlling Interests                                                                     69               52
                                                                                          --------------------------------------
   TOTAL SHAREHOLDERS EQUITY                                                                             7,250            6,998
                                                                                          --------------------------------------
   COMMITMENTS, CONTINGENCIES AND GUARANTEES (Note 16)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                              23,031           22,048
                                                                                          ======================================
</TABLE>

<TABLE>
<CAPTION>
UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME - US GAAP
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30

                                                                                  Three Months                   Nine Months
                                                                               Ended September 30            Ended September 30
                                                                                2009        2008              2009         2008
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>        <C>                <C>         <C>
Net Income Attributable to Nexen Inc. - US GAAP                                  175       1,006               319        1,941
Other Comprehensive Income (Loss), Net of Income Taxes:
   Foreign Currency Translation Adjustment                                       (26)         41               (49)          60
                                                                             ---------------------------------------------------
Comprehensive Income Attributable to Nexen Inc. - US GAAP                        149       1,047               270        2,001
                                                                             ===================================================
</TABLE>


                                       27
<PAGE>

<TABLE>
<CAPTION>
UNAUDITED CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE LOSS - US GAAP
                                                                                            September 30          December 31
                                                                                                    2009                 2008
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                   <C>
Foreign Currency Translation Adjustment                                                             (183)                (134)
Unamortized Defined Benefit Pension Plan Costs (ii)                                                  (75)                 (75)
                                                                                       ----------------------------------------
Accumulated Other Comprehensive Loss                                                                (258)                (209)
                                                                                       ========================================
</TABLE>

NOTES TO THE UNAUDITED CONSOLIDATED US GAAP FINANCIAL STATEMENTS:

i.    Under Canadian GAAP, we defer certain  development costs to PP&E. Under US
      principles,  these costs have been included in operating expenses in prior
      years.  As a result PP&E is lower  under US GAAP by $30 million  (December
      31, 2008 - $30 million).

ii.   US GAAP  requires the  recognition  of the  over-funded  and  under-funded
      status  of a  defined  benefit  plan on the  balance  sheet as an asset or
      liability.  At September  30, 2009 and  December  31,  2008,  the unfunded
      amount of our defined  benefit  pension plans that was not included in the
      pension  liability  under Canadian GAAP was $104 million.  This amount has
      been included in deferred  credits and other  liabilities and $75 million,
      net of income taxes, has been included in Accumulated Other  Comprehensive
      Income (AOCI).

iii.  On January 1, 2003, we adopted ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS
      for US  GAAP  reporting  purposes.  We  adopted  the  equivalent  Canadian
      standard  for asset  retirement  obligations  on January  1,  2004.  These
      standards are consistent except for the adoption date which results in our
      PP&E under US GAAP being lower by $19 million.

iv.   Under Canadian principles, we record obligations for liability-based stock
      compensation plans using the intrinsic-value  method of accounting.  Under
      US principles,  obligations for  liability-based  stock compensation plans
      are recorded using the fair-value method of accounting. In addition, under
      Canadian principles,  we retroactively  adopted EIC-162 which requires the
      accelerated  recognition  of  stock-based  compensation  expense  for  all
      stock-based awards made to our retired and retirement-eligible  employees.
      However,  US GAAP  requires the  accelerated  recognition  of  stock-based
      compensation  expense for such  employees  for awards  granted on or after
      January 1, 2006. As a result under US GAAP:

      o     general and administrative (G&A) expense is lower by $24 million and
            higher by $14 million ($17  million and $11  million,  net of income
            taxes)  for the three and nine  months  ended  September  30,  2009,
            respectively  (2008  -  higher  by  $36  million  and  $15  million,
            respectively  ($26 million and $11 million,  net of income  taxes));
            and
      o     accounts  payable and accrued  liabilities are higher by $72 million
            as at September 30, 2009 (December 31, 2008 - $58 million).

v.    Under US GAAP,  asset  disposition  gains and  losses  are  included  with
      transportation  and other  expense.  Losses of $6 million  and gains of $2
      million  for  the  three  and  nine  months  ended   September  30,  2009,
      respectively,  were  reclassified  from  marketing  and  other  income  to
      transportation  and  other  expense  (gains  of nil  and $4  million  were
      reclassified for the three and nine months ended September 30, 2008).

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

      o     marketing  and other income is higher by $42 million and $69 million
            ($29 million and $46 million, net of income taxes) for the three and
            nine months ended September 30, 2009, respectively (2008 - higher by
            $235 million and $87 million ($146  million and $56 million,  net of
            income taxes)); and
      o     inventories  are higher by $11  million  as at  September  30,  2009
            (December 31, 2008 - lower by $58 million).

vii.  On January 1, 2007, we adopted  ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
      regarding  accounting and  disclosure for uncertain tax positions.  On the
      adoption of this US guidance,  we recorded a cumulative effect of a change
      in accounting principle of $28 million. This amount increased our deferred
      income tax liabilities,  and decreased our retained earnings as at January
      1, 2007 in our US GAAP - Unaudited  Consolidated Balance Sheet. During the
      quarter our uncertain tax position changed. As a result:

      o     Deferred income tax expense is lower by $7 million for the three and
            nine months ended September 30, 2009 (2008 - nil); and
      o     Deferred  income tax  liabilities  are  higher by $21  million as at
            September 30, 2009 (December 31, 2008 - higher by $28 million).

      As at September 30, 2009, the total amount of our unrecognized tax benefit
      was approximately $273 million, all of which, if recognized,  would affect
      our  effective  tax rate.  To the extent  interest  and  penalties  may be
      assessed by taxing  authorities  on any  underpayment  of income tax, such
      amounts  have been  accrued and are  classified  as a component  of income
      taxes in the Unaudited  Consolidated  Statement of Income. As at September
      30, 2009, the total amount of interest


                                       28
<PAGE>

and penalties  related to uncertain tax positions  recognized in deferred income
tax  liabilities  in the US GAAP -  Unaudited  Consolidated  Balance  Sheet  was
approximately  $7 million.  We had no interest or  penalties  included in the US
GAAP - Unaudited  Consolidated Statement of Income for the three and nine months
ended September 30, 2009.

Our income tax filings are  subject to audit by taxation  authorities  and as at
September 30, 2009 the following tax years remained subject to examination,  (i)
Canada - 1985 to date (ii) United Kingdom - 2007 to date and (iii) United States
- 2005 to date. We do not  anticipate any material  changes to the  unrecognized
tax benefits previously disclosed within the next 12 months.


CHANGES IN ACCOUNTING POLICIES - US GAAP
Business Combinations

On  January  1, 2009,  we  prospectively  adopted  BUSINESS  COMBINATIONS  which
establishes  principles and requirements of the acquisition  method for business
combinations  and related  disclosures.  The adoption of this  statement did not
impact our results of operations or financial position.

NON-CONTROLLING INTERESTS

On  January 1, 2009,  we  prospectively  adopted  NON-CONTROLLING  INTERESTS  IN
CONSOLIDATED   FINANCIAL   STATEMENTS.   This   statement   clarifies   that   a
non-controlling  interest  in a  subsidiary  is an  ownership  interest  in  the
consolidated  entity  that  should be  reported  as  equity in the  consolidated
financial  statements.  The adoption of this  statement  did not have a material
impact on our results of  operations  or financial  position.  The  presentation
changes  have  been  included  in  the  Consolidated  Financial  Statements,  as
applicable.

DERIVATIVE AND HEDGING ACCOUNTING AND DISCLOSURES

On  January 1, 2009,  we  prospectively  adopted  DISCLOSURES  ABOUT  DERIVATIVE
INSTRUMENTS  AND  HEDGING   ACTIVITIES.   The  statement  requires   qualitative
disclosures   about  the  objectives  and  strategies  for  using   derivatives,
quantitative  data  about  the fair  value of gains  and  losses  on  derivative
contracts and details of credit-risk-related contingent features in their hedged
position. The statement also requires the disclosure of the location and amounts
of derivative instruments in the financial statements.  The disclosures required
by this standard are provided in Notes 6 and 7.

On April 1, 2009,  we  prospectively  adopted  three  changes  to FASB  guidance
intended to improve  guidance  and  disclosures  on fair value  measurement  and
impairments. The positions clarify fair value accounting specifically regarding:
inactive markets and distressed transactions,  other-than-temporary impairments,
and  expanded  fair  value  disclosures  for  financial  instruments  in interim
periods.  The adoption of these  positions did not have a material impact on our
results of operation or financial position.


SUBSEQUENT EVENTS

On April 1, 2009, we prospectively  adopted  SUBSEQUENT EVENTS. The new standard
reflects  the  existing  principles  of  current  subsequent  events  accounting
guidance  and  retains the notion and  definition  of  "available  to be issued"
financial  statements.  The new standard requires disclosure of the date through
which subsequent events have been evaluated and clarifies that original issuance
of financial  statements  means both "issued" or  "available to be issued".  The
adoption  of this  standard  did not have a  material  impact on our  results of
operation or financial position.

NEW ACCOUNTING PRONOUNCEMENTS - US GAAP

In December 2008, FASB issued EMPLOYERS DISCLOSURES ABOUT POSTRETIREMENT BENEFIT
PLAN ASSETS. This position provides guidance on disclosures about plan assets of
a defined  benefit  pension or other  postretirement  plans.  This  position  is
effective for fiscal years ending after  December 15, 2009. We do not expect the
adoption of this  statement to  materially  impact our results of  operations or
financial position.

In June 2009,  FASB issued  AMENDMENTS  TO  CONSOLIDATION  OF VARIABLE  INTEREST
ENTITIES.  It retains the scope of the  previous  guidance  with the addition of
entities  previously   considered   qualifying   special-purpose   entities  and
eliminates  the previous  quantitative  approach for a  qualitative  analysis in
determining  whether the enterprise's  variable  interest or interests give it a
controlling  financial  interest in a variable interest entity. The Statement is
further amended to require ongoing reassessments of whether an enterprise is the
primary  beneficiary  of  a  variable  interest  entity  and  requires  enhanced
disclosures about an enterprise's involvement in a variable interest entity. The
Statement  is effective at the  beginning of the first annual  reporting  period
after November 15, 2009. We do not expect the adoption of this statement to have
a material impact on our results of operations or financial position.


                                       29
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (MD&A)

THE FOLLOWING  SHOULD BE READ IN  CONJUNCTION  WITH THE  UNAUDITED  CONSOLIDATED
FINANCIAL  STATEMENTS  INCLUDED  IN  THIS  REPORT.  THE  UNAUDITED  CONSOLIDATED
FINANCIAL  STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE  WITH GENERALLY  ACCEPTED
ACCOUNTING   PRINCIPLES  (GAAP)  IN  CANADA.   THE  IMPACT  OF  THE  SIGNIFICANT
DIFFERENCES BETWEEN CANADIAN AND UNITED STATES (US) ACCOUNTING PRINCIPLES ON THE
FINANCIAL  STATEMENTS  IS  DISCLOSED  IN NOTE 19 TO THE  UNAUDITED  CONSOLIDATED
FINANCIAL STATEMENTS. THE DATE OF THIS DISCUSSION IS OCTOBER 27, 2009.

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 IS ALSO PRESENTED.

NOTE:  CANADIAN  INVESTORS SHOULD READ THE SPECIAL NOTE TO CANADIAN INVESTORS ON
PAGE 79 OF OUR 2008 ANNUAL REPORT OF FORM 10-K (2008 FORM 10-K) WHICH HIGHLIGHTS
DIFFERENCES  BETWEEN OUR RESERVES  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, FAIR VALUES OF DERIVATIVE CONTRACT ASSETS
AND  LIABILITIES AND THE  DETERMINATION  OF PROVED RESERVES ON AN ONGOING BASIS.
CHANGES IN FACTS AND  CIRCUMSTANCES  MAY RESULT IN REVISED  ESTIMATES AND ACTUAL
RESULTS MAY DIFFER FROM THESE ESTIMATES.

<TABLE>
<CAPTION>
EXECUTIVE SUMMARY OF THIRD QUARTER RESULTS
                                                                                  Three Months              Nine Months
                                                                               Ended September 30        Ended September 30
(Cdn$ millions, except as indicated)                                            2009        2008          2009        2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>        <C>            <C>         <C>
Production before Royalties (mboe/d)                                             214         249           235         257
Production after Royalties (mboe/d)                                              184         209           206         214
Nexen's Average Realized Oil and Gas Price (Cdn$/boe)                          63.00      106.22         56.89       99.64

Cash Flow from Operating Activities                                              461         968         1,359       3,299
Net Income Attributable to Nexen Inc.                                            122         886           277       1,896
Earnings per Common Share, Basic ($/share)                                      0.23        1.68          0.53        3.59

Capital Investment                                                               655         725         2,119       2,149
Acquisition of Additional Interest in Long Lake                                    -           -           755           -
Net Debt (1)                                                                   5,532       3,914         5,532       3,914
                                                                         ---------------------------------------------------
</TABLE>

(1)  Net  debt is a  non-GAAP  measure  and is  defined  as  long-term  debt and
     short-term borrowings less cash and cash equivalents.

Planned  maintenance and turnaround  activity in the UK North Sea, Long Lake and
the Gulf of Mexico temporarily  reduced our production during the third quarter.
Production  was  approximately  39,000  boe/d lower (based on  production  rates
immediately  prior) as a result of these activities.  In the North Sea, the shut
down of Buzzard and  Scott/Telford  was  designed  to  coincide  with a six week
slowdown for routine  maintenance on the Forties pipeline.  During the shutdown,
we successfully  completed the fourth platform jacket installation and tie in at
Buzzard and  performed  planned  maintenance  at  Scott/Telford.  With this work
behind us and the  start-up of Ettrick  towards the end of the  quarter,  we are
currently  producing  approximately  275,000  boe/d and we expect  production to
remain strong throughout the remainder of the year.

Commodity  prices were  slightly  higher  than the  previous  quarter,  but were
considerably  lower than a year ago.  Our realized  quarterly  oil and gas price
increased  3% from the prior  quarter  to  average  $63.00/boe,  but it  remains
approximately  40% below last year's realized price.  With 85% of our production
weighted to oil, we continue to be highly levered to increasing oil prices.

Our capital investment during the quarter focused on developing our Usan project
offshore  Nigeria,  advancing  our shale gas  knowledge  and  capabilities,  and
appraising  the  Golden  Eagle  area  discoveries  in the UK North  Sea.  We are
currently  reviewing  development  options  for the  Golden  Eagle  area,  which
includes our Hobby and Pink discoveries. We are also making significant progress
with our shale gas  project in the Dilly  Creek area of the Horn River  basin in
north-east  British  Columbia.  During the  quarter,  we  concluded a three-well
drilling and completion program and now have five shale gas wells on-stream.  In
the Eastern Gulf of Mexico,  we are currently  drilling an  exploratory  well at
Appomattox,  about six miles west of our  discovery at  Vicksburg.  Our Longhorn
development in the Gulf of Mexico recently came on stream in late October.

At Long Lake,  we  achieved  a major  milestone  at the end of August,  when the
solvent  de-asphalter  and  thermal  cracker  units were  successfully  put into
operation.  As a result,  we expect our PSC(TM)  yield to increase to our design
yield of approximately

                                       30
<PAGE>

80%. In September, we successfully completed the previously announced turnaround
to replace valves, clean-out our hot lime softeners, isolate our water treatment
trains and perform a number of other planned  maintenance  activities to improve
reliability  and  operability.  We also completed the  installation  of electric
submersible pumps (ESPs) in some of our SAGD wells. With the turnaround complete
we have resumed steaming our wells and bitumen volumes are ramping up.

Our  financial   position  remains  strong.  We  have  available   liquidity  of
approximately  US$3.3  billion,  comprised of cash on hand and undrawn  lines of
credit.  We have no  significant  debt  maturities  until  2012 and the  average
term-to-maturity of our long-term debt is approximately 17 years. We believe our
significant liquidity, combined with strong operating cash netbacks, provides us
with the financial flexibility to carry out our investment programs.

CAPITAL INVESTMENT
Our strategy is to build a sustainable  energy  company  focused in three areas:
oil  sands,   unconventional  gas  and  select   conventional   exploration  and
exploitation.  We are committed to growing  long-term value for our shareholders
responsibly and are advancing our plans to achieve this as described below.

In 2009,  we brought  both  Ettrick in the North Sea and Longhorn in the Gulf of
Mexico on stream.  We are  currently  investing  primarily in:

     o    ramping up Long Lake safely and reliably;
     o    developing  our Usan project and  continuing to explore our additional
          acreage, offshore Nigeria;
     o    advancing appraisal of our Golden Eagle, Hobby and Pink discoveries in
          the UK North Sea;
     o    targeting a number of  exploration  prospects,  primarily in the North
          Sea and Gulf of Mexico; and
     o    advancing  our  Horn  River  shale  gas  play  in  north-east  British
          Columbia.

Details of our capital programs are set out below:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2009
                                                              Major     Early Stage       New Growth     Core Asset
                                                        Development     Development      Exploration     Development      Total
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>             <C>              <C>             <C>              <C>
Oil and Gas
    United Kingdom                                               12               -               32             121        165
    Nigeria                                                     129               -                1               -        130
    Synthetic (mainly Long Lake) (1)                            101              15                -               -        116
    Canada                                                        -               -               42              19         61
    United States                                                25               -               46               6         77
    Yemen                                                         -               -                -              11         11
    Other Countries                                               -               -                8               1          9
Syncrude                                                          -               -                -              17         17
                                                       ---------------------------------------------------------------------------
                                                                267              15              129             175        586
Chemicals                                                        53               -                -               -         53
Energy Marketing, Corporate and Other                             -               -                -              16         16
                                                       ---------------------------------------------------------------------------
Total Capital                                                   320              15              129             191        655
                                                       ===========================================================================
As a % of Total Capital                                          49%              2%              20%             29%       100%
                                                       ---------------------------------------------------------------------------
</TABLE>

(1)  Includes $72 million of capitalized start-up costs.



                                       31
<PAGE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2009
                                                              Major     Early Stage       New Growth     Core Asset
                                                        Development     Development      Exploration     Development       Total
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>               <C>             <C>               <C>
Oil and Gas
    Long Lake Acquisition                                       755               -                -               -         755
    United Kingdom                                              114               6              109             271         500
    Nigeria                                                     326               -               20               -         346
    Synthetic (mainly Long Lake) (1)                            366              78                1               -         445
    Canada                                                        -               2              188              73         263
    United States                                                94               -              111              12         217
    Yemen                                                         -               -                -              62          62
    Other Countries                                               -               -               30               2          32
Syncrude                                                          -               -                -              56          56
                                                      ----------------------------------------------------------------------------
                                                              1,655              86              459             476       2,676
Chemicals                                                       161               -                -               -         161
Energy Marketing, Corporate and Other                             -               -                -              37          37
                                                      ----------------------------------------------------------------------------
Total Capital                                                 1,816              86              459             513       2,874
                                                      ============================================================================
As a % of Total Capital                                          63%              3%              16%             18%        100%
                                                      --------------------------------=-------------------------------------------
</TABLE>

(1)  Includes $223 million of capitalized start-up costs.

UNITED KINGDOM - NORTH SEA
Our Ettrick development in the North Sea produced first oil in mid August and we
have tested the floating production,  storage and offloading vessel (FPSO) up to
its design rates. Field production will ramp-up as we commission the gas system.
We have a 2008  discovery  at  Blackbird  which  could be a future  tie-back  to
Ettrick.  We operate both Ettrick and Blackbird,  with a 79.73% working interest
in each.

The Golden Eagle area has emerged as a significant development  opportunity.  We
expect  development  of the area  will be  economic  with oil  prices  as low as
US$40/bbl and require standalone facilities due to its size. Project sanction is
targeted for 2010. Appraisal activity continues and we have now drilled 13 wells
in the area.

As we move into 2010,  we are  finalizing  exploration  plans to drill the North
Uist  prospect,  west of the  Shetland  Islands  and the Brand  prospect  in the
Norwegian  North Sea.  These  prospects have target sizes well above our typical
North Sea target size.


OFFSHORE WEST AFRICA
Development  of the Usan  field on block  OML  138,  offshore  Nigeria  is fully
underway.  The field  development  plan  includes a FPSO  vessel  with a storage
capacity of two million barrels of oil. Development drilling is underway and the
FPSO hull is under construction. The Usan field is expected to come on stream in
2012 and will ramp up to a peak production rate of 180,000 bbls/d (36,000 bbls/d
net to us).  Nexen has a 20% interest in  exploration  and  development  on this
block and Total E&P Nigeria Limited is the operator.

Earlier this year,  we completed  drilling an  exploration  well in the southern
portion of Oil Prospecting  License (OPL) 223,  offshore West Africa.  The Owowo
South B-1 well was  drilled  in a water  depth of 670  metres  and is located 20
kilometres northeast of the Usan field,  currently under development.  We expect
to announce drilling results shortly.

Under the production  sharing contract  governing OPL 223, the Nigerian National
Petroleum Corporation (NNPC) is concessionaire of the license, which is operated
by Total Exploration & Production  Nigeria Ltd. Nexen has an 18% interest in the
well. As is typical in many jurisdictions,  the Nigerian Government is reviewing
its existing  petroleum fiscal terms, the impact of which on our projects is not
yet known.


SYNTHETIC
The turnaround at Long Lake is complete and we have resumed  steaming our wells.
Steam production is increasing.  Bitumen production is back up to pre-turnaround
rates of 10,000 to 12,000  bbls/d  (gross)  (6,500 to 7,800 bbls/d net to Nexen)
and growing.  The upgrader has recently restarted.


The turnaround activities focused on replacing valves, cleaning out the hot lime
softeners and isolating the water treatment trains, and we performed a number of
other planned  maintenance  activities to improve  reliability and  operability.
These  activities  were  successfully  completed  within the period of scheduled
downtime.  We also installed ESPs in a number of our SAGD wells. This will allow
us  to  have  better  pressure   control  and  ultimately   reduce  our  overall
steam-to-oil ratio ("SOR").


                                       32
<PAGE>

In addition,  we recently completed the steam  de-bottleneck  project which will
increase our SAGD steam production capacity to over 230,000 bbls/d.  Start-up of
the de-bottleneck  project will proceed as required to support the SAGD ramp-up.
We continue to expect a long-term SOR of 3.0 over the life of the project.

With  respect to the  Upgrader,  we have now operated  all units  including  the
solvent  de-asphalter  and the thermal  cracker.  These units are  necessary  to
achieve our target yield of approximately 80%. In addition, Syngas is being used
in all SAGD operations.  This allows us to decrease  operating costs by reducing
the requirement for purchased natural gas.

Phase 1 of our Long Lake project is designed to produce  72,000  bbls/d of gross
bitumen,  upgraded to approximately  60,000 bbls/d (39,000 bbls/d, net to us) of
PSC(TM).  We have a 65% interest in the project and the joint venture lands.  We
are the sole operator of the resource and the upgrader. We expect Long Lake will
generate  significant  value  with 40 years of  production  at a $10/bbl  margin
advantage.


CANADA - HORN RIVER SHALE GAS
Following  the  conclusion  of our recent  three-well  drilling  and  completion
program, we continue to make significant  progress on our substantial Horn River
shale gas position in north-east British Columbia. With five shale gas wells now
on-stream,  we are  producing  approximately  15  mmcf/d  with the  majority  of
production  coming  from the three new wells.  These  wells  have a higher  frac
density than our earlier  wells.  Our land  position  here has the  potential to
support 500 to 700 wells.

Substantial cost savings and productivity  improvements  were realized with this
drilling  and  completion  program.  We took  advantage  of  improved  equipment
utilization,  drilled longer wells, initiated more fracs per well and maintained
an  industry-leading  frac pace of 26 fracs in 15 days  while  achieving  a 100%
success rate on our frac program.

We have  approximately  88,000  acres in the Dilly  Creek area of the Horn River
basin with a 100%  working  interest.  Further  appraisal  activity  is required
before our reserve estimates can be finalized and commerciality established.


UNITED STATES - GULF OF MEXICO
In late October, we started production from the Longhorn development.  The field
is expected to reach peak production of approximately 200 mmcf/d or 33,000 boe/d
gross (50  mmcf/d or 8,000  boe/d,  net to us) early  next  year.  We have a 25%
non-operated working interest in this project and ENI is the operator.

In the Gulf of Mexico, the arrival of the Ensco 8501 rig has allowed us to start
drilling our Knotty Head appraisal well. The well spud earlier this month and we
expect results in the second quarter of 2010. A second  deep-water  drilling rig
is expected to arrive in mid 2010.  This will allow us to start drilling more of
our identified prospects.

In the Eastern Gulf, we recently spud the Appomattox prospect,  which is located
six miles west of our Vicksburg  discovery.  Drilling results are expected early
next year. During the quarter, we completed drilling the Antietam prospect.  The
well encountered thick good quality sand, but was wet. We have a 25% interest in
Vicksburg and a 20% interest in  Appomattox  and Shiloh,  an earlier  discovery.
Shell operates all three discoveries.



                                       33
<PAGE>

<TABLE>
<CAPTION>
FINANCIAL RESULTS

CHANGE IN NET INCOME

                                                                                                 2009 VS. 2008
                                                                                ------------------------------------------------
                                                                                   Three Months Ended       Nine Months Ended
                                                                                         September 30            September 30
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                      <C>
NET INCOME AT SEPTEMBER 30, 2008                                                                  886                   1,896
                                                                                ------------------------------------------------
     Favorable (unfavorable) variances(1):

         Realized Commodity Prices
              Crude Oil                                                                          (581)                 (1,994)
              Natural Gas                                                                        (106)                   (266)
                                                                                ------------------------------------------------
                  Total Price Variance                                                           (687)                 (2,260)

         Production Volumes, After Royalties
              Crude Oil                                                                          (310)                   (379)
              Natural Gas                                                                          17                     (30)
              Changes in Crude Oil Inventory Pending Sale                                        (112)                   (114)
                                                                                ------------------------------------------------
                  Total Volume Variance                                                          (405)                   (523)

         Oil and Gas Operating Expense                                                              3                      15

         Oil and Gas Depreciation, Depletion, Amortization and Impairment
                                                                                                   38                     (63)

         Exploration Expense                                                                       23                      26

         Energy Marketing Revenue, Net                                                            130                     389

         Chemicals Contribution                                                                    24                      46

         General and Administrative Expense (2)                                                  (421)                   (215)

         Interest Expense                                                                         (68)                   (167)

         Current Income Taxes                                                                    (216)                    303
         Future Income Taxes                                                                      726                     980

         Other
              Decrease in Fair Value of Crude Oil Put Options                                     (32)                   (217)
              Other                                                                               121                      67
                                                                                ------------------------------------------------

NET INCOME AT SEPTEMBER 30, 2009                                                                  122                     277
                                                                                ================================================
</TABLE>

(1)  All amounts are presented before provision for income taxes.
(2)  Includes stock-based compensation expense.


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



                                       34
<PAGE>

<TABLE>
<CAPTION>
OIL & GAS AND SYNCRUDE

PRODUCTION (BEFORE ROYALTIES) (1)
                                                                                  Three Months              Nine Months
                                                                               Ended September 30         Ended September 30
                                                                               2009          2008         2009          2008
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>           <C>          <C>          <C>
Crude Oil and Liquids (mbbls/d)
   United Kingdom                                                              73.7         100.0         91.6         102.0
   Yemen                                                                       48.7          54.1         51.5          58.0
   Canada                                                                      14.2          16.0         14.9          16.2
   United States                                                                9.5           8.5         10.6          11.2
   Long Lake Bitumen (2)                                                        5.5           5.2          7.6           3.0
   Other Countries                                                              2.6           5.7          3.9           5.7
Syncrude (mbbls/d) (3)                                                         22.5          22.9         19.1          20.4
                                                                         -----------------------------------------------------
                                                                              176.7         212.4        199.2         216.5
                                                                         -----------------------------------------------------
Natural Gas (mmcf/d)
   United Kingdom                                                                17            17           18            19
   Canada                                                                       143           133          139           128
   United States                                                                 63            70           58            94
                                                                         -----------------------------------------------------
                                                                                223           220          215           241
                                                                         -----------------------------------------------------

Total Production (mboe/d)                                                       214           249          235           257
                                                                         =====================================================

<CAPTION>

PRODUCTION (AFTER ROYALTIES)
                                                                                  Three Months              Nine Months
                                                                               Ended September 30         Ended September 30
                                                                               2009          2008         2009          2008
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>             <C>        <C>            <C>
Crude Oil and Liquids (mbbls/d)
   United Kingdom                                                              73.7         100.0         91.6         102.0
   Yemen                                                                       28.3          29.9         31.0          30.3
   Canada                                                                      10.9          12.0         11.6          12.3
   United States                                                                8.5           7.3          9.6           9.7
   Long Lake Bitumen (2)                                                        5.5           5.2          7.6           3.0
   Other Countries                                                              2.4           5.1          3.6           5.3
Syncrude (mbbls/d) (3)                                                         20.0          18.9         17.6          17.3
                                                                        -------------------------------------------------------
                                                                              149.3         178.4        172.6         179.9
                                                                        -------------------------------------------------------
Natural Gas (mmcf/d)
   United Kingdom                                                                17            17          17             19
   Canada                                                                       137           107         130            107
   United States                                                                 56            60          52             80
                                                                        -------------------------------------------------------
                                                                                210           184         199            206
                                                                        -------------------------------------------------------

Total Production (mboe/d)                                                       184           209         206            214
                                                                        =======================================================
</TABLE>

(1)  We have presented  production  volumes  before  royalties as we measure our
     performance  on this  basis  consistent  with  other  Canadian  oil and gas
     companies.
(2)  Pre-operating  revenues  and costs  associated  with Long Lake  bitumen are
     capitalized as development costs until we reach commercial operations.
(3)  Currently considered a mining operation for US reporting purposes.


LOWER VOLUMES DECREASED NET INCOME FOR THE QUARTER BY $405 MILLION
Production  before  royalties was 11% lower from the prior quarter and 14% lower
from the third  quarter  of 2008.  Our  production  was  primarily  lower due to
previously announced planned turnarounds and maintenance  activities at a number
of our  fields.  At  Buzzard,  we were  impacted  by  routine  Forties  pipeline
maintenance.  During  this  downtime,  we  installed  the jackets for the fourth
platform.  At  Scott/Telford,  we completed a major turnaround which resulted in
the field being  shutdown for  approximately  five weeks.  Elsewhere,  a planned
turnaround  was completed late in the third quarter at Long Lake and in the Gulf
of Mexico,  maintenance  activities at third-party  hosted  facilities  impacted
production  from the Aspen and Wrigley  fields.  Lower  volumes  were  partially
offset  by:  i) first  oil from  Ettrick;  ii) a  step-out  development  well at
Telford;  iii)  increased  shale gas  production  at Horn River;  and iv) higher
production at Syncrude,  following  the  completion of a turnaround in the first
half of the year.


                                       35
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                               Before                After
(mboe/d)                                                                                    Royalties            Royalties
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                  <C>
Production, second quarter 2009                                                                   240                  208
   Production changes:
       Syncrude                                                                                     8                    7
       Canada                                                                                       -                    1
       United Kingdom                                                                             (24)                 (24)
       Long Lake Bitumen                                                                           (4)                  (4)
       Yemen                                                                                       (3)                  (1)
       United States                                                                               (2)                  (2)
       Other                                                                                       (1)                  (1)
                                                                                  ------------------------------------------
Production, third quarter 2009                                                                    214                  184
                                                                                  ==========================================
</TABLE>

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

UNITED KINGDOM
Production  volumes in the UK North Sea were approximately 25% lower as a result
of previously  announced  downtime for  maintenance  and turnaround  activity at
Buzzard and Scott/Telford.

Our share of production  from the Buzzard field  averaged  approximately  60,000
boe/d  (138,000  boe/d gross)  during the  quarter.  This was 32% lower than the
previous  quarter  and 34%  lower  than the  third  quarter  of 2008.  The lower
production was due to four weeks of planned downtime, scheduled to coincide with
a six week slowdown of the Forties pipeline for routine maintenance.  During the
downtime,  we  successfully  installed  the jackets for the fourth  platform and
prepared the tie-ins.  This  platform  will allow us to handle  higher levels of
hydrogen  sulphide and maintain  peak  production  until at least 2014.  Buzzard
production has since returned to full rates and is currently  producing  between
200,000 and 220,000 boe/d gross.

Production at Scott/Telford  was 6% lower from the prior quarter as the platform
was shut down for approximately five weeks for planned  maintenance,  coinciding
with the  Forties  pipeline  shutdown.  Scott/Telford  production  increased  9%
compared to the third  quarter of 2008  primarily due to new  production  from a
step-out  development well at Telford.  This well was completed in September and
is tied back to our Scott platform.  Production from our non-operated  fields at
Duart and Farragon averaged 1,700 boe/d for the quarter.

The Ettrick field began producing in mid August. Ettrick contributed 5,800 boe/d
during the quarter and has been  successfully  produced at rates that allowed us
to test the design capacity of the floating  production,  storage and offloading
vessel (FPSO). In addition,  we have a nearby discovery at Blackbird which could
be a future  tie-back  to  Ettrick,  further  enhancing  the  economics  of this
development.

YEMEN
Yemen  production  decreased  5% and 10% from the  prior  quarter  and the third
quarter of 2008,  respectively.  The decline is consistent with our expectations
as the  fields  mature and as we drill  fewer  development  wells.  In the third
quarter of 2009,  we drilled  one  development  well.  Production  declines  are
expected  to  continue  as we  focus on  maximizing  recovery  of the  remaining
reserves.

CANADA
Production in Canada has remained flat.  Slightly lower conventional  production
from our heavy oil properties was offset somewhat by increasing  coalbed methane
(CBM)  production.  CBM production for the quarter  averaged 52 mmcf/d, 7 mmcf/d
higher than the same period in 2008 and consistent with the prior quarter.

We continue to make significant progress on our substantial Horn River shale gas
position in  north-east  British  Columbia.  During the quarter,  we concluded a
three-well  drilling and  completion  program.  We now have five shale gas wells
on-stream  and are  producing  approximately  15  mmcf/d  with the  majority  of
production coming from the three new wells.

LONG LAKE
Bitumen  production  for the quarter  averaged  5,500 boe/d (8,500 boe/d gross),
down 3,800 boe/d from the prior quarter,  while the facility sold  approximately
3,200 boe/d  (4,900  boe/d gross) of bitumen and 1,900 boe/d (2,900 boe/d gross)
of premium synthetic crude (PSC(TM)).

Production  volumes  decreased  as a result  of  water  treatment  issues  and a
previously announced turnaround in September. During the turnaround, we replaced
valves,  cleaned  hot  lime  softeners,  isolated  water  treatment  trains  and
performed  a  number  of  other  planned   maintenance   activities  to  improve
reliability and operability. We installed ESPs in a number of our SAGD

                                       36
<PAGE>

wells.  With the  turnaround  complete we have  resumed  steaming  the wells and
bitumen volumes are back up to pre-turnaround  levels of 10,000 to 12,000 bbls/d
(gross) (6,500 to 7,800 bbls/d net to Nexen).

The last two major upgrader units, the solvent de-asphalter and thermal cracker,
were  successfully  put into  operation at the end of August.  This allows us to
transition from gasifying  vacuum residue,  which contains some lighter parts of
the barrel,  to gasifying  asphaltenes,  the heaviest  part of the barrel.  As a
result,  we  expect  our  PSC(TM)  yield  to  increase  to our  target  yield of
approximately 80%.

In addition,  we recently completed the steam  de-bottleneck  project which will
increase our SAGD steam production capacity to over 230,000 bbls/d.  Start-up of
the de-bottleneck project will proceed as required to support the SAGD ramp-up.

UNITED STATES
Gulf of Mexico production volumes were 10% lower than the prior quarter.  In the
deep water,  maintenance  activities at third-party  hosted facilities  impacted
production  from the Aspen and Wrigley  fields.  These  declines were  partially
offset by  producing  for a full  quarter on the shelf at Eugene  Island 295, as
production was brought back on stream at the end of June,  following last year's
hurricane damage.

Production  volumes  were 1% lower  than the third  quarter of 2008 as our Green
Canyon 6, 50 and 137 deep-water fields remain shut-in following Hurricane Ike in
2008,  which caused the  destruction  of the  third-party  processing  platform.
Production is expected to return in late 2010 or 2011, after  reconstruction  of
the  platform is  completed.  This  decrease was  substantially  offset as Aspen
production increased during the full quarter as compared to the same period last
year when hurricane interruptions curtailed production. Aspen production is also
higher as a result of additional  water handling  facilities  being installed on
the  third-party  platform  earlier this year.  At the end of the third  quarter
2009, production in the Gulf of Mexico was approximately 22,000 boe/d.

Production  from our  non-operated  Longhorn  development  has now started.  The
development is a four-well  subsea  tie-back to the Corral  platform  located 19
miles northwest of the field.  The field is expected to reach peak production of
approximately 200 mmcf/d or 33,000 boe/d gross (50 mmcf/d or 8,000 boe/d, net to
us) early next year.

OTHER COUNTRIES
Our share of production  from the Guando field in Colombia  averaged 2,600 boe/d
during the  quarter,  1,000 boe/d  lower than the prior  quarter and 3,100 boe/d
lower than the third  quarter of 2008.  The lower  volumes  reflect  the reduced
working  interest of the Guando field  effective in the second  quarter of 2009.
Under the  terms of our  license,  our  working  interest  in the  Guando  field
decreased from 20% to 10% in May 2009 after cumulative production from the field
reached 60 million barrels.

SYNCRUDE
Syncrude  production was 51% higher than the previous  quarter and 2% lower than
the third  quarter of 2008.  Production  volumes  were higher than the  previous
quarter when we had; i) a scheduled  turnaround on Coker 8-3; ii) maintenance on
Coker 8-1; and iii) fewer shipments of synthetic crude as a result of outages on
the Pembina  pipeline.  The higher  production  rates were  partially  offset by
unscheduled maintenance on the Vacuum Distillation Unit in the third quarter.




                                       37
<PAGE>

<TABLE>
<CAPTION>
COMMODITY PRICES
                                                                                   Three Months              Nine Months
                                                                                Ended September 30       Ended September 30
                                                                                2009          2008       2009          2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>           <C>        <C>          <C>
CRUDE OIL
   Dated Brent (Brent) (US$/bbl)                                               68.27        114.78      57.16        111.02
   West Texas Intermediate (WTI) (US$/bbl)                                     68.30        117.98      57.00        113.29
                                                                         ---------------------------------------------------

   Benchmark Differentials (1) (US$/bbl)
         Heavy Oil                                                             10.39         17.74       9.10         20.55
         Mars                                                                   1.90          5.38       1.17          6.42
         Masila                                                                (0.54)         5.01       0.15          3.75

   Realized Prices from Producing Assets (Cdn$/bbl)
         United Kingdom                                                        73.15        114.89      63.78        108.21
         Yemen                                                                 76.31        115.92      65.22        110.46
         Canada                                                                59.88         97.91      50.10         85.69
         United States                                                         72.27        122.46      61.60        110.29
         Other Countries                                                       70.49        120.11      55.89        108.03
         Syncrude                                                              74.54        126.56      67.26        120.12

   Corporate Average (Cdn$/bbl)                                                72.95        115.56      63.15        108.36
                                                                         ---------------------------------------------------

NATURAL GAS
   New York Mercantile Exchange (US$/mmbtu)                                     3.44          8.95       3.91          9.73
   AECO (Cdn$/mcf)                                                              2.87          8.76       3.89          8.13
                                                                         ---------------------------------------------------

   Realized Prices from Producing Assets (Cdn$/mcf)
         United Kingdom                                                         2.64          7.53       4.04          7.11
         Canada                                                                 2.85          8.00       3.67          8.33
         United States                                                          3.56         10.14       4.59         10.28

   Corporate Average (Cdn$/mcf)                                                 3.04          8.65       3.96          9.03
                                                                         ---------------------------------------------------

NEXEN'S AVERAGE REALIZED OIL AND GAS PRICE (Cdn$/boe)                          63.00        106.22      56.89         99.64
                                                                         ---------------------------------------------------

AVERAGE FOREIGN EXCHANGE RATE - Canadian to US Dollar                         0.9108        0.9599     0.8546       0.9817
                                                                         ---------------------------------------------------
</TABLE>

(1)  These differentials are a discount/(premium) to WTI.

LOWER COMMODITY PRICES REDUCED QUARTERLY NET INCOME BY $687 MILLION
Crude oil prices  strengthened  15% during the  quarter  with  Brent,  which the
majority  of our  production  is  priced  off,  averaging  US$68.27/bbl  and WTI
averaging  US$68.30/bbl.  However,  crude  prices were  approximately  42% lower
compared  to the record  prices in the third  quarter  last year.  The impact of
lower   commodity   prices  from  last  year  was  mitigated   somewhat  by  the
strengthening US dollar. Our realized crude oil sales price averaged $72.95/bbl,
37% lower than the third quarter of 2008.

Natural gas prices continued to struggle during the quarter with NYMEX averaging
US$3.44/mmbtu and AECO averaging  $2.87/mcf.  This was a decline of 10% and 17%,
respectively  from the previous  quarter,  and approximately 66% lower than last
year.  As most of our  natural  gas  sales  are  priced  based on NYMEX and AECO
benchmark prices,  these declines resulted in a realized average gas sales price
of $3.04/mcf, 19% lower than the previous quarter and 65% lower than last year.

Compared to the third quarter of 2008,  the US dollar  strengthened  against the
Canadian  dollar.  As a  result,  our  realized  crude oil  price  increased  by
$3.73/bbl,  while our realized  natural gas price  increased by $0.16/mcf.  This
increased our net sales by approximately  $50 million.  Compared to the previous
quarter however, the US dollar weakened against the Canadian dollar,  decreasing
our net sales by approximately $62 million.  This reduced our realized crude oil
and natural gas prices by $4.57/bbl and $0.19/mcf, respectively.

CRUDE OIL REFERENCE PRICES
During the third  quarter,  WTI traded from a low of  US$59.52/bbl  to a high of
US$74.37/bbl.  The main drivers  supporting recent increases in crude oil prices
included a continuing rally in US equity markets, positive investment flows into
commodity  markets due to the weakening US dollar and a more optimistic  outlook
on the global economic recovery.


                                       38
<PAGE>

However,  near-term  supply/demand  fundamentals  have not  improved  as  global
inventory  levels  and spare  capacity  remain  high and demand has been slow to
recover.  Economic indicators continue to be mixed and uncertainty remains about
the shape of the recovery over the next few years.  Most  countries are expected
to show positive third quarter growth,  consumer  confidence has increased,  and
industrial surveys show improvement. However, unemployment is expected to remain
high, US mortgage default rates have continued to increase, and questions remain
concerning the  sustainability  of future  economic  growth without support from
government spending.

Geopolitical  events  during the quarter  such as concerns  over Iran's  nuclear
enrichment  program,  ongoing  unrest in Iraq and  Afghanistan  and requests for
stronger  regulation of energy  markets and futures  trading  appear to have had
little impact on price.

CRUDE OIL DIFFERENTIALS
The heavy oil differential  continued to be narrower than historic levels due to
increasing North American heavy oil refinery capacity,  cuts in medium crude oil
production  by OPEC,  strong  fuel oil  prices and lower  heavy oil supply  from
Mexico.  Line-fill  requirements for the Keystone  pipeline in North America are
expected to offset the impact of colder winter  weather  which has  historically
caused differentials to widen in the winter season.

The Brent/WTI  differential  was volatile during the quarter.  Brent traded at a
premium to WTI early in the third quarter due to depressed WTI pricing caused by
high  inventory  levels at Cushing  and  reduced  supply in the North Sea due to
maintenance downtime.  However, as US inventories decreased through the quarter,
the differential reverted to a discount to WTI.

Higher  Cushing  inventory  levels  also  contributed  to  the  narrower  Masila
differential. The Masila price strengthened relative to Brent, reflecting strong
demand from China and other Asian countries.

The Mars differential was narrow during July and August but widened in September
as inventories fell at Cushing.

NATURAL GAS REFERENCE PRICES
NYMEX  natural gas prices were  volatile  during the  quarter.  Relative to last
year, low prices were driven by declines in industrial and power demand and high
inventory  levels as natural  gas  producers  have been slow to respond to lower
prices by reducing supply. Despite the fundamentals,  prices strengthened during
the quarter to a high of US$5/mmbtu at the end of September. Continuing weak gas
prices are  forecasted as strong  supply  additions are expected from shale gas,
tight gas and new LNG volumes from Russia and the Middle East.

<TABLE>
<CAPTION>
OPERATING EXPENSES

                                                                                   Three Months                Nine Months
                                                                                Ended September 30         Ended September 30
(Cdn$/boe)                                                                      2009          2008         2009          2008
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>          <C>           <C>
Operating expenses based on our production before royalties (1)
   Conventional Oil and Gas                                                    11.56          8.75         9.41          8.38
   Synthetic Crude Oil
         Syncrude                                                              29.50         32.40        39.26         37.22
   Average Oil and Gas                                                         13.60         10.90        11.97         10.70
                                                                         -----------------------------------------------------

Operating expenses based on our production after royalties
   Conventional Oil and Gas                                                    13.45         10.38        10.90         10.09
   Synthetic Crude Oil
         Syncrude                                                              33.19         39.23        42.67         44.01
   Average Oil and Gas                                                         15.76         12.96        13.79         12.87
                                                                         -----------------------------------------------------
</TABLE>

(1)  Operating  expenses  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.


LOWER OPERATING EXPENSES INCREASED NET INCOME FOR THE QUARTER BY $3 MILLION
Our corporate average oil and gas operating cost increased $2.70/boe compared to
the third quarter of 2008.  Changes in production  mix due to various  temporary
shutdowns  for  maintenance  during the  quarter  resulted  in lower  production
volumes.  However, we continued to incur fixed operating costs at the same time.
The lower  volumes and fixed  operating  costs  increased  our per unit costs by
$1.62/boe.  The  stronger  US dollar  resulted in higher  US-dollar  denominated
operating costs, increasing our corporate average by $0.60/boe.

In the UK North Sea, absolute operating costs at Buzzard decreased compared with
the same period last year due to previously  announced  downtime.  However,  per
unit  operating  costs  were  higher  as  additional  costs  were  incurred  for
maintenance during the shut down, combined with lower production  volumes.  This
increased our corporate average  by $0.56/boe.   At Scott/Telford,  we similarly

                                       39
<PAGE>

incurred higher operating costs per barrel due to planned maintenance  downtime.
This, combined with the start up of Ettrick where operating costs per barrel are
higher than our corporate average, increased our corporate average by $0.22/boe.

In Yemen, we continue to incur costs to maintain  existing well  productivity to
maximize  reserve  recoveries and slow the natural  decline of the field.  These
costs,  combined with  production  declines,  increased  our  corporate  average
operating  cost by  $0.73/boe.  In the US  Gulf  of  Mexico,  lower  repair  and
maintenance costs and higher volumes reduced the consolidated  average unit cost
by $0.59/boe.

Canada  reduced  our  corporate  average by  $0.11/boe  from lower  utility  and
downhole workover costs, while lower natural gas prices and maintenance costs at
Syncrude decreased our corporate average by $0.33/boe.

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

                                                                                  Three Months                Nine Months
                                                                               Ended September 30         Ended September 30
(Cdn$/boe)                                                                     2009          2008         2009          2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>           <C>          <C>           <C>
DD&A based on our production before royalties (1)
   Conventional Oil and Gas                                                   19.14         16.08        18.71         15.05
   Synthetic Crude Oil
         Syncrude                                                              6.12          6.10         6.29          6.47
   Average Oil and Gas                                                        17.66         15.17        17.64         14.36
                                                                         ----------------------------------------------------

DD&A based on our production after royalties
   Conventional Oil and Gas                                                   22.26         19.08        21.67         18.13
   Synthetic Crude Oil
         Syncrude                                                              6.88          7.38         6.83          7.65
   Average Oil and Gas                                                        20.46         18.03        20.32         17.27
                                                                         ----------------------------------------------------
</TABLE>

(1)  DD&A per boe is our DD&A for oil and gas operations  divided by our working
     interest production before royalties. We use production before royalties to
     monitor  our  performance  consistent  with  other  Canadian  oil  and  gas
     companies.


LOWER OIL AND GAS DD&A INCREASED NET INCOME FOR THE QUARTER BY $38 MILLION
Our corporate  average DD&A cost per barrel increased  $2.49/boe over last year.
However,  lower  production as a result of maintenance  and turnaround  activity
during the quarter  reduced our  absolute  oil and gas DD&A  expense by 11%. The
stronger US dollar increased our corporate  average by $1.09/boe as depletion of
our international and US assets is denominated in US dollars.

Our  production  mix was  impacted  as a result  of lower  production  caused by
maintenance  downtime  in the UK North Sea and natural  declines in Yemen.  This
change in production mix increased our overall corporate average by $0.51/boe.

In the UK North Sea, our Buzzard  depletion  rate decreased from the same period
last year as  successful  development  drilling  increased  our  proved  reserve
estimates at the end of 2008.  This lower  depletion  rate reduced our corporate
average by $0.06/boe. Elsewhere in the UK, higher depletion rates at Ettrick and
Scott/Telford  increased our corporate average by $1.18/boe.  The depletion rate
at our mature  Scott/Telford  fields increased compared to last year as a result
of downward price-related reserve revisions at the end of 2008.

Lower depletion rates in Yemen, due to lower capital  expenditures from drilling
fewer  development  wells and higher  reserve  estimates,  reduced our corporate
average  by  $1.23/boe.  In the Gulf of  Mexico,  higher  estimates  for  future
abandonment  costs and downward  price-related  reserve  revisions at the end of
2008 resulted in higher depletion rates,  increasing our corporate  average rate
by $0.31/boe.

Canadian depletion increased our corporate average by $0.69/boe. Depletion rates
at our heavy oil properties were also up due to downward price-related revisions
to our proved  reserves at the end of 2008.  This was partially  offset by lower
depletion  rates at our CBM properties  where  additional  proved  reserves were
recognized through improved recovery rates.



                                       40
<PAGE>

<TABLE>
<CAPTION>
EXPLORATION EXPENSE

                                                                                  Three Months               Nine Months
                                                                               Ended September 30        Ended September 30
                                                                               2009          2008        2009          2008
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>         <C>           <C>
Seismic                                                                          16            38          59            72
Unsuccessful Drilling                                                            51            50          78           101
Other                                                                            22            24          82            72
                                                                         ----------------------------------------------------
Total Exploration Expense                                                        89           112         219           245
                                                                         ====================================================

New Growth Exploration                                                          129           126         459           446
Geological and Geophysical Costs                                                 16            38          59            72
                                                                         ----------------------------------------------------
Total Exploration Expenditures                                                  145           164         518           518
                                                                         ====================================================

Exploration Expense as a % of Exploration Expenditures                           61%           68%         42%           47%
                                                                         ----------------------------------------------------
</TABLE>

LOWER  EXPLORATION  EXPENSE  INCREASED NET INCOME FOR THE QUARTER BY $23 MILLION
Exploration  expenditures  were $19 million lower than the same period last year
primarily due to lower seismic acquisition costs. During the quarter, we focused
on: i)  furthering  our  appraisal of the Golden Eagle area in the UK North Sea;
ii)  investing in our shale gas  exploration  program at Dilly  Creek;  and iii)
advancing our deep water exploration program in the Eastern Gulf of Mexico.

We have significant exploration success in the Golden Eagle area, which includes
our 34%  operated  interest  in Golden  Eagle and  Hobby,  and our 46%  operated
interest in Pink. We have drilled  three  exploration  and ten appraisal  wells,
with additional  appraisal  wells due in the fourth  quarter.  We are evaluating
development options as we move towards project sanction.

We continue to make  significant  progress on our shale gas project in the Dilly
Creek area of the Horn River basin in north-east British Columbia, where we have
approximately 88,000 acres with a 100% working interest.  During the quarter, we
concluded a three-well  fracing and  completion  program and now have five shale
gas wells on stream. Substantial cost savings and productivity improvements were
realized with this drilling and completion program.

In the Eastern Gulf of Mexico, we are currently  drilling an exploratory well at
Appomattox,  about six miles west of our  discovery at  Vicksburg.  The well was
spud in September and drilling operations are ongoing. Elsewhere, we continue to
evaluate drilling results from our Owowo South B-1 well, 20 kilometers northeast
of the Usan field, offshore Nigeria.

Exploration expense was $23 million lower than the same period last year, mainly
related to lower seismic  acquisition  costs.  Our exploration  expense includes
costs to acquire seismic data in the Gulf of Mexico and North Sea.

Unsuccessful  drilling expense during the quarter includes CBM drilling costs in
Canada and an unsuccessful well in the Eastern Gulf of Mexico. We expensed costs
of $20 million related to our CBM  exploration  activities in central Alberta on
those properties where we have no future development plans. Our Antietam well in
the  Eastern  Gulf of Mexico  was  drilled to a depth of 23,000  feet.  The well
encountered  thick good quality  sand,  but was wet.  The well was  subsequently
plugged and abandoned,  and we expensed  drilling  costs of $31 million.  In the
third quarter of 2008,  exploration expense included unsuccessful drilling costs
of $26 million related to our  Fredericksburg  well in the US Gulf of Mexico and
$6 million for our Yeoman well in the UK North Sea.



                                       41
<PAGE>

<TABLE>
<CAPTION>
ENERGY MARKETING
                                                                                  Three Months               Nine Months
                                                                               Ended September 30        Ended September 30
                                                                               2009          2008        2009          2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>          <C>         <C>           <C>
   Physical Sales (1)                                                         9,711        16,479      29,719        48,987
   Physical Purchases (1)                                                    (9,605)      (16,255)    (29,011)      (48,077)
   Net Financial Transactions (2)                                               117           239        (111)         (365)
   Change in Fair Market Value of Inventory                                     (35)         (314)         79          (164)
                                                                         ---------------------------------------------------
Marketing Revenue                                                               188           149         676           381
   Transportation Expense                                                      (145)         (197)       (473)         (536)
   Other                                                                          4             7           8            19
                                                                         ---------------------------------------------------
NET MARKETING REVENUE                                                            47           (41)        211          (136)
                                                                         ===================================================

CONTRIBUTION TO NET MARKETING REVENUE BY REGION
   North America                                                                 33           (53)        192          (131)
   Asia                                                                           4             2          22            10
   Europe                                                                        10            10          (3)          (15)
                                                                         ---------------------------------------------------
NET MARKETING REVENUE                                                            47           (41)        211          (136)
   DD&A                                                                         (14)           (4)        (21)          (11)
   General and Administrative                                                   (19)            4         (68)          (63)
   Allowance for Doubtful Receivables                                             4           (38)          4           (38)
                                                                         ---------------------------------------------------
MARKETING CONTRIBUTION TO INCOME BEFORE INCOME TAXES                             18           (79)        126          (248)
                                                                         ===================================================
NORTH AMERICA
   NATURAL GAS
   Physical Sales Volumes (3)  (bcf/d)                                          4.9           7.0         4.9           7.0
   Transportation Capacity (bcf/d)                                              1.5           2.1         1.5           2.1
   Storage Capacity (bcf)                                                      32.5          49.3        32.5          49.3
   Financial Volumes (4) (bcf/d)                                                8.7          12.5        11.4          19.2
   CRUDE OIL
   Physical Sales Volumes (3) (mbbls/d)                                         802           645         837           649
   Storage Capacity (mmbbls)                                                    3.1           3.2         3.1           3.2
   Financial Volumes (4) (mbbls/d)                                              699         1,454         796         1,429
   POWER
   Physical Sales Volumes (3) (GWh/d)                                            14             5           9             5
   Generation Capacity (MW)                                                      87            87          87            87

ASIA
   Physical Sales Volumes (3) (mbbls/d)                                          93            82          97           103
   Financial Volumes (4) (mbbls/d)                                              420           365         425           324

EUROPE
   NATURAL GAS
   Physical Sales Volumes (3)  (bcf/d)                                          1.2           1.1         1.2           1.2
   Storage Capacity (bcf)                                                       3.1           3.8         3.1           3.8
   CRUDE OIL
   Financial Volumes (4) (mbbls/d)                                              261           216         340           970
   POWER
   Physical Sales Volumes (3) (GWh/d)                                             6             6           6             5

VALUE-AT-RISK
   Quarter-end                                                                   13            27          13            27
   High                                                                          15            33          24            40
   Low                                                                           11            19          11            19
   Average                                                                       12            29          16            31
                                                                         ---------------------------------------------------
</TABLE>

(1)  Marketing's   physical   sales,   physical   purchases  and  net  financial
     transactions are reported within marketing revenue as detailed in the notes
     to the unaudited consolidated financial statements.
(2)  Net  financial  transactions  include  all  gains and  losses on  financial
     derivatives  and the  unrealized  portion of gains and  losses on  physical
     purchase and sale contracts.
(3)  Excludes  inter-segment  transactions.  Physical volumes  represent amounts
     delivered during the quarter.
(4)  Financial volumes represent amounts largely acquired to economically  hedge
     physical transactions during the quarter.

                                       42
<PAGE>

HIGHER  CONTRIBUTION FROM ENERGY MARKETING  INCREASED NET INCOME BY $130 MILLION
During the  quarter,  we  initiated a strategic  review of our energy  marketing
natural gas and power  businesses.  This review continues to align our marketing
activities with our upstream oil and gas businesses.  The review may include the
sale of all or part of these  businesses  and is expected to continue into 2010.
Data rooms are ready and numerous parties have expressed interest.

In the interim,  our energy  marketing team continues to focus on optimizing our
physical marketing business with all groups contributing positive results in the
quarter. In particular,  positive returns generated by active asset optimization
by the natural gas team more than offset the impact of narrowing  transportation
spreads.  The global crude oil team  continued to profit from the contango crude
oil forward curve.

Our energy marketing results in 2009 are significantly  improved over 2008. Last
year, we incurred losses in our natural gas business,  due to narrowing  spreads
between  supply  regions and consuming  markets,  and on certain  physical basis
contracts  and  losses on  contracts  used to  protect  the value of some of our
physical  capacity  contracts.  The losses  were  offset  somewhat by gains from
blending  crude oil.  Late in the year,  the team began  exiting  positions  and
working to reduce  trading levels and the overall size of our North American gas
business.

Our results last year also included a $38 million  provision for our exposure to
Lehman Brothers who filed for bankruptcy protection in September 2008.

Our third quarter results were consistent  relative to the second quarter.  This
was due to improved  results from the global  crude oil teams who profited  from
the contango  curve offset by lower income from the North America gas team.  The
gas team  recognized  mark-to-market  losses on  derivatives  that  protect  our
storage and inventory  assets,  and losses on the value of inventory  associated
with  lower  prompt gas  prices.  We expect to see some  recovery  in the fourth
quarter in the value of our physical  assets as we move towards higher  seasonal
prices for winter.

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

<TABLE>
<CAPTION>
COMPOSITION OF NET MARKETING REVENUE
                                                                                  Three Months               Nine Months
                                                                               Ended September 30        Ended September 30
                                                                               2009          2008        2009          2008
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>         <C>           <C>
Trading Activities (Physical and related Financial)                              43           (49)        201          (157)
Non-Trading Activities                                                            4             8          10            21
                                                                         ---------------------------------------------------
Total Net Marketing Revenue                                                      47           (41)        211          (136)
                                                                         ===================================================
</TABLE>

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

OTHER ACTIVITIES
We enter into fee for service contracts related to  transportation,  storage and
sales of  third-party  oil and gas. In  addition,  we earn income from our power
generation facilities at Balzac and Soderglen.


FAIR VALUE OF DERIVATIVE CONTRACTS
Our processes for  estimating and  classifying  the fair value of our derivative
contracts are consistent with those in place at December 31, 2008.



                                       43
<PAGE>

At September 30, 2009, the fair value of our derivative  contracts in our energy
marketing  trading  activities  was  a  net  liability  of  $7  million.   These
derivatives   are  used  to   economically   hedge  our  physical   storage  and
transportation  contracts  which  cannot be carried at fair value until they are
used.  Below is a breakdown of the derivative fair value by valuation method and
contract maturity.

<TABLE>
<CAPTION>
                                                                                          MATURITY
------------------------------------------------------------------------------------------------------- -----------------------
                                                             less than                                  more than
                                                                1 year     1-3 years      4-5 years       5 years       Total
                                                             ------------------------------------------ -----------------------
<S>                                                          <C>           <C>            <C>           <C>             <C>
   Level 1 - Actively Quoted Markets                              (106)          (54)           (20)            -        (180)
   Level 2 - Based on Other Observable Pricing Inputs               82            53              9             7         151
   Level 3 - Based on Unobservable Pricing Inputs                    4            17              1             -          22
                                                             ------------------------------------------ -----------------------
Total                                                              (20)           16            (10)            7          (7)
                                                             ========================================== =======================

<CAPTION>
CHANGES IN FAIR VALUE OF DERIVATIVE CONTRACTS
                                                                                                                        Total
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                                     <C>
Fair Value at December 31, 2008                                                                                            63
   Change in Fair Value of Contracts                                                                                      116
   Net Losses (Gains) on Contracts Closed                                                                                (186)
   Changes in Valuation Techniques and Assumptions (1)                                                                      -
                                                                                                              ----------------
Fair Value at September 30, 2009                                                                                           (7)
                                                                                                              ================
</TABLE>

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

The fair values of our  derivative  contracts  will be realized over time as the
related contracts  settle.  Until then, the value of certain contracts will vary
with forward commodity prices and price  differentials.  The average term of our
derivative  contracts is approximately 1.3 years. Those maturing beyond one year
primarily relate to North American natural gas positions.


CHEMICALS

HIGHER CHEMICALS CONTRIBUTION INCREASED NET INCOME BY $24 MILLION
Third quarter chemicals  revenue  experienced a decline in both chlor-alkali and
chlorate  sales in North  America and Brazil.  North  America  chlorate  revenue
decreased 4% from the same period last year, as a 12% reduction in sales volumes
attributable to the global economic downturn was only partially offset by higher
prices.  North America  chlor-alkali  revenue decreased 11% over the same period
due to a combination  of lower  volumes and weaker  caustic  prices.  In Brazil,
lower prices and sales volumes reduced chlorate and chlor-alkali revenues by 10%
and 42%, respectively. Chlor-alkali revenues in Brazil were lower as a result of
fewer sales of purchased product as this activity generates no gross margin.

Chemicals  contribution increased from the same period last year as the stronger
Canadian  dollar at September 30, 2009  generated  unrealized  foreign  exchange
gains of $24 million on the Canexus US-dollar  denominated debt. This was higher
than the third quarter of 2008 when our chemicals operations  recognized foreign
exchange translation losses of $12 million.


<TABLE>
<CAPTION>
CORPORATE EXPENSES

GENERAL AND ADMINISTRATIVE (G&A)
                                                                                      Three Months             Nine Months
                                                                                   Ended September 30       Ended September 30
                                                                                     2009       2008          2009      2008
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>        <C>           <C>       <C>
General and Administrative Expense before Stock-Based Compensation                    118        100           329       286
Stock-Based Compensation (1)                                                           (5)      (408)           51      (121)
                                                                                ----------------------- ----------------------
Total General and Administrative Expense                                              113       (308)          380       165
                                                                                ======================= ======================
</TABLE>

(1)  Includes cash and non-cash  expenses related to our tandem option and stock
     appreciation rights plans.

HIGHER G&A COSTS DECREASED NET INCOME BY $421 MILLION
Changes in our share price create volatility in our net income as we account for
stock-based  compensation using the intrinsic-value  method. During the quarter,
our share  price  decreased  4% and we  reversed  approximately  $19  million of
non-cash stock-based compensation expense that we had previously recognized.  In
the same period last year,  our share price was lower by 39% resulting in a $410
million reversal of previously recognized stock-based compensation expense. Cash
payments made in connection  with our stock-based  compensation  programs during
the three and nine month periods  ended  September 30, 2009 were $14 million and
$28 million respectively (2008 - $2 million and $89 million, respectively).


                                       44
<PAGE>

<TABLE>
<CAPTION>
INTEREST
                                                                                      Three Months             Nine Months
                                                                                   Ended September 30       Ended September 30
                                                                                     2009       2008          2009      2008
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>        <C>           <C>       <C>
Interest                                                                              100         80           286       235
   Less: Capitalized                                                                  (16)       (64)          (60)     (176)
                                                                                ----------------------------------------------
Net Interest Expense                                                                   84         16           226        59
                                                                                ==============================================

Effective Interest Rate                                                              5.2%       6.1%         4.9%       4.6%
                                                                                ----------------------------------------------
</TABLE>

HIGHER NET INTEREST EXPENSE REDUCED NET INCOME BY $68 MILLION
Our  financing  costs  increased  $20 million from the third quarter of 2008. In
July 2009, we issued US$1 billion of long-term notes and additional  interest in
the quarter related to this debt was $13 million.  In addition,  the stronger US
dollar  increased our interest  expense by $6 million.  Interest  expense on our
term credit  facilities  was slightly  higher than the third quarter of 2008, as
additional  borrowings were partially offset by lower interest rates on floating
rate debt.

Capitalized  interest on our Long Lake  Project  was $51 million  lower than the
previous year as  construction  of the facilities  was completed  earlier in the
year. We also ceased capitalizing interest on Ettrick during the quarter.  These
decreases  were  partially  offset  by  capitalizing   additional   interest  on
construction of the fourth  platform at Buzzard and on our major  development at
Usan, offshore West Africa.

<TABLE>
<CAPTION>
INCOME TAXES
                                                                                     Three Months              Nine Months
                                                                                   Ended September 30       Ended September 30
                                                                                     2009       2008          2009      2008
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>        <C>           <C>       <C>
Current                                                                               190        (26)          514       817
Future                                                                                (81)       645          (397)      583
                                                                                ----------------------------------------------
Total Provision for Income Taxes                                                      109        619           117     1,400
                                                                                ==============================================
</TABLE>

LOWER TAXES INCREASED NET INCOME BY $510 MILLION
Our provision for income taxes  decreased  $510 million as compared to the third
quarter  of 2008 due to lower  commodity  prices  and  production  in 2009 and a
significant  reversal of stock-based  compensation expense in 2008. In the third
quarter of 2008,  we completed an internal  reorganization  and financing of our
North Sea assets  which  provided  us with an  additional  one-time  current tax
reduction.  Our income tax  provision  includes  current taxes in the UK, Yemen,
Norway, Colombia and the US.

<TABLE>
<CAPTION>
OTHER
                                                                                     Three Months             Nine Months
                                                                                   Ended September 30       Ended September 30
                                                                                     2009       2008          2009      2008
------------------------------------------------------------------------------- ----------------------------------------------
<S>                                                                                  <C>        <C>           <C>         <C>
Decrease in Fair Value of Crude Oil Put Options                                       (23)         9          (218)       (1)
                                                                                ----------------------------------------------
</TABLE>

During the first  quarter of 2008,  we  purchased  put options on  approximately
70,000 bbls/d of our 2009 crude oil production.  These options establish a Dated
Brent floor price of US$60/bbl, are settled annually and provide a base level of
price protection  without limiting our upside to higher prices.  The put options
were  purchased for $14 million and are carried at fair value.  During the third
quarter of 2008, Lehman Brothers,  one of the put option  counterparties,  filed
for bankruptcy  protection  impacting 25,000 bbls/d of our 2009 put options. The
carrying  value of these put options has been reduced to nil. At  September  30,
2009, the remaining options had a fair value of $12 million,  $218 million lower
than the end of 2008.



                                       45
<PAGE>

<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL RESOURCES

CAPITAL STRUCTURE
                                                                                            September 30         December 31
                                                                                                    2009                2008
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                  <C>
NET DEBT (1)
     Bank Debt                                                                                     1,847               1,448
     Public Senior Notes                                                                           5,064               4,582
                                                                                       --------------------------------------
       Total Senior Debt                                                                           6,911               6,030
     Subordinated Debt                                                                               518                 548
                                                                                       --------------------------------------
       Total Debt                                                                                  7,429               6,578
     Less: Cash and Cash Equivalents                                                              (1,897)             (2,003)
                                                                                       --------------------------------------
TOTAL NET DEBT                                                                                     5,532               4,575
                                                                                       ======================================

SHAREHOLDERS' EQUITY                                                                               7,401               7,191
                                                                                       ======================================
</TABLE>

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

During the quarter,  we issued US$1 billion of senior notes with US$300  million
maturing in 10 years and US$700  million  maturing in 30 years.  The issuance of
the new debt  increased  the average  term-to-maturity  of our debt to 17 years.
Proceeds  from the debt issue  were used to repay a portion  of our  outstanding
term credit facilities as well as for general corporate purposes.

NET DEBT

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

<TABLE>
<CAPTION>
                                                                                           Three Months         Nine Months
                                                                                                  Ended               Ended
                                                                                           September 30        September 30
                                                                                                   2009                2009
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                        <C>                 <C>
Capital Investment                                                                                  655                2,119
Acquisition of Additional Working Interest at Long Lake                                               -                  755
Cash Flow from Operating Activities (1)                                                            (461)              (1,359)
                                                                                       --------------------------------------
   Deficiency                                                                                       194                1,515

Dividends on Common Shares                                                                           26                   78
Issue of Common Shares                                                                              (12)                 (42)
Changes in Restricted Cash                                                                          (93)                 154
Foreign Exchange Translation of US-dollar Debt and Cash                                            (470)                (797)
Other                                                                                                (2)                  49
                                                                                       --------------------------------------
Increase (Decrease) in Net Debt                                                                    (357)                 957
                                                                                       ======================================
</TABLE>

(1)  Includes changes in non-cash  working  capital.  For the three months ended
     September  30, $113  million was  included as a source of cash flow and for
     the nine months ended  September  30, $193 million was included as a source
     of cash flow.

Our net debt  decreased from June 30, 2009 primarily as a result of the Canadian
dollar strengthening relative to the US dollar. This impact was partially offset
as our  quarterly  capital  investment  exceeded  our cash flow  from  operating
activities  by $194 million.  Our available  liquidity at September 30, 2009 was
approximately  US$3.3  billion,  comprised  of cash on hand and  undrawn  credit
facilities.  Operating cash flows in the oil and gas industry can be volatile as
short-term   commodity   prices  are  driven  by  existing   supply  and  demand
fundamentals  and market  volatility.  We invest through the lows of the current
commodity  market to create future growth and value for our shareholders for the
long-term.  Changes in our non-cash working capital can vary between quarters as
our energy marketing net working capital position fluctuates depending on timing
of settlement of  outstanding  positions,  the movement in commodity  prices and
inventory cycles.



                                       46
<PAGE>

<TABLE>
<CAPTION>
CHANGE IN WORKING CAPITAL
                                                                         September 30       December 31           Increase/
                                                                                 2009              2008          (Decrease)
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                <C>                  <C>
Cash and Cash Equivalents                                                       1,897             2,003               (106)
Restricted Cash                                                                   216               103                113
Accounts Receivable                                                             2,877             3,163               (286)
Inventories and Supplies                                                          590               484                106
Accounts Payable and Accrued Liabilities                                       (3,358)           (3,326)               (32)
Other                                                                              92                76                 16
                                                                      ------------------------------------------------------
Net Working Capital                                                             2,314             2,503
                                                                      ===================================
</TABLE>

Accounts receivable in our energy marketing group decreased since year end as we
reduced our trading  activity to focus on supporting our core physical  business
as a producer/marketer.  Commodity inventory increased since 2008 as our trading
inventory  is carried at fair value and was higher  than year end as a result of
stronger crude oil prices.

At September 30, 2009, our restricted  cash consists of margin  deposits of $216
million (December 31, 2008 - $103 million) related to exchange-traded derivative
financial  contracts  used by our  energy  marketing  group  to  hedge  physical
commodities,  and storage,  transportation and customer sales contracts.  We are
required  to  maintain  margin  for net  out-of-the-money  derivative  financial
contracts.  The increase in margin  primarily  relates to  derivative  financial
contracts protecting our natural gas positions. Our physical positions gained in
value in a  declining  gas  price  environment  while the  derivative  financial
contracts  protecting these positions  declined in value.  Additional margin was
required to cover the increase in the net out-of-the-money  derivative financial
contracts.

OUTLOOK FOR REMAINDER OF 2009

Following the  completion of turnaround  and  maintenance  activity in the third
quarter  and  the  start  up of  new  production,  we  are  currently  producing
approximately 275,000 boe/d. With production ramping up at Ettrick, Longhorn and
Long Lake, we expect fourth quarter production volumes will remain strong.

Our future liquidity and ability to fund capital requirements  generally depends
upon operating cash flows,  existing  working  capital,  unused committed credit
facilities,  and our ability to access debt and equity  markets.  Given the long
cycle time of some of our development projects and volatile commodity prices, it
is not  unusual in any year for  capital  expenditures  to exceed our cash flow.
Changes in commodity prices, particularly crude oil as it represents over 85% of
our current  production,  can impact our operating cash flows. We use short-term
contracts  to sell the  majority of our oil and gas  production,  exposing us to
short-term  price  movements.  A  US$1/bbl  change  in WTI  above  US$60/bbl  is
projected to increase or decrease our cash flow from operating activities, after
cash taxes, by approximately $13 million for the remainder of 2009. Our exposure
to a $0.01  change in the US to Canadian  dollar  exchange  rate is projected to
increase or decrease our cash flow by approximately $9 million for the remainder
of 2009. While commodity  prices can fluctuate  significantly in the short term,
we  believe  that over the  longer  term,  commodity  prices  will  continue  to
strengthen  as a result of growth in world  demand  and delays or  shortages  in
supply growth.  We believe that our existing  liquidity,  balance sheet capacity
and  capital  investment  flexibility  provides  us with the ability to fund our
obligations during periods of lower commodity prices.

We have incurred  approximately 80% of our 2009 planned capital  expenditures to
date and also acquired an additional 15% working  interest in Long Lake.  During
the  quarter,  our capital  was  concentrated  on  developing  our Usan  project
offshore Nigeria,  appraising the Golden Eagle/Hobby area, advancing work on the
fourth  platform at Buzzard,  bringing our Ettrick and Longhorn  developments on
stream, and on progressing our Horn River shale gas play in northeastern British
Columbia.

During the first nine months of 2009,  lower  commodity  prices reduced our cash
flow from operating  activities  relative to the same period last year. Over the
same period, we have invested approximately $2.1 billion in capital projects and
another $755 million to acquire an additional  15% in the Long Lake Project.  As
our capital expenditures  exceeded our cash flow from operating  activities,  we
drew upon our available  liquidity and issued US$1 billion of long-term debt. We
currently have  approximately  $1.9 billion of cash and cash equivalents on hand
and as well as significant  undrawn  committed credit facilities  available.  At
September 30, 2009, we had unsecured term credit facilities of US$3.1 billion in
place that are  available  until  2012,  of which  US$1.5  billion was drawn and
US$398 million was used to support  outstanding  letters of credit. We also have
approximately $493 million of undrawn, uncommitted, unsecured credit facilities,
of which $119  million was used to support  outstanding  letters of credit.  The
average length-to-maturity of our public debt is approximately 17 years.

In the third quarter,  our board of directors  declared a quarterly common share
dividend of $0.05 per share.


                                       47
<PAGE>

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 2008 Form 10-K.  There have been
no significant developments since year-end.

CONTINGENCIES

There are a number of lawsuits and claims pending,  the ultimate result 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 2008 Form 10-K.  There have been no significant  developments
since year-end.

NEW ACCOUNTING PRONOUNCEMENTS


CANADIAN PRONOUNCEMENTS
All  Canadian  publicly  accountable  enterprises  will  be  required  to  adopt
International  Financial  Reporting  Standards  (IFRS)  for  interim  and annual
reporting  purposes for fiscal years  beginning on or after  January 1, 2011. We
have set up a project team to manage this  transition  and to ensure  successful
implementation within the required timeframe.

We are  currently  assessing  the  impact of  adopting  IFRS on our  results  of
operations,  financial  position,  disclosures  and financial  systems.  We have
completed our diagnostic phase and are in the midst of the implementation phase.
To date, we determined  that the majority of our existing oil and gas accounting
policies are acceptable  under current IFRS  standards.  IFRS does not prescribe
specific  accounting  guidance for  extractive  industries  such as oil and gas,
other than for costs  associated with the exploration and evaluation  phase. Our
detailed analysis has identified differences that will impact certain aspects of
our accounting for property, plant and equipment,  asset retirement obligations,
and long-term asset impairments.  We expect to complete the implementation phase
early in 2010. We are also  currently  evaluating  the impact of exemptions  and
exceptions  available  to  first-time  IFRS  adopters  which  give  relief  from
retrospective  application  of IFRS.  We  continue  to  monitor  changes to IFRS
standards  prior to  adoption  in 2011.  Training  sessions  have  been  ongoing
throughout the company and will continue into 2010.

At this time, we cannot  quantify the impact that the adoption of IFRS will have
on our future  results of operations or future  financial  position.  Additional
disclosure  of the key  elements of our plan and progress on the project will be
provided as we move towards the changeover date.


US PRONOUNCEMENTS
In December  2008,  the  Financial  Accounting  Standards  Board  (FASB)  issued
EMPLOYERS  DISCLOSURES ABOUT  POSTRETIREMENT  BENEFIT PLAN ASSETS. This position
provides  guidance on disclosures about plan assets of a defined benefit pension
plan or other postretirement  plans. This position is effective for fiscal years
ending after  December 15, 2009. We do not expect the adoption of this statement
to materially impact our results of operations or financial position.

In June 2009,  FASB issued  AMENDMENTS  TO  CONSOLIDATION  OF VARIABLE  INTEREST
ENTITIES.  It retains the scope of the  previous  guidance  with the addition of
entities  previously   considered   qualifying   special-purpose   entities  and
eliminates  the previous  quantitative  approach for a  qualitative  analysis in
determining  whether the enterprise's  variable  interest or interests give it a
controlling  financial  interest in a variable interest entity. The Statement is
further amended to require ongoing reassessments of whether an enterprise is the
primary  beneficiary  of  a  variable  interest  entity  and  requires  enhanced
disclosures about an enterprise's involvement in a variable interest entity. The
Statement is effective at the beginning the first annual  reporting period after
November  15, 2009.  We do not expect the  adoption of this  statement to have a
material impact on our results of operations or financial position.

EQUITY SECURITY REPURCHASES

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


                                       48
<PAGE>

<TABLE>
<CAPTION>
SUMMARY OF QUARTERLY RESULTS

                                                    2007  |                 2008                   |          2009
----------------------------------------------------------|----------------------------------------|-----------------------------
(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                                          1,598     1,870     2,071    2,213      1,270       1,048     1,200     1,097

Net Income (Loss)                                    194       630       380      886       (181)        135        20       122

Earnings (Loss) Per Common Share ($/share)
     Basic                                          0.37      1.19      0.72     1.68      (0.35)       0.26      0.04      0.23
     Diluted                                        0.36      1.17      0.70     1.66      (0.35)       0.26      0.04      0.23
                                                  -------------------------------------------------------------------------------
</TABLE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain  statements in this report,  including  those  appearing in MANAGEMENT'S
DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND  RESULTS OF  OPERATIONS,
constitute "forward-looking statements" (within the meaning of the United States
PRIVATE   SECURITIES   LITIGATION   REFORM   ACT  OF  1995,   as   amended)   or
"forward-looking   information"  (within  the  meaning  of  applicable  Canadian
securities    legislation).    Such   statements   or   information    (together
"forward-looking  statements") are generally identifiable by the forward-looking
terminology used such as "ANTICIPATE",  "BELIEVE",  "INTEND",  "PLAN", "EXPECT",
"ESTIMATE",  "BUDGET", "OUTLOOK", "FORECAST" or other similar words, and include
statements relating to or associated with individual wells, regions or projects.
Any statements regarding the following are forward-looking statements:

o    future crude oil, natural gas or chemicals prices;
o    future production levels;
o    future cost recovery oil revenues from our Yemen operations;
o    future  capital  expenditures  and  their  allocation  to  exploration  and
     development activities;
o    future earnings;
o    future asset acquisitions or dispositions;
o    future sources of funding for our capital program;
o    future debt levels;
o    availability of committed credit facilities;
o    possible commerciality;
o    development plans or capacity expansions;
o    future ability to execute dispositions of assets or businesses;
o    future sources of liquidity, cash flows and their uses;
o    future drilling of new wells;
o    ultimate recoverability of current and long-term assets;
o    ultimate recoverability of reserves or resources;
o    expected finding and development costs;
o    expected operations costs;
o    future demand for chemical products;
o    estimates on a per share basis;
o    future foreign currency exchange rates;
o    future   expenditures  and  future  allowances  relating  to  environmental
     matters;
o    dates by which  certain  areas will be  developed,  will come  on-stream or
     reach expected operating capacity; and
o    changes in any of the foregoing.

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

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

o    market prices for oil and gas and chemical products;
o    our  ability to  explore,  develop,  produce  and  transport  crude oil and
     natural gas to markets;


                                       49
<PAGE>

o    ultimate effectiveness of design modification to facilities;
o    the results of exploration and development drilling and related activities;
o    volatility in energy trading markets;
o    foreign-currency exchange rates;
o    economic  conditions  in the  countries  and  regions  in which we carry on
     business;
o    governmental  actions including  changes to taxes or royalties,  changes in
     environmental and other laws and regulations;
o    renegotiations of contracts;
o    results of litigation, arbitration or regulatory proceedings;
o    political uncertainty,  including actions by terrorists, insurgent or other
     groups, or other armed conflict, including conflict between states; and
o    other factors, many of which are beyond our control.

These  risks,  uncertainties  and other  factors and their  possible  impact are
discussed  more  fully  in the  sections  titled  RISK  FACTORS  in  Item 1A and
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK and in Item 7A of our
2008  Form  10-K.  The  impact  of any one  risk,  uncertainty  or  factor  on a
particular forward-looking statement is not determinable with certainty as these
factors are  interdependent,  and  management's  future  course of action  would
depend on an assessment of all information at that time.

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


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are  exposed  to normal  market  risks  inherent  in the oil and gas,  energy
marketing   and   chemicals   business,    including   commodity   price   risk,
foreign-currency  exchange  rate risk,  interest  rate risk and credit risk.  We
recognize these risks and manage our operations to minimize our exposures to the
extent practical.  These are addressed in the unaudited  consolidated  financial
statements.


Most of our credit  exposures are with  counterparties  in the energy  industry,
including  integrated  oil  companies,  crude oil refiners and utilities and are
subject to normal industry credit risk.

At September 30, 2009:

o    over 93% of our credit exposures were investment grade;
o    approximately  74%  of  our  credit  exposures  were  with  integrated  oil
     companies, crude oil refiners and marketers, and large utilities; and
o    only one  counterparty  individually  made up more  than 10% of our  credit
     exposure. This counterparty is a major integrated oil company with a strong
     investment grade credit rating.


Further  information  presented on market risks can be found in Item 7A on pages
75 - 78 in our 2008 Form 10-K and have not materially changed since December 31,
2008.


ITEM 4.  CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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


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<PAGE>

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


CHANGES IN INTERNAL CONTROLS

We have  continually  had in place  systems  relating to internal  control  over
financial  reporting.  There has not been any change in the  Company's  internal
control over financial  reporting  during the first nine months of 2009 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.




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<PAGE>

                                     PART II


Item 1.  Legal Proceedings

Information  in  response  to this item is included in Part I, Item 1 in Note 16
"Commitments,  Contingencies  and  Guarantees"  and is incorporated by reference
into Part II of this Quarterly Report on Form 10-Q.


Item 6.     Exhibits

4.58        Second  Supplemental  Indenture  dated  July 30,  2009  between  the
            Registrant  and Deutsche Bank Trust Company  Americas  pertaining to
            the issuance of US$300 million,  6.20% senior notes due 2019 and the
            issuance   of  US$700   million,   7.50%   senior   notes  due  2039
            (incorporated by reference to Exhibit 4.2 to Form 8-K dated July 30,
            2009).

10.58       Pricing  Agreement dated July 27, 2009 among the Registrant and Banc
            of America  Securities LLC, BNP Paribas  Securities Corp.,  Deutsche
            Bank Securities Inc., and HSBC Securities (USA) Inc. as Underwriters
            (incorporated  by  reference  to Exhibit 10.1 to Form 8-K dated July
            30, 2009).

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 November 3, 2009.


                                          NEXEN INC.


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


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






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