**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

 
| **x**  | **Quarterly Report Pursuant to Section 13 or 15(d) of the                        Securities Exchange Act of 1934** |
|--------|--------------------------------------------------------------------------------------------------------------------|
|   | For the quarterly period ended March 31, 2008                                                                      |   |

 
| **o**  | **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**

 

 

**NEXEN INC.**

 

Incorporated under the Laws of Canada

98-6000202

(I.R.S. Employer Identification No.)

 

801            – 7th Avenue S.W.

Calgary, Alberta, Canada T2P 3P7

Telephone (403) 699-4000

Web            site – www.nexeninc.com

 

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

 
|   | Yesx | No  o |
|--------|------|------------|

 

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

 

   Large accelerated            filer   x                     Non-Accelerated            filer    o                     Accelerated            filer   o                     Smaller reporting            company   o

 

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

 
|   | Yes   o | Nox |
|--------|-------------------|-----|

 

On            March 31, 2008, there were 529,439,432 common shares issued and outstanding.

             

 

 

 

----

 

 

 

**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 | 27                                                                                       |
|        | Item 3.                   | Quantitative and Qualitative Disclosures about Market                        Risk        | 47 |
|        | Item 4.                   | Controls and Procedures                                                                  | 47 |
| **PART II** | **OTHER INFORMATION**     |                                                                                     |
|        | Item 4.                   | Submission of Matters to a Vote of Security                        Holders               | 48 |
|        | Item 6.                   | Exhibits                                                                                 | 48 |
|             |                           |                                                                                          |  |  |  |  |  |  |

This            report should be read in conjunction with our 2007 Annual Report on Form 10-K and with            our current reports on Form 8-K filed or furnished during the year.

**SPECIAL NOTE TO CANADIAN INVESTORS**

Nexen is a US Securities and Exchange Commission (SEC) registrant and a            Form 10-K and related forms filer. Therefore, our reserves estimates and securities            regulatory disclosures generally follow SEC requirements. In 2004, certain Canadian            regulatory authorities adopted*National Instrument 51-101            – Standards of Disclosure for Oil and Gas Activities*(NI 51-101) which prescribe that Canadian companies follow certain            standards for the preparation and disclosure of reserves and related information. We            have been granted certain exemptions from NI 51-101. Please refer to the*Special Note to Canadian Investors*on page            76 of our 2007 Annual Report on Form 10-K.

**Unless we indicate otherwise, all dollar amounts ($) are in Canadian            dollars, and oil and gas volumes, reserves and related performance measures are            presented on a working-interest, before-royalties basis. Where appropriate, information            on an after-royalties basis is presented in tabular format. Volumes and reserves            include Syncrude operations unless otherwise stated.**

Below is a list ofterms specific to the oil and            gas industry. They are used throughout the Form 10-Q.
| /d     | = | per day                            | mcf   | = | thousand cubic feet          |
|--------|---|------------------------------------|-------|---|------------------------------|
| bbl    | = | barrel                             | mmcf  | = | million cubic feet           |
| mbbls  | = | thousand barrels                   | bcf   | = | billion cubic feet           |
| mmbbls | = | million barrels                    | NGL   | = | natural gas liquid           |
| mmbtu  | = | million British thermal units      | WTI   | = | West Texas Intermediate      |
| boe    | = | barrels of oil equivalent          | MW    | = | megawatt                     |
| mboe   | = | thousand barrels of oil equivalent | Brent | = | Dated Brent                  |
| mmboe  | = | million barrels of oil equivalent  | NYMEX | = | New York Mercantile Exchange |

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

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

On            March 31, 2008, the noon-day exchange rate was US$0.9729 for Cdn$1.00, as reported by            the Bank of Canada.

             

 

2

 

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**PART I**

**Item 1.   Unaudited Consolidated Financial Statements**

**TABLE OF CONTENTS**
| **Page     ** |
|----------------------------------------|

Unaudited Consolidated Statement of Income
| for the Three Months Ended March 31, 2008 and                        2007 | 4 |
|---------------------------------------------------------------------------|---|

 

Unaudited Consolidated Balance Sheet
| as at March 31, 2008 and December 31, 2007 | 5 |
|--------------------------------------------|---|

 

Unaudited Consolidated Statement of Cash Flows
| for the Three Months Ended March 31, 2008 and                        2007 | 6 |
|---------------------------------------------------------------------------|---|

 

Unaudited Consolidated Statement of Shareholders’            Equity
| for the Three Months Ended March 31, 2008 and                        2007 | 7 |
|---------------------------------------------------------------------------|---|

 

Unaudited Consolidated Statement of Comprehensive Income
| for the Three Months Ended March 31, 2008 and                        2007 | 7 |
|---------------------------------------------------------------------------|---|

 
| Notes to Unaudited Consolidated Financial                        Statements | 8 |
|-----------------------------------------------------------------------------|---|

 

 

3

 

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**Nexen Inc.**

**Unaudited Consolidated Statement of Income**

**For            the Three Months Ended March 31**

 
| (Cdn$ millions, except per share amounts)                                         |   |   | **2008   **                | **2007   **                                                |
|-----------------------------------------------------------------------------------|--------|--------|-------------------------------------------|---------------------------------------------------------------------------|
| **Revenues and Other Income**                                                     |   |   |                                      |                                                                      |
| Net Sales                                                                         |   |   | 1,870                                     | 1,140                                                                     |
| Marketing and Other(Note                        15)                               |   |   | 222                                       | 248                                                                       |
|                                                                              |   |   | 2,092                                     | 1,388                                                                     |
| **Expenses**                                                                      |   |   |                                      |                                                                      |
| Operating                                                                         |   |   | 309                                       | 290                                                                       |
| Depreciation, Depletion, Amortization and                        Impairment       |   |   | 364                                       | 334                                                                       |
| Transportation and Other                                                          |   |   | 205                                       | 246                                                                       |
| General and Administrative                                                        |   |   | 55                                        | 202                                                                       |
| Exploration                                                                       |   |   | 32                                        | 49                                                                        |
| Interest(Note 6)                                                                  |   |   | 27                                        | 48                                                                        |
|                                                                              |   |   | 992                                       | 1,169                                                                     |
|                                                                              |   |   |                                      |                                                                      |
| **Income before Income Taxes**                                                    |   |   | 1,100                                     | 219                                                                       |
|                                                                              |   |   |                                      |                                                                      |
| **Provision for Income Taxes**                                                    |   |   |                                      |                                                                      |
| Current                                                                           |   |   | 392                                       | 60                                                                        |
| Future                                                                            |   |   | 77                                        | 35                                                                        |
|                                                                              |   |   | 469                                       | 95                                                                        |
|                                                                              |   |   |                                      |                                                                      |
| **Net Income before Non-Controlling                        Interests**            |   |   | 631                                       | 124                                                                       |
| Less: Net Income Attributable to Non-Controlling                        Interests |   |   | (1)                                       | (3)                                                                       |
|                                                                              |   |   |                                      |                                                                      |
| **Net Income**                                                                    |   |   | 630                                       | 121                                                                       |
|                                                                              |   |   |                                      |                                                                      |
| **Earnings Per Common Share**($/share)                                            |   |   |                                      |                                                                      |
| Basic(Note 13)                                                                    |   |   |        1.19 |        0.23                                 |
|                                                                              |   |   |                                      |                                                                      |
| Diluted(Note 13)                                                                  |   |   |        1.17 |        0.22

                          |
|                                                                              |   |   |                                      |                                                                      |

*See            accompanying notes to the Unaudited Consolidated Financial Statements.*

 

4

 

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**Nexen Inc.**

**Unaudited Consolidated Balance Sheet**

 
|                                                                                                                                                                     | March 31                        | December 31 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------|-------------|
| (Cdn$ millions, except share amounts)                                                                                                                                    | **2008**                        | **2007**    |
| **Assets**                                                                                                                                                               |                            |        |
| **Current Assets**                                                                                                                                                       |                            |        |
| Cash and Cash Equivalents                                                                                                                                                | 524                             | 206         |
| Restricted Cash                                                                                                                                                          | 75                              | 203         |
| Accounts Receivable(Note                        2)                                                                                                                       | 4,041                           | 3,502       |
| Inventories and Supplies(Note                        3)                                                                                                                  | 755                             | 659         |
| Future Income Tax Assets                                                                                                                                                 | 25                              | 18          |
| Other                                                                                                                                                                    | 84                              | 71          |
|   Total Current Assets                                                                                                                                         | 5,504                           | 4,659       |
|                                                                                                                                                                     |                            |        |
| **Property, Plant and Equipment**                                                                                                                                        |                            |        |
| Net of Accumulated Depreciation, Depletion, Amortization                        and                                                                                      |                            |        |
|                Impairment                        of $7,703 (December 31, 2007 – $7,195) | 13,139                          | 12,498      |
| **Future Income Tax Assets**                                                                                                                                             | 263                             | 268         |
| **Deferred Charges and Other Assets**(Note 4)                                                                                                                            | 418                             | 324         |
| **Goodwill**                                                                                                                                                             | 337                             | 326         |
| **Total Assets**                                                                                                                                                         | 19,661                          | 18,075      |
|                                                                                                                                                                     |                            |        |
| **Liabilities and Shareholders’ Equity**                                                                                                                           |                            |        |
| **Current Liabilities**                                                                                                                                                  |                            |        |
| Current Portion of Long-Term Debt(Note 6)                                                                                                                                | 125                             | -           |
| Accounts Payable and Accrued Liabilities                                                                                                                                 | 4,894                           | 4,180       |
| Accrued Interest Payable                                                                                                                                                 | 67                              | 54          |
| Dividends Payable                                                                                                                                                        | 13                              | 13          |
|   Total Current Liabilities                                                                                                                                    | 5,099                           | 4,247       |
|                                                                                                                                                                     |                            |        |
| **Long-Term Debt**(Note                        6)                                                                                                                        | 4,458                           | 4,610       |
| **Future Income Tax Liabilities**                                                                                                                                        | 2,415                           | 2,290       |
| **Asset Retirement Obligations**(Note 8)                                                                                                                                 | 814                             | 792         |
| **Deferred Credits and Other Liabilities**(Note 9)                                                                                                                       | 525                             | 459         |
| **Non-Controlling Interests**                                                                                                                                            | 64                              | 67          |
|                                                                                                                                                                     |                            |        |
| **Shareholders’ Equity**(Note 12)                                                                                                                                  |                            |        |
| Common Shares, no par value                                                                                                                                              |                            |        |
|    Authorized:                                                                                                                                            | Unlimited                       |        |   |
|    Outstanding:                                                                                                                                           | 2008 – 529,439,432 shares |        |   |
|                                                                                                                                                                     | 2007 – 528,304,813 shares | 949         | 917 |
| Contributed Surplus                                                                                                                                                      | 3                               | 3           |
| Retained Earnings                                                                                                                                                        | 5,600                           | 4,983       |
| Accumulated Other Comprehensive Loss                                                                                                                                     | (266)                           | (293)       |
|   Total Shareholders’ Equity                                                                                                                             | 6,286                           | 5,610       |
| **Commitments, Contingencies and Guarantees**(Note 16)                                                                                                                   |                            |        |
|                                                                                                                                                                     |                            |        |
| **Total Liabilities and Shareholders’                        Equity**                                                                                              | 19,661                          | 18,075      |

 

*See accompanying notes to the Unaudited Consolidated Financial            Statements.*

 

5

 

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**Nexen Inc.**

**Unaudited Consolidated Statement of Cash Flows**

**For the Three Months Ended March 31**

 
| (Cdn$ millions)                                                                           | **2008** | **2007** |
|-------------------------------------------------------------------------------------------|----------|----------|
| **Operating Activities**                                                                  |     |     |
| Net Income                                                                                | 630      | 121      |
| Charges and Credits to Income not Involving Cash(Note 14)                                 | 383      | 435      |
| Exploration Expense                                                                       | 32       | 49       |
| Changes in Non-Cash Working Capital(Note 14)                                              | 140      | 32       |
| Other                                                                                     | (17)     | (189)    |
|                                                                                      | 1,168    | 448      |
|                                                                                      |     |     |
| **Financing Activities**                                                                  |     |     |
| (Repayment of) Proceeds from Term Credit Facilities,                        Net           | (228)    | 366      |
| Proceeds from Term Credit Facilities of Canexus                                           | 8        | 18       |
| Repayment of Short-Term Borrowings, Net                                                   | -        | (48)     |
| Dividends on Common Shares                                                                | (13)     | (13)     |
| Issue of Common Shares and Exercise of Stock                        Options               | 26       | 29       |
| Other                                                                                     | (4)      | (7)      |
|                                                                                      | (211)    | 345      |
|                                                                                      |     |     |
| **Investing Activities**                                                                  |     |     |
| Capital Expenditures                                                                      |          |          |
|       Exploration and                        Development    | (769)    | (790)    |
|       Proved Property                        Acquisitions   | -        | (1)      |
|       Chemicals, Corporate and                        Other | (17)     | (20)     |
| Changes in Restricted Cash                                                                | 121      | 16       |
| Changes in Non-Cash Working Capital(Note 14)                                              | 22       | 28       |
| Other                                                                                     | (27)     | (4)      |
|                                                                                      | (670)    | (771)    |
|                                                                                      |     |     |
|                                                                                      |     |     |
| **Effect of Exchange Rate Changes on Cash**                                               |     |     |
| **and Cash Equivalents**                                                                  | 31       | (13)     |
|                                                                                      |     |     |
| **Increase in Cash and Cash Equivalents**                                                 | 318      | 9        |
|                                                                                      |     |     |
| **Cash and Cash Equivalents – Beginning of                        Period**          | 206      | 101      |
|                                                                                      |     |     |
| **Cash and Cash Equivalents – End of                        Period**                | 524      | 110      |

 

*See            accompanying notes to the Unaudited Consolidated Financial Statements.*

 

6

 

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**Nexen Inc.**

**Unaudited Consolidated Statement of Shareholders’            Equity**

**For            the Three Months Ended March 31**

             
| (Cdn$ millions)                                                                                                                          | **2008** | **2007** |
|------------------------------------------------------------------------------------------------------------------------------------------|----------|----------|
| **Common Shares**                                                                                                                        |     |     |
| Balance at Beginning of Period                                                                                                           | 917      | 821      |
| Issue of Common Shares                                                                                                                   | 20       | 21       |
| Proceeds from Tandem Options Exercised for Shares                                                                                        | 6        | 8        |
| Accrued Liability Relating to Tandem Options Exercised for                        Shares                                                 | 6        | 16       |
| Balance at End of Period                                                                                                                 | 949      | 866      |
|                                                                                                                                     |     |     |
| **Contributed Surplus**                                                                                                                  |     |     |
| Balance at Beginning and End of Period                                                                                                   | 3        | 4        |
|                                                                                                                                     |     |     |
| **Retained Earnings**                                                                                                                    |     |     |
| Balance at Beginning of Period                                                                                                           | 4,983    | 3,972    |
| Net Income                                                                                                                               | 630      | 121      |
| Dividends on Common Shares(Note                        12)                                                                               | (13)     | (13)     |
| Balance at End of Period                                                                                                                 | 5,600    | 4,080    |
|                                                                                                                                     |     |     |
| **Accumulated Other Comprehensive Loss**                                                                                                 |     |     |
| Balance at Beginning of Period                                                                                                           | (293)    | (161)    |
| Opening Derivatives Designated as Cash Flow                        Hedges                                                                | -        | 61       |
| Other Comprehensive Income (Loss)                                                                                                        | 27       | (67)     |
| Balance at End of Period                                                                                                                 | (266)    | (167)    |
|                                                                                                                                     |     |     |
|                                                                                                                                     |     |     |
|                                                                                                                                     |     |     |
| **Nexen Inc.****Unaudited Consolidated Statement of Comprehensive                        Income****For the Three months Ended March 31** |     |     |
| (Cdn$ millions)                                                                                                                          | **2008** | **2007** |
| **Net Income**                                                                                                                           | 630      | 121      |
| Other Comprehensive Income (Loss), Net of Income                        Taxes:                                                           |     |     |
| Foreign Currency Translation Adjustment:                                                                                                 |     |     |
| Net Gains (Losses) on Investment in Self-Sustaining Foreign                        Operations                                            | 186      | (58)     |
| Net Gains (Losses) on Hedges of Self-Sustaining Foreign                        Operations 1                                              | (159)    | 50       |
| Realized Translation Adjustments Recognized in Net Income                        2                                                       | -        | 2        |
| Cash Flow Hedges:                                                                                                                        |     |     |
| Realized Mark-to-Market Gains Recognized in Net                        Income                                                            | -        | (61)     |
| Other Comprehensive Income (Loss), Net of Income                        Taxes                                                            | 27       | (67)     |
| **Comprehensive Income**                                                                                                                 | 657      | 54       |
| 1 | Net of income tax expense for the three months ended March                        31, 2008 of $23 million (2007 – $9 million recovery). |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------|
| *2* | Net of income tax expense for the three months ended March                        31, 2008 of $nil (2007 – $1 million expense). |
|-----|---------------------------------------------------------------------------------------------------------------------------------------|

 

*See            accompanying notes to the Unaudited Consolidated Financial Statements.*

 

7

 

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**Nexen Inc.**

**Notes to Unaudited Consolidated Financial Statements**

Cdn$            millions, except as noted
| **1.** | **ACCOUNTING POLICIES** |
|--------|-------------------------|

Our            Unaudited Consolidated Financial Statements are prepared in accordance with Canadian            Generally Accepted Accounting Principles (GAAP). The impact of significant differences            between Canadian and United States (US) GAAP on the Unaudited Consolidated Financial            Statements is disclosed in Note 18. In the opinion of management, the Unaudited            Consolidated Financial Statements contain all adjustments of a normal and recurring            nature necessary to present fairly Nexen Inc.’s (Nexen, we or our) financial            position at March 31, 2008 and December 31, 2007 and the results of our operations and            our cash flows for the three months ended March 31, 2008 and 2007.

We            make estimates and assumptions that affect the reported amounts of assets and            liabilities and disclosure of contingent assets and liabilities at the date of the            Unaudited Consolidated Financial Statements, and revenues and expenses during the            reporting period. Our management reviews these estimates, including those related to            accruals, litigation, environmental and asset retirement obligations, income taxes,            derivative contract assets and liabilities and determination of proved reserves, on an            ongoing basis. Changes in facts and circumstances may result in revised estimates and            actual results may differ from these estimates. The results of operations and cash            flows for the three months ended March 31, 2008 are not necessarily indicative of the            results of operations or cash flows to be expected for the year ending December 31,            2008.

These Unaudited Consolidated Financial Statements should be read in            conjunction with our Audited Consolidated Financial Statements included in our 2007            Annual Report on Form 10-K. Except as described below, the accounting policies we            follow are described in Note 1 of the Audited Consolidated Financial Statements            included in our 2007 Annual Report on Form 10-K.

**Change in Accounting Policies**

**Inventories**

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

**Capital Disclosures**

On            January 1, 2008, we prospectively adopted CICA Section 1535*Capital Disclosures*issued by the AcSB.            This Section establishes standards for disclosing information about an entity’s            objectives, policies and processes for managing its capital structure. The disclosures            have been included in Note 7.

**Financial Instruments Disclosures and Presentation**

On            January 1, 2008, we prospectively adopted the following new standards issued by the            AcSB:*Financial Instruments – Disclosure*(Section 3862) and*Financial Instruments            – Presentation*(Section 3863). These accounting            standards replaced*Financial Instruments – Disclosure            and Presentation*(Section 3861). The disclosures required by            Section 3862 provide additional information on the risks associated with our financial            instruments and how we manage those risks. The additional disclosures required by these            standards are provided in Notes 10 and 11.

**New Accounting Pronouncements**

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

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

 

8

 

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| **2.** | **ACCOUNTS RECEIVABLE** |
|--------|-------------------------|
|                                                      | March 31 | December 31 |
|-----------------------------------------------------------|----------|-------------|
|                                                      | **2008** | **2007**    |
| Trade                                                     |     |        |
| Marketing                                                 | 2,907    | 2,501       |
| Oil and Gas                                               | 931      | 819         |
| Chemicals and Other                                       | 64       | 60          |
|                                                      | 3,902    | 3,380       |
| Non-Trade                                                 | 149      | 132         |
|                                                      | 4,051    | 3,512       |
| Allowance                        for Doubtful Receivables | (10)     | (10)        |
| Total                                                     | 4,041    | 3,502       |
| **3.** | **INVENTORIES AND SUPPLIES** |
|--------|------------------------------|
|                | March 31 | December 31 |
|---------------------|----------|-------------|
|                | **2008** | **2007**    |
| Finished Products   |     |        |
| Marketing           | 659      | 577         |
| Oil and Gas         | 20       | 14          |
| Chemicals and Other | 16       | 13          |
|                | 695      | 604         |
| Work in Process     | 4        | 3           |
| Field Supplies      | 56       | 52          |
| Total               | 755      | 659         |
|   | **4.** | **DEFERRED CHARGES AND OTHER ASSETS** |
|--------|--------|---------------------------------------|
|                                                 | March 31 | December 31 |
|------------------------------------------------------|----------|-------------|
|                                                 | **2008** | **2007**    |
| Long-Term Marketing Derivative Contracts(Note 10)    | 294      | 248         |
| Long-Term Capital Prepayments                        | 38       | 9           |
| Crude Oil Put Options and Natural Gas Swaps(Note 10) | 18       | -           |
| Asset Retirement Remediation Fund                    | 13       | 13          |
| Other                                                | 55       | 54          |
| Total                                                | 418      | 324         |

             

 

9

 

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|   | **5.** | **SUSPENDED WELL COSTS** |
|--------|--------|--------------------------|

The            following table shows the changes in capitalized exploratory well costs during the            three months ended March 31, 2008 and the year ended December 31, 2007, and does not            include amounts that were initially capitalized and subsequently expensed in the same            period. Capitalized exploratory well costs are included in property, plant &            equipment.
|                                                                                                          | ThreeMonths EndedMarch 31 | YearEndedDecember 31 |   |
|---------------------------------------------------------------------------------------------------------------|---------------------------|----------------------|--------|
|                                                                                                          | **2008**                  | **2007**             |   |
| Balance at Beginning of Period                                                                                | 326                       | 226                  |   |
| Additions to Capitalized Exploratory Well Costs Pending                        the                            |                      |                 |   |
|          Determination                        of Proved Reserves | 49                        | 215                  |   |
| Capitalized Exploratory Well Costs Charged to                        Expense                                  | -                         | (10)                 |   |
| Transfers to Wells, Facilities and Equipment Based                        on                                  |                      |                      |
|          Determination                        of Proved Reserves | -                         | (74)                 |   |
| Effects of Foreign Exchange                                                                                   | 7                         | (31)                 |   |
| Balance at End of Period                                                                                      | 382                       | 326                  |   |

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.
|                                                                                         | March 31 | December 31 |
|----------------------------------------------------------------------------------------------|----------|-------------|
|                                                                                         | **2008** | **2007**    |
| Capitalized for a Period of One Year or Less                                                 | 195      | 202         |
| Capitalized for a Period of Greater than One Year                                            | 187      | 124         |
| Balance at End of Period                                                                     | 382      | 326         |
| Number of Projects that have Exploratory Well Costs                        Capitalized for a |     |        |
|       Period Greater than One                        Year      | 8        | 5           |

As            at March 31, 2008, we have exploratory costs that have been capitalized for more than            one year relating to our interest in four exploratory blocks in the North Sea ($55            million), an exploratory block in the Gulf of Mexico ($54 million), our coalbed methane            exploratory activities in Canada ($41 million), exploratory activities on Block 51 in            Yemen ($19 million) and our interest in an exploratory block, offshore Nigeria ($18            million). These costs relate to projects with successful exploration wells for which we            have not been able to record proved reserves. We are assessing all of these wells and            projects, and are working with our partners to prepare development plans, drill            additional appraisal wells or to assess commercial viability.
|   | **6.** | **LONG-TERM DEBT AND SHORT-TERM BORROWINGS** |
|--------|--------|----------------------------------------------|
|                                                                                       | March 31 | December 31 |
|--------------------------------------------------------------------------------------------|----------|-------------|
|                                                                                       | **2008** | **2007**    |
| Term Credit Facilities(a)                                                                  | -        | 211         |
| Canexus Limited Partnership Term Credit Facilities (US$213                        million) | 218      | 202         |
| Medium-Term Notes, due 2008(b)                                                             | 125      | 125         |
| Notes, due 2013 (US$500 million)                                                           | 514      | 494         |
| Notes, due 2015 (US$250 million)                                                           | 257      | 247         |
| Notes, due 2017 (US$250 million)                                                           | 257      | 247         |
| Notes, due 2028 (US$200 million)                                                           | 205      | 198         |
| Notes, due 2032 (US$500 million)                                                           | 514      | 494         |
| Notes, due 2035 (US$790 million)                                                           | 812      | 781         |
| Notes, due 2037 (US$1,250 million)                                                         | 1,285    | 1,235       |
| Subordinated Debentures, due 2043 (US$460                        million)                  | 473      | 454         |
|                                                                                       | 4,660    | 4,688       |
| Less: Unamortized Debt Issue Costs                                                         | (77)     | (78)        |
|                                                                                       | 4,583    | 4,610       |
| Less: Current Portion of Long-Term Debt(b)                                                 | (125)    | -           |
|                                                                                       | 4,458    | 4,610       |
|  

                          |
|----------------------------------------|

 

10

 

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| **(a)** | **Term credit facilities** |
|---------|----------------------------|

We            have unsecured term credit facilities of US$3 billion available to 2012, none of which            were drawn at March 31, 2008 (December 31, 2007 – US$214 million). Borrowings are            available as Canadian bankers’ acceptances, LIBOR-based loans, Canadian prime            rate loans, US-dollar base rate loans or British pound call-rate loans. Interest is            payable at floating rates. The weighted-average interest rate on our term credit            facilities was 3.9% for the three months ended March 31, 2008 (2007 – 5.9%). At            March 31, 2008, $296 million of these facilities were utilized to support outstanding            letters of credit (December 31, 2007 – $283 million).
| **(b)** | **Medium-Term Notes, due 2008** |
|---------|---------------------------------|

During October 1997, we issued $125 million of notes. Interest is            payable semi-annually at a rate of 6.3% and the principal is to be repaid in June 2008.            At December 31, 2007 this amount was not included in current liabilities as we expected            to repay the principal using our term credit facilities. During the quarter, we            reclassified this obligation to current liabilities as we now expect to repay this            amount using our existing cash on hand.
| **(c)** | **Interest expense** |
|---------|----------------------|
|              | Three MonthsEnded March 31 |
|-------------------|----------------------------|
|              | **2008**                   | **2007** |
| Long-Term Debt    | 76                         | 81 |
| Other             | 4                          | 5 |
|              | 80                         | 86 |
| Less: Capitalized | (53)                       | (38) |
| Total             | 27                         | 48 |

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

Nexen has uncommitted, unsecured credit facilities of approximately $666            million, none of which were drawn at March 31, 2008 (December 31, 2007 – nil). We            have utilized $44 million of these facilities to support outstanding letters of credit            at March 31, 2008 (December 31, 2007 – $196 million). Interest is payable at            floating rates. The weighted-average interest rate on our short-term borrowings was            4.3% for the three months ended March 31, 2008 (2007 – 5.9%).
| **7.** | **CAPITAL DISCLOSURES** |
|--------|-------------------------|

Our            objective for managing our capital structure is to ensure that we have the financial            capacity, liquidity and flexibility to fund our investment in full-cycle exploration            and development of conventional and unconventional resources and for our energy            marketing activities. We generally rely on operating cash flows to fund capital            investments. However, given the long cycle-time of some of our development projects,            which require significant capital investment prior to cash flow generation, and            volatile commodity prices, it is not unusual for capital expenditures to exceed our            cash flow from operating activities in any given year. As such, our financing needs            depend on where we are in a particular development cycle. This requires us to maintain            financial flexibility and liquidity. Our capital management policies are aimed            at:
|   | **•** | maintaining an appropriate balance between short-term debt,                        long-term debt and equity, such as using longer-term senior and                        subordinated debt securities to minimize near-term refinancing                        risks; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | maintaining sufficient undrawn committed credit capacity to                        provide liquidity; |
|--------|------------|-------------------------------------------------------------------------------------------------------|
|   | **•** | ensuring ample covenant room permitting us to draw on our                        credit lines as required; |
|--------|------------|------------------------------------------------------------------------------------------------------------|
|   | **•** | maintaining a level of leverage with sufficient room for                        increases when necessary; and |
|--------|------------|---------------------------------------------------------------------------------------------------------------|
|   | **•** | ensuring we maintain a credit rating that is appropriate for                        our circumstances. |
|--------|------------|--------------------------------------------------------------------------------------------------------|

 

11

 

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We have            the ability to make adjustments to our capital structure by issuing additional equity            or debt, controlling the amount we return to shareholders and making adjustments to our            capital investment programs. Our capital consists of shareholders’ equity,            short-term and long-term debt and cash and cash equivalents (excluding restricted cash)            as follows:
|                            | March 31 | December 31 |
|---------------------------------|----------|-------------|
|                            | **2008** | **2007**    |
| **Net Debt**1                   |     |        |
| Bank Debt                       | 218      | 413         |
| Public Senior Notes             | 3,907    | 3,758       |
| Senior Debt                     | 4,125    | 4,171       |
| Subordinated Debt               | 458      | 439         |
| Total Debt                      | 4,583    | 4,610       |
| Less: Cash and Cash Equivalents | (524)    | (206)       |
| **Total Net Debt**              | 4,059    | 4,404       |
|                            |     |        |
| **Shareholders’ Equity**  | 6,286    | 5,610       |
| 1 | Includes all of our borrowings and is calculated as                        long-term debt and short-term borrowings less cash and cash                        equivalents. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

We            monitor our capital structure by reviewing the ratio of net debt to cash flow from            operating activities and interest coverage on a trailing 12 month basis that we feel            are appropriate for Nexen.

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

For            the twelve months ending March 31, 2008 our net debt to cash flow from operating            activities ratio was 1.1 times compared to 1.6 times at December 31, 2007. While we            typically expect the target ratio to fluctuate between 1.0 and 2.0 times under            normalized commodity prices, this can be higher when we identify strategic            opportunities requiring additional investment. Whenever we exceed our target ratio, we            devise a strategy to reduce our leverage and lower this ratio back to target levels. In            the past, each time we exceeded our internal net debt to cash flow from operating            activities target band, we successfully brought our leverage down through asset sales            and capital management.

Our            interest coverage ratio allows us to monitor our ability to meet the interest            requirements of our capital and consequently the level, terms and condition of our debt            profile. The higher the interest coverage, the better positioned we are to finance our            longer-term investment projects. Our interest coverage strengthened in 2008 from 12.1            times at the end of 2007 to 14.4 times at March 31, as our earnings before interest,            taxes, depreciation, depletion and amortization (EBITDA) increased from strong            production and high commodity prices.

Interest coverage is calculated by dividing our twelve-month trailing            EBITDA by interest expense before capitalized interest. EBITDA is a non-GAAP measure            which is calculated using net income excluding interest expense, provision for income            taxes, exploration expenses, DD&A and other non-cash expenses. The calculation of            EBITDA is set out in the following table.
|                                                                        | Twelve MonthsEndedMarch 31**2008** | Twelve MonthsEndedDecember 31**2007** |
|-----------------------------------------------------------------------------|------------------------------------|---------------------------------------|
| Net Income                                                                  | 1,595                              | 1,086                                 |
| Add:                                                                        |                               |                                  |
| Interest Expense                                                            | 147                                | 168                                   |
| Provision for Income Taxes                                                  | 1,166                              | 792                                   |
| Depreciation, Depletion, Amortization and                        Impairment | 1,797                              | 1,767                                 |
| Exploration Expense                                                         | 309                                | 326                                   |
| Other Non-cash Expenses                                                     | (176)                              | (52)                                  |
| EBITDA                                                                      | 4,838                              | 4,087                                 |

 

 

12

 

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| **8.** | **ASSET RETIREMENT OBLIGATIONS**

                          |
|--------|------------------------------------------------------------------|

Changes in carrying amounts of the asset retirement obligations            associated with our property, plant and equipment are as follows:
|                                             | ThreeMonths EndedMarch 31 | YearEndedDecember 31 |
|--------------------------------------------------|---------------------------|----------------------|
|                                             | **2008**                  | **2007**             |
| Balance at Beginning of Period                   | 832                  | 704             |
| Obligations Incurred with Development Activities | 2                    | 105             |
| Expenditures Made on Asset Retirements           | (13)                      | (23)                 |
| Accretion                                        | 13                   | 44              |
| Revisions to Estimates                           | (1)                       | 79              |
| Effects of Foreign Exchange                      | 21                   | (77)                 |
| Balance at End of Period1, 2                     | 854                  | 832             |

1                 Obligations due within 12 months of $40 million (December 31, 2007 –            $40 million) have been included in accounts payable and accrued                  liabilities.

2                 Obligations relating to our oil and gas activities amount to $807            million (December 31, 2007 – $786 million) and obligations relating to our                  chemicals business amount to $47 million (December            31, 2007 – $46 million).

Our            total estimated undiscounted asset retirement obligations amount to $2,200 million            (December 31, 2007 – $2,165 million). We have discounted the total estimated            asset retirement obligations using a weighted-average, credit-adjusted risk-free rate            of 5.9%. Approximately $139 million included in our asset retirement obligations will            be settled over the next five years. The remaining obligations settle beyond five years            and will be funded by future cash flows from our operations.

We            own interests in assets for which the fair value of the asset retirement obligations            cannot be reasonably determined because the assets currently have an indeterminate life            and we cannot determine when remediation activities would take place. These assets            include our interest in Syncrude’s upgrader and sulphur pile. The estimated            future recoverable reserves at Syncrude are significant and given the long life of this            asset, we are unable to determine when asset retirement activities would take place.            Furthermore, the Syncrude plant can continue to run indefinitely with ongoing            maintenance activities. The retirement obligations for these assets will be recorded in            the first year in which the obligation to remediate becomes determinable.
| **9.** | **DEFERRED CREDITS AND OTHER LIABILITIES** |
|--------|--------------------------------------------|
|                                                   | March 31**2008** | December 31**2007** |
|---------------------------------------------------|------------------|---------------------|
| Long-Term Marketing Derivative Contracts(Note 10) | 225              | 163                 |
| Deferred Transportation Revenue                   | 73               | 82                  |
| Defined Benefit Pension Obligations               | 58               | 57                  |
| Capital Lease Obligations                         | 53               | 52                  |
| Fixed-Price Natural Gas Contracts(Note 10)        | 49               | 48                  |
| Other                                             | 67               | 57                  |
| Total                                             | 525              | 459                 |

 

13

 

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| **10.** | **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 value of our            short-term receivables and payables approximates their fair value because the            instruments are near maturity.

In            our energy marketing group, we enter into contracts to purchase and sell crude oil and            natural gas and use derivative contracts, including futures, forwards, swaps and            options, for hedging and trading purposes (collectively derivatives). Occasionally, we            use derivatives such as put options to manage commodity price risk and foreign currency            risk for non-trading purposes. We categorize our derivative instruments as trading or            non-trading activities and carry the instruments at fair value on our balance sheet.            Refer to the derivatives section below for details of our derivatives and fair values            as at March 31, 2008. The fair value is included with accounts receivable or payable            and they are classified as long-term or short-term based on their anticipated            settlement date. Any change in fair value is included in marketing and other            income.

We            carry our long-term debt at amortized cost using the effective interest rate method. At            March 31, 2008, the estimated fair value of our long-term debt was $4,578 million            (December 31, 2007 – $4,692 million) as compared to the carrying value of $4,583            million (December 31, 2007 – $4,610 million). The fair value of long-term debt is            estimated based on prices provided by quoted markets and third-party            brokers.

**Derivatives**
| **a)** | **Total carrying value of derivative contracts related to                        trading activities** |
|--------|-------------------------------------------------------------------------------------------------------|

The            fair value and carrying amounts related to derivative instruments held by our            energymarketing operations are as follows:
|                                                                       | March 31**2008** | December 31**2007** |
|----------------------------------------------------------------------------|------------------|---------------------|
| Accounts Receivable                                                        | 595              | 334                 |
| Deferred Charges and Other Assets1                                         | 294              | 248                 |
| Total Derivative Assets                                                    | 889              | 582                 |
|                                                                       |             |                |
| Accounts Payable and Accrued Liabilities                                   | 543              | 413                 |
| Deferred Credits and Other Liabilities1                                    | 225              | 163                 |
| Total Derivative Liabilities                                               | 768              | 576                 |
|                                                                       |             |                |
| Total Net Derivatives related to Trading                        Activities | 121              | 6                   |
|   | 1 | These derivative contracts settle beyond 12 months and are                        considered non-current. |
|--------|---|-----------------------------------------------------------------------------------------------------------|
| **b)** | **Total carrying value of derivative contracts related to                        non-trading activities** |
|--------|-----------------------------------------------------------------------------------------------------------|

The            fair value andcarrying amounts related to derivative instruments            related to non-trading activities are as follows:
|                                                                           | March 31**2008** | December 31**2007** |
|--------------------------------------------------------------------------------|------------------|---------------------|
| Accounts Receivable                                                            | 8                | -                   |
| Deferred Charges and Other Assets1                                             | 18               | 1                   |
| Total Derivative Assets                                                        | 26               | 1                   |
|                                                                           |             |                |
| Accounts Payable and Accrued Liabilities                                       | 36               | 28                  |
| Deferred Credits and Other Liabilities1                                        | 49               | 51                  |
| Total Derivative Liabilities                                                   | 85               | 79                  |
|                                                                           |             |                |
| Total Net Derivatives related to Non-Trading                        Activities | (59)             | (78)                |
|   | 1 | These derivative contracts settle beyond 12 months and are                        considered non-current. |
|--------|---|-----------------------------------------------------------------------------------------------------------|

***Crude oil put options***

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

 

14

 

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

 
|                              | NotionalVolumes | Term   | AverageFloor Price | FairValue       |
|-----------------------------------|-----------------|--------|--------------------|-----------------|
|                              | (bbls/d)        |   | (US$/bbl)          | (Cdn$ millions) |
| Dated Brent Crude Oil Put Options | 100,000         | 2008   | 50                 |            | - |
| Dated Brent Crude Oil Put Options | 70,000          | 2009   | 60                 |            | 14 |
|                              |            |   |               |            | 14 |

***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 included in our trading activities. These sales contracts and swaps are carried at            fair value and are included with amounts receivable or payable. They are classified as            long-term or short-term based on their anticipated settlement date. Any change in fair            value is included in marketing and other income.
|                              | NotionalVolumes | Term              | AveragePrice      | FairValue       |
|-----------------------------------|-----------------|-------------------|-------------------|-----------------|
|                              | (Gj/d)          |              | ($/Gj)            | (Cdn$ millions) |
| Fixed-Price Natural Gas Contracts | 15,514          | 2008              | 2.46              |            | (36)     |
|                              | 15,514          | 2009 – 2010 | 2.56 – 2.77 |            | (49) |
| Natural Gas Swaps                 | 15,514          | 2008              | 7.60              |            | 8 |
|                              | 15,514          | 2009 – 2010 | 7.60              |            | 4 |
|                              |            |              |              |            | (73) |
| **c)** | **Fair Value of Derivatives** |
|--------|-------------------------------|

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

We            classify our derivatives according to the following hierarchy based on the amount of            observable inputs used to value the instruments.
|   | **•** | Level 1 – Quoted prices are available in active                        markets for identical assets or liabilities as of the reporting date.                         Active markets are those in which transactions for the asset or liability                        occur in sufficient frequency and volume to provide pricing information on                        an ongoing basis. Level 1 primarily consists of financial instruments such                        as exchange-traded derivatives and we use information from markets such as                        the New York Mercantile Exchange and the International Petroleum                        Exchange. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | Level 2 – Pricing inputs are other than quoted prices                        in active markets included in Level 1, which are either directly or                        indirectly observable as of the reported date. Level 2 valuations are based                        on inputs, including quoted forward prices for commodities, time value,                        volatility factors, and broker quotations, which can be observed or                        corroborated in the marketplace. Instruments in this category include                        non-exchange traded derivatives such as over-the-counter physical forwards                        and options. We obtain information from sources such as the Natural Gas                        Exchange, independent price publications and over-the-counter broker                        quotes. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | Level 3 – Valuations in this level are based on inputs                        which are less observable, unavailable or where the observable data does                        not support the majority of the instrument’s fair value. Level 3                        instruments include longer-term transactions, transactions in less active                        markets or transactions at locations for which pricing information is not                        available. In these instances, internally developed methodologies are used                        to determine fair value which primarily include extrapolation of observable                        future prices to similar locations, similar instruments or later time                        periods. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

15

 

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The            following table includes our derivatives that are carried at fair value on a recurring            basis for our trading and non-trading activities as at March 31, 2008. Financial assets            and liabilities are classified in the fair value hierarchy in their entirety based on            the lowest level of input that is significant to the fair value measurement. Assessment            of the significance of a particular input to the fair value measurement requires            judgment and may affect placement within the fair value hierarchy levels.
|                    | Level 1 | Level 2 | Level 3 | Total  |
|-------------------------|---------|---------|---------|--------|
| Net Derivatives         |    |    |    |   |
| Trading Derivatives     | 148     | 7       | (34)    | 121    |
| Non-Trading Derivatives | – | (59)    | – | (59)   |
| Total Net Derivatives   | 148     | (52)    | (34)    | 62     |

A            reconciliation of changes in the fair value of our derivatives classified as Level 3            for the three months ended March 31, 2008 is provided below:
|                                                                                                    | Level 3 |
|---------------------------------------------------------------------------------------------------------|---------|
| Fair Value at January 1, 2008                                                                           | (7)     |
| Realized and unrealized gains (losses)                                                                  | (5)     |
| Purchases, issuances and settlements                                                                    | (2)     |
| Transfers in and/or out of Level 3                                                                      | (20)    |
| Fair Value at March 31, 2008                                                                            | (34)    |
|                                                                                                    |    |
| Unsettled gains (losses) relating to instruments still held                        as of March 31, 2008 | (23)    |

Transfers in and/or out represent existing assets and liabilities that            were either previously categorized as a higher level for which the inputs became            unobservable or assets and liabilities that were previously classified as Level 3 for            which the lowest significant input became observable during the period.
| **11.** | **RISK MANAGEMENT** |
|---------|---------------------|
| **(a)** | **Market Risk** |
|---------|-----------------|

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

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

**Commodity price risk**

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

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

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

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

 

16

 

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

We            manage the level of market risk through daily monitoring of our energy-trading            activities relative to:
|   | **•** | prescribed limits for Value-at-Risk (VaR); |
|--------|------------|--------------------------------------------|
|   | **•** | nominal size of commodity positions; |
|--------|------------|--------------------------------------|
|   | **•** | stop loss limits; and |
|--------|------------|-----------------------|
|   | **•** | stress testing. |
|--------|------------|-----------------|

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

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

Our            quarter end, high, low, and average VaR amounts for the three months ended March 31 are            as follows:
|          | Three Months                        Ended March 31 |
|---------------|----------------------------------------------------|
|          | **2008**                                           | **2007** |
| Value-at-Risk |                                               |   |
| Quarter End   | 35                                                 | 33 |
| High          | 40                                                 | 35 |
| Low           | 21                                                 | 24 |
| Average       | 30                                                 | 28 |

**Foreign currency risk**

Foreign exchange risk is created by fluctuations in the fair values or            cash flows of financial instruments due to changes in foreign exchange rates. A            substantial portion of our activities are transacted in or referenced to US dollars            including:
|   | **•** | sales of crude oil, natural gas and certain chemicals                        products; |
|--------|------------|----------------------------------------------------------------------------------------|
|   | **•** | capital spending and expenses for our oil and gas, Syncrude                        and chemicals operations; |
|--------|------------|--------------------------------------------------------------------------------------------------------------|
|   | **•** | commodity derivative contracts used primarily by our energy                        marketing group; and |
|--------|------------|---------------------------------------------------------------------------------------------------------|
|   | **•** | short-term and long-term borrowings. |
|--------|------------|--------------------------------------|

In            our oil and gas operations, we manage our exposure to fluctuations between the US and            Canadian dollar by matching our expected net cash flows and borrowings in the same            currency. Net revenue from our foreign operations and our US-dollar borrowings are            generally used to fund US-dollar capital expenditures and debt repayments. We maintain            revolving Canadian and US-dollar borrowing facilities that can be used or repaid            depending on expected net cash flows. We designate our US-dollar borrowings as a hedge            against our US-dollar net investment in self-sustaining foreign operations. At March            31, 2008, we had US$4,413 million of long-term debt issued in US dollars and a one cent            change in the US dollar to Canadian dollar exchange rate would increase or decrease our            accumulated other comprehensive income by approximately $45 million, before income            tax.

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

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

 

17

 

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| **(b)** | **Credit Risk** |
|---------|-----------------|

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

At            March 31, 2008:
|   | **•** | over 97% of our credit exposures were investment grade;                        and |
|--------|------------|------------------------------------------------------------------------------------|
|   | **•** | only one counterparty individually made up more than 10% of                        our credit exposure. This counterparty was investment grade. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

Our            maximum counterparty credit exposure at the balance sheet date consists primarily of            the carrying amounts of non-derivative financial assets such as accounts receivable, as            well as the fair value of derivative financial assets. There are no significant amounts            past due or impaired at the balance sheet date. Collateral received from customers at            March 31, 2008 includes $17 million of cash and $581 million of letters of credit            related to our trading activities and the cash received is included in our accounts            payable and accrued liabilities.
| **(c)** | **Liquidity Risk** |
|---------|--------------------|

Liquidity risk is the risk that we will not be able to meet our            financial obligations as they fall due. We require liquidity specifically to fund            capital requirements, satisfy financial obligations as they become due, and to engage            in our energy marketing business. We generally rely on operating cash flows to provide            liquidity and we also maintain significant undrawn committed credit facilities. At            March 31, 2008, we had unsecured term credit facilities of US$3 billion available until            2012. At March 31, 2008, no amounts were drawn on these facilities, however, $296            million of the facilities were used to support outstanding letters of credit. We also            had $666 million of undrawn, uncommitted, unsecured credit facilities, of which $44            million was supporting letters of credit at March 31, 2008.

The            following table details the contractual maturities for our non-derivative financial            liabilities, including both the principal and interest cash flows at March 31,            2008:
|                        | Total  | < 1 Year | 1-3 Years | 4-5 Years | > 5 Years |
|-----------------------------|--------|-------------|-----------|-----------|--------------|
| Long-Term Debt              | 4,660  | 125         | 218       | –   | 4,317        |
| Interest on Long-Term Debt1 | 6,593  | 219         | 548       | 548       | 5,278        |
| Total                       | 11,253 | 344         | 766       | 548       | 9,595        |

1Excludes            interest on term credit facilities of US$3 billion and Canexus LP term credit            facilities of $350 million as the amounts drawn on the facilities fluctuate. As a            result, we are unable to provide a reasonable estimate of the interest.

The            following table details contractual maturities for our derivative financial            liabilities. The balance sheet amounts for derivative financial liabilities included            below are not materially different from the contractual amounts due on            maturity.
|                    | Total | < 1 Year | 1–3 Years | 4–5 Years | > 5 Years |
|-------------------------|-------|-------------|-----------------|-----------------|--------------|
| Trading Derivatives     | 768   | 543         | 206             | 19              | –      |
| Non-Trading Derivatives | 89    | 38          | 51              | –         | –      |
| Total                   | 857   | 581         | 257             | 19              | –      |

The            commercial agreements our energy marketing group enters into often include financial            assurance provisions that allow us and our counterparties to effectively manage credit            risk. The agreements normally require collateral to be posted if an adverse            credit-related event, such as a drop in credit ratings, occurs. Based on contracts in            place and commodity prices at March 31, 2008, we could be required to post collateral            of up to $1.7 billion if we were downgraded to non-investment grade. These obligations            are reflected on our balance sheet. The posting of collateral merely secures the            payment of such amounts.

            At March 31, 2008, collateral posted to our counterparties includes $36 million of cash            and $200 million of letters of credit related to our trading activities. Cash posted is            included with our accounts receivable. Letters of credit issued cannot be drawn on            unless there has been default, which would have to be proven to the bank in order for            them to release the funds. Cash collateral is not normally applied to contract            settlement. Once a contract has been settled, the collateral amounts are refunded. If            there is a default, the cash is retained.

 

            18

 

----

Our            exchange-traded derivative contracts are also subject to margin requirements. We have            margin deposits of $75 million (December 31, 2007 – $203 million), which have            been included in restricted cash.

 
| **12.** | **SHAREHOLDERS’ EQUITY** |
|---------|--------------------------------|

**Dividends**

Dividends per common share for the three months ended March 31, 2008            were $0.025 (2007 – $0.025). Dividends paid to holders of common shares have been            designated as “eligible dividends” for Canadian tax purposes.

**13.**  **EARNINGS PER COMMON            SHARE**

Our            shareholders approved a split of our issued and outstanding common shares on a            two-for-one basis at our annual and special meeting on April 26, 2007. All common share            and per common share amounts have been retroactively restated to reflect this share            split.

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

               Ended                        March 31 |
|-------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (millions of shares)                                                                | **2008**                                                                                                                                                                                                                                           | **2007** |
| Weighted-average number of common shares                        outstanding         | 528.9                                                                                                                                                                                                                                              | 526.0 |
| Shares issuable pursuant to tandem options                                          | 22.5                                                                                                                                                                                                                                               | 28.4 |
| Shares notionally purchased from proceeds of tandem                        options  |    (14.2)                                                                                                                                                                                                                           | (15.8) |
| Weighted-average number of diluted common shares                        outstanding | 537.2                                                                                                                                                                                                                                              | 538.6 |

In            calculating the weighted-average number of diluted common shares outstanding for the            three months ended March 31, 2008, we excluded 4,103,560 tandem options, 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 months ended March 31, 2007, all options were included because their exercise            price was less than the quarterly average common share market price in the period.            During the periods presented, outstanding tandem options were the only potential            dilutive instruments.
| **14.** | **CASH FLOWS** |
|---------|----------------|
| **(a)** | **Charges and credits to income not involving                        cash** |
|---------|-----------------------------------------------------------------------------|

 
|                                                                        |             Three                        Months

             Ended                        March 31 |
|-----------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                        | **2008**                                                                                                                                                                                                                         | **2007** |
| Depreciation, Depletion, Amortization and                        Impairment | 364                                                                                                                                                                                                                              | 334 |
| Stock-Based Compensation                                                    | (59)                                                                                                                                                                                                                             | 44 |
| Future Income Taxes                                                         | 77                                                                                                                                                                                                                               | 35 |
| Change in Fair Value of Crude Oil Put Options                               | -                                                                                                                                                                                                                                | 16 |
| Net Income Attributable to Non-Controlling                        Interests | 1                                                                                                                                                                                                                                | 3 |
| Other                                                                       | -                                                                                                                                                                                                                                | 3 |
| Total                                                                       | 383                                                                                                                                                                                                                              | 435 |

             

 

19

 

----

 
|   | ***(*****b)** | **Changes in non-cash working capital** |
|--------|---------------|-----------------------------------------|
|                                     |           Three                        Months            Ended                        March 31 |
|------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                     | **2008**                                                                                                                                                                                                     | **2007** |
| Accounts Receivable                      | (446)                                                                                                                                                                                                        | 75 |
| Inventories and Supplies                 | (78)                                                                                                                                                                                                         | 65 |
| Other Current Assets                     | (10)                                                                                                                                                                                                         | (4) |
| Accounts Payable and Accrued Liabilities | 683                                                                                                                                                                                                          | (58) |
| Accrued Interest Payable                 | 13                                                                                                                                                                                                           | (18) |
| Total                                    | 162                                                                                                                                                                                                          | 60 |
|                                     |                                                                                                                                                                                                         |   |
| Relating to:                             |                                                                                                                                                                                                         |   |
| Operating Activities                     | 140                                                                                                                                                                                                          | 32 |
| Investing Activities                     | 22                                                                                                                                                                                                           | 28 |
| Total                                    | 162                                                                                                                                                                                                          | 60 |
| **(c)** | **Other cash flow information** |
|---------|---------------------------------|
|  

                          |          Three                        Months          Ended                        March 31 |
|----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                   | **2008**                                                                                                                                                                                   | **2007** |
| Interest Paid                          | 66                                                                                                                                                                                         | 101 |
| Income Taxes Paid                      | 85                                                                                                                                                                                         | 57

                          |

Cash            flow from other operating activities includes cash outflows related to geological and            geophysical expenditures of $10 million for the three months ended March 31, 2008 (2007            – $10 million).
| **15.** | **MARKETING AND OTHER INCOME** |
|---------|--------------------------------|
|                                          |           Three                        Months           Ended                        March 31 |
|-----------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          | **2008**                                                                                                                                                                                               | **2007** |
| Marketing Revenue, Net                        | 211                                                                                                                                                                                                    | 247 |
| Change in Fair Value of Crude Oil Put Options | -                                                                                                                                                                                                      | (16) |
| Interest                                      | 10                                                                                                                                                                                                     | 9 |
| Foreign Exchange Gains (Losses)               | 5                                                                                                                                                                                                      | (5) |
| Other                                         | (4)                                                                                                                                                                                                    | 13 |
| Total                                         | 222                                                                                                                                                                                                    | 248 |
| **16.** | **COMMITMENTS, CONTINGENCIES AND GUARANTEES** |
|---------|-----------------------------------------------|

As            described in Note 15 to the Audited Consolidated Financial Statements included in our            2007 Annual Report on Form 10-K, there are a number of lawsuits and claims pending, the            ultimate results of which cannot be ascertained at this time. We record costs as they            are incurred or become determinable. We believe the resolution of these matters would            not have a material adverse effect on our liquidity, consolidated financial position or            results of operations.

 

20

 

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**17.**     **OPERATING SEGMENTS AND RELATED INFORMATION**

Nexen is involved in activities relating to Oil and Gas, Energy            Marketing, Syncrude and Chemicals in various geographic locations as described in Note            20 to the Audited Consolidated Financial Statements included in our 2007 Annual Report            on Form 10-K.

**Three Months Ended March 31, 2008**
|                                                |        |        |                                 |                                  |                                                       |        |   |                                      |      |
|-----------------------------------------------------|-------------|-------------|--------------------------------------|---------------------------------------|------------------------------------------------------------|-------------|--------|--------------------------------------|-----------|
|                                                |        |        |                                 |                                  |                                                       | Energy      |   | Corporate                        and |      |
| (Cdn$ millions)                                     | Oil and Gas | Marketing   | Syncrude                             | Chemicals                             | Other                                                      | Total  |
|                                                | Yemen       | Canada      | United                        States | United                        Kingdom | Other                            Countries1 |        |   |                                 |      |   |
|                                                |        |        |                                 |                                  |                                                       |        |   |                                 |      |   |
| Net Sales                                           | 276    | 147    | 181                                  | 939                                   | 46                                                    | 14          | 158    | 109                             | -         | 1,870 |
| Marketing and Other                                 | 4      | -      | 1                                    | 1                                | -                                                     | 211    | -      | (7)                                  | 122       | 222 |
| Total Revenues                                      | 280    | 147    | 182                                  | 940                              | 46                                                    | 225    | 158    | 102                             | 12   | 2,092 |
| Less: Expenses                                      |        |        |                                 |                                  |                                                       |        |   |                                 |      |   |
| Operating                                           | 45     | 42     | 24                                   | 57                               | 3                                                     | 9      | 62     | 67                              | -    | 309 |
| Depreciation, Depletion, Amortization               |        |        |                                 |                                  |                                                       |        |   |                                 |      |   |
| and Impairment                                      | 34     | 47     | 74                                   | 170                              | 4                                                     | 3      | 12     | 10                              | 10   | 364 |
| Transportation and Other                            | 2      | 5      | 1                                    | -                                | -                                                     | 173    | 5      | 19 3                                 | -    | 205 |
| General and Administrative                        4 | (2)         | 1      | 6                                    | (1)                                   | 1                                                     | 26     | 1      | 7                               | 16   | 55 |
| Exploration                                         | -      | 4      | 6                                    | 7                                | 155                                                        | -      | -      | -                               | -    | 32 |
| Interest                                            | -      | -      | -                                    | -                                | -                                                          | -      | -      | 3                               | 24   | 27 |
| Income (Loss)                                       |        |        |                                 |                                  |                                                       |        |   |                                 |      |   |
| before Income Taxes                                 | 201    | 48     | 71                                   | 707                              | 23                                                    | 14     | 78     | (4)                                  | (38)      | 1,100 |
| Less: Provision for (Recovery                       |        |        |                                 |                                  |                                                       |        |   |                                 |      |   |
| of) Income Taxes                                    | 70     | 14     | 25                                   | 359                              | 3                                                     | 1      | 22     | -                                    | (25)      | 469 |
| Less: Non-Controlling                               |        |        |                                 |                                  |                                                       |        |   |                                 |      |   |
| Interests                                           | -      | -      | -                                    | -                                | -                                                     | -      | -      | 1                               | -         | 1 |
| Net Income (Loss)                                   | 131    | 34     | 46                                   | 348                              | 20                                                    | 13     | 56     | (5)                                  | (13)      | 630 |
|                                                |        |        |                                 |                                  |                                                       |        |   |                                 |      |   |
|                                                |        |        |                                 |                                  |                                                       |        |   |                                 |      |   |
| Identifiable Assets                                 | 341    | 5,8376      | 1,766                                | 4,970                            | 393                                                   | 4,2717      | 1,216  | 476                             | 391       | 19,661 |
|                                                |        |        |                                 |                                  |                                                       |        |   |                                 |      |   |
| Capital Expenditures                                |        |        |                                 |                                  |                                                       |        |   |                                 |      |   |
| Development and Other                               | 18     | 351    | 79                                   | 100                              | 28                                                    | -      | 9      | 13                              | 4    | 602 |
| Exploration                                         | 5      | 86     | 67                                   | 16                               | 10                                                    | -      | -      | -                               | -    | 184 |
|                                                | 23     | 437    | 146                                  | 116                              | 38                                                    | -      | 9      | 13                              | 4    | 786 |
|                                                |        |        |                                 |                                  |                                                       |        |   |                                 |      |   |
| Property, Plant and Equipment                       |        |        |                                 |                                  |                                                       |        |   |                                 |      |   |
| Cost                                                | 2,288  | 7,171  | 3,330                                | 4,999                            | 302                                                   | 252    | 1,339  | 848                             | 313  | 20,842 |
| Less: Accumulated DD&A                          | 2,068  | 1,637  | 1,898                                | 1,085                            | 84                                                    | 65     | 214    | 474                             | 178  | 7,703 |
| Net Book Value                                      | 220    | 5,5346      | 1,432                                | 3,914                            | 218                                                   | 187    | 1,125  | 374                             | 135  | 13,139 |

 

1                 Includes results of operations from producing activities in            Colombia.

2     Includes            interest income of $10 million, foreign exchange gains of $5 million and other losses            of $3 million.

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

4     Includes            recovery of stock-based compensation expense of $41 million.

5                 Includes exploration activities primarily in Nigeria, Norway and            Colombia.

6     Includes            costs of $4,003 million related to our Long Lake Project (Phase 1 and future            phases).

7     Approximately            83% of Marketing’s identifiable assets are accounts receivable and            inventories.

 

 

21

 

----

**Three Months Ended March 31, 2007**
|                                                |        |      |                                 |                                       |                                     |
|-----------------------------------------------------|-------------|-----------|--------------------------------------|---------------------------------------|------------------------------------------|
|                                                |        | Energy    |                                 |                                  | Corporate                        and     |   |
| (Cdn$ millions)                                     | Oil and Gas | Marketing | Syncrude                             | Chemicals                             | Other                                    | Total |
|                                                | Yemen       | Canada    | United                        States | United                        Kingdom | Other                        Countries 1 |   |   |   |   |   |
|                                                |        |      |                                 |                                  |                                     |   |   |   |   |   |
| Net Sales                                           | 243         | 115       | 168                                  | 344                                   | 29                             | 16   | 119 | 106 | -   | 1,140 |
| Marketing and Other                                 | 3           | 1         | -                                    | 4                                     | -                              | 247   | - | 5 | (12)2 | 248 |
| Total Revenues                                      | 246         | 116       | 168                                  | 348                                   | 29                             | 263   | 119 | 111 | (12)  | 1,388 |
| Less: Expenses                                      |        |      |                                 |                                  |                                     |   |   |   |   |   |
| Operating                                           | 42          | 39        | 28                                   | 53                                    | 2                              | 13   | 47 | 66 | -   | 290 |
| Depreciation, Depletion,                            |        |      |                                 |                                  |                                     |   |   |   |   |   |
| Amortization and                                    |        |      |                                 |                                  |                                     |   |   |   |   |   |
| Impairment                                          | 58          | 41        | 84                                   | 114                                   | 3                              | 4   | 13 | 11 | 6   | 334 |
| Transportation and Other                            | 3           | 7         | -                                    | -                                     | -                              | 220   | 5 | 11 | -   | 246 |
| General and Administrative                        3 | 1           | 32        | 19                                   | 5                                     | 24                             | 30   | - | 9 | 82   | 202 |
| Exploration                                         | 3           | 5         | 13                                   | 20                                    | 8 4                                      | -   | - | - | -   | 49 |
| Interest                                            | -           | -         | -                                    | -                                     | -                              | -   | - | 3 | 45   | 48 |
| Income (Loss)                                       |        |      |                                 |                                  |                                     |   |   |   |   |   |
| before Income Taxes                                 | 139         | (8)       | 24                                   | 156                                   | (8)                                 | (4)  | 54 | 11 | (145)  | 219 |
| Less: Provision for (Recovery                       |        |      |                                 |                                  |                                     |   |   |   |   |   |
| of) Income Taxes                                    | 48          | (2)       | 8                                    | 75                                    | (1)                                 | (1)  | 17 | 3 | (52)  | 95 |
| Less: Non-Controlling                               |        |      |                                 |                                  |                                     |   |   |   |   |   |
| Interests                                           | -           | -         | -                                    | -                                     | -                              | -   | - | 3 | -   | 3 |
| Net Income (Loss)                                   | 91          | (6)       | 16                                   | 81                                    | (7)                                 | (3)  | 37 | 5 | (93)  | 121 |
|                                                |        |      |                                 |                                  |                                     |   |   |   |   |   |
|                                                |        |      |                                 |                                  |                                     |   |   |   |   |   |
| Identifiable Assets                                 | 521         | 4,279 5   | 1,668                                | 5,356                                 | 248                            | 3,372 6 | 1,196 | 467 | 206   | 17,313 |
|                                                |        |      |                                 |                                  |                                     |   |   |   |   |   |
| Capital Expenditures                                |        |      |                                 |                                  |                                     |   |   |   |   |   |
| Development and Other                               | 32          | 356       | 139                                  | 140                                   | 8                              | -   | 7 | 12 | 8   | 702 |
| Exploration                                         | 5           | 33        | 14                                   | 46                                    | 10                             | -   | - | - | -   | 108 |
| Proved Property Acquisitions                        | -           | -         | -                                    | 1                                     | -                              | -   | - | - | -   | 1 |
|                                                | 37          | 389       | 153                                  | 187                                   | 18                             | -   | 7 | 12 | 8   | 811 |
|                                                |        |      |                                 |                                  |                                     |   |   |   |   |   |
| Property, Plant and Equipment                       |        |      |                                 |                                  |                                     |   |   |   |   |   |
| Cost                                                | 2,414       | 5,601     | 2,982                                | 4,834                                 | 256                            | 230   | 1,305 | 797 | 294   | 18,713 |
| Less: Accumulated DD&A                          | 2,121       | 1,485     | 1,491                                | 528                                   | 81                             | 49   | 185 | 436 | 154   | 6,530 |
| Net Book Value                                      | 293         | 4,116 5   | 1,491                                | 4,306                                 | 175                            | 181   | 1,120 | 361 | 140   | 12,183 |

             
| 1 | Includes results of operations from producing activities in                        Colombia. |
|---|----------------------------------------------------------------------------------------------|
| 2 | Includes interest income of $9 million, foreign exchange                        losses of $5 million and decrease in the fair value of crude oil put                        options of $16 million. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3 | Includes stock-based compensation expense of $116                        million. |
|---|-----------------------------------------------------------------------------------|
| 4 | Includes exploration activities primarily in Nigeria, Norway                        and Colombia. |
|---|---------------------------------------------------------------------------------------------------|
| 5 | Includes costs of $2,847 million related to our Long Lake                        Project (Phase 1 and future phases). |
|---|-----------------------------------------------------------------------------------------------------------------------|
| 6 | Approximately 78% of Marketing’s identifiable assets                        are accounts receivable and inventories. |
|---|----------------------------------------------------------------------------------------------------------------------------|

 

 

22

 

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**18.**     **DIFFERENCES BETWEEN CANADIAN AND US GENERALLY ACCEPTED            ACCOUNTING **

**                       PRINCIPLES**

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

**For the Three Months Ended March 31**
| (Cdn$ millions, except per share amounts)                                   | **2008** | **2007** |
|-----------------------------------------------------------------------------|----------|----------|
| **Revenues and Other Income**                                               |     |     |
| Net Sales                                                                   | 1,870    | 1,140    |
| Marketing and Other(i);                        (vii)                        | 206      | 246      |
|                                                                        | 2,076    | 1,386    |
| **Expenses**                                                                |     |     |
| Operating(ii)                                                               | 310      | 296      |
| Depreciation, Depletion, Amortization and                        Impairment | 364      | 334      |
| Transportation and Other                                                    | 205      | 246      |
| General and Administrative(iii)                                             | 62       | 199      |
| Exploration                                                                 | 32       | 49       |
| Interest                                                                    | 27       | 48       |
|                                                                        | 1,000    | 1,172    |
|                                                                        |     |     |
| **Income before Income Taxes**                                              | 1,076    | 214      |
|                                                                        |     |     |
| **Provision for Income Taxes**                                              |     |     |
| Current                                                                     | 392      | 60       |
| Deferred(i) – (vii)                                                   | 66       | 33       |
|                                                                        | 458      | 93       |
|                                                                        |     |     |
| **Net Income before Non-Controlling                        Interests**      | 618      | 121      |
| Net Income Attributable to Non-Controlling                        Interests | (1)      | (3)      |
|                                                                        |     |     |
| **Net Income – US GAAP**1                                             | 617      | 118      |
|                                                                        |     |     |
| **Earnings Per Common Share**($/share)                                      |     |     |
| Basic(Note 13)                                                              | 1.17     | 0.23     |
|                                                                        |     |     |
| Diluted(Note 13)                                                            | 1.15     | 0.22     |

 

 

Note:
| 1      | **Reconciliation of Canadian and US GAAP Net                        Income** |                                                                             |
|--------|------------------------------------------------------------------------------|----------------------------------------------------------------------------------|
|   |                                                                         | Three Months      Ended March 31    |
|   | (Cdn$ millions)                                                              | **2008**                                                                         | **2007** |
|   | Net Income – Canadian GAAP                                             | 630                                                                         | 121  |
|   | Impact of US Principles, Net of Income Taxes:                                |                                                                             |   |
|   | Ineffective Portion of Cash Flow Hedges (i)                                  | -                                                                           | (2) |
|   | Pre-operating Costs (ii)                                                     | (1)                                                                              | (3) |
|   | Inventory Valuation (vii)                                                    | (7)                                                                              | -  |
|   | Stock-based Compensation (iii)                                               | (5)                                                                              | 2  |
|   | Net Income – US GAAP                                                   | 617                                                                         | 118  |

 

            23

 

----

| **(b)** | **Unaudited Consolidated Balance Sheet – US                        GAAP**

                          |
|---------|-----------------------------------------------------------------------------------------------------------------|
|                                                                                    | March 31 | December 31 |
|-----------------------------------------------------------------------------------------|----------|-------------|
| (Cdn$ millions, except share amounts)                                                   | **2008** | **2007**    |
| **Assets**                                                                              |     |        |
| **Current Assets**                                                                      |     |        |
| Cash and Cash Equivalents                                                               | 524      | 206         |
| Restricted Cash                                                                         | 75       | 203         |
| Accounts Receivable                                                                     | 4,041    | 3,502       |
| Inventories and Supplies(vii)                                                           | 695      | 615         |
|        Deferred Income Tax                        Asset   | 25       | 18          |
| Other                                                                                   | 84       | 71          |
| Total Current Assets                                                                    | 5,444    | 4,615       |
|                                                                                    |     |        |
| **Property, Plant and Equipment**                                                       |     |        |
| Net of                        Accumulated Depreciation, Depletion, Amortization and     |     |        |
| Impairment of $8,096 (December 31, 2007 –                        $7,588)(ii); (v) | 13,089   | 12,449      |
| **Goodwill**                                                                            | 337      | 326         |
| **Deferred Income Tax Assets**                                                          | 263      | 268         |
| **Deferred Charges and Other Assets**                                                   | 418      | 324         |
| **Total                        Assets**                                                 | 19,551   | 17,982      |
|                                                                                    |     |        |
| **Liabilities and Shareholders’ Equity**                                          |     |        |
| **Current Liabilities**                                                                 |     |        |
| Short-Term Borrowings                                                                   | 125      | -           |
| Accounts Payable and Accrued Liabilities(iii)                                           | 4,954    | 4,233       |
| Accrued Interest Payable                                                                | 67       | 54          |
| Dividends Payable                                                                       | 13       | 13          |
| Total Current Liabilities                                                               | 5,159    | 4,300       |
|                                                                                    |     |        |
| **Long-Term Debt**                                                                      | 4,458    | 4,610       |
| **Deferred Income Tax Liabilities**(i) – (vii)                                    | 2,344    | 2,230       |
| **Asset Retirement Obligations**                                                        | 814      | 792         |
| **Deferred Credits and Liabilities**(iv)                                                | 600      | 534         |
| **Non-Controlling Interests**                                                           | 64       | 67          |
| **Shareholders’ Equity**                                                          |     |        |
| Common Shares, no par value                                                             |     |        |
| Authorized:   Unlimited                                                  |     |        |
| Outstanding:   2008 – 529,439,432                        shares    |     |        |
| 2007                        – 528,304,813 shares                                  | 949      | 917         |
| Contributed Surplus                                                                     | 3        | 3           |
| Retained                        Earnings(i) – (vii)                               | 5,480    | 4,876       |
| Accumulated Other Comprehensive Loss(i); (iv)                                           | (320)    | (347)       |
| Total Shareholders’ Equity                                                        | 6,112    | 5,449       |
| **Commitments, Contingencies and Guarantees**                                           |     |        |
|                                                                          |     |        |
| **Total                        Liabilities and Shareholders’ Equity**             | 19,551   | 17,982      |
| **(c)** | **Unaudited Consolidated Statement of Comprehensive Income                        – US GAAP** |
|---------|-----------------------------------------------------------------------------------------------------|

**For the Three Months Ended March 31**
| (Cdn$ millions)                                  | **2008**  | **2007**  |
|--------------------------------------------------|-----------|-----------|
| Net Income – US GAAP                       | 617  | 118  |
| Other Comprehensive Income, Net of Income Taxes: |      |      |
| Foreign Currency Translation Adjustment          | (27)      | (6)       |
| Change in Mark to Market on Cash Flow Hedges(i)  | -    | (61)      |
| Comprehensive Income                             | 590  | 51   |

 
|   |   |
|--------|--------|

 

24

 

----

| **(d)** | **Unaudited Consolidated Statement of Accumulated                        Other Comprehensive Income – US GAAP** |
|---------|-----------------------------------------------------------------------------------------------------------------------|
|                                                                 | March 31 | December 31 |
|----------------------------------------------------------------------|----------|-------------|
| (Cdn$ millions)                                                      | **2008** | **2007**    |
| Foreign Currency Translation                        Adjustment       | (266)    | (293)       |
| Unamortized                        Defined Benefit Pension Costs(iv) | (54)     | (54)        |
|                                                                 | (320)    | (347)       |

***Notes:***
| i. | Under US GAAP, all derivative instruments are recognized on                        the balance sheet as either an asset or a liability measured at fair value.                        Changes in the fair value of derivatives are recognized in earnings unless                        specific hedge criteria are met. On January 1, 2007, we adopted the                        equivalent Canadian standard for derivative instruments. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

At March 31, 2008, there were no cash flow hedges in place.
| ii. | Under Canadian GAAP, we defer certain development costs and                        all pre-operating revenues and costs to property, plant and equipment.                        Under US principles, these costs have been included in operating expenses.                        As a result: |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | operating expenses include pre-operating costs of $1 million                        for the three months ended March 31, 2008 ($1 million, net of income taxes)                        (2007 – $6 million ($3 million, net of income taxes)); and |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | property, plant and equipment is lower under US GAAP by $31                        million (December 31, 2007 – $30 million). |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------|
| iii. | Under Canadian principles, we record obligations for                        liability-based stock compensation plans using the intrinsic-value method                        of accounting. Under US principles, obligations for liability-based stock                        compensation plans are recorded using the fair-value method of accounting.                        We are also required to accelerate the recognition of stock-based                        compensation expense for all stock-based awards made to our                        retirement-eligible employees under Canadian GAAP. However, under US GAAP,                        the accelerated recognition for such employees is only required for                        stock-based awards granted on or after January 1, 2006. As a                        result: |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | general and administrative expense is higher by $7 million                        ($5 million, net of income taxes) for the three months ended March 31, 2008                        (2007 – lower by $3 million ($2 million, net of income taxes));                        and |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | accounts payable and accrued liabilities are higher by $60                        million as at March 31, 2008 (December 31, 2007 – $53                        million). |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| iv. | On December 31, 2006, we adopted FASB Statement 158*Employers’ Accounting for Defined Benefit Pension                        and Other Postretirement Plans*(FAS 158). At                        March 31, 2008, the unfunded amount of our defined benefit pension plans                        was $75 million. This amount has been included in deferred credits and                        other liabilities and $54 million, net of income taxes has been included in                        AOCI. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| v. | On January 1, 2003, we adopted FASB Statement 143,*Accounting for Asset Retirement Obligations*(FAS 143) for US GAAP reporting purposes. We adopted the                        equivalent Canadian standard for asset retirement obligations on January 1,                        2004. These standards are consistent except for the adoption date which                        results in our property, plant and equipment under US GAAP being lower by                        $19 million. |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| vi. | On January 1, 2007, we adopted FASB Interpretation                        48,*Accounting for Uncertainty in Income                        Taxes*(FIN 48) with respect to FAS 109*Accounting for Income Taxes*regarding accounting and disclosure for uncertain tax                        positions. On the adoption of FIN 48, we recorded a cumulative effect of a                        change in accounting principle of $28 million. This amount increased our                        deferred income tax liabilities, with a corresponding decrease to our                        retained earnings as at January 1, 2007 in our US GAAP – Unaudited                        Consolidated Balance Sheet. As at March 31, 2008, the total amount of our                        unrecognized tax benefits was approximately $223 million, all of which, if                        recognized, would affect our effective tax rate. As at March 31, 2008, the                        total amount of interest and penalties in relation to uncertain tax                        positions recognized in deferred income tax liabilities in the US GAAP                        –Unaudited Consolidated Balance Sheet is approximately $10 million.                        We had no interest or penalties in the US GAAP – Unaudited                        Consolidated Statement of Income for the first quarter of 2008. Our income                        tax filings are subject to audit by taxation authorities and as at March                        31, 2008 the following tax years remained subject to examination; (i)                        Canada – 1985 to date, (ii) United Kingdom – 2002 to date and                        (iii) United States – 2004 to date. We do not anticipate any material                        changes to the unrecognized tax benefits previously disclosed within the                        next twelve months. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

25

 

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| vii. | Under Canadian GAAP, we began carrying our commodity                        inventory held for trading purposes at fair value, less any costs to sell                        effective October 31, 2007. Under US GAAP, we are required to carry this                        inventory at the lower of cost or net realizable value. As a                        result: |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | marketing and other income is lower by $16 million ($7                        million, net of income taxes) for the three months ended March 31, 2008;                        and |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | inventories are lower by $60 million as at March 31, 2008                        (December 31, 2007 – $44 million). |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------|

**Changes in Accounting Policies–US GAAP**

During the quarter, we adopted FASB Statement 157*Fair Value Measurements*which defines fair            value, establishes a framework for measuring fair value and expands disclosures about            fair value measurements. The adoption of this statement did not have a material impact            on our results of operations or financial position. The additional disclosures required            by the statement are included in Note 10.

**New Accounting Pronouncements–US GAAP**

Effective December 31, 2006, we adopted the recognition and disclosure            provisions of FASB Statement 158,*Employers’ Accounting            for Defined Benefit Pension and Other Postretirement Plans*.            This statement also requires measurement of the funded status of a plan as of the            balance sheet date. The measurement provisions of the statement are effective for            fiscal years ending after December 15, 2008. We do not expect the adoption of the            change in measurement date in 2008 will have a material impact on our results of            operations or financial position.

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

In            December 2007, FASB issued Statement 160,*Non-controlling            Interests In Consolidated Financial Statements, an amendment of ARB. No.            51*. This statement clarifies that a non-controlling interest            in a subsidiary is an ownership interest in the consolidated entity that should be            reported as equity in the consolidated financial statements. This statement is            effective for fiscal years beginning on or after December 15, 2008. We do not expect            the adoption of this statement to have a material impact on our results of operations            or financial position.

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

 

26

 

 

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| **Item 2.** | **Management’s Discussion and Analysis of Financial                        Condition and Results of Operations** |
|-------------|------------------------------------------------------------------------------------------------------------------------|

*The following should be read in conjunction with the Unaudited            Consolidated Financial Statements included in this report. The Unaudited Consolidated            Financial Statements have been prepared in accordance with generally accepted            accounting principles (GAAP) in Canada. The impact of the significant differences            between Canadian and United States (US) accounting principles on the financial            statements is disclosed in Note 18 to the Unaudited Consolidated Financial Statements.            The date of this discussion is April 28, 2008.*

*Unless otherwise noted, tabular amounts are in millions of Canadian            dollars. The discussion and analysis of our oil and gas activities with respect to oil            and gas volumes, reserves and related performance measures is presented on a            working-interest, before-royalties basis. We measure our performance in this manner            consistent with other Canadian oil and gas companies. Where appropriate, we have            provided information on a net, after-royalties basis in tabular format.*

*Note: Canadian investors should read the Special Note to Canadian            Investors on page 76 of our 2007 Annual Report on Form 10-K which highlights            differences between our reserve estimates and related disclosures that are otherwise            required by Canadian regulatory authorities.*

*We make estimates and assumptions that affect the reported amounts of            our assets and liabilities and the disclosure of contingent assets and liabilities at            the date of the Unaudited Consolidated Financial Statements and our revenues and            expenses during the reported period. Our management reviews these estimates, including            those related to accruals, litigation, environmental and asset retirement obligations,            income taxes, derivative contract assets and liabilities and the determination of            proved reserves on an ongoing basis. Changes in facts and circumstances may result in            revised estimates and actual results may differ from these estimates.*

**EXECUTIVE SUMMARY OF FIRST QUARTER RESULTS**
|                                                       |   | Three Months

Ended March 31 |
|------------------------------------------------------------|--------|------------------------------|
| (Cdn$ millions)                                            |   |                         | **2008** | **2007** |
| Net Income                                                 |   |                         | 630 | 121 |
| Earnings per Common Share, Basic($/share)                  |   |                         | 1.19 | 0.23 |
| Cash Flow from Operating Activities                        |   |                         | 1,168 | 448 |
|                                                       |   |                         |   |   |
| Production, before Royalties(mboe/d)                       |   |                         | 267 | 238 |
| Production, after Royalties(mboe/d)                        |   |                         | 222 | 191 |
| Nexen’s Average Realized Oil and Gas Price(Cdn$/boe) |   |                         | 85.90 | 59.13 |
|                                                       |   |                         |   |   |
| Capital Investment, including Acquisitions                 |   |                         | 786 | 811 |
| Net Debt                        1                          |   |                         | 4,059 | 4,939 |

Note:
| 1 | Net debt is defined as long-term debt and short-term                        borrowings less cash and cash equivalents. |
|---|------------------------------------------------------------------------------------------------------------------------|

Higher production, combined with strong commodity prices, contributed to            record quarterly net income and cash flow from operating activities in excess of a            billion dollars. We met or exceeded our production targets during the quarter in all            areas with the exception of Syncrude and volumes were 2% higher from the prior quarter            and 12% higher from the same period last year. Buzzard averaged 91,500 boe/d and            facility performance consistently exceeds our original design expectations. Base            declines in mature assets in Yemen and the Gulf of Mexico partially offset volume            increases from Buzzard.

WTI            averaged US$97.90 for the quarter, 68% higher than the first quarter of 2007. Strong            reference crude oil prices allowed us to realize an average crude oil price for the            quarter of $93.00/boe, 51% higher from the same period last year. Our cash netback per            boe increased 67% from the first quarter of 2007 and reflects the high-margin            production from Buzzard. Since the majority of our oil and gas sales are denominated in            or referenced to the US dollar, the strengthening Canadian dollar mitigated the            increase in benchmark commodity prices. Overall, the higher Canadian dollar reduced our            quarterly cash flow from operating activities and net income by approximately $250            million and $135 million, respectively.

During the quarter, we reached two major milestones at Long Lake as            bitumen production began to increase and we completed construction of the upgrader. We            have 29 of 81 well-pairs converted to SAGD production and total            bitumen production is averaging 6,200 bbls/d (3,100 bbls/d net to us).            In the UK North Sea, our Ettrick development is progressing with production expected            later this year.

These strong results generated cash flow in excess of our capital            investment requirements and net debt decreased $345 million from the end of 2007. We            recently doubled our quarterly dividend payable to shareholders to $0.05 per            share.

 

27

 

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**CAPITAL INVESTMENT**

            Our strategy and capital programs are focused on growing long-term value for our            shareholders responsibly. We are advancing our strategy as described below. In 2008, we            are investing in:
|   | **•** | bringing Phase 1 of our Long Lake project on stream and                        advancing other phases; |
|--------|------------|--------------------------------------------------------------------------------------------------------|
|   | **•** | completing our Ettrick development in the UK North                        Sea; |
|--------|------------|--------------------------------------------------------------------------------|
|   | **•** | targeting a number of exploration prospects, primarily in                        the Gulf of Mexico and the North Sea; and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------|
|   | **•** | creating value in our existing asset base. |
|--------|------------|--------------------------------------------|

            Details of our first quarter capital programs are set out below.
|                                      | Major       | Early Stage | New Growth  | Core Asset  |   |
|-------------------------------------------|-------------|-------------|-------------|-------------|--------|
| (Cdn$ millions)                           | Development | Development | Exploration | Development | Total  |
| Oil and Gas                               |        |        |        |        |   |
| Synthetic (mainly Long Lake)              | 242         | 66          | 2           | -           | 310    |
| United Kingdom                            | 57          | -           | 16          | 43          | 116    |
| Yemen                                     | -           | -           | 5           | 18          | 23     |
| United States                             | 2           | -           | 67          | 77          | 146    |
| Canada                                    | 12          | 6           | 84          | 25          | 127    |
| Other Countries                           | 23          | -           | 10          | 5           | 38     |
| Syncrude                                  | -           | -           | -           | 9           | 9      |
|                                      | 336         | 72          | 184         | 177         | 769    |
| Chemicals, Marketing, Corporate and Other | -           | -           | -           | 17          | 17     |
| Total Capital                             | 336         | 72          | 184         | 194         | 786    |
| As a % of Total Capital                   | 43%         | 9%          | 23%         | 25%         | 100%   |

 

**MAJOR AND EARLY STAGE DEVELOPMENT PROJECTS**

***Synthetic***

During the quarter, we reached two major milestones at Long Lake as            bitumen production began to ramp up and we completed construction of the upgrader.            Total costs and project timing remain on schedule.

We            are injecting steam into the reservoir through all well pads and we started converting            wells to SAGD production in late February. Currently 29 of 81 well pairs have been            converted to SAGD. While early production rates are variable, total bitumen production            is averaging 6,200 bbls/d with peak rates to date in excess of 7,500 bbls/d (3,750            bbls/d net to us). During the first quarter, we started up the first cogeneration unit            which has reliably produced power in excess of 80 megawatts. Surplus power was sold            into the Alberta power grid. We recently started up the second cogeneration unit and we            expect it to be fully operational shortly. We expect to convert the remaining well            pairs to SAGD by mid summer. This will allow bitumen production to grow to full rates            over the next 6 to 12 months. The bitumen production capacity of the SAGD facilities is            approximately 72,000 bbls/d (36,000 bbls/d net to us).

With            construction of the upgrader complete, we have turned over all units and systems to            operations. We estimate that commissioning is over 50% complete and we plan to start            introducing hydrocarbons into key processing units in May. Last week, while introducing            oxygen into a liquid oxygen tank, the tank roof was damaged. We are presently            investigating the cause of the damage and implementing solutions to keep the upgrader            start up process on track. Our start up schedule forecasts production of synthetic            crude to ramp up to full rates over a 12 to 18 month period following initial upgrader            start up. The upgrader is designed to produce approximately 60,000 bbls/d (30,000            bbls/d net to us) of premium synthetic crude.

This            project only develops about 10% of our oil sands leases. We plan to increase synthetic            crude oil production as we sequentially develop our lands in 60,000 bbls/d (30,000            bbls/d net to us) phases using technologies developed at Long Lake.

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

***United Kingdom – Ettrick***

Our            Ettrick development in the North Sea is progressing towards first oil in the second            half of 2008. The development will utilize a leased floating production, storage and            offloading vessel (FPSO) designed to handle 30,000 bbls/d of oil and 35 mmcf/d of gas.            Construction of the FPSO is nearly complete and sea trials are expected to commence mid            year.

 

 

28

 

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We have            also identified a number of exploration opportunities in the immediate area that could            be future tie-backs to Ettrick. We recently spud one of these opportunities, Blackbird,            and have plans to drill another one later this year. We operate both Ettrick and            Blackbird with an 80% working interest in each. We plan to drill six exploration wells            in total in the UK North Sea before year end.

***Canada – Coalbed Methane (CBM)***

In            Canada, we continue to develop CBM from Mannville coals in the Fort Assiniboine area            and well performance continues to meet expectations. The Government of Alberta recently            provided clarification of the length adjustment to be used for calculation of the            proposed royalties and we are reviewing our investment program in light of this            announcement. Our production from this area averaged 34 mmcf/d for the quarter and we            expect to exit the year around 46 mmcf/d as our existing wells dewater and production            increases.

***Offshore West Africa***

During the quarter, we commenced development of the Usan field, offshore            Nigeria. The field development plan includes a floating production, storage and            offloading vessel with a storage capacity of two million barrels of oil. All major            contracts for deep-water facilities have been awarded and contractors are mobilizing            for detailed engineering and project execution. Our capital investment is expected to            be within the range of US$1.6 to US$2.0 billion over the development period, with an            estimated 2008 capital commitment of approximately US$300 million. The Usan field is            expected to come on stream in early 2012 and will ramp up to a peak production rate of            180,000 barrels of oil per day (36,000 boe/d net to us).

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

***United States – Gulf of Mexico***

In            the Gulf of Mexico, we sanctioned development of our Longhorn discovery during the            quarter. Development will consist of three subsea wells tied-back approximately 20            miles to the non-operated Crystal facility. First production is expected in 2009 with a            peak production rate of approximately 200 mmcf/d gross. We have a 25% non-operated            working interest and Eni is the operator.

To            date, we have not been able to find a rig with the capability of drilling a delineation            well at Knotty Head. As a result, we plan to drill an appraisal well in mid 2009 when            our first new deep-water drilling rig arrives. We have a 25% operated interest in the            field.

**NEW GROWTH EXPLORATION**

***Canada – Shale Gas***

Over            the past 18 months, we have accumulated a substantial land position of approximately            123,000 net acres in an emerging Devonian shale gas play in the Horn River Basin in            northeast British Columbia which has the potential to become one of the most            significant shale gas plays in North America. We have a 100% working interest in these            lands. Our capital program over the past two winters has primarily focused on the Dilly            Creek area in the Horn River Basin where we have approximately 85,000 net acres. This            shale gas play has been compared to the Barnett Shale in Texas by other operators in            the area as it displays similar rock properties and play characteristics. The average            gross shale thickness on our Dilly Creek lands is approximately 175 meters which is            almost 50% thicker than the Barnett.

During the 2006/2007 winter drilling season, we drilled two vertical            wells on our acreage at Dilly Creek, recovered core data and conducted extensive            wire-line logging which was analyzed last summer. This information confirmed the            significant potential of this play. In our 2007/2008 winter program, we drilled one            vertical and two horizontal wells at Dilly Creek. We fraced our three vertical wells to            obtain data across the entire gross shale interval and we tested a variety of            techniques to frac and complete one of the horizontal wells. We plan to frac and            complete the second horizontal well next winter.

We            fraced approximately 300 meters of the horizontal well and the well tested over 2            mmcf/d from its two frac segments. These test rates are consistent with rates reported            by competitor wells in the area which average approximately 1 mmcf/d per frac segment.            We expect typical future development wells on our acreage to consist of 6 to 12 frac            segments over longer horizontal lengths. We have placed this horizontal well and one            vertical well on long-term production tests and they are currently producing            approximately 2.5 mmcf/d.

 

29

 

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To            further assess the potential of our lands, we are gearing up to conduct a summer            drilling program consisting of two horizontal wells which will be fraced, completed and            tied-in. We recently participated in the construction of an all-season road, providing            us access to these well locations and approximately half of our Dilly Creek lands year            round.

***United States***

In            the Eastern Gulf of Mexico, where we have interests in discoveries at Vicksburg and            Shiloh, we increased our acreage position on an unpromoted basis by acquiring working            interests of 25% in 33 blocks recently awarded to Shell from the lease sale in late            2007. A number of additional exploration opportunities have been identified in the            region and plans are in place to spud one of these opportunities, Fredricksburg, in the            next few months. We have a 20% interest in Shiloh, a 25% interest in Vicksburg and a            20% interest in Fredricksburg, with Shell operating all three.

**CORE ASSET DEVELOPMENT**

During the quarter, we drilled a development well at Green Canyon 6 in            the deep-water US Gulf of Mexico. The sidetrack was drilled to a depth of 8,400 feet            where it encountered hydrocarbons. Completion operations commenced in March and we            expect production from this well in the second quarter of 2008.

In            the UK North Sea, work continues on our Buzzard enhancement project where engineering            design and material procurement progressed on the fourth platform. The additional            platform has production sweetening facilities which will be able to handle higher            levels of hydrogen sulphide previously identified in the reservoir. We expect that            existing equipment and processes on the Buzzard platform can maintain current            deliverability until the additional equipment is commissioned in 2010.

 

 

30

 

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**FINANCIAL RESULTS**

**Change in Net Income**
|                                                                                       |              |
|--------------------------------------------------------------------------------------------|-------------------|
| (Cdn$ millions)                                                                            | **2008 vs. 2007** |
| **Net Income at March 31, 2007**                                                           | 121               |
| Favourable (unfavourable) variances:                                                       |              |
|                                                                                            |              |
| Production Volumes, After Royalties                                                        |              |
| Crude Oil                                                                                  | 173               |
| Natural Gas                                                                                | 19                |
| Change in Crude Oil Inventory                                                              | 15                |
| Total Volume Variance                                                                      | 207               |
|                                                                                       |              |
| Realized Commodity Prices                                                                  |              |
| Crude Oil                                                                                  | 509               |
| Natural Gas                                                                                | 13                |
| Total Price Variance                                                                       | 522               |
|                                                                                       |              |
| Oil and Gas Operating Expense                                                              |              |
| Conventional                                                                               | (7)               |
| Syncrude                                                                                   | (15)              |
| Total Operating Expense Variance                                                           | (22)              |
|                                                                                       |              |
| Depreciation, Depletion, Amortization and                        Impairment                |              |
| Conventional                                                                               | (29)              |
| Syncrude                                                                                   | 1                 |
| Other                                                                                      | (2)               |
| Total Depreciation, Depletion, Amortization and Impairment                        Variance | (30)              |
|                                                                                       |              |
| Exploration Expense                                                                        | 17                |
|                                                                                       |              |
| Energy Marketing Contribution                                                              | 13                |
|                                                                                       |              |
| Chemicals Contribution                                                                     | (18)              |
|                                                                                       |              |
| General and Administrative Expense                                                         | 147               |
|                                                                                       |              |
| Interest Expense                                                                           | 21                |
|                                                                                       |              |
| Current Income Taxes                                                                       | (332)             |
| Future Income Taxes                                                                        | (42)              |
|                                                                                       |              |
| Other                                                                                      |              |
| Decrease in Fair Value of Crude Oil Put Options                                            | 16                |
| Other                                                                                      | 10                |
|                                                                                       |              |
| **Net Income at March 31, 2008**                                                           | 630               |

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

 

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**OIL            & GAS AND SYNCRUDE**

**Production**
|                        |   | Three Months Ended March 31 |
|-----------------------------|--------|-----------------------------|
|                        |   | **2008**                    | **2007** |
|                        |   |                        | Before | After | Before | After |
|                        |   |                        | Royalties                        1 | Royalties | Royalties                        1 | Royalties |
| Crude Oil and NGLs(mbbls/d) |   |                        |   |   |   |   |
| Yemen                       |   |                        | 62.2 | 31.8 | 77.1 | 45.0 |
| Canada                      |   |                        | 16.9 | 12.9 | 17.8 | 14.2 |
| United States               |   |                        | 13.7 | 12.0 | 21.6 | 19.3 |
| United Kingdom              |   |                        | 106.0 | 106.0 | 55.6 | 55.6 |
| Other Countries             |   |                        | 6.0 | 5.5 | 5.8 | 5.4 |
| Syncrude(mbbls/d)2          |   |                        | 19.3 | 17.0 | 21.4 | 18.9 |
|                        |   |                        | 224.1 | 185.2 | 199.3 | 158.4 |
| Natural Gas(mmcf/d)         |   |                        |   |   |   |   |
| Canada                      |   |                        | 127 | 107 | 118 | 95 |
| United States               |   |                        | 112 | 95 | 101 | 86 |
| United Kingdom              |   |                        | 21 | 21 | 14 | 14 |
|                        |   |                        | 260 | 223 | 233 | 195 |
|                        |   |                        |   |   |   |   |
| Total Production(mboe/d)    |   |                        | 267 | 222 | 238 | 191 |

Notes:
| 1 | We have presented production volumes before royalties as we                        measure our performance on this basis consistent with other Canadian oil                        and gas companies. |
|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2 | Considered a mining operation for US reporting                        purposes.                                                                                                                       |

***Higher production increased net income for the quarter by $207            million***

Production after royalties increased 16% from the first quarter of 2007            and 4% from the prior quarter. The increase over last year was primarily the result of            higher rates at Buzzard in the North Sea. The higher volumes were partially offset by            natural declines in Yemen and the Gulf of Mexico and temporary production shortfalls at            Syncrude. Production before royalties was 2% higher than the prior quarter and 12%            higher than the first quarter of 2007.

The            following table summarizes our production volume changes since the last            quarter:
|                            | Before    | After     |
|---------------------------------|-----------|-----------|
| (mboe/d)                        | Royalties | Royalties |
| Production, fourth quarter 2007 | 262       | 214       |
| Production changes:             |      |      |
| United Kingdom                  | 13        | 13        |
| Yemen                           | (4)       | (2)       |
| Syncrude                        | (3)       | (2)       |
| Other                           | (1)       | (1)       |
| Production, first quarter 2008  | 267       | 222       |

We            expect our 2008 production to range between 260,000 and 280,000 boe/d before royalties            (220,000 and 240,000 boe/d after royalties). Production is expected to increase later            this year with new volumes from the Ettrick development in the UK North Sea and as            bitumen production continues to ramp up at Long Lake. Production of premium synthetic            crude oil from the Long Lake upgrader is expected upon start up of the facilities this            summer. Production volumes discussed in this section represent before-royalties            volumes, net to our working interest.

UNITED KINGDOM

Buzzard production for the quarter averaged 91,500 boe/d, an increase of            150% from the first quarter of 2007 when operations first came on stream. With Buzzard            production regularly exceeding our original design expectations, we continue to pursue            debottlenecking opportunities to increase processing capacity. We expect Buzzard            volumes in the second and third quarters to be lower due to reduced platform uptime as            a result of scheduled maintenance activities. We have commenced work on a fourth            platform at Buzzard which will contain production sweetening facilities designed to            handle higher levels of hydrogen sulphide previously identified in the reservoir. The            projected cost of the new platform is between US$350 million and US$400 million, net to            us.

Natural declines and unplanned maintenance at Scott/Telford contributed            to a 12% and 25% decrease in production as compared to the previous quarter and the            first quarter of 2007, respectively. In addition, we are performing flow trials on            one

 

32

 

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of our            Telford wells which required us to temporarily shut in a producing well. Our            non-operated fields at Duart and Farragon contributed 4,300 boe/d to our first quarter            volumes.

YEMEN

Production from the Masila field decreased 6% from the fourth quarter            and 18% from the first quarter of 2007, consistent with expectations. Production            declines at Masila reflect the maturity of the field and the impact of drilling fewer            development wells. We are focusing our capital spending on maximizing reserve            recoveries and economic returns from existing wells. In the first quarter of 2008, we            drilled three development wells and one sidetrack well. We expect to drill a further            six development wells this year. Production declines are expected to continue as we            maximize recovery of the remaining reserves on the block.

Block 51 production decreased 24% from the first quarter of 2007 and 8%            from the prior quarter, due to relatively high natural decline rates and fewer            development wells. Our 2008 capital investment program includes further development of            the BAK A field including five development wells and one exploration well.

We            expect Yemen production will average between 50,000 and 55,000 boe/d in            2008.

CANADA

Production in Canada was flat when compared with both the previous            quarter and the first quarter of 2007. Long Lake SAGD production is ramping up as we            convert wells to SAGD production from steam circulation. CBM production continues to            increase as the wells in our Fort Assiniboine area de-water and we bring additional            development wells and facilities on stream. The increase in natural gas production has            been largely offset by a decrease in heavy oil volumes. Investment in our heavy oil            winter drilling program partially offset natural declines in the field.

Production volumes are expected to increase in the remainder of 2008            from additional CBM natural gas and bitumen production growth at Long Lake.

UNITED STATES

Gulf            of Mexico production decreased 16% from the same period in 2007, while remaining flat            relative to the prior quarter. Production from the Aspen wells decreased in 2007            reflecting natural declines. In 2008, additional water handling facilities were            installed on the host platform during the quarter, increasing Aspen production by 2,600            boe/d over the previous quarter to average 6,900 boe/d this quarter. Natural declines            and ongoing maintenance at Gunnison decreased production by 3,300 boe/d relative to the            same period last year.

These production decreases were partially offset by increases at Wrigley            and from three properties in the Garden Banks and Green Canyon areas. Wrigley came on            stream in the second quarter of 2007 and contributed 2,900 boe/d to our volumes this            quarter. The three properties in the Garden Banks and Green Canyon areas were acquired            mid 2007 and produced 2,000 boe/d during the quarter.

On            the shelf, we completed several successful workovers and recompletions which enhanced            well performance. This activity offset natural declines elsewhere. We are minimizing            the amount of capital invested in our mature assets on the shelf.

OTHER COUNTRIES

Production from the Guando field in Colombia averaged 6,000 boe/d during            the quarter. We began an infill drilling program in 2007 and virtually all wells were            on stream by early 2008. We expect production from Colombia to average between 6,000            and 7,000 boe/d in 2008. Under the terms of our license with the Colombian government,            our interest in the Guando field will decrease by half to 10% once the field has            produced 60 million barrels, likely in 2009.

SYNCRUDE

Syncrude production decreased 15% from the prior quarter and 10% from            the same period last year. A combination of downtime due to maintenance on one of the            cokers and extreme winter conditions at the end of January contributed to lower            production rates. Additionally, our upgrader production was reduced due to a shortage            of high-quality ore and low bitumen inventories. Planned coker turnarounds at Syncrude            will keep production volumes at similar rates for the next two quarters.

 

 

33

 

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**Commodity Prices**
|                                                                                  |   | Three Months

Ended March 31 |
|---------------------------------------------------------------------------------------|--------|------------------------------|
|                                                                                  |   |                         | **2008** | **2007** |
| **Crude Oil and NGLs**                                                                |   |                         |   |   |
| West Texas Intermediate (WTI)(US$/bbl)                                                |   |                         | 97.90 | 58.16 |
|                                                                                  |   |                         |   |   |
| Differentials                        1(US$/bbl)                                       |   |                         |   |   |
| Heavy Oil                                                                             |   |                         | 21.85 | 16.57 |
| Mars                                                                                  |   |                         | 6.93 | 5.09 |
| Masila                                                                                |   |                         | 2.32 | 2.01 |
| Dated Brent                                                                           |   |                         | 1.00 | 0.41 |
|                                                                                  |   |                         |   |   |
| Producing Assets(Cdn$/bbl)                                                            |   |                         |   |   |
| Yemen                                                                                 |   |                         | 96.57 | 63.02 |
| Canada                                                                                |   |                         | 65.94 | 41.71 |
| United States                                                                         |   |                         | 94.07 | 58.49 |
| United Kingdom                                                                        |   |                         | 93.38 | 64.33 |
| Other Countries                                                                       |   |                         | 91.85 | 59.81 |
| Syncrude                                                                              |   |                         | 101.70 | 70.03 |
|                                                                                  |   |                         |   |   |
| Corporate Average(Cdn$/bbl)                                                           |   |                         | 93.00 | 61.69 |
|                                                                                  |   |                         |   |   |
| **Natural Gas**                                                                       |   |                         |   |   |
| New York Mercantile Exchange (NYMEX)(US$/mmbtu)                                       |   |                         | 8.75 | 7.18 |
| AECO(Cdn$/GJ)                                                                         |   |                         | 6.76 | 7.07 |
|                                                                                  |   |                         |   |   |
| Producing Assets(Cdn$/mcf)                                                            |   |                         |   |   |
| Canada                                                                                |   |                         | 7.57 | 7.16 |
| United States                                                                         |   |                         | 9.03 | 8.58 |
| United Kingdom                                                                        |   |                         | 6.82 | 3.87 |
|                                                                                  |   |                         |   |   |
| Corporate Average(Cdn$/mcf)                                                           |   |                         | 7.97 | 7.58 |
|                                                                                  |   |                         |   |   |
| **Nexen’s Average Realized Oil and Gas                        Price**(Cdn$/boe) |   |                         | 85.90 | 59.13 |
|                                                                                  |   |                         |   |   |
| **Average Foreign Exchange Rate**                                                     |   |                         |   |   |
| Canadian to US Dollar(US$)                                                            |   |                         | 0.9959 | 0.8573 |

Note:
| 1 | These differentials are a discount to WTI. |
|---|--------------------------------------------|

***Higher realized commodity prices increased quarterly net income by            $522 million***

Commodity prices increased significantly throughout 2007 and continued            to strengthen during the first few months of 2008. WTI averaged US$97.90/bbl in the            quarter, an 8% increase over the prior quarter and 68% higher than the first quarter of            last year. These strong benchmark commodity prices allowed us to realize a record price            of $93.00/bbl for our crude oil sales in the quarter, 51% higher than the same period            last year. However, the increase in WTI and other benchmark crude prices was reduced as            the stronger Canadian dollar relative to the US dollar partially offset the full effect            of the increase.

Our            quarterly realized gas price increased 5% from a year ago to average $7.97/mcf. NYMEX            increased 22% in the same period averaging US$8.75/mmbtu. AECO natural gas prices fell            4% from last year, which impacted our realized gas price as approximately half of our            gas production comes from western Canada.

CRUDE            OIL REFERENCE PRICES

Crude oil prices were volatile during the first quarter with WTI ranging            from a low of US$86.11/bbl to a record high in March of US$111.80/bbl, before settling            to US$101.58/bbl at quarter end. The high prices were driven more by the weakening US            dollar and global political tensions than by traditional supply and demand            fundamentals.

The            US dollar continued to weaken during the quarter and fell to an all-time low against            the Euro as the financial markets reacted to the threat of a US recession and the            global credit liquidity crisis. Investors re-directed their investments into the            commodity markets to hedge against the weak dollar and inflation, which contributed to            the volatility in oil prices.

Geopolitical risk continued to place upward pressure on crude oil            prices. Supply outages in Nigeria, Africa’s largest oil producer, reduced            production. In the Middle East, escalating conflict between Turkey and Kurdish rebels            in Northern Iraq,

 

34

 

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added to geopolitical instability. In Southern Iraq, military action led            to the bombing of a major export pipeline in Basra. The market reacted strongly to the            disrupted supply although the pipeline was quickly repaired.

CRUDE            OIL DIFFERENTIALS

In            Canada, heavy oil differentials averaged US$21.85/bbl (22% of WTI) for the quarter,            compared to US$16.57/bbl (28% of WTI) for the first quarter of 2007. The differentials            were wider in the first two months of the quarter as outages at BP’s Whiting            refinery reduced the demand for Canadian crude. The refinery came back on line in March            and the differential narrowed significantly from US$24.06/bbl in February to            US$16.75/bbl in March. Production disruption at Cold Lake, which decreased heavy supply            by 25%, and the approach of the summer asphalt season also contributed to the narrower            differentials in March.

The            Brent/WTI differential widened with Brent trading at a discount to WTI of US$1.00/bbl            compared to US$0.41/bbl for the first quarter of 2007. Historically, Brent traded at a            discount to WTI because of the transportation cost to supply Brent crude to the US            market. In 2007, Brent traded at a premium to WTI for part of the year as inventories            were high, thereby putting downward pressure on WTI. Crude oil inventories at Cushing            remain low as backwardation of the WTI forward curve has not encouraged inventory            building.

In            the US Gulf Coast, the Mars differential widened during the quarter, averaging            US$6.93/bbl (7% of WTI) compared to US$5.09/bbl (9% of WTI) in the first quarter of            2007. Higher production offshore in the Gulf increased supply to the US, widening the            differential. Financial investment in WTI contracts also created support for WTI            relative to other crude qualities, including Mars. Overall, the differential is            returning to more normal historic levels.

The            Yemen Masila differential widened slightly relative to WTI, with Masila trading at a            discount of US$2.32/bbl compared to US$2.01/bbl in the first quarter of 2007. The            Masila price remains high reflecting strong demand from China, India and Thailand.            Masila sales are typically priced based on Brent pricing and the wider differential to            WTI reflects the WTI/Brent differential.

NATURAL            GAS REFERENCE PRICES

NYMEX natural gas prices averaged US$8.75/mmbtu for the quarter,            compared to US$7.18/mmbtu for the first quarter of 2007. The higher prices were driven            by lower storage levels, cooler than normal temperatures in US consuming regions and            reduced supply from LNG imports and western Canada. Storage levels at the end of the            quarter were at their lowest level in the last three years. Strong demand for LNG in            Europe and Asia resulted in reduced supply to the North American market.

**Operating Costs**
|                     |   | Three Months Ended March 31 |
|--------------------------|--------|-----------------------------|
| (Cdn$/boe)               |   | **2008**                    | **2007** |
|                     |   |                        | Before | After | Before | After |
|                     |   |                        | Royalties                        1 | Royalties | Royalties                        1 | Royalties |
| Conventional Oil and Gas |   |                        | 7.49 | 9.06 | 8.24 | 10.49 |
| Synthetic Crude Oil      |   |                        |   |   |   |   |
| Syncrude                 |   |                        | 35.16 | 39.79 | 24.40 | 27.66 |
| Average Oil and Gas      |   |                        | 9.46 | 11.39 | 9.67 | 12.18 |

Note:
| 1 | Operating costs per boe are our total oil and gas operating                        costs divided by our working interest production before royalties. We use                        production before royalties to monitor our performance consistent with                        other Canadian oil and gas companies. |
|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Higher oil and gas operating costs decreased net income for the            quarter by $22 million***

Changes in our production mix during the quarter, primarily as a result            of increases at Buzzard, reduced our corporate average unit cost by $0.36/boe. The            strengthening Canadian dollar also had an impact on our average cost per barrel.            US-dollar denominated operating costs were lower when translated to Canadian dollars,            reducing our corporate quarterly average by $0.83/boe.

In            the UK North Sea, Buzzard operating costs reduced our corporate average by $0.90/boe            compared to the same period last year. A combination of higher production rates and            fixed operating costs on the Buzzard platform reduced our average unit operating cost.            Elsewhere in the UK North Sea, quarterly operating costs on the Scott and Telford            fields were consistent with the first quarter of 2007, however lower production            increased our corporate average by $0.23/boe.

In            Yemen, a combination of lower production and higher service rig activity increased per            unit operating costs. Our corporate unit average cost increased by $0.34/boe and            $0.36/boe for Masila and Block 51, respectively. On the shelf in the Gulf of Mexico,            reduced downtime and fewer expenses for maintenance activity lowered our corporate            average by

 

35

 

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$0.15/boe. In the deep water of the Gulf, lower production and higher            operating costs due to workovers and other maintenance increased our corporate average            by $0.13/boe.

In            Canada, operating costs increased our corporate average by $0.14/boe. Our heavy oil            properties have higher per unit operating costs as many of our costs are fixed in            nature and production is declining. Additional surface maintenance costs have been            partially offset by lower downhole maintenance. CBM operating costs also increased as            we brought additional wells on stream with high initial operating costs. We expect            operating costs will decrease over time as the wells de-water and gas production            increases.

Syncrude operating costs were $15 million higher than the first quarter            of 2007. This increase was the result of purchasing bitumen for upgrading and            unscheduled maintenance costs. The higher operating costs and lower production rates,            increased our corporate average by $0.77/boe during the quarter.

**Depreciation, Depletion, Amortization and Impairment            (DD&A)**
|                     |   | Three Months Ended March 31 |
|--------------------------|--------|-----------------------------|
| (Cdn$/boe)               |   | **2008**                    | **2007** |
|                     |   |                        | Before | After | Before | After |
|                     |   |                        | Royalties                        1 | Royalties | Royalties                        1 | Royalties |
| Conventional Oil and Gas |   |                        | 14.40 | 17.42 | 15.20 | 19.35 |
| Synthetic Crude Oil      |   |                        |   |   |   |   |
| Syncrude                 |   |                        | 6.87 | 7.77 | 6.65 | 7.54 |
| Average Oil and Gas      |   |                        | 13.86 | 16.69 | 14.45 | 18.19 |

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

***Higher conventional and Syncrude DD&A reduced net income for            the quarter by $28 million***

The            impact of Buzzard production at full rates in the North Sea has changed our production            mix. Depletion costs relating to the Buzzard field are higher than our corporate            average as they include our acquisition cost and the costs to complete the project.            This change in production mix increased our average unit DD&A by $0.81/boe. In            2007, we increased our estimates of proved reserves at Buzzard, thereby reducing the            depletion rate. This reduced our corporate average unit DD&A by $0.75/boe. Buzzard            unit depletion is expected to decrease further in the next few years as we anticipate            booking additional proved reserves reflecting production experience and further            development drilling. DD&A on our other North Sea assets increased our corporate            average by $0.45/boe.

In            Yemen, production declines, combined with lower capital expenditures from drilling            fewer wells, decreased our corporate unit depletion rate by $0.26/boe as compared to            the first quarter of 2007. Despite higher realized oil prices, lower production volumes            resulted in a slower recovery of capital costs paid on behalf of the            government.

Depletion of our Canadian assets increased our corporate average by            $0.21/boe. This reflects capital spending on new wells and facilities, and the timing            of reserve bookings for our CBM projects in central Alberta. We expect our depletion            rate for our CBM projects will decline as wells de-water and we are able to recognize            additional proved reserves. Our depletion rate in the Gulf of Mexico increased our            corporate average rate by $0.69/boe as compared to 2007 from lower reserve estimates at            the end of 2007.

The            strengthening Canadian dollar reduced our DD&A expense relative to the first            quarter of 2007 as depletion of our international and US assets is denominated in US            dollars. This decreased our corporate average by $1.81/boe.

 

36

 

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**Exploration Expense**
|                                                                          |   |           Three                        Months

          Ended                        March 31 |
|-------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Cdn$ millions)                                                               |   |                                                                                                                                                                                     | **2008** | **2007** |
| Seismic                                                                       |   |                                                                                                                                                                                     | 10 | 10 |
| Unsuccessful Exploration Drilling                                             |   |                                                                                                                                                                                     | - | 21 |
| Other                                                                         |   |                                                                                                                                                                                     | 22 | 18 |
| Total Exploration Expense                                                     |   |                                                                                                                                                                                     | 32 | 49 |
|                                                                          |   |                                                                                                                                                                                     |   |   |
| New Growth Exploration                                                        |   |                                                                                                                                                                                     | 184 | 108 |
| Geological and Geophysical Costs                                              |   |                                                                                                                                                                                     | 10 | 10 |
| Total Exploration Expenditures                                                |   |                                                                                                                                                                                     | 194 | 118 |
|                                                                          |   |                                                                                                                                                                                     |   |   |
| Exploration Expense as a % of Exploration                        Expenditures |   |                                                                                                                                                                                     | 16% | 42% |

***Lower exploration expense increased net income for the quarter by            $17 million***

Exploration activity during the first quarter was primarily focused on            acquiring additional acreage and seismic data in the Gulf of Mexico, Norway and Canada.            We are continuing to assess our opportunities in new growth areas and develop            opportunities for our exploration drilling program.

Early in the quarter, we drilled two successful exploration wells in the            Gulf of Mexico at Green Canyon 448 and Mississippi Canyon 72 and we are currently            reviewing development options for these assets. We also continued to appraise the            results from our emerging shale gas play in northeast British Columbia during the            quarter.

Late            in the quarter, we began drilling two exploration wells in the Gulf of Mexico and            Yemen. In the Gulf of Mexico, we re-entered our Cote De Mer exploration well and            resumed drilling operations at approximately 13,000 feet. This well is expected to            reach a depth of approximately 21,000 feet with preliminary results expected in the            third quarter. In Yemen, we are currently drilling an exploration well on Block            51.

 

 

37

 

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**ENERGY MARKETING**
|                                                                            |   | Three Months

Ended March 31 |
|---------------------------------------------------------------------------------|--------|------------------------------|
| (Cdn$ millions, except as indicated)                                            |   |                         | **2008** | **2007** |
| Physical Sales                        1                                         |   |                         | 14,227 | 10,898 |
| Physical Purchases                        1                                     |   |                         | (13,738) | (10,624) |
| Net Financial Transactions                        1                             |   |                         | (287) | (27) |
| Increase in Fair Market Value of Inventory                                      |   |                         | 9 | – |
| Net Revenue                                                                     |   |                         | 211 | 247 |
| Transportation Expense                                                          |   |                         | (173) | (220) |
| Other                                                                           |   |                         | 5 | 3 |
| **Net Marketing Revenue**                                                       |   |                         | 43 | 30 |
|                                                                            |   |                         |   |   |
| **Contribution to Net Marketing Revenue by                        Region:**     |   |                         |   |   |
| North America                                                                   |   |                         | 45 | 21 |
| Asia                                                                            |   |                         | 4 | – |
| Europe                                                                          |   |                         | (6) | 9 |
| **Net Marketing Revenue**                                                       |   |                         | 43 | 30 |
| Depreciation, Depletion, Amortization and                        Impairment     |   |                         | (3) | (4) |
| General and Administrative                                                      |   |                         | (26) | (30) |
| **Marketing Contribution to Income before Income                        Taxes** |   |                         | 14 | (4) |
|                                                                            |   |                         |   |   |
| **North America**

**Natural Gas**                                              |   |                         |   |   |
| Physical Sales Volumes                        2(bcf/d)                          |   |                         | 6.6 | 5.4 |
| Transportation Capacity(bcf/d)                                                  |   |                         | 1.9 | 4.0 |
| Storage Capacity(bcf)                                                           |   |                         | 42.6 | 48.0 |
| Financial Volumes                        3(bcf/d)                               |   |                         | 26.4 | 24.9 |
|                                                                            |   |                         |   |   |
| **Crude Oil**                                                                   |   |                         |   |   |
| Physical Sales Volumes                        2(mbbls/d)                        |   |                         | 649 | 672 |
| Storage Capacity(mbbls)                                                         |   |                         | 3,119 | 1,784 |
| Financial Volumes                        3(mbbls/d)                             |   |                         | 1,412 | 2,340 |
|                                                                            |   |                         |   |   |
| **Power**                                                                       |   |                         |   |   |
| Physical Sales Volumes                        2(MW/d)                           |   |                         | 5,157 | 4,548 |
| Generation Capacity(MW/hr)                                                      |   |                         | 132 | 87 |
|                                                                            |   |                         |   |   |
| **Asia**                                                                        |   |                         |   |   |
| Physical Sales Volumes                        2(mbbls/d)                        |   |                         | 206 | 179 |
| Financial Volumes                        3(mbbls/d)                             |   |                         | 268 | 266 |
|  

**Europe**                                                              |   |                         |   |   |
| Financial Volumes                        3(mbbls/d)                             |   |                         | 2,106 | 285 |
|                                                                            |   |                         |   |   |
| **Value-at-Risk**                                                               |   |                         |   |   |
| Quarter-end                                                                     |   |                         | 35 | 33 |
| High                                                                            |   |                         | 40 | 35 |
| Low                                                                             |   |                         | 21 | 24 |
| Average                                                                         |   |                         | 30 | 28 |

Notes:
| 1 | Marketing’s physical sales, physical purchases and net                        financial transactions are reported net on the Unaudited Consolidated                        Statement of Income as marketing and other. |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2 | Excludes intra-segment transactions. Physical volumes                        represent amounts delivered during the quarter.                                                                                                 |
| 3 | Financial volumes represent amounts traded during the                        quarter.                                                                                                                                        |

***Higher contribution from Energy Marketing increased net income by            $13 million***

Energy Marketing’s quarterly contribution was higher than a year            ago with a stronger contribution from North America, offset in part by losses in            Europe. Through optimizing storage positions and by taking advantage of volatility in            commodity price differentials, North America crude oil delivered record quarterly            results of $45 million. With the volatility in differentials we were able to move            product between markets, blend different crude qualities as well as buy and sell            at

 

 

38

 

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opportune times to generate profits. We also increased our crude oil            physical storage position compared to last year to take advantage of location and            quality differentials.

The            gains recognized by crude oil were offset in part by financial losses on basis            positions in North America natural gas. As part of our gas marketing strategy, we hold            physical transportation and storage contracts that allow us to take advantage of            pricing differences between locations (i.e. west vs. east) and time periods (i.e.            summer vs. winter). We use derivatives, which are carried at fair value, to hedge these            physical transportation positions. While the value of our North America transportation            assets increased, we are unable to recognize these value gains in our reported results            until the transportation assets are used. However, the change in fair value of the            derivatives hedging these physical positions is included in our net income for the            quarter.

Our            European team incurred losses during the first quarter compared to gains in the first            quarter of 2007. Losses were recognized primarily on our UK gas and spark spread            strategies.

At            December 31, 2007, we adopted a new inventory standard under Canadian GAAP which            requires us to carry our commodity trading inventories at fair value. As a result,            increases in commodity prices enabled us to recognize $9 million in fair value gains            during the quarter.

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

Ended March 31 |
|-----------------------|--------|------------------------------|
| (Cdn$ millions)       |   |                         | **2008** | **2007** |
| Trading Activities    |   |                         | 37 | 24 |
| Other Activities      |   |                         | 6 | 6 |
| Net Marketing Revenue |   |                         | 43 | 30 |

**Trading Activities**

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

***Fair Value of Derivative Contracts***

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

We            classify our derivatives according to the following hierarchy based on the amount of            observable inputs used to value the instruments.
|   | **•** | Level 1 – Quoted prices are available in active                        markets for identical assets or liabilities as of the reporting date.                         Active markets are those in which transactions for the asset or liability                        occur in sufficient frequency and volume to provide pricing information on                        an ongoing basis. Level 1 primarily consists of financial instruments such                        as exchange-traded derivatives and we use information from markets such as                        the New York Mercantile Exchange and the International Petroleum                        Exchange. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | **•** | Level 2 – Pricing inputs are other than quoted prices                        in active markets included in Level 1, which are either directly or                        indirectly observable as of the reported date. Level 2 valuations are based                        on inputs, including quoted forward prices for commodities, time value,                        volatility factors, and broker quotations, which can be observed or                        corroborated in the marketplace. Instruments in this category include                        non-exchange traded derivatives such as over-the-counter |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

 

39

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physical forwards and options. We obtain information from sources such            as the Natural Gas Exchange, independent price publications and over-the-counter broker            quotes.
|   | **•** | Level 3 – Valuations in this level are based on inputs                        which are less observable, unavailable or where the observable data does                        not support the majority of the instrument’s fair value. Level 3                        instruments include longer-term transactions, transactions in less active                        markets or transactions at locations for which pricing information is not                        available. In these instances, internally developed methodologies are used                        to determine fair value which primarily includes extrapolation of                        observable future prices to similar locations, similar instruments or later                        time periods. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

At            March 31, 2008, the fair value of our derivative contracts in our energy marketing            trading activities totalled $121 million. Below is a breakdown of this fair value by            valuation method and contract maturity.
| (Cdn$ millions)                                                                 | **Maturity** |
|---------------------------------------------------------------------------------|--------------|
|                                                                            | < 1 year  | 1-3 years | 4-5 years | > 5 years | Total |
| Level 1 – Actively Quoted Markets                                         | 93           | 73 | (18) | – | 148 |
| Level 2 – Based on Other Observable Pricing                        Inputs | (35)         | 32 | 10 | – | 7 |
| Level 3 – Based on Unobservable Pricing                        Inputs     | (7)          | (27) | – | – | (34) |
| Total                                                                           | 51           | 78 | (8) | – | 121 |

 

***Changes in Fair Value of Derivative Contracts***
|                                                                     |   |   |   |
|--------------------------------------------------------------------------|--------|--------|--------|
| (Cdn$ millions)                                                          |   |   | Total  |
| Fair Value at December 31, 2007                                          |   |   | 6      |
| Change in Fair Value of Contracts                                        |   |   | 31     |
| Net Losses (Gains) on Contracts Closed                                   |   |   | 96     |
| Changes in Valuation Techniques and Assumptions                        1 |   |   | (12)   |
| Fair Value at March 31, 2008                                             |   |   | 121    |

Note:
| 1 | Our valuation methodology has been applied consistently in                        each period, with the exception of two portfolio level reserves that were                        included this period to account for a) credit risk associated with                        counterparty default and b) liquidity risk in our portfolio. |
|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

**Other Activities**

We            enter into fee for service contracts related to transportation and storage of            third-party oil and gas. In addition, we earn income from our power generation            facilities at Balzac and Soderglen. We earned $6 million from these activities in the            first quarter (2007 – $6 million).

**CHEMICALS**

***Lower Chemicals contribution decreased net income by $18            million***

North American sodium chlorate sales volumes increased 5% from a year            ago, while chlor-alkali sales volumes were consistent. The increase in sales volumes            was partially offset by lower chlor-alkali prices compared to the first quarter of            2007. Our operations in Brazil remain strong as a result of continued demand from            Aracruz Cellulose, our primary customer in Brazil. Higher chlor-alkali sales volumes            and prices; however, were offset by a decrease in chlorate prices in Brazil.

During the quarter, we successfully completed the expansion of our plant            at Brandon, increasing capacity by 12%. Chemicals net income includes foreign exchange            losses of $6 million on Canexus US-dollar denominated debt. Canexus also accrued            severance costs of $7 million during the quarter relating to a new technology            conversion project currently underway in the North Vancouver plant, which will result            in staff reductions following completion in 2010.

 

40

 

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**CORPORATE EXPENSES**

**General and Administrative (G&A)**
|                                                                                      |   | Three Months

Ended March 31 |
|-------------------------------------------------------------------------------------------|--------|------------------------------|
| (Cdn$ millions)                                                                           |   |                         | **2008** | **2007** |
| General and Administrative Expense before Stock-Based                        Compensation |   |                         | 96 | 86 |
| Stock-Based Compensation                        1                                         |   |                         | (41) | 116 |
| Total General and Administrative Expense                                                  |   |                         | 55 | 202 |

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

***Lower G&A costs increased quarterly net income by $147            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, a 5% decrease in our share price since the end of 2007 created a recovery of            stock-based compensation expense of $41 million. This decrease compared to a 10%            increase in our share price in the first quarter of 2007. Cash expense related to our            stock-based compensation programs was $18 million during the quarter as compared to $72            million in the first quarter of 2007. Other G&A expense increased as we incurred            additional employee costs from expanding our oil and gas operations            internationally.

**Interest and Financing Costs**
|                       |   | Three Months

Ended March 31 |
|----------------------------|--------|------------------------------|
| (Cdn$ millions)            |   |                         | **2008** | **2007** |
| Interest                   |   |                         | 80 | 86 |
| Less: Capitalized Interest |   |                         | (53) | (38) |
| Net Interest Expense       |   |                         | 27 | 48 |

***Lower interest expense increased net income by $21            million***

Our            financing costs decreased $6 million from the first quarter of 2007 as cash generated            from operations was used to reduce borrowings on our debt facilities. Capitalized            interest on our Long Lake development project increased $13 million from the same            period in 2007 and we have capitalized interest on our Ettrick project in the North            Sea. Both projects are expected to be completed later this year, at which time our net            interest expense should increase.

**Income Taxes**
|                             |   | Three Months

Ended March 31 |
|----------------------------------|--------|------------------------------|
| (Cdn$ millions)                  |   |                         | **2008** | **2007** |
| Current                          |   |                         | 392 | 60 |
| Future                           |   |                         | 77 | 35 |
| Total Provision for Income Taxes |   |                         | 469 | 95 |
|                             |   |                         |   |   |
| Effective Tax Rate (%)           |   |                         | 43% | 43% |

***Higher taxes decreased net income by $374 million, while the            effective tax rate remained unchanged at 43%***

While our effective tax rate remains unchanged from the first quarter of            2007, the total provision for income taxes has increased $374 million as a result of            higher earnings. Strong Buzzard production, combined with high commodity prices,            created a provision for taxes of $359 million in the UK as compared to $75 million for            the same period last year. Our income tax provision also includes current taxes in            Yemen, the United States and Colombia.

 

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**Other**
|                                            |   | Three Months

Ended March 31 |
|-------------------------------------------------|--------|------------------------------|
| (Cdn$ millions)                                 |   |                         | **2008** | **2007** |
| Decrease in Fair Value of Crude Oil Put Options |   |                         | – | (16) |

            During the first quarter of 2008, we purchased put options on 70,000 bbls/d of our 2009            crude oil production. These options establish a Dated Brent floor price of US$60/bbl on            these volumes, are settled annually and provide a base level of price protection            without limiting our upside to higher prices. The put options were purchased for $14            million and are carried at fair value. At March 31, 2008, the options had a fair value            of $14 million. In the first quarter of 2007, we recorded a loss of $16 million on            crude oil put options purchased in the second quarter of 2006 for our 2007            production.

 

 

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**LIQUIDITY**

**Capital Structure**
|                            | March 31 | December 31 |
|---------------------------------|----------|-------------|
| (Cdn$ millions)                 | **2008** | **2007**    |
| **Net Debt**1                   |     |        |
| Bank Debt                       | 218      | 413         |
| Public Senior Notes             | 3,907    | 3,758       |
| Senior Debt                     | 4,125    | 4,171       |
| Subordinated Debt               | 458      | 439         |
| Total Debt                      | 4,583    | 4,610       |
| Less: Cash and Cash Equivalents | (524)    | (206)       |
| **Total Net Debt**              | 4,059    | 4,404       |
|                            |     |        |
| **Shareholders’ Equity**2 | 6,286    | 5,610       |

Notes:
| 1 | Includes all of our debt and is calculated as long-term debt                        and short-term borrowings less cash and cash equivalents.                                                                                                                                                                                                                                                                                 |
|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2 | At March 31, 2008, there were 529,439,432 common shares and                        US$460 million of unsecured subordinated securities outstanding. These                        subordinated securities may be redeemed by issuing common shares at our                        option after November 8, 2008. The number of shares issuable depends on the                        common share price on the redemption date. |

**Net Debt**

Our            net debt levels are directly related to our operating cash flows and our capital            expenditure activities. Changes in net debt are related to:
| (Cdn$ millions)                                                                            |   |    |
|--------------------------------------------------------------------------------------------|--------|---------|
| Capital Investment                                                                         |   | 786     |
| Cash Flow from Operating Activities                                                        |   | (1,168) |
| Excess of Cash Flow over Capital Investment                                                |   | (382)   |
|                                                                                       |   |    |
| Dividends on Common Shares                                                                 |   | 13      |
| Issue of Common Shares                                                                     |   | (26)    |
| Foreign Exchange Translation of US-dollar Denominated Debt                        and Cash |   | 160     |
| Other                                                                                      |   | (110)   |
| Decrease in Net Debt                                                                       |   | (345)   |

**Change in Working Capital**
|                                     | March 31 | December 31 | Increase/  |
|------------------------------------------|----------|-------------|------------|
| (Cdn$ millions)                          | **2008** | **2007**    | (Decrease) |
| Cash and Cash Equivalents                | 524      | 206         | 318        |
| Restricted Cash                          | 75       | 203         | (128)      |
| Accounts Receivable                      | 4,041    | 3,502       | 539        |
| Inventories and Supplies                 | 755      | 659         | 96         |
| Future Income Tax Assets                 | 25       | 18          | 7          |
| Accounts Payable and Accrued Liabilities | (4,894)  | (4,180)     | (714)      |
| Current Portion of Long-Term Debt        | (125)    | -           | (125)      |
| Other                                    | 4        | 4           | -          |
| Net Working Capital                      | 405      | 412         | (7)        |

            Generally, our receivables and payables are higher as a result of record commodity            prices. The higher commodity prices at the end of the first quarter resulted in a $500            million increase in our crude oil and marketing receivables. Natural gas inventory held            by our marketing group was higher than year end despite a reduction in storage volumes,            as natural gas prices increased significantly in the first quarter. Additionally,            strong Buzzard production, combined with higher commodity prices resulted in a higher            current tax provision at the end of the quarter. These increases were partially offset            by reducing the accruals for our stock-based compensation obligations as a result of a            lower share price and exercises throughout 2007.

During the quarter, the Canadian dollar weakened slightly relative to            the end of 2007. This impacted our US-dollar denominated working capital by increasing            our accounts receivable, inventory and accounts payable approximately $90 million, $10            million and $80 million, respectively.

 

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**Outlook for Remainder of 2008**

We            expect our 2008 full year production will average between 260,000 and 280,000 boe/d            before royalties. We expect to generate over $3 billion in cash flow (before            remediation and geological and geophysical expenditures) after cash taxes of            approximately $1 billion in 2008, assuming the following for the remainder of the            year:
|                                                 |   |                          |
|------------------------------------------------------|--------|-------------------------------|
| WTI(US$/bbl)                                         |   | 70.00 1                       |
| NYMEX natural gas(US$/mmbtu)                         |   | 6.75                        2 |
| Oil & Gas and Syncrude Operating Costs(Cdn$/boe) |   | 10.00          |
| US to Canadian dollar exchange rate                  |   | 0.97           |

Notes:
| 1 | The WTI forward commodity price for the remainder of 2008 at                        April 28, 2008 is US$116.39/bbl.    |
|---|-------------------------------------------------------------------------------------------------------------------------|
| 2 | The NYMEX forward commodity price for the remainder of 2008                        at April 28, 2008 is US$11.58/mmbtu. |

            The majority of our oil and gas production is sold under short-term contracts, exposing            us to short-term price movements. A US$1/bbl change in WTI above US$50 increases or            decreases our 2008 cash flow by approximately $42 million ($33 million for the            remainder of the year). Our exposure to a $0.01 change in the US to Canadian dollar            exchange rate increases or decreases our 2008 cash flow by approximately $45 million            ($30 million for the remainder of the year).

To            date, we have incurred almost a third of our planned 2008 capital investment program,            which is consistent with our plans. Our 2008 capital investment program is focused on            completing the commissioning of the Long Lake upgrader and advancing future phases of            Long Lake, bringing our Ettrick development in the North Sea on stream and investing in            exploration opportunities in our growth areas.

We            generally rely on operating cash flow to fund capital requirements and provide            liquidity. Given the long cycle-time of some of our development projects and volatile            commodity prices, it is not unusual in any year for capital expenditures to exceed our            cash flow. Accordingly, we maintain significant undrawn committed credit facilities. At            March 31, 2008, we had undrawn, unsecured term credit facilities of US$3 billion in            place that are available until 2012, of which $296 million was used to support            outstanding letters of credit. We also had approximately $666 million of undrawn,            uncommitted, unsecured credit facilities, of which $44 million was used to support            outstanding letters of credit. In June 2008, we expect to repay $125 million of medium            term notes that become due using our cash on hand.

In            the first quarter, we declared common share dividends of $0.025 per share. In April            2008, we declared a common share dividend of $0.05 per share, payable July 1,            2008.

**Contractual Obligations, Commitments and Guarantees**

We            have assumed various contractual obligations and commitments in the normal course of            our operations and financing activities. We have included these obligations and            commitments in our MD&A in our 2007 Annual Report on Form 10-K. During the quarter,            our international oil and gas operations entered into additional work commitments of            $205 million related to a drilling rig and seismic purchases in the North Sea. In            addition, the development of the Usan field, offshore Nigeria received all the            necessary approvals to proceed during the quarter. As a result, we entered into            additional work commitments related to the development of the Usan field totaling $800            million. There have been no other significant developments since year end.

**CONTINGENCIES**

There are a number of lawsuits and claims pending, the ultimate results            of which cannot be ascertained at this time. We record costs as they are incurred or            become determinable. We believe the resolution of these matters would not have a            material adverse effect on our liquidity, consolidated financial position or results of            operations. These matters are described in*Legal            Proceedings*in Item 3 contained in our 2007 Annual Report on            Form 10-K. There have been no significant developments since year end.

**NEW            ACCOUNTING PRONOUNCEMENTS**

***Canadian Pronouncements***

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

In            February 2008, the AcSB issued Section 3064,*Goodwill and            Intangible Assets*and amended Section 1000,*Financial Statement Concepts*clarifying the            criteria for the recognition of assets, intangible assets and internally developed            intangible assets. Items that no longer meet the definition of an asset are no longer            recognized with assets. The standard is effective for

 

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fiscal years beginning on or after October 1, 2008 and early adoption is            permitted. We are currently evaluating the impact these sections will have on our            results of operations or financial position.

***US Pronouncements***

Effective December 31, 2006, we adopted the recognition and disclosure            provisions of the Financial Accounting Standards Board (FASB) Statement 158,*Employers’ Accounting for Defined Benefit Pension and Other            Postretirement Plans*. This statement also requires            measurement of the funded status of a plan as of the balance sheet date. The            measurement provisions of the statement are effective for fiscal years ending after            December 15, 2008. We do not expect the adoption of the change in measurement date in            2008 to have a material impact on our results of operations or financial            position.

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

In            December 2007, FASB issued Statement 160,*Non-controlling            Interests In Consolidated Financial Statements*, an amendment            of ARB. No51. This statement clarifies that a non-controlling interest in a subsidiary            is an ownership interest in the consolidated entity that should be reported as equity            in the consolidated financial statements. This statement is effective for fiscal years            beginning on or after December 15, 2008. We do not expect the adoption of this            statement to have a material impact on our results of operations or financial            position.

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

**EQUITY SECURITY REPURCHASES**

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

**SUMMARY OF QUARTERLY RESULTS**
|                                | Three Months Ended |
|-------------------------------------|--------------------|
|                                | **2006**           | **2007** | **2008** |
| (Cdn$ millions)                     | Jun                | Sept | Dec | Mar | Jun | Sep | Dec | Mar |
| Net Sales                           | 1,039              | 997 | 920 | 1,140 | 1,399 | 1,446 | 1,598 | 1,870 |
|                                |               |   |   |   |   |   |   |   |
| Net Income                          | 408                | 199 | 77 | 121 | 368 | 403 | 194 | 630 |
|                                |               |   |   |   |   |   |   |   |
| Earnings per Common Share ($/share) |               |   |   |   |   |   |   |   |
| Basic                               | 0.78               | 0.38 | 0.15 | 0.23 | 0.70 | 0.77 | 0.37 | 1.19 |
| Diluted                             | 0.76               | 0.37 | 0.14 | 0.22 | 0.68 | 0.75 | 0.36 | 1.17 |

 

 

45

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**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

Certain statements in this report, including those appearing in            *Management’s Discussion and Analysis of Financial Condition and            Results of Operations*, constitute “forward-looking            statements” (within the meaning of the United States            *Private Securities Litigation Reform Act of            1995*, Section 21E of the United States            *Securities Exchange Act of 1934*, as            amended, and Section 27A of the United States *Securities Act            of 1933,* as amended) or “forward-looking            information” (within the meaning of applicable Canadian securities legislation).            Such statements or information (together “forward-looking statements”) are            generally identifiable by the terminology used such as            “*anticipate”, “believe”,            “intend”, “plan”*,            “*expect”*,            “*estimate”*,            “*budget”, “outlook”,*            “*forecast” *  or other similar            words, and include statements relating to or associated with individual wells, regions            or projects. Any statements regarding the following are forward-looking            statements:
| **•** | future crude oil, natural gas or chemicals                        prices; |
|------------|---------------------------------------------------------------------------|
| **•** | future production levels; |
|------------|---------------------------|
| **•** | future cost recovery oil revenues from our Yemen                        operations; |
|------------|-------------------------------------------------------------------------------------|
| **•** | future capital expenditures and their allocation to                        exploration and development activities; |
|------------|--------------------------------------------------------------------------------------------------------------------|
| **•** | future earnings; |
|------------|------------------|
| **•** | future asset dispositions; |
|------------|----------------------------|
| **•** | future sources of funding for our capital                        program; |
|------------|---------------------------------------------------------------------------|
| **•** | future debt levels; |
|------------|---------------------|
| **•** | possible commerciality; |
|------------|-------------------------|
| **•** | development plans or capacity expansions; |
|------------|-------------------------------------------|
| **•** | future ability to execute dispositions of assets or                        businesses; |
|------------|----------------------------------------------------------------------------------------|
| **•** | future cash flows and their uses; |
|------------|-----------------------------------|
| **•** | future drilling of new wells; |
|------------|-------------------------------|
| **•** | ultimate recoverability of reserves or resources; |
|------------|---------------------------------------------------|
| **•** | expected finding and development costs; |
|------------|-----------------------------------------|
| **•** | expected operating costs; |
|------------|---------------------------|
| **•** | future demand for chemicals products; |
|------------|---------------------------------------|
| **•** | estimates on a per share basis; |
|------------|---------------------------------|
| **•** | sales; |
|------------|--------|
| **•** | future expenditures and future allowances relating to                        environmental matters; |
|------------|-----------------------------------------------------------------------------------------------------|
| **•** | dates by which certain areas will be developed or will come                        on-stream; and |
|------------|---------------------------------------------------------------------------------------------------|
| **•** | 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:
| **•** | market prices for oil and gas and chemicals                        products; |
|------------|------------------------------------------------------------------------------|
| **•** | our ability to explore, develop, produce and transport crude                        oil and natural gas to markets; |
|------------|---------------------------------------------------------------------------------------------------------------------|
| **•** | the results of exploration and development drilling and                        related activities; |
|------------|----------------------------------------------------------------------------------------------------|
| **•** | volatility in energy trading markets; |
|------------|---------------------------------------|
| **•** | foreign-currency exchange rates; |
|------------|----------------------------------|
| **•** | economic conditions in the countries and regions in which we                        carry on business; |
|------------|--------------------------------------------------------------------------------------------------------|
| **•** | governmental actions including changes to taxes or                        royalties, changes in environmental and other laws and                        regulations; |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **•** | renegotiations of contracts; |
|------------|------------------------------|
| **•** | results of litigation, arbitration or regulatory                        proceedings; and |
|------------|------------------------------------------------------------------------------------------|
| **•** | political uncertainty, including actions by terrorists,                        insurgent or other groups, or other armed conflict, including conflict                        between states. |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

These items and their possible impact are discussed more fully in the            sections titled*Risk Factors*in Item            1A and*Quantitative and Qualitative Disclosures About Market            Risk*in Item 7A of our 2007 Annual Report on Form 10-K. The            impact of any one risk, uncertainty or factor on a particular forward-looking statement            is not determinable with certainty as these factors are interdependent, and            management’s future course of action would depend on our assessment of all            information at that time.

Although we believe that the expectations conveyed by the            forward-looking statements are reasonable based on information available to us on the            date such forward-looking statements were made, no assurances can be given as to future            results, levels

 

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of            activity and achievements. Undue reliance should not be placed on the statements            contained herein, which are made as of the date hereof and, except as required by law,            we undertake no obligation to update publicly or revise any forward-looking statements,            whether as a result of new information, future events or otherwise. The forward-looking            statements contained herein are expressly qualified by this cautionary statement.
| **Item 3.** | **Quantitative and Qualitative Disclosures about Market                        Risk** |
|-------------|---------------------------------------------------------------------------------------|

We            are exposed to normal market risks inherent in the oil and gas and chemicals business,            including commodity price risk, foreign-currency rate risk, interest rate risk and            credit risk. We recognize these risks and manage our operations to minimize our            exposures to the extent practical. The information presented on market risks in Item 7A            on pages 72 – 74 in our 2007 Annual Report on Form 10-K has not changed            materially since December 31, 2007.
| **Item 4.** | **Controls and Procedures** |
|-------------|-----------------------------|

**EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES**

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

 

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

**CHANGES IN INTERNAL CONTROLS**

We            have continually had in place systems relating to internal control over financial            reporting. There has not been any change in the Company's internal control over            financial reporting during the first quarter of 2008 that has materially affected, or            is reasonably likely to materially affect, the Company's internal control over            financial reporting.

 

47

 

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**PART II**

 
| **Item 4.** | **Submission of Matters to a Vote of Security                        Holders** |
|-------------|--------------------------------------------------------------------------------|

 

None.

             
| **Item 6.** | **Exhibits** |
|-------------|--------------|

 
| 31.1 | Certification of Chief Executive Officer pursuant to Section                        302 of the Sarbanes-Oxley Act of 2002. |
|------|----------------------------------------------------------------------------------------------------------------------------|
| 31.2 | Certification of Chief Financial Officer pursuant to Section                        302 of the Sarbanes-Oxley Act of 2002. |
|------|----------------------------------------------------------------------------------------------------------------------------|
| 32.1 | Certification of periodic report by Chief Executive Officer                        pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of                        the Sarbanes-Oxley Act of 2002. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.2 | Certification of periodic report by Chief Financial Officer                        pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of                        the Sarbanes-Oxley Act of 2002. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities            Exchange Act of 1934, the Company has duly caused this report to be signed on its            behalf by the undersigned, thereunto duly authorized, on May 1, 2008.

 

 
|   |   | **NEXEN INC.**                                                                       |
|--------|--------|--------------------------------------------------------------------------------------|
|   |   | /s/ Charles W. Fischer                                                               |
|   |   | Charles W. FischerPresident and Chief Executive Officer(Principal Executive Officer) |

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

 

 

 

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