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


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q


[X]       QUARTERLY  REPORT  PURSUANT  TO SECTION 13 OR 15(D) OF THE  SECURITIES
          EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2008

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

                          COMMISSION FILE NUMBER 1-6702


                                [GRAPHIC OMITTED]



                                   NEXEN INC.

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

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


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

                Yes    X        No
                     -----         -----

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

     Large accelerated filer   X        Accelerated filer
                             -----                        ------
     Non-Accelerated filer              Smaller reporting company
                             -----                                ------

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

                Yes             No   X
                    -----          -----

On  September  30,  2008,  there  were  520,969,101  common  shares  issued  and
outstanding.


<PAGE>


                                   NEXEN INC.
                                      INDEX

PART I              FINANCIAL INFORMATION                                  PAGE

          Item 1.   Unaudited Consolidated Financial Statements               3
          Item 2.   Management's Discussion and Analysis of Financial
                    Condition and Results of Operations                      30
          Item 3.   Quantitative and Qualitative Disclosures about
                    Market Risk                                              52
          Item 4.   Controls and Procedures                                  52

PART II             OTHER INFORMATION

          Item 1.   Legal Proceedings                                        53
          Item 2.   Unregistered Sales of Equity Securities and
                    Use of Proceeds                                          53
          Item 4.   Submission of Matters to a Vote of Security Holders      53
          Item 6.   Exhibits                                                 53

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

SPECIAL NOTE TO CANADIAN INVESTORS

Nexen is a US Securities and Exchange  Commission  (SEC)  registrant and a Form
10-K and related forms filer. Therefore,  our reserves estimates and securities
regulatory  disclosures  generally follow SEC  requirements.  In 2004,  certain
Canadian regulatory  authorities adopted NATIONAL INSTRUMENT 51-101 - STANDARDS
OF  DISCLOSURE  FOR OIL AND GAS  ACTIVITIES  (NI 51-101) which  prescribe  that
Canadian  companies follow certain standards for the preparation and disclosure
of reserves and related  information.  We have been granted certain  exemptions
from NI 51-101.  Please refer to the SPECIAL NOTE TO CANADIAN INVESTORS on page
76 of our 2007 10-K.

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

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

/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 September 30, 2008,  the noon-day  exchange rate was US$0.9435 for Cdn$1.00,
as reported by the Bank of Canada.

<PAGE>

                                     PART I


ITEM 1.  UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

                                TABLE OF CONTENTS

Unaudited Consolidated Statement of Income
for the Three and Nine Months Ended September 30, 2008 and 2007             4

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

Unaudited Consolidated Statement of Cash Flows
for the Three and Nine Months Ended September 30, 2008 and 2007             6

Unaudited Consolidated Statement of Shareholders' Equity
for the Three and Nine Months Ended September 30, 2008 and 2007             7

Unaudited Consolidated Statement of Comprehensive Income
for the Three and Nine Months Ended September 30, 2008 and 2007             7

Notes to Unaudited Consolidated Financial Statements                        8

<PAGE>

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

                                                                                  Three Months              Nine Months
                                                                               Ended September 30        Ended September 30
(Cdn$ millions, except per share amounts)                                       2008         2007         2008          2007
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>          <C>          <C>           <C>
Revenues and Other Income
     Net Sales                                                                 2,213        1,446        6,154         3,985
     Marketing and Other (Note 16)                                               131          226          387           773
                                                                         ----------------------------------------------------
                                                                               2,344        1,672        6,541         4,758
                                                                         ----------------------------------------------------
Expenses
     Operating                                                                   341          283          998           862
     Depreciation, Depletion, Amortization and Impairment                        386          349        1,084         1,043
     Transportation and Other                                                    291          238          691           694
     General and Administrative (Note 17)                                       (308)           7          165           247
     Exploration                                                                 112           67          245           221
     Interest (Note 7)                                                            16           40           59           134
                                                                         ----------------------------------------------------
                                                                                 838          984        3,242         3,201
                                                                         ----------------------------------------------------

Income before Income Taxes                                                     1,506          688        3,299         1,557
                                                                         ----------------------------------------------------

Provision for Income Taxes
     Current                                                                     (26)         136          817           347
     Future                                                                      645          142          583           303
                                                                         ----------------------------------------------------
                                                                                 619          278        1,400           650
                                                                         ----------------------------------------------------

Net Income before Non-Controlling Interests                                      887          410        1,899           907
     Less: Net Income Attributable to Non-Controlling Interests                   (1)          (7)          (3)          (15)
                                                                         ----------------------------------------------------

Net Income                                                                       886          403        1,896           892
                                                                         ====================================================

Earnings Per Common Share ($/share)
     Basic (Note 14)                                                            1.68         0.77        3.59           1.69
                                                                         ====================================================

     Diluted (Note 14)                                                          1.66         0.75        3.53           1.66
                                                                         ====================================================
</TABLE>

See accompanying notes to the Unaudited Consolidated Financial Statements.


                                       4
<PAGE>

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

                                                                                             September 30       December 31
(Cdn$ millions, except share amounts)                                                                2008              2007
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>               <C>
Assets
   Current Assets
      Cash and Cash Equivalents                                                                     1,772               206
      Restricted Cash                                                                                  65               203
      Accounts Receivable (Note 2)                                                                  4,369             3,502
      Inventories and Supplies (Note 3)                                                               813               659
      Other                                                                                           163                89
                                                                                           ----------------------------------
         Total Current Assets                                                                       7,182             4,659
                                                                                           ----------------------------------

   Property, Plant and Equipment
      Net of Accumulated Depreciation, Depletion, Amortization and
         Impairment of $8,566 (December 31, 2007 - $7,195)                                         13,968            12,498
   Future Income Tax Assets                                                                           348               268
   Deferred Charges and Other Assets (Note 4)                                                         370               324
   Goodwill                                                                                           347               326
                                                                                           ----------------------------------
Total Assets                                                                                       22,215            18,075
                                                                                           ==================================

Liabilities and Shareholders' Equity
   Current Liabilities
      Accounts Payable and Accrued Liabilities (Note 6)                                             4,475             4,135
      Income Taxes Payable                                                                             70                45
      Accrued Interest Payable                                                                         67                54
      Dividends Payable                                                                                27                13
                                                                                           ----------------------------------
         Total Current Liabilities                                                                  4,639             4,247
                                                                                           ----------------------------------

   Long-Term Debt (Note 7)                                                                          5,686             4,610
   Future Income Tax Liabilities                                                                    2,507             2,290
   Asset Retirement Obligations (Note 9)                                                              925               792
   Deferred Credits and Other Liabilities (Note 10)                                                 1,136               459
   Non-Controlling Interests                                                                           59                67

   Shareholders' Equity (Note 13)
      Common Shares, no par value
         Authorized:   Unlimited
         Outstanding:  2008 - 520,969,101 shares
                       2007 - 528,304,813 shares                                                      963               917
      Contributed Surplus                                                                               2                 3
      Retained Earnings                                                                             6,531             4,983
      Accumulated Other Comprehensive Loss                                                           (233)             (293)
                                                                                           ----------------------------------
         Total Shareholders' Equity                                                                 7,263             5,610
                                                                                           ----------------------------------
   Commitments, Contingencies and Guarantees (Note 18)

                                                                                           ----------------------------------
Total Liabilities and Shareholders' Equity                                                         22,215            18,075
                                                                                           ==================================
</TABLE>

See accompanying notes to the Unaudited Consolidated Financial Statements.



                                       5
<PAGE>

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

                                                                                      Three Months            Nine Months
                                                                                    Ended September 30     Ended September 30
(Cdn$ millions)                                                                      2008        2007       2008         2007
------------------------------------------------------------------------------- ---------------------------------------------
<S>                                                                               <C>           <C>        <C>         <C>
Operating Activities
   Net Income                                                                         886         403      1,896          892
   Charges and Credits to Income not Involving Cash (Note 15)                         693         404      1,547        1,286
   Exploration Expense                                                                112          67        245          221
   Changes in Non-Cash Working Capital  (Note 15)                                    (840)        253       (468)         (19)
   Other                                                                              117         (30)        79         (253)
                                                                                ---------------------------------------------
                                                                                      968       1,097      3,299        2,127

Financing Activities
   Repayment of Short-Term Borrowings, Net                                             (4)        (60)        (4)        (152)
   Proceeds from (Repayment of) Term Credit Facilities, Net                         1,031         188        803         (767)
   Repayment of Medium-Term Notes (Note 7)                                              -        (150)      (125)        (150)
   Proceeds from Long-Term Notes                                                        -           -          -        1,660
   Proceeds from (Repayment of) Canexus Term Credit Facilities, Net                    (9)         12        (19)          45
   Proceeds from Canexus Notes (Note 7)                                                 -           -         51            -
   Dividends on Common Shares                                                         (26)        (13)       (66)         (39)
   Issue of Common Shares and Exercise of Tandem Options                                8           4         48           44
   Repurchase of Common Shares for Cancellation (Note 13)                            (300)          -       (300)           -
   Changes in Non-Cash Working Capital (Note 15)                                       10           -         10            -
   Other                                                                               (2)         (8)       (11)         (43)
                                                                                ---------------------------------------------
                                                                                      708         (27)       387          598

Investing Activities
   Capital Expenditures
       Exploration and Development                                                   (689)       (772)    (2,064)      (2,309)
       Proved Property Acquisitions                                                     -        (104)        (2)        (150)
       Chemicals, Corporate and Other                                                 (36)        (25)       (83)         (72)
   Changes in Restricted Cash                                                         196        (103)       143          (21)
   Changes in Non-Cash Working Capital (Note 15)                                      (66)        (33)      (120)          11
   Other                                                                               36          (1)       (61)         (15)
                                                                                ---------------------------------------------
                                                                                     (559)     (1,038)    (2,187)      (2,556)

Effect of Exchange Rate Changes on Cash and Cash Equivalents                           41         (18)        67          (98)
                                                                                ---------------------------------------------

Increase in Cash and Cash Equivalents                                               1,158          14      1,566           71

Cash and Cash Equivalents - Beginning of Period                                       614         158        206          101
                                                                                ---------------------------------------------

Cash and Cash Equivalents - End of Period                                           1,772         172      1,772          172
                                                                                =============================================
</TABLE>

 See accompanying notes to the Unaudited Consolidated Financial Statements.


                                       6
<PAGE>


NEXEN INC.
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30

<TABLE>
<CAPTION>
                                                                                         Three Months              Nine Months
                                                                                       Ended September 30      Ended September 30
(Cdn$ millions)                                                                         2008       2007        2008         2007
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>        <C>         <C>          <C>
Common Shares
   Balance at Beginning of Period                                                        972        893         917          821
      Issue of Common Shares                                                               8          3          32           28
      Proceeds from Tandem Options Exercised for Shares                                    -          1          16           16
      Accrued Liability Relating to Tandem Options Exercised for Shares                    1         (6)         16           26
      Repurchased under Normal Course Issuer Bid (Note 13)                               (18)         -         (18)           -
                                                                                   ----------------------------------------------
   Balance at End of Period                                                              963        891         963          891
                                                                                   ==============================================

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

Retained Earnings
   Balance at Beginning of Period                                                      5,953      4,435       4,983        3,972
      Net Income                                                                         886        403       1,896          892
      Dividends on Common Shares (Note 13)                                               (26)       (13)        (66)         (39)
      Repurchase of Common Shares (Note 13)                                             (282)         -        (282)           -
                                                                                   ----------------------------------------------
   Balance at End of Period                                                            6,531      4,825       6,531        4,825
                                                                                   ==============================================

Accumulated Other Comprehensive Loss
   Balance at Beginning of Period                                                        (274)     (253)       (293)        (161)
      Opening Derivatives Designated as Cash Flow Hedges                                   -          -           -           61
      Other Comprehensive Income/(Loss)                                                   41        (51)         60         (204)
                                                                                   ----------------------------------------------
   Balance at End of Period                                                             (233)      (304)       (233)        (304)
                                                                                   ==============================================

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

                                                                                         THREE MONTHS            NINE MONTHS
                                                                                      ENDED SEPTEMBER 30       ENDED SEPTEMBER 30
(CDN$ MILLIONS)                                                                         2008       2007        2008         2007
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>         <C>        <C>           <C>
Net Income                                                                               886        403       1,896          892
   Other Comprehensive Income, Net of Income Taxes:
      Foreign Currency Translation Adjustment:
         Net Gains (Losses) on Investment in Self-Sustaining Foreign Operations          221       (327)        365         (822)
         Net Gains (Losses) on Hedges of Self-Sustaining Foreign Operations (1)         (180)       276        (305)         679
      Cash Flow Hedges:
         Realized Mark-to-Market Gains Recognized in Net Income                            -          -           -          (61)
                                                                                   ----------------------------------------------
      Other Comprehensive Income/(Loss)                                                   41        (51)         60         (204)
                                                                                   ----------------------------------------------
Comprehensive Income                                                                     927        352       1,956          688
                                                                                   ==============================================
</TABLE>

(1)  Net of income tax recovery for the three months ended September 30, 2008 of
     $26 million  (2007 - net of income tax expense of $47  million)  and net of
     income tax  recovery for the nine months  ended  September  30, 2008 of $45
     million (2007 - net of income tax expense of $113 million).


See accompanying notes to the Unaudited Consolidated Financial Statements.


                                       7
<PAGE>

NEXEN INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CDN$ MILLIONS, EXCEPT AS NOTED

1. ACCOUNTING POLICIES

Our Unaudited  Consolidated Financial Statements are prepared in accordance with
Canadian  Generally  Accepted  Accounting   Principles  (GAAP).  The  impact  of
significant differences between Canadian and United States GAAP on the Unaudited
Consolidated  Financial  Statements  is  disclosed in Note 20. In the opinion of
management,   the  Unaudited   Consolidated  Financial  Statements  contain  all
adjustments of a normal and recurring  nature  necessary to present fairly Nexen
Inc.'s (Nexen, we or our) financial  position at September 30, 2008 and December
31, 2007 and the results of our  operations and our cash flows for the three and
nine months ended September 30, 2008 and 2007.

We make estimates and assumptions that affect the reported amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  Unaudited  Consolidated  Financial  Statements,  and  revenues and expenses
during the  reporting  period.  Our  management  reviews  these  estimates on an
ongoing basis,  including those related to accruals,  litigation,  environmental
and asset  retirement  obligations,  income  taxes,  fair  values of  derivative
contract assets and liabilities and determination of proved reserves. Changes in
facts and  circumstances  may result in revised estimates and actual results may
differ from these  estimates.  The results of operations  and cash flows for the
three and nine months ended September 30, 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 the  Canadian  Institute of  Chartered  Accountants  (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 nine
months of 2007 have not been restated for this change in accounting policy.

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

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

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


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


                                       8
<PAGE>

<TABLE>
<CAPTION>
2. ACCOUNTS RECEIVABLE

                                                                 September 30         December 31
                                                                         2008                2007
----------------------------------------------------------------------------------------------------
<S>                                                                   <C>                 <C>
Trade
     Marketing                                                          3,083               2,501
     Oil and Gas                                                        1,046                 819
     Chemicals and Other                                                   56                  60
                                                            ----------------------------------------
                                                                        4,185               3,380
Non-Trade                                                                 227                 132
                                                            ----------------------------------------
                                                                        4,412               3,512
Allowance for Doubtful Receivables                                        (43)                (10)
                                                            ----------------------------------------
Total                                                                   4,369               3,502
                                                            ========================================

3. INVENTORIES AND SUPPLIES

                                                                 September 30         December 31
                                                                         2008                2007
----------------------------------------------------------------------------------------------------
Finished Products
     Marketing                                                            721                 577
     Oil and Gas                                                           18                  14
     Chemicals and Other                                                   18                  13
                                                            ----------------------------------------
                                                                          757                 604
Work in Process                                                             4                   3
Field Supplies                                                             52                  52
                                                            ----------------------------------------
Total                                                                     813                 659
                                                            ========================================

4. DEFERRED CHARGES AND OTHER ASSETS

                                                                 September 30         December 31
                                                                         2008                2007
----------------------------------------------------------------------------------------------------
Long-Term Energy Marketing Derivative Contracts (Note 11)                 217                 248
Long-Term Capital Prepayments                                              77                   9
Crude Oil Put Options and Natural Gas Swaps (Note 11)                      15                   -
Asset Retirement Remediation Fund                                          13                  13
Other                                                                      48                  54
                                                            ----------------------------------------
Total                                                                     370                 324
                                                            ========================================
</TABLE>

5. SUSPENDED WELL COSTS

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

<TABLE>
<CAPTION>
                                                                                     Nine Months Ended           Year Ended
                                                                                          September 30          December 31
                                                                                                  2008                 2007
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>                  <C>
Balance at Beginning of Period                                                                     326                  226
     Additions to Capitalized Exploratory Well Costs Pending the
       Determination of Proved Reserves                                                            146                  215
     Capitalized Exploratory Well Costs Charged to Expense                                         (27)                 (10)
     Transfers to Wells, Facilities and Equipment Based on
       Determination of Proved Reserves                                                            (31)                 (74)
     Effects of Foreign Exchange                                                                    14                  (31)
                                                                                   ------------------------------------------
Balance at End of Period                                                                           428                  326
                                                                                   ------------------------------------------
</TABLE>


                                       9
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                          September 30          December 31
                                                                                                  2008                 2007
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>                  <C>
Capitalized for a Period of One Year or Less                                                       150                  202
Capitalized for a Period of Greater than One Year                                                  278                  124
                                                                                   ------------------------------------------
Balance at End of Period                                                                           428                  326
                                                                                   ==========================================
Number of Projects that have Exploratory Well Costs Capitalized for a
Period Greater than One Year                                                                         8                    5
                                                                                   ==========================================
</TABLE>

As at September 30, 2008, we have  exploratory  costs that have been capitalized
for more than one year  relating to our interests in two  exploratory  blocks in
the Gulf of Mexico ($102 million), our coalbed methane exploratory activities in
Canada ($92 million),  three exploratory  blocks in the North Sea ($56 million),
our  interest in an  exploratory  block,  offshore  Nigeria  ($19  million)  and
exploratory activities on Block 51 in Yemen ($9 million).  These costs relate to
projects with  successful  exploration  wells for which we have not been able to
record proved  reserves.  We are assessing all of these wells and projects,  and
are working with our partners to prepare  development  plans,  drill  additional
appraisal wells or to assess commercial viability.

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

                                                                                          September 30          December 31
                                                                                                  2008                 2007
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>                  <C>
Accrued Payables                                                                                 2,908                2,546
Energy Marketing Derivative Contracts (Note 11)                                                    723                  413
Trade Payables                                                                                     425                  578
Stock-based Compensation (Note 17)                                                                 167                  393
Other                                                                                              252                  205
                                                                                   ------------------------------------------
Total                                                                                            4,475                4,135
                                                                                   ==========================================
<CAPTION>
7. LONG-TERM DEBT AND SHORT-TERM BORROWINGS

                                                                                          September 30           December 31
                                                                                                  2008                  2007
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>                  <C>
Term Credit Facilities (US$1,000 million) (a)                                                    1,060                   211
Canexus Limited Partnership Term Credit Facilities (US$186 million) (b)                            197                   202
Medium-Term Notes, due 2008 (c)                                                                      -                   125
Canexus Notes, due 2013 (US$50 million) (d)                                                         53                     -
Notes, due 2013 (US$500 million)                                                                   530                   494
Notes, due 2015 (US$250 million)                                                                   265                   247
Notes, due 2017 (US$250 million)                                                                   265                   247
Notes, due 2028 (US$200 million)                                                                   212                   198
Notes, due 2032 (US$500 million)                                                                   530                   494
Notes, due 2035 (US$790 million)                                                                   837                   781
Notes, due 2037 (US$1,250 million)                                                               1,325                 1,235
Subordinated Debentures, due 2043 (US$460 million)                                                 488                   454
                                                                                   -------------------------------------------
                                                                                                 5,762                 4,688
Less: Unamortized Debt Issue Costs                                                                 (76)                  (78)
                                                                                   -------------------------------------------
Total                                                                                            5,686                 4,610
                                                                                   ===========================================
</TABLE>

(a) TERM CREDIT FACILITIES

We have unsecured term credit  facilities of US$3 billion  available to 2012, of
which US$1 billion was drawn at September  30, 2008  (December 31, 2007 - US$214
million). Borrowings are available as Canadian bankers' acceptances, LIBOR-based
loans,  Canadian  prime rate loans,  US-dollar  base rate loans or British pound
call-rate  loans.  Interest is payable at floating rates.  The  weighted-average
interest rate on our term credit  facilities was 3.5% for the three months ended
September  30, 2008 (2007 - 5.9%) and 3.6% for the nine months  ended  September
30, 2008 (2007 - 5.9%). At September 30, 2008, $458 million of these  facilities
were utilized to support outstanding letters of credit (December 31, 2007 - $283
million).

                                      10
<PAGE>

(b) CANEXUS LIMITED PARTNERSHIP TERM CREDIT FACILITIES

Canexus  Limited  Partnership  (Canexus)  has  committed,  secured  term  credit
facilities of $410 million  available  until 2011.  At September 30, 2008,  $197
million (US$186 million) was drawn on these facilities (December 31, 2007 - $202
million). Borrowings are available as Canadian bankers' acceptances, LIBOR-based
loans,  Canadian  prime rate loans or  US-dollar  base rate  loans.  Interest is
payable monthly at floating rates.  The term credit  facilities are secured by a
floating charge debenture over all of Canexus' assets.  The credit facility also
contains   covenants   with   respect   to   certain   financial   ratios.   The
weighted-average  interest rate on our term credit  facilities  was 4.6% for the
three months ended September 30, 2008 (2007 - 6.2%) and 4.5% for the nine months
ended September 30, 2008 (2007 - 6.2%).

(c) MEDIUM-TERM NOTES, DUE 2008

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

(d) CANEXUS NOTES, DUE 2013

During  the second  quarter  of 2008,  Canexus  issued  US$50  million of notes.
Interest is payable  quarterly  at a rate of 6.57%,  and the  principal is to be
repaid in May 2013. Canexus may redeem part or all of the notes at any time. The
redemption price will be the greater of par and an amount that provides the same
yield as a US Treasury security having a term to maturity equal to the remaining
term of the notes plus 0.20%.

(e) INTEREST EXPENSE

                                       Three Months               Nine Months
                                    Ended September 30        Ended September 30
                                     2008       2007           2008       2007
--------------------------------------------------------------------------------
Long-Term Debt                         75         80            220        244
Other                                   5          5             15         14
                                ------------------------------------------------
                                       80         85            235        258
   Less: Capitalized                  (64)       (45)          (176)      (124)
                                ------------------------------------------------
Total                                  16         40             59        134
                                ================================================

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

(f) SHORT-TERM BORROWINGS

Nexen  has  uncommitted,  unsecured  credit  facilities  of  approximately  $657
million,  none of which were drawn at September  30, 2008  (December  31, 2007 -
nil). We utilized $30 million of these facilities to support outstanding letters
of credit at September 30, 2008 (December 31, 2007 - $196 million).  Interest is
payable at floating rates. The weighted-average  interest rate on our short-term
borrowings was 3.6% for the three months ended  September 30, 2008 (2007 - 5.8%)
and 3.2% for the nine months ended September 30, 2008 (2007 - 5.8%).

8. CAPITAL DISCLOSURES

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

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

     o    maintaining  sufficient  undrawn  committed credit capacity to provide
          liquidity;

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

     o    maintaining a reasonable level of leverage; and

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

                                       11
<PAGE>

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

                                              September 30        December 31
                                                      2008               2007
-------------------------------------------------------------------------------
Net Debt (1)
  Bank Debt                                          1,257                413
  Senior Notes                                       3,956              3,758
                                            -----------------------------------
     Senior Debt                                     5,213              4,171
  Subordinated Debt                                    473                439
                                            -----------------------------------
     Total Debt                                      5,686              4,610
  Less: Cash and Cash Equivalents                   (1,772)              (206)
                                            -----------------------------------
Total Net Debt                                       3,914              4,404
                                            ===================================

Shareholders' Equity                                 7,263              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 the leverage in our capital  structure by reviewing  the ratio of net
debt to cash flow from operating activities as well as interest coverage ratios.

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

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

Our  interest  coverage  ratio  allows us to  monitor  our  ability  to fund the
interest   requirements   associated  with  our  debt.  Our  interest   coverage
strengthened  in 2008  from  12.1  times  at the end of  2007 to 18.1  times  at
September 30, 2008.

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

<TABLE>
<CAPTION>
                                                                                         Twelve Months         Twelve Months
                                                                                                 Ended                 Ended
                                                                                          September 30           December 31
                                                                                                  2008                  2007
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>                   <C>
Net Income                                                                                       2,090                 1,086
  Add:
     Interest Expense                                                                               93                   168
     Provision for Income Taxes                                                                  1,542                   792
     Depreciation, Depletion, Amortization and Impairment                                        1,808                 1,767
     Exploration Expense                                                                           350                   326
     Other Non-Cash Expenses                                                                      (112)                  (52)
                                                                                   -------------------------------------------
EBITDA                                                                                           5,771                 4,087
                                                                                   ===========================================
</TABLE>

                                       12
<PAGE>

<TABLE>
<CAPTION>
9. ASSET RETIREMENT OBLIGATIONS

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

                                                                                     Nine Months Ended            Year Ended
                                                                                          September 30           December 31
                                                                                                  2008                  2007
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>                   <C>
Balance at Beginning of Period                                                                     832                   704
  Obligations Incurred with Development Activities                                                  17                   105
  Expenditures Made on Asset Retirements                                                           (30)                  (23)
  Accretion                                                                                         41                    44
  Revisions to Estimates                                                                           102                    79
  Effects of Foreign Exchange                                                                        3                   (77)
                                                                                   -------------------------------------------
Balance at End of Period (1)(2)                                                                    965                   832
                                                                                   ===========================================
</TABLE>
(1)  Obligations  due within 12 months of $40 million  (December  31, 2007 - $40
     million) have been included in accounts payable and accrued liabilities.
(2)  Obligations  relating to our oil and gas activities  amount to $916 million
     (December  31,  2007  -  $786  million)  and  obligations  relating  to our
     chemicals business amount to $49 million (December 31, 2007 - $46 million).

Our total estimated undiscounted inflated asset retirement obligations amount to
$2,350  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 6.1%. Approximately $132 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,  and  our  interest  in the  Long  Lake  upgrader.  The  estimated  future
recoverable  reserves at Syncrude  and Long Lake are  significant  and given the
long life of these  assets,  we are unable to  determine  when asset  retirement
activities would take place.  Furthermore,  the Syncrude plant and the Long Lake
upgrader  can  both  continue  to  run  indefinitely  with  ongoing  maintenance
activities.  The retirement obligations for these assets will be recorded in the
first year in which the obligation to remediate becomes determinable.

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

                                                                                          September 30          December 31
                                                                                                  2008                 2007
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>                   <C>
Deferred Tax Credit                                                                                649                    -
Long-Term Energy Marketing Derivative Contracts (Note 11)                                          183                  163
Deferred Transportation Revenue                                                                     68                   82
Fixed-Price Natural Gas Contracts and Swaps (Note 11)                                               35                   51
Defined Benefit Pension Obligations                                                                 62                   57
Capital Lease Obligations                                                                           53                   52
Long-Term Stock-based Compensation                                                                   -                    2
Other                                                                                               86                   52
                                                                                   ------------------------------------------
Total                                                                                            1,136                  459
                                                                                   ==========================================
</TABLE>

During the quarter, we completed an internal reorganization and financing of our
assets in the  North  Sea which  provided  us with an  additional  one-time  tax
deduction  in  the  UK.  As  these   transactions   were  completed  within  our
consolidated group, we are unable to recognize the benefit of the tax deductions
until the assets are  recognized  in income by way of a sale to a third party or
depletion through use. Accordingly, we have deferred recognizing $649 million of
tax credits in our consolidated income statement.

                                       13
<PAGE>

11. FINANCIAL INSTRUMENTS

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

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

We carry our long-term debt at amortized cost using the effective  interest rate
method.  At September 30, 2008,  the estimated  fair value of our long-term debt
was $4,940  million  (December  31,  2007 - $4,692  million)  as compared to the
carrying value of $5,686 million (December 31, 2007 - $4,610 million).  The fair
value of long-term debt is estimated  based on prices provided by quoted markets
and third-party brokers.

DERIVATIVES

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

The fair value and carrying  amounts related to derivative  instruments  held by
our energy marketing operations are as follows:

<TABLE>
<CAPTION>
                                                                                         September 30          December 31
                                                                                                 2008                 2007
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                  <C>
Accounts Receivable                                                                               781                  334
Deferred Charges and Other Assets (1)                                                             217                  248
                                                                                  ------------------------------------------
  Total Derivative Assets                                                                         998                  582
                                                                                  ==========================================

Accounts Payable and Accrued Liabilities                                                          723                  413
Deferred Credits and Other Liabilities (1)                                                        183                  163
                                                                                  ------------------------------------------
  Total Derivative Liabilities                                                                    906                  576
                                                                                  ==========================================

  Total Net Derivatives related to Trading Activities (2)                                          92                    6
                                                                                  ==========================================
</TABLE>
(1)  These  derivative  contracts  settle  beyond 12 months  and are  considered
     non-current.
(2)  Comprised  of  $107  million  (2007 - $15  million)  related  to  commodity
     contracts  and losses of $15 million  (2007 - $9 million  loss)  related to
     US-dollar forward contracts and swaps.

(b) TOTAL CARRYING VALUE OF DERIVATIVE CONTRACTS RELATED TO NON-TRADING
ACTIVITIES

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

<TABLE>
<CAPTION>
                                                                                         September 30          December 31
                                                                                                 2008                 2007
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                   <C>
Accounts Receivable                                                                                 -                    -
Deferred Charges and Other Assets (1)                                                              15                    1
                                                                                  ------------------------------------------
  Total Derivative Assets                                                                          15                    1
                                                                                  ==========================================

Accounts Payable and Accrued Liabilities                                                           27                   28
Deferred Credits and Other Liabilities (1)                                                         35                   51
                                                                                  ------------------------------------------
  Total Derivative Liabilities                                                                     62                   79
                                                                                  ==========================================

  Total Net Derivatives related to Non-Trading Activities                                         (47)                 (78)
                                                                                  ==================== =====================
</TABLE>

(1)  These  derivative  contracts  settle  beyond 12 months  and are  considered
     non-current.

                                       14
<PAGE>

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 Brent floor
price of US$60/bbl on these volumes.  In September  2008,  Lehman Brothers filed
for bankruptcy protection.  This impacts approximately 36% (or 25,000 bbls/d) of
our 2009 put  options  and the  carrying  value of these  put  options  has been
reduced to nil.  In 2007,  we  purchased  put  options on 36 million  barrels or
approximately  100,000  bbls/d of our 2008 crude oil  production.  These options
establish  an annual  average  Dated  Brent floor  price of  US$50/bbl  on these
volumes.

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

<TABLE>
<CAPTION>
                                                             Notional                             Average             Fair
                                                              Volumes              Term       Floor Price            Value
---------------------------------------------------------------------------------------------------------------------------
                                                             (bbls/d)                           (US$/bbl)   (Cdn$ millions)
<S>                                                          <C>                 <C>            <C>             <C>
Dated Brent Crude Oil Put Options                             100,000              2008                50                -
Dated Brent Crude Oil Put Options                              45,000              2009                60               13
                                                                                                                 ----------
                                                                                                                        13
                                                                                                                 ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                             Notional                             Average             Fair
                                                              Volumes              Term             Price            Value
---------------------------------------------------------------------------------------------------------------------------
                                                               (Gj/d)                              ($/Gj)   (Cdn$ millions)
<S>                                                          <C>            <C>               <C>            <C>
Fixed-Price Natural Gas Contracts                              15,514              2008              2.46              (24)
                                                               15,514       2009 - 2010       2.56 - 2.77              (35)
Natural Gas Swaps                                              15,514              2008              7.60               (3)
                                                               15,514       2009 - 2010              7.60                2
                                                                                                                -----------
                                                                                                                       (60)
                                                                                                                ===========
</TABLE>

(c) FAIR VALUE OF DERIVATIVES

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

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

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

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

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

                                       15
<PAGE>

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

<TABLE>
<CAPTION>
                                                                          Level 1       Level 2       Level 3        Total
                                                                     -------------------------------------------------------
<S>                                                                        <C>           <C>            <C>          <C>
Net Derivatives
  Trading Derivatives                                                         136           (44)            -           92
  Non-Trading Derivatives                                                       -           (47)            -          (47)
                                                                     -------------------------------------------------------
  Total Net Derivatives                                                       136           (91)            -           45
                                                                     =======================================================

<CAPTION>
A reconciliation  of changes in the fair value of our derivatives  classified as
Level 3 for the nine months ended September 30, 2008 is provided below:

                                                                                                                    Level 3
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                               <C>
Fair Value at January 1, 2008                                                                                            (7)
  Realized and unrealized gains (losses)                                                                                  5
  Purchases, issuances and settlements                                                                                   (3)
  Transfers in and/or out of Level 3                                                                                      5
                                                                                                                  ----------
Fair Value at September 30, 2008                                                                                          -
                                                                                                                  ==========

Unsettled gains (losses) relating to instruments still held as of September 30, 2008                                     10
                                                                                                                  ==========
</TABLE>

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

12. RISK MANAGEMENT

(a) MARKET RISK

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

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

COMMODITY PRICE RISK

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

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

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

                                       16
<PAGE>

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

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

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

    o  prescribed limits for Value-at-Risk (VaR);
    o  nominal size of commodity positions;
    o  stop loss limits; and
    o  stress testing.

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

    o  changes in commodity prices follow a statistical pattern of distribution;
    o  price volatility remains stable; and
    o  price correlation relationships remain stable.

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

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

<TABLE>
<CAPTION>
                                                                                        Three Months           Nine Months
                                                                                     Ended September 30     Ended September 30
                                                                                      2008        2007       2008        2007
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>         <C>        <C>         <C>
Value-at-Risk
   Quarter End                                                                          27          34         27          34
   High                                                                                 33          38         40          38
   Low                                                                                  19          28         19          24
   Average                                                                              29          33         31          31
                                                                                ----------------------------------------------
</TABLE>

FOREIGN CURRENCY RISK

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

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

In our oil and gas operations,  we manage our exposure to  fluctuations  between
the US and  Canadian  dollar  by  matching  our  expected  net  cash  flows  and
borrowings in the same currency. Net revenue from our foreign operations and our
US-dollar  borrowings are generally used to fund US-dollar capital  expenditures
and debt  repayments.  We maintain  revolving  Canadian and US-dollar  borrowing
facilities  that can be used or repaid  depending on expected net cash flows. We
designate  our  US-dollar  borrowings  as a  hedge  against  our  US-dollar  net
investment in self-sustaining foreign operations.  At September 30, 2008, we had
US$5,436 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  $54 million,  before
income tax.

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

                                       17
<PAGE>

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

(b)  CREDIT RISK

Credit risk affects both our trading and non-trading  activities and is the risk
of loss if  counterparties  do not fulfill their  contractual  obligations.  The
majority  of our  accounts  receivable  are with  counterparties  in the  energy
industry,  including integrated oil companies,  refiners and utilities,  and are
subject  to normal  industry  credit  risk.  Approximately  85% of our  accounts
receivable are with these large energy  companies.  This  concentration  of risk
within the energy  industry is reduced because of our broad base of domestic and
international   counterparties.   We  assess  the  financial   strength  of  our
counterparties,  including  those  involved  in  marketing  and other  commodity
arrangements,  and we limit the total exposure to individual counterparties.  As
well, a number of our contracts  contain  provisions that allow us to demand the
posting of  collateral  in the event of a downgrade  to a  non-investment  grade
credit  rating.  Credit  risk,  including  credit  concentrations,  is routinely
reported  to  management.  We also use  standard  agreements  that allow for the
netting of  exposures  associated  with a single  counterparty.  We believe this
minimizes our overall credit risk. However, there can be no assurance that these
processes will protect us against all losses from non-performance.


At September 30, 2008:

    o  over 96% of our credit exposures were investment grade;
    o  approximately  85% of our  credit  exposures  were  with  integrated  oil
       companies, crude oil refiners & marketers and large utilities; and
    o  only two  counterparties  individually made up more than 5% of our credit
       exposure,  and one of these  counterparties  made up more than 10% of our
       credit  exposure.  Both  counterparties  are super major  integrated  oil
       companies with strong investment grade ratings.

In light of current  market  conditions,  we have  increased  our  monitoring of
credit exposure.  We review our  counterparty  credit risks daily to effectively
limit  our  exposures.  In  September,  Lehman  Brothers  filed  for  bankruptcy
protection  and our exposure at the time was  approximately  $38  million.  This
amount was written off in the quarter however we continue to pursue recovery of
these amounts.

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 at the balance sheet date for which we
have not  provided.  Collateral  received  from  customers at September 30, 2008
includes  $62  million of cash and $603  million of letters of credit.  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  September  30,  2008,  we had  $1.8  billion  of cash  and cash
equivalents on hand.  Approximately  US$1 billion of this amount was a result of
draws  made on our term  credit  facilities,  which  were  used for an  internal
reorganization  and  financing  of our North Sea assets.  In  addition,  we have
undrawn term credit facilities of US$1.6 billion. These facilities are available
until 2012. We also have $657 million of undrawn, uncommitted credit facilities,
of which $30 million was supporting letters of credit at September 30, 2008.


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

<TABLE>
<CAPTION>
                                                                less than                                         greater than
                                                Total              1 Year        1-3 Years         4-5 Years           5 Years
------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>               <C>              <C>             <C>              <C>
Long-Term Debt                                  5,762                   -                -             1,257            4,505
Interest on Long-Term Debt (1)                  6,708                 286              572               572            5,278
                                       ---------------------------------------------------------------------------------------
Total                                          12,470                 286              572             1,829            9,783
                                       =======================================================================================
</TABLE>

(1) Excludes  interest on term credit  facilities of $3.2 billion and Canexus LP
  term credit  facilities of $410 million as the amounts drawn on the facilities
  fluctuate.  As a result, we are unable to provide a reasonable estimate of the
  interest.

                                       18
<PAGE>

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

<TABLE>
<CAPTION>
                                                                less than                                         greater than
                                                Total              1 Year        1-3 Years         4-5 Years           5 Years
------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>               <C>              <C>             <C>              <C>
Trading Derivatives                               906                 723              183                 -                -
Non-Trading Derivatives                            62                  27               35                 -                -
                                       ---------------------------------------------------------------------------------------
Total                                             968                 750              218                 -                -
                                       =======================================================================================
</TABLE>

The commercial  agreements our energy  marketing group enters into often include
financial  assurance   provisions  that  allow  us  and  our  counterparties  to
effectively manage credit risk. The agreements normally require collateral to be
posted if an adverse  credit-related  event,  such as a drop in credit  ratings,
occurs.  Based on contracts in place and commodity prices at September 30, 2008,
we  could  be  required  to post  collateral  of up to $1.6  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.  In the event of a ratings downgrade,  we have trading  inventories and
receivables that can be quickly monetized as well as significant  undrawn credit
facilities.

At  September  30,  2008,  collateral  posted with  counterparties  includes $73
million of cash and $296  million of  letters of credit  related to our  trading
activities.   Cash  posted  is  included  with  our  accounts  receivable.  Cash
collateral is not normally applied to contract  settlement.  Once a contract has
been settled,  the collateral amounts are refunded.  If there is a default,  the
cash is retained.

Our   exchange-traded   derivative   contracts   are  also   subject  to  margin
requirements.  We have margin deposits of $65 million  (December 31, 2007 - $203
million), which have been included in restricted cash.


13.  SHAREHOLDERS' EQUITY

(a)  DIVIDENDS

Dividends  per common share for the three months ended  September  30, 2008 were
$0.05 per common share (2007 - $0.025).  Dividends per common share for the nine
months ended  September 30, 2008 were $0.125 (2007 - $0.075).  Dividends paid to
holders of common  shares  have been  designated  as  "eligible  dividends"  for
Canadian tax purposes.

(b)  NORMAL COURSE ISSUER BID

In July 2008, we received  approval from the Toronto Stock  Exchange (TSX) for a
Normal Course Issuer Bid (Bid).  Under the Bid, we are allowed to repurchase for
cancellation  up to 10% of our public float of common shares,  approximately  53
million shares. Purchases under the Bid commenced August 6, 2008 and can be made
until August 5, 2009.  Purchases can be made on the open market  through the TSX
and the New York Stock Exchange at the market price at the time of acquisition.


During the quarter, we purchased 10 million common shares at an average price of
$30.05 per common  share for a total cost of $300  million.  Of the amount paid,
$18 million reduced the book value of our common shares.  The cost to repurchase
common shares in excess of their average book value has been charged to retained
earnings ($282  million).

14. EARNINGS PER COMMON SHARE

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

<TABLE>
<CAPTION>
                                                                                       Three Months             Nine Months
                                                                                     Ended September 30      Ended September 30
(millions of shares)                                                                  2008         2007       2008        2007
------------------------------------------------------------------------------- ----------------------------------------------
<S>                                                                                <C>          <C>        <C>         <C>
Weighted-average number of common shares outstanding                                 525.9        527.4      528.3       526.8
Shares issuable pursuant to tandem options                                            19.6         25.7       24.9        27.0
Shares notionally purchased from proceeds of tandem options                          (13.0)       (15.3)     (16.2)      (15.2)
                                                                                ----------------------------------------------
Weighted-average number of diluted common shares outstanding                         532.5        537.8      537.0       538.6
                                                                                ==============================================
</TABLE>

In calculating the weighted-average  number of diluted common shares outstanding
for the three and nine months ended  September 30, 2008,  we excluded  4,019,880
and 40,000  tandem  options,  respectively,  because  their  exercise  price was
greater than the average common share market price in the period. In calculating
the  weighted-average  number of diluted common shares outstanding for the three
and nine months ended  September 30, 2007, we excluded  80,000 and 45,445 tandem
options respectively,  because their exercise price was greater than the average
common  share  market  price  in  the  period.  During  the  periods  presented,
outstanding tandem options were the only potential dilutive instruments.

                                       19
<PAGE>

15. CASH FLOWS

(a) CHARGES AND CREDITS TO INCOME NOT INVOLVING CASH

<TABLE>
<CAPTION>
                                                                                      Three Months           Nine Months
                                                                                   Ended September 30      Ended September 30
                                                                                    2008         2007       2008         2007
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>          <C>      <C>          <C>
Depreciation, Depletion, Amortization and Impairment                                 386          349      1,084        1,043
Stock-Based Compensation                                                            (410)        (106)      (210)        (132)
Future Income Taxes                                                                  645          142        583          303
Change in Fair Value of Crude Oil Put Options                                         (9)          11          1           31
Net Income Attributable to Non-Controlling Interests                                   1            7          3           15
Allowance for Doubtful Accounts                                                       38           (2)        34           (3)
Other                                                                                 42            3         52           29
                                                                                ----------------------------------------------
Total                                                                                693          404      1,547        1,286
                                                                                ==============================================
</TABLE>

(b)  CHANGES IN NON-CASH WORKING CAPITAL

<TABLE>
<CAPTION>
                                                                                      Three Months           Nine Months
                                                                                   Ended September 30      Ended September 30
                                                                                    2008         2007       2008         2007
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>          <C>       <C>            <C>
   Accounts Receivable                                                               503          122       (821)          55
   Inventories and Supplies                                                          260          200       (128)          21
   Other Current Assets                                                              (64)         (29)       (80)         (18)
   Accounts Payable and Accrued Liabilities                                         (862)         (96)       496         (156)
   Income Taxes Payable                                                             (745)          20        (71)          76
   Accrued Interest Payable                                                           12            3         13           14
   Dividends Payable                                                                   -            -         13            -
                                                                                ----------------------------------------------
Total                                                                               (896)         220       (578)          (8)
                                                                                ==============================================

Relating to:
   Operating Activities                                                             (840)         253       (468)         (19)
   Financing Activities                                                               10            -         10            -
   Investing Activities                                                              (66)         (33)      (120)          11
                                                                                ----------------------------------------------
Total                                                                               (896)         220       (578)          (8)
                                                                                ==============================================

<CAPTION>
(c) OTHER CASH FLOW INFORMATION

                                                                                      Three Months           Nine Months
                                                                                   Ended September 30      Ended September 30
                                                                                    2008         2007       2008         2007
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>          <C>       <C>            <C>
Interest Paid                                                                         64           77        212          233
Income Taxes Paid                                                                    655          127        816          284
                                                                                ----------------------------------------------
</TABLE>

Cash flow from other  operating  activities  includes cash  outflows  related to
geological  and  geophysical  expenditures  of $38 million for the three  months
ended  September  30,  2008 (2007 - $19  million)  and $72  million for the nine
months ended September 30, 2008 (2007 - $79 million).

16. MARKETING AND OTHER INCOME

<TABLE>
<CAPTION>
                                                                                      Three Months           Nine Months
                                                                                   Ended September 30      Ended September 30
                                                                                    2008         2007       2008         2007
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>          <C>        <C>          <C>
Marketing Revenue, Net                                                               149          219        381          750
Change in Fair Value of Crude Oil Put Options                                          9          (11)        (1)         (31)
Interest                                                                               7           10         20           29
Foreign Exchange Losses                                                              (33)         (11)       (34)         (54)
Other                                                                                 (1)          19         21           79
                                                                                ----------------------------------------------
Total                                                                                131          226        387          773
                                                                                ==============================================
</TABLE>

                                       20
<PAGE>

17. STOCK BASED COMPENSATION

We account for our stock-based  compensation  programs using the intrinsic-value
method and  therefore  fluctuating  share prices  create  volatility  in our net
income.  We  recovered  non-cash   stock-based   compensation  costs  that  were
previously  expensed,  of $410 million for the three months ended  September 30,
2008 (2007 - $106 million) and $210 million for the nine months ended  September
30,  2008 (2007 - $132  million).  Cash  payments  made in  connection  with out
stock-based  compensation  programs  during the  quarter  amounted to $2 million
(2007 - $29 million) and year-to-date  payments totaled $89 million (2007 - $116
million). These amounts are included in general and administrative expense.

18. COMMITMENTS, CONTINGENCIES AND GUARANTEES

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



                                       21
<PAGE>

19.  OPERATING SEGMENTS AND RELATED INFORMATION

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

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

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

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

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

Property, Plant and
Equipment
  Cost                       2,402     7,697      3,670    5,558        358       268     1,363        896         322      22,534
  Less: Accumulated DD&A     2,220     1,725      2,072    1,456         95        72       232        495         199       8,566
                            ------------------------------------------------------------------------------------------------------
Net Book Value                 182     5,972(5)   1,598    4,102        263       196     1,131        401         123      13,968
                            ======================================================================================================
</TABLE>
(1)   Includes results of operations from producing activities in Colombia.
(2)   Includes  interest  income of $7 million,  foreign  exchange losses of $33
      million, increase in the fair value of crude oil put options of $9 million
      and other losses of $2 million.
(3)   Includes recovery of stock-based compensation expense of $408 million.
(4)   Includes exploration activities primarily in Norway and Colombia.
(5)   Includes costs of $4,432 million related to our Synthetic group (Long Lake
      Phase 1 and future  phases) which are not being  depreciated,  depleted or
      amortized.
(6)   Approximately  85%  of  Marketing's   identifiable   assets  are  accounts
      receivable and inventories.


                                       22
<PAGE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2008
                                                                                                              Corporate
                                                                                Energy                              and
(Cdn$ millions)                                   Oil and Gas                Marketing  Syncrude   Chemicals      Other       Total
------------------------------------------------------------------------------------------------------------------------------------
                                                  United    United     Other
                                Yemen   Canada    States   Kingdom  Countries(1)
                              ------- --------   --------  -------  ---------
<S>                             <C>     <C>       <C>      <C>      <C>         <C>       <C>       <C>        <C>          <C>
Net Sales                         912      545       518     3,053       156        52       567         351          -       6,154
Marketing and Other                 9        2         4        17         2       381         3         (13)       (18)(2)     387
                               ----------------------------------------------------------------------------------------------------
Total Revenues                    921      547       522     3,070       158       433       570         338        (18)      6,541

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

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

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

Property, Plant and Equipment
  Cost                          2,402    7,697     3,670     5,558       358       268     1,363         896        322      22,534
  Less: Accumulated DD&A        2,220    1,725     2,072     1,456        95        72       232         495        199       8,566
                               ----------------------------------------------------------------------------------------------------
Net Book Value                    182    5,972(6)  1,598     4,102       263       196     1,131         401        123      13,968
                               ====================================================================================================
</TABLE>

(1)   Includes results of operations from producing activities in Colombia.
(2)   Includes  interest income of $20 million,  foreign  exchange losses of $34
      million, decrease in the fair value of crude oil put options of $1 million
      and other losses of $3 million.
(3)   Includes  a  severance  accrual of $7  million  in  connection  with North
      Vancouver   technology   conversion  project.
(4)   Includes recovery of stock-based compensation expense of $121 million.
(5)   Includes exploration activities primarily in Norway and Colombia.
(6)   Includes costs of $4,432 million related to our Synthetic group (Long Lake
      Phase 1 and future  phases) which are not being  depreciated,  depleted or
      amortized.
(7)   Approximately  85%  of  Marketing's   identifiable   assets  are  accounts
      receivable and inventories.




                                       23
<PAGE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2007
                                                                                                              Corporate
                                                                                  Energy                            and
(Cdn$ millions)                                     Oil and Gas                Marketing  Syncrude  Chemicals     Other       Total
------------------------------------------------------------------------------------------------------------------------------------
                                                   United    United     Other
                                Yemen   Canada     States   Kingdom  Countries(1)
                              ------- --------   --------   -------  ---------
<S>                             <C>     <C>       <C>      <C>      <C>         <C>       <C>       <C>        <C>          <C>
Net Sales                        280       101        137       608         42        13       160        105         -       1,446
Marketing and Other                2         -          1         7          -       219         -          9       (12)(2)     226
                              ------------------------------------------------------------------------------------------------------
Net Sales                        280       101        137       608         42        13       160        105         -       1,446
Marketing and Other                2         -          1         7          -       219         -          9       (12)(2)     226
                              ------------------------------------------------------------------------------------------------------
Total Revenues                   282       101        138       615         42       232       160        114       (12)      1,672

Less: Expenses
  Operating                       43        49         21        50          2         7        53         58         -         283
  Depreciation, Depletion,
   Amortization and
     Impairment                   54        41         66       151          2         3        14         11         7         349
  Transportation and Other         2         5          -         -          -       211         4         10         6         238
  General and
     Administrative (3)           (7)      (10)         5        (2)        (3)       15         1          7         1           7
  Exploration                      -         4         33        12         18(4)      -         -          -         -          67
  Interest                         -         -          -         -          -         -         -          3        37          40
                              ------------------------------------------------------------------------------------------------------
Income (Loss)
  before Income Taxes            190        12         13       404         23        (4)       88         25       (63)        688
Less: Provisions for
(Recovery                         63         4          4       206         (3)       (1)       26          8       (29)        278
  of) Income Taxes
Less: Non-Controlling
  Interests                        -         -          -         -          -         -         -          7         -           7
                              ------------------------------------------------------------------------------------------------------
Net Income (Loss)                127         8          9       198         26        (3)       62         10       (34)        403
                              ======================================================================================================

Identifiable Assets              378     4,961(5)   1,786     4,616        272     2,983(6)  1,190        470       215      16,871
                              ======================================================================================================

Capital Expenditures
  Development and Other           32       304         98       136         20         1        12         13        11         627
  Exploration                      1        42         90        31          6         -         -          -         -         170
  Proved Property Acquisition      -         -        104(7)      -          -         -         -          -         -         104
                              ------------------------------------------------------------------------------------------------------
                                  33       346        292       167         26         1        12         13        11         901
                              ======================================================================================================

Property, Plant and
Equipment
  Cost                         2,148     6,265      2,921     4,576        243       230     1,324        809       314      18,830
  Less: Accumulated DD&A       1,930     1,560      1,349       746         75        54       209        452       164       6,539
                              ------------------------------------------------------------------------------------------------------
Net Book Value                   218     4,705(5)   1,572     3,830        168       176     1,115        357       150      12,291
                              ======================================================================================================
</TABLE>

(1)  Includes results of operations from producing activities in Colombia.
(2)  Includes  interest  income of $10 million,  foreign  exchange losses of $11
     million  and  decrease  in the fair  value of crude oil put  options of $11
     million.
(3)  Includes recovery of stock-based compensation expense of $77 million.
(4)  Includes exploration activities primarily in Nigeria, Norway and Colombia.
(5)  Includes costs of $2,533 million  related to our Synthetic group (Long Lake
     Phase 1 and future  phases)  which are not being  depreciated,  depleted or
     amortized.
(6)  Approximately   77%  of  Marketing's   identifiable   assets  are  accounts
     receivable and inventories.
(7)  Includes acquisition of producing properties in the Gulf of Mexico.


                                       24
<PAGE>

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2007
                                                                                                              Corporate
                                                                                  Energy                            and
(Cdn$ millions)                                 Oil and Gas                    Marketing  Syncrude  Chemicals     Other       Total
------------------------------------------------------------------------------------------------------------------------------------
                                                  United    United     Other
                              Yemen    Canada     States   Kingdom  Countries(1)
                            -------  --------   --------   -------  ---------
<S>                         <C>       <C>        <C>       <C>      <C>         <C>       <C>        <C>        <C>           <C>
Net Sales                       811       329        453     1,544         106        36       394        312         -       3,985
Marketing and Other               8         4          1        35           -       750         -         31       (56)(2)     773
                             ------------------------------------------------------------------------------------------------------
Total Revenues                  819       333        454     1,579         106       786       394        343       (56)      4,758

Less: Expenses
  Operating                     127       130         75       156           6        26       151        191         -         862
  Depreciation, Depletion,
   Amortization and
     Impairment                 176       123        212       423           8        10        39         33        19       1,043
  Transportation and Other        6        18          -         -           -       620        13         29         8         694
  General and
     Administrative (3)         (10)       30         19         -          22        68         1         24        93         247
  Exploration                     5        18         95        50          53(4)      -         -          -         -         221
  Interest                        -         -          -         -           -         -         -          9       125         134
                             ------------------------------------------------------------------------------------------------------
Income (Loss)
  before Income Taxes           515        14         53       950          17        62       190         57      (301)      1,557
Less: Provisions for
(Recovery                       176         4         18       490           4        25        56         17      (140)        650
  of) Income Taxes
Less: Non-Controlling
  Interests                       -         -          -         -           -         -         -         15         -          15
                             ------------------------------------------------------------------------------------------------------
Net Income (Loss)               339        10         35       460          13        37       134         25      (161)        892
                             ======================================================================================================

Identifiable Assets             378     4,961(5)   1,786     4,616         272     2,983(6)  1,190        470       215      16,871
                             ======================================================================================================

Capital Expenditures
  Development and Other          95       976        365       434          35         2        27         39        31       2,004
  Exploration                    11        87        153        94          32         -         -          -         -         377
  Proved Property Acquisition     -         -        104(7)     46(8)       -          -         -          -         -         150
                             ------------------------------------------------------------------------------------------------------
                                106     1,063        622       574          67         2        27         39        31       2,531
                             ======================================================================================================

Property, Plant and
Equipment
  Cost                        2,148     6,265      2,921     4,576         243       230     1,324        809       314      18,830
  Less: Accumulated DD&A      1,930     1,560      1,349       746          75        54       209        452       164       6,539
                             ------------------------------------------------------------------------------------------------------
Net Book Value                  218     4,705(5)   1,572     3,830         168       176     1,115        357       150      12,291
                             ======================================================================================================
</TABLE>

(1)   Includes results of operations from producing activities in Colombia.
(2)   Includes  interest income of $29 million,  foreign  exchange losses of $54
      million  and  decrease  in the fair value of crude oil put  options of $31
      million.
(3)   Includes recovery of stock-based compensation expense of $16 million.
(4)   Includes exploration activities primarily in Nigeria, Norway and Colombia.
(5)   Includes costs of $2,533 million related to our Synthetic group (Long Lake
      Phase 1 and future  phases) which are not being  depreciated,  depleted or
      amortized.
(6)   Approximately  77%  of  Marketing's   identifiable   assets  are  accounts
      receivable and inventories.
(7)   Includes acquisition of producing properties in the Gulf of Mexico.
(8)   Includes  acquisition  of  additional  interests  in the Scott and Telford
      fields.


                                       25
<PAGE>

20.  DIFFERENCES BETWEEN CANADIAN AND US GENERALLY ACCEPTED ACCOUNTING
     PRINCIPLES

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

(a)  UNAUDITED CONSOLIDATED STATEMENT OF INCOME - US GAAP
     FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30

<TABLE>
<CAPTION>
                                                                                 Three Months               Nine Months
                                                                               Ended September 30        Ended September 30
(Cdn$ millions, except per share amounts)                                       2008         2007         2008          2007
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>          <C>          <C>           <C>
Revenues and Other Income
     Net Sales                                                                 2,213        1,446        6,154         3,985
     Marketing and Other (vii); (viii)                                           366          226          470           771
                                                                         ----------------------------------------------------
                                                                               2,579        1,672        6,624         4,756
                                                                         ----------------------------------------------------
Expenses
     Operating (ii)                                                              341          292          998           884
     Depreciation, Depletion, Amortization and Impairment                        386          349        1,084         1,043
     Transportation and Other (viii)                                             291          238          687           694
     General and Administrative (iii)                                           (272)          18          180           268
     Exploration                                                                 112           67          245           221
     Interest                                                                     16           40           59           134
                                                                         ----------------------------------------------------
                                                                                 874        1,004        3,253         3,244
                                                                         ----------------------------------------------------

Income before Income Taxes                                                     1,705          668        3,371         1,512
                                                                         ----------------------------------------------------

Provision for Income Taxes
     Current                                                                     (26)         136          817           347
     Deferred (i) - (vii)                                                        724          137          610           290
                                                                         ----------------------------------------------------
                                                                                 698          273        1,427           637
                                                                         ----------------------------------------------------

Net Income before Non-Controlling Interests                                    1,007          395        1,944           875
     Less: Net Income Attributable to Non-Controlling Interests                   (1)          (7)          (3)          (15)
                                                                         ----------------------------------------------------

Net Income - US GAAP (1)                                                       1,006          388        1,941           860
                                                                         ====================================================

Earnings Per Common Share ($/share)
     Basic (Note 14)                                                            1.91         0.74         3.67          1.63
                                                                         ====================================================

     Diluted (Note 14)                                                          1.89         0.72         3.61          1.60
                                                                         ====================================================
</TABLE>

Note:
(1) Reconciliation of Canadian and US GAAP Net Income

<TABLE>
<CAPTION>
                                                                                   Three Months              Nine Months
                                                                                        Ended                     Ended
                                                                                   September 30              September 30
                                                                                2008         2007         2008          2007
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>          <C>          <C>           <C>
Net Income - Canadian GAAP                                                       886          403        1,896           892
Impact of US Principles, Net of Income Taxes:
     Ineffective Portion of Cash Flow Hedges (i)                                   -            -            -            (2)
     Pre-operating Costs (ii)                                                      -           (7)           -           (15)
     Inventory Valuation (vii)                                                   146            -           56             -
     Stock-based Compensation (iii)                                              (26)          (8)         (11)          (15)
                                                                         ----------------------------------------------------
Net Income - US GAAP                                                           1,006          388        1,941           860
                                                                         ====================================================
</TABLE>



                                       26
<PAGE>


(b) UNAUDITED CONSOLIDATED BALANCE SHEET - US GAAP

<TABLE>
<CAPTION>
                                                                                              September 30          December 31
(Cdn$ millions, except share amounts)                                                                 2008                 2007
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>                    <C>
Assets
   Current Assets
      Cash and Cash Equivalents                                                                      1,772                  206
      Restricted Cash                                                                                   65                  203
      Accounts Receivable                                                                            4,369                3,502
      Inventories and Supplies (vii)                                                                   856                  615
      Other                                                                                            163                   89
                                                                                               ---------------------------------
         Total Current Assets                                                                        7,225                4,615
                                                                                               ---------------------------------

   Property, Plant and Equipment
      Net of Accumulated Depreciation, Depletion, Amortization and
         Impairment of $8,959 (December 31, 2007 - $7,588) (ii); (v)                                13,919               12,449
   Goodwill                                                                                            347                  326
   Deferred Income Tax Assets                                                                          348                  268
   Deferred Charges and Other Assets                                                                   370                  324
                                                                                               ---------------------------------
Total Assets                                                                                        22,209               17,982
                                                                                               =================================
Liabilities and Shareholders' Equity
   Current Liabilities
      Accounts Payable and Accrued Liabilities (iii)                                                 4,543                4,188
      Income Taxes Payable                                                                              70                   45
      Accrued Interest Payable                                                                          67                   54
      Dividends Payable                                                                                 27                   13
                                                                                               ---------------------------------
         Total Current Liabilities                                                                   4,707                4,300
                                                                                               ---------------------------------

   Long-Term Debt                                                                                    5,686                4,610
   Deferred Income Tax Liabilities (i) - (vii)                                                       2,474                2,230
   Asset Retirement Obligations                                                                        925                  792
   Deferred Credits and Other Liabilities (iv)                                                       1,211                  534
   Non-Controlling Interests                                                                            59                   67
   Shareholders' Equity
      Common Shares, no par value
         Authorized:   Unlimited
         Outstanding:  2008 - 520,969,101 shares
                       2007 - 528,304,813 shares                                                       963                  917
      Contributed Surplus                                                                                2                    3
      Retained Earnings (i) - (vii)                                                                  6,469                4,876
      Accumulated Other Comprehensive Loss (i); (iv)                                                  (287)                (347)
                                                                                               ---------------------------------
         Total Shareholders' Equity                                                                  7,147                5,449
                                                                                               ---------------------------------
   Commitments, Contingencies and Guarantees

Total Liabilities and Shareholders' Equity                                                          22,209               17,982
                                                                                               =================================
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                  Three Months               Nine Months
                                                                               Ended September 30         Ended September 30
(Cdn$ millions)                                                                 2008         2007         2008          2007
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>            <C>        <C>             <C>
Net Income - US GAAP                                                           1,006          388        1,941           860
Other Comprehensive Income, Net of Income Taxes:
     Foreign Currency Translation Adjustment                                      41          (51)          60          (143)
     Change in Mark to Market on Cash Flow Hedges (i)                              -            -            -           (61)
                                                                         ----------------------------------------------------
Comprehensive Income                                                           1,047          337        2,001           656
                                                                         ====================================================
</TABLE>


                                       27
<PAGE>

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

<TABLE>
<CAPTION>
                                                         September 30          December 31
(Cdn$ millions)                                                  2008                 2007
--------------------------------------------------------------------------------------------
<S>                                                      <C>                  <C>
Foreign Currency Translation Adjustment                          (233)                (293)
Unamortized Defined Benefit Pension Costs (iv)                    (54)                 (54)
                                                         -----------------------------------
                                                                 (287)                (347)
                                                         ===================================
</TABLE>

Notes:

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

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

      At September 30, 2008, there were no cash flow hedges in place.

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

      o   operating expenses include  pre-operating  costs of $9 million and $22
          million  for the three  and nine  months  ended  September  30,  2007,
          respectively ($7 million and $15 million,  respectively, net of income
          taxes); and

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

iii.  Under Canadian principles, we record obligations for liability-based stock
      compensation plans using the intrinsic-value  method of accounting.  Under
      US principles,  obligations for  liability-based  stock compensation plans
      are  recorded  using  the  fair-value  method of  accounting.  We are also
      required to accelerate the recognition of stock-based compensation expense
      for all stock-based awards made to our retirement-eligible employees under
      Canadian GAAP.  However,  under US GAAP, the  accelerated  recognition for
      such employees is only required for stock-based awards granted on or after
      January 1, 2006. As a result under US GAAP:

      o   general  and  administrative  expense is higher by $36 million and $15
          million  ($26  million and $11  million,  respectively,  net of income
          taxes)  for the  three  and nine  months  ended  September  30,  2008,
          respectively   (2007  -  higher  by  $11  million  and  $21   million,
          respectively, ($8 million and $15 million, respectively, net of income
          taxes)); and

      o   accounts payable and accrued  liabilities are higher by $68 million as
          at September 30, 2008 (December 31, 2007 - $53 million).

iv.   On December 31, 2006, we adopted the Financial  Accounting Standards Board
      (FASB) Statement 158 Employers' Accounting for Defined Benefit Pension and
      other  Postretirement Plans (FAS 158). At September 30, 2008, the unfunded
      amount of our defined benefit  pension plans was $75 million.  This amount
      has been  included  in  deferred  credits  and other  liabilities  and $54
      million, net of income taxes has been included in AOCI.

v.    On January 1, 2003, we adopted FASB  Statement  143,  Accounting for Asset
      Retirement  Obligations  (FAS  143)  for US GAAP  reporting  purposes.  We
      adopted the equivalent Canadian standard for asset retirement  obligations
      on January 1, 2004. These standards are consistent except for the adoption
      date which  results in our  property,  plant and  equipment  under US GAAP
      being lower by $19 million.

vi.   On January 1, 2007,  we adopted FASB  Interpretation  48,  Accounting  for
      Uncertainty  in Income Taxes (FIN 48) with  respect to FAS 109  Accounting
      for Income Taxes  regarding  accounting  and  disclosure for uncertain tax
      positions. On the adoption of FIN 48, we recorded a cumulative effect of a
      change in accounting  principle of $28 million.  This amount increased our
      deferred  income tax  liabilities,  with a  corresponding  decrease to our
      retained  earnings  as at  January  1,  2007  in our US  GAAP -  Unaudited
      Consolidated  Balance Sheet. As at September 30, 2008, the total amount of
      our unrecognized tax benefit was approximately $227 million, all of which,
      if  recognized,  would affect our  effective tax rate. As at September 30,
      2008,  the total amount of interest and penalties in relation to uncertain
      tax positions recognized in deferred income tax liabilities in the US GAAP
      - Unaudited  Consolidated  Balance Sheet is approximately $11 million.  We
      had no  interest  or  penalties  in the US GAAP -  Unaudited  Consolidated
      Statement  of Income  for the first  nine  months of 2008.  Our income tax


                                       28
<PAGE>

      filings are subject to audit by taxation  authorities  and as at September
      30, 2008 the  following tax years  remained  subject to  examination:  (i)
      Canada - 1985 to date, (ii) United Kingdom - 2002 to date and (iii) United
      States - 2004 to date. We do not  anticipate  any material  changes to the
      unrecognized  tax  benefits  previously  disclosed  within the next twelve
      months.

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

      o   marketing  and other  income is higher by $235 million and $87 million
          ($146  million  and $56  million,  net of income  taxes) for the three
          months and nine months ended September 30, 2008, respectively; and

      o   inventories  are  higher  by $43  million  as at  September  30,  2008
          (December 31, 2007 - lower by $44 million).

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


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


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

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

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

In  March  2008,  FASB  issued  Statement  161,   Disclosures  about  Derivative
Instruments  and Hedging  Activities,  an amendment of FASB  Statement  133. The
statement requires  qualitative  disclosures about the objectives and strategies
for using  derivatives,  quantitative  data  about  the fair  value of gains and
losses on  derivative  contracts and details of  credit-risk-related  contingent
features in their hedged position. 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.

In October  2008,  FASB  issued FSP FAS 157-3,  Determining  the Fair Value of a
Financial  Asset When the Market for That  Asset is Not  Active.  This  position
clarifies the  application  of FASB statement 157 in a market that is not active
and provides an example to illustrate  key  considerations  in such a situation.
This  position is effective  upon the issuance date of October 10, 2008. We have
reviewed  the position  and have  determined  that the impact of adoption is not
material on our results of operation or financial position.


                                       29

<PAGE>

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

THE FOLLOWING  SHOULD BE READ IN  CONJUNCTION  WITH THE  UNAUDITED  CONSOLIDATED
FINANCIAL  STATEMENTS  INCLUDED  IN  THIS  REPORT.  THE  UNAUDITED  CONSOLIDATED
FINANCIAL  STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE  WITH GENERALLY  ACCEPTED
ACCOUNTING   PRINCIPLES  (GAAP)  IN  CANADA.   THE  IMPACT  OF  THE  SIGNIFICANT
DIFFERENCES BETWEEN CANADIAN AND UNITED STATES (US) ACCOUNTING PRINCIPLES ON THE
FINANCIAL  STATEMENTS  IS  DISCLOSED  IN NOTE 20 TO THE  UNAUDITED  CONSOLIDATED
FINANCIAL STATEMENTS. THE DATE OF THIS DISCUSSION IS OCTOBER 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 10-K  WHICH  HIGHLIGHTS  DIFFERENCES  BETWEEN  OUR  RESERVES
ESTIMATES  AND  RELATED  DISCLOSURES  THAT ARE  OTHERWISE  REQUIRED  BY CANADIAN
REGULATORY AUTHORITIES.

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

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

                                                           Three Months            Nine Months
                                                      Ended September 30     Ended September 30
(Cdn$ millions)                                           2008      2007         2008      2007
-----------------------------------------------------------------------------------------------
<S>                                                        <C>       <C>        <C>         <C>
Net Income                                                 886       403        1,896       892
Earnings per Common Share, Basic ($/share)                1.68      0.77         3.59      1.69
Cash Flow from Operating Activities                        968     1,097        3,299     2,127

Production before Royalties (mboe/d)                       249       261          257       251
Production after Royalties (mboe/d)                        209       214          214       204
Nexen's Average Realized Oil and Gas Price (Cdn$/boe)    106.22    69.82        99.64     65.96

Capital Investment                                         725       901        2,149     2,531
Net Debt (1)                                             3,914     4,393        3,914     4,393
                                                         --------------------------------------
</TABLE>
Note:
(1) Net  debt is a  non-GAAP  measure  and is  defined  as  long-term  debt  and
    short-term borrowings less cash and cash equivalents.

We recognized  solid net income and cash flow from operating  activities  during
the quarter as a result of high  commodity  prices and strong  production  rates
from our oil and gas  operations.  WTI was 57% higher than the third  quarter of
2007, which allowed us to realize crude oil prices of $115.56/bbl for our sales.
Production  from the North Sea  remains  strong and uptime  rates on our Buzzard
platform  exceeded  96%  during  the  quarter.  Our Gulf of Mexico  assets  were
impacted  by  Hurricanes  Ike and Gustav in  September  and the  majority of our
production is still shut in as a result of damage to platforms  and  third-party
infrastructure  and  pipelines.  We  expect  to  restore  the  majority  of this
production by year end.

At Long Lake,  the  commissioning  of the  gasifier  was  delayed by about three
weeks. Once the gasifier achieves steady state operations,  the hydrocracker and
sulphur  units will be  started  and we expect  first  synthetic  production  to
commence shortly thereafter.  Our bitumen production rates are increasing and 45
of the total 81 well  pairs have now been  converted  to SAGD  operation.  Gross
production rates have recently exceeded 19,000 barrels per day.

In the  quarter,  our  net  income  includes  a  recovery  of $408  million  for
stock-based  compensation  costs that were  previously  expensed.  Our marketing
division reported a loss in the third quarter, reflecting continued, but reduced
losses from our natural gas marketing  business which were  partially  offset by
strong  contributions  from our crude oil  marketing.  During  the  quarter,  we
recognized some gains on the use of physical storage and  transportation  assets
and we have  unrecognized  gains, that we expect to realize on the future use of
these assets,  that more than offset the quarterly loss reported.  Over the past
few months,  we have been simplifying our marketing  strategies and positions to
better  support our  underlying  physical  business  which has been built around
storage,  blending and transportation.  To this end, we are reducing our trading
levels to reduce  volatility and focus on the physical side of our business.  We
are exiting trading  positions that do not support our physical  business and we

                                       30
<PAGE>

are continuing to reduce trading  exposures.  This is reflected in the quarterly
financial  results from this division.  Compared to the same time last year, our
North American  natural gas and crude oil financial  trading volumes are down by
approximately 43% and 40%, respectively.

During the third quarter, we completed an internal  reorganization and financing
of our assets in the North Sea which provided us with an additional one-time tax
deduction in the UK. This,  together with falling commodity  prices,  will cause
our expected  2008 tax  liability  to be lower than  previously  expected.  As a
result,  we have reduced our current tax expense by approximately  $514 million.
Following  this  reorganization  and financing,  we are well  positioned to move
forward  with our  development  and  exploration  plans in the North Sea. In the
short-term,  these plans  include the  upcoming  commissioning  and  start-up of
Ettrick  and our  investment  in the  previously  announced  fourth  platform at
Buzzard to process hydrogen sulphide.  Longer term, our plans include the future
development of our recent discoveries at Golden Eagle, Blackbird and Pink and an
active exploration program over the next few years.

Our cash flow from operating  activities  exceeded capital investment during the
quarter by $243  million.  Our net debt is $490 million lower than year-end 2007
as a result of our strong  financial  results.  Our cash and cash equivalents on
hand at September  30, 2008 was almost $1.8  billion  which,  together  with our
undrawn term credit  facilities,  provides us with strong liquidity to carry out
our investment programs.

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 primarily in:

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

    o   completing our Ettrick development in the UK North Sea;

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

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

Details of our capital programs are set out below:

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

                                                      Major   Early Stage     New Growth     Core Asset
(Cdn$ millions)                                 Development   Development    Exploration    Development          Total
----------------------------------------------------------------------------------------------------------------------
<S>                                             <C>           <C>            <C>            <C>                  <C>
Oil and Gas
    Synthetic (mainly Long Lake)                        194            15              -              -            209
    United Kingdom                                       90             -             43             99            232
    Yemen                                                 -             -              -             29             29
    United States                                        33             -             38             13             84
    Canada                                               15             2             34             19             70
    Nigeria                                              34             -              -              -             34
    Other Countries                                       -             -             11              1             12
Syncrude                                                  -             -              -             19             19
                                             --------------------------------------------------------------------------
                                                        366            17            126            180            689
Chemicals, Marketing, Corporate and Other                 -             -              -             36             36
                                             --------------------------------------------------------------------------
Total Capital                                           366            17            126            216            725
                                             ==========================================================================
As a % of Total Capital                                  50%            3%            17%            30%           100%
                                             --------------------------------------------------------------------------
</TABLE>

                                       31
<PAGE>

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

                                                      Major   Early Stage     New Growth     Core Asset
(Cdn$ millions)                                 Development   Development    Exploration    Development          Total
-----------------------------------------------------------------------------------------------------------------------
<S>                                             <C>           <C>            <C>            <C>                  <C>
Oil and Gas
    Synthetic (mainly Long Lake)                        623           127              2              -            752
    United Kingdom                                      209             -            114            201            524
    Yemen                                                 -             -              9             61             70
    United States                                        40             -            147            140            327
    Canada                                               34            10            144             63            251
    Nigeria                                              63             -              1              -             64
    Other Countries                                       -             -             29             10             39
Syncrude                                                  -             -              -             39             39
                                             --------------------------------------------------------------------------
                                                        969           137            446            514          2,066
Chemicals, Marketing, Corporate and Other                 -             -              -             83             83
                                             --------------------------------------------------------------------------
Total Capital                                           969           137            446            597          2,149
                                             ==========================================================================
As a % of Total Capital                                  45%            6%            21%            28%           100%
                                             --------------------------------------------------------------------------
</TABLE>

SYNTHETIC
Commissioning  of the gasifier  was delayed by about three  weeks.  Upon initial
test firing, mechanical issues were identified with several automated valves and
the burners required  change-out.  The burner change-out work has been completed
and the automated  valves have been repaired.  The valves have been  reinstalled
and the gasifier is in the process of being refired.  Once the gasifier achieves
steady state operations,  the hydrocracker and sulphur units will be started and
we expect first synthetic production to commence shortly thereafter.

On the bitumen front,  the reservoir is performing  well, the reliability of our
surface  facilities is  improving,  steam  injection  rates are at their highest
levels since SAGD start-up and production rates are increasing. In the field, 45
of the total 81 well  pairs have now been  converted  to SAGD  operation,  gross
production  rates  averaged  15,200  bbls/d for the first  half of  October  and
recently  exceeded  19,000 bbls/d.  The average steam to oil ratio (SOR) for the
wells that have been converted to SAGD  operation is currently  about 4.0. About
one-quarter of these wells are already at or below our long-term SOR expectation
of 3.0 and approximately 10% have achieved targeted bitumen production rates. We
expect to reach full design rates of 72,000 bbls/d of bitumen production (36,000
bbls/d net to us),  upgraded to  approximately  60,000  bbls/d of Premium  Sweet
Crude (PSC(TM)) late next year or early 2010.

We are  engaged  in  engineering  and  planning  for  Phase 2 and have  received
regulatory  approval for the Phase 2 upgrader.  Ultimately,  the  sanctioning of
Phase 2 will depend on multiple  factors  including the initial  performance  of
Phase 1, receiving  regulatory  approval for Phase 2 SAGD operations,  receiving
clarity on proposed climate change regulations, finalizing cost estimates and an
improved economic environment.


UNITED KINGDOM - NORTH SEA
In the North Sea, we drilled a  discovery  at Pink that  encountered  oil shows.
These results are encouraging and consistent  with pre-drill  estimates.  We see
additional  prospects in the area and are currently  assessing  them.  Pink is a
candidate for co-development  with Golden Eagle where we are currently reviewing
development  options.  We have a 34% operated interest in Golden Eagle and a 46%
operated working interest in Pink.

During the quarter,  we also made a discovery at Blackbird  which is located six
kilometres south of our operated  Ettrick field. The well was drill-stem  tested
and flowed at an average  restricted rate of 3,800 bbls/d.  Further appraisal is
planned with a view to tying Blackbird back to Ettrick.  We operate both Ettrick
and Blackbird and have an 80% working interest in each.

Delivery of the FPSO we are leasing for Ettrick has been delayed until  December
following  commissioning delays in Singapore.  The cost of these delays is borne
by the owner of the FPSO.  First  production  is now  scheduled  for early 2009.
Production  volumes are  expected to average  between  approximately  15,000 and
20,000 boe/d in 2009. The FPSO is designed to handle 30,000 bbls/d of oil and 35
mmcf/d of gas and has capacity for nearby discoveries such as Blackbird.


UNITED  STATES - GULF OF  MEXICO
At our  Cote  de Mer  prospect,  located  on the  Louisiana  coast,  exploration
drilling was  interrupted by hurricanes  Gustav and Ike. Upon resuming  drilling
operations, we experienced drilling difficulties. We have encountered the target
reservoir  but have not yet  reached  the target  depth of 21,900  feet.  We are
encouraged by the  preliminary  data obtained and are currently  conducting pipe
recovery operations in order to resume drilling to reach target depth. We have a
37.5% working interest in this prospect.

In the Eastern Gulf of Mexico, we drilled the  Fredericksburg  exploration well.
Target sands were reached but we did not encounter commercial hydrocarbons. This
was the third prospect to be drilled in the area following  earlier successes at

                                       32
<PAGE>

Vicksburg and Shiloh.  We remain optimistic about the potential of this emerging
play and are currently working with Shell, the operator,  to finalize 2009 plans
for this area. We expect to drill an  additional  well here next year and have a
feasibility study underway to assess development options for Vicksburg.  We have
a 25% interest in Vicksburg and a 20% interest in Shiloh and Fredericksburg.

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

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


CANADA
Following the success of last winter's  drilling program in the Horn River basin
in northeast  British  Columbia,  we decided to drill two horizontal  wells this
summer.  The wells have been drilled and are currently being fraced with testing
results  expected  before  year-end.  The results from these wells will be taken
into consideration as we plan our upcoming winter program for the area.

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

Our CBM production continues to increase and averaged 45 mmcf/d for the quarter.
Since the beginning of the year, our production has increased  approximately 60%
as our existing wells dewater and we bring new ones on-stream. Performance is in
line with expectations and underlines the increasing value of our CBM assets.


OFFSHORE WEST AFRICA
Development of the Usan field,  offshore  Nigeria is fully  underway.  The field
development  plan includes a FPSO vessel with a storage  capacity of two million
barrels of oil. All major  contracts for  deep-water  facilities  are proceeding
with detailed engineering and early procurement of equipment and materials.  The
Usan  field is  expected  to come on stream in early  2012 and will ramp up to a
peak production rate of 180,000 bbls/d (36,000 bbls/d net to us).

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


                                       33
<PAGE>

<TABLE>
<CAPTION>
FINANCIAL RESULTS

CHANGE IN NET INCOME

                                                                                               2008 VS. 2007
                                                                                     Three Months           Nine Months
(Cdn$ millions)                                                                   Ended September 30     Ended September 30
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>                    <C>
NET INCOME AT SEPTEMBER 30, 2007                                                                 403                    892
                                                                               =============================================
   Favourable (unfavourable) variances:

     Production Volumes, After Royalties
       Crude Oil                                                                                 (24)                   120
       Natural Gas                                                                                (9)                    27
       Change in Crude Oil Inventory                                                              67                      3
                                                                               ---------------------------------------------
          Total Volume Variance                                                                   34                    150

     Realized Commodity Prices
       Crude Oil                                                                                 653                  1,848
       Natural Gas                                                                                50                    116
                                                                               ---------------------------------------------
          Total Price Variance                                                                   703                  1,964

     Oil and Gas Operating Expense
       Conventional                                                                              (19)                   (42)
       Syncrude                                                                                  (15)                   (57)
                                                                               ---------------------------------------------
          Total Operating Expense Variance                                                       (34)                   (99)

     Depreciation, Depletion, Amortization and Impairment
       Conventional                                                                              (34)                   (31)
       Syncrude                                                                                    2                      3
       Other                                                                                      (5)                   (13)
                                                                               ---------------------------------------------
          Total Depreciation, Depletion, Amortization and Impairment Variance                    (37)                   (41)

     Exploration Expense                                                                         (45)                   (24)

     Energy Marketing Contribution                                                               (55)                  (276)

     Chemicals Contribution                                                                      (18)                   (47)

     General and Administrative Expense                                                          315                     82

     Interest Expense                                                                             24                     75

     Current Income Taxes                                                                        162                   (470)
     Future Income Taxes                                                                        (503)                  (280)

     Other
       Increase in Fair Value of Crude Oil Put Options                                            20                     30
       Allowance for Doubtful Receivables                                                        (38)                   (38)
       Other                                                                                     (45)                   (22)
                                                                               ---------------------------------------------

NET INCOME AT SEPTEMBER 30, 2008                                                                 886                  1,896
                                                                               =============================================
</TABLE>

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


                                       34
<PAGE>

<TABLE>
<CAPTION>
OIL & GAS AND SYNCRUDE

PRODUCTION (BEFORE ROYALTIES) (1)

                                                                      Three Months                Nine Months
                                                                  Ended September 30         Ended September 30
                                                                   2008         2007         2008          2007
----------------------------------------------------------------------------------------------------------------
<S>                                                               <C>           <C>         <C>           <C>
Crude Oil and NGLs (mbbls/d)
      United Kingdom                                              100.0         90.0        102.0          77.2
      Yemen                                                        54.1         69.8         58.0          73.3
      Canada                                                       16.0         17.0         16.2          17.3
      United States                                                 8.5         14.2         11.2          17.3
      Other Countries                                               5.7          6.5          5.7           6.2
      Long Lake Bitumen (2)                                         5.2          -            3.0           -
Syncrude (mbbls/d) (3)                                             22.9         25.2         20.4          21.9
                                                           -----------------------------------------------------
                                                                  212.4        222.7        216.5         213.2
                                                           -----------------------------------------------------
Natural Gas (mmcf/d)
      Canada                                                        133          111          128           115
      United States                                                  70           98           94            95
      United Kingdom                                                 17           18           19            15
                                                           -----------------------------------------------------
                                                                    220          227          241           225
                                                           -----------------------------------------------------

Total Production (mboe/d)                                           249          261          257           251
                                                           =====================================================

PRODUCTION (AFTER ROYALTIES) (1)

                                                                      Three Months                Nine Months
                                                                  Ended September 30         Ended September 30
                                                                   2008         2007         2008          2007
----------------------------------------------------------------------------------------------------------------
Crude Oil and NGLs (mbbls/d)
      United Kingdom                                              100.0         90.0        102.0          77.2
      Yemen                                                        29.9         39.0         30.3          41.8
      Canada                                                       12.0         12.9         12.3          13.5
      United States                                                 7.3         12.5          9.7          15.3
      Other Countries                                               5.1          6.0          5.3           5.7
      Long Lake Bitumen (2)                                         5.2          -            3.0           -
Syncrude (mbbls/d) (3)                                             18.9         21.1         17.3          18.8
                                                           -----------------------------------------------------
                                                                  178.4        181.5        179.9         172.3
                                                           -----------------------------------------------------
Natural Gas (mmcf/d)
      Canada                                                        107           94          107            96
      United States                                                  60           83           80            81
      United Kingdom                                                 17           18           19            15
                                                           -----------------------------------------------------
                                                                    184          195          206           192
                                                           -----------------------------------------------------

Total Production (mboe/d)                                           209          214          214           204
                                                           =====================================================
</TABLE>
Notes:
(1) We have  presented  production  volumes  before  royalties as we measure our
    performance  on  this  basis  consistent  with  other  Canadian  oil and gas
    companies.
(2) Pre-operating  revenues  and costs  associated  with Long Lake  bitumen  are
    capitalized as development costs until we reach commercial operations.
(3) Considered a mining operation for US reporting purposes.


HIGHER SALES VOLUMES INCREASED NET INCOME FOR THE QUARTER BY $34 MILLION
Production  before royalties  decreased 2% and 5% from the prior quarter and the
third quarter of 2007, respectively.  The decrease was primarily caused by lower
production  volumes  in the Gulf of Mexico as a result  of  hurricanes  in early
September.  Natural  declines  in Yemen  were  only  partially  offset by rising
bitumen  production at Long Lake,  which  averaged  5,200 bbls/d in the quarter.
Production  after  royalties was comparable  with the prior quarter,  but was 2%
lower than the third quarter of 2007.

Early in July, we sold approximately 850,000 barrels of crude oil inventory from
our North Sea operations that was produced during the second quarter and carried
as inventory at June 30, 2008.

                                       35
<PAGE>

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

                                                               Before     After
(mboe/d)                                                    Royalties  Royalties
--------------------------------------------------------------------------------
Production, second quarter 2008                                   254       211
   Production changes:
       Yemen                                                       (3)        -
       United States                                               (7)       (6)
       Long Lake Bitumen                                            2         2
       Syncrude                                                     4         3
       Other                                                       (1)       (1)
                                                        ------------------------
Production, third quarter 2008                                    249       209
                                                        ========================

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

UNITED KINGDOM
The Buzzard platform consistently operated above the original design expectation
and production  was 4% higher from the previous  quarter and 17% higher from the
third quarter of 2007. Buzzard averaged uptime of approximately 96% and produced
89,600 boe/d during the quarter  (207,500 boe/d gross).  In early July,  Buzzard
was shut in for two days to  complete  a planned  rig move.  During  the  fourth
quarter, we expect to have one week of downtime at Buzzard to carry out platform
maintenance.

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

At  Scott/Telford,  natural  declines,  combined  with downtime for platform and
subsea  maintenance,  reduced  production volumes 28% and 41% as compared to the
previous  quarter and the third quarter of 2007,  respectively.  Production from
our  non-operated  fields at Duart and  Farragon  averaged  4,400  boe/d for the
quarter.

YEMEN
Masila  production  continues to decline  consistent with  expectations.  We are
targeting infill development  drilling  opportunities due to the maturity of the
field. This resulted in production declines of 7% from the prior quarter and 20%
from the third  quarter of 2007.  Our drilling  program for 2008 is focusing our
capital  investment  on  existing  fields to  maximize  reserve  recoveries  and
economic  returns.  To date this year, we have drilled 13 development  wells and
plan to drill 10 additional wells in the fourth quarter. Production declines are
expected to continue as we maximize  recovery of the  remaining  reserves on the
block, prior to contract expiry in 2011.

Block 51 production was consistent with the prior quarter but was 30% lower than
the third quarter of 2007 due to natural  decline rates and from drilling  fewer
development wells. We drilled four development wells at BAK A this year with two
more planned before the end of the year.

CANADA
Production  in Canada is 2% higher than the previous  quarter and 8% higher than
the same period last year. Our  conventional  production  from our heavy oil and
natural gas properties is consistent with the previous quarter and only slightly
lower than the third quarter of 2007, as our capital  investments offset natural
declines.  CBM production averaged 45 mmcf/d during the quarter, 12% higher than
the previous  quarter and 70% higher than the third quarter of 2007.  Production
continues to increase as our wells in the Fort  Assiniboine area de-water and we
bring additional development wells on stream.

UNITED STATES
Gulf of Mexico  production  volumes are 27% and 34% lower than the prior quarter
and the same period last year, respectively,  primarily due to hurricane-related
downtime  and damage.  We were  producing  approximately  30,000  boe/d prior to
Hurricanes Gustav and Ike. The hurricanes  reduced our third quarter  production
by  approximately  8,300 boe/d.  A number of our properties  have been brought
back  online,  while others are ready to start  production  when  pipelines  are
re-opened.

In the deep water,  Gunnison  received  minor damage while at Aspen and Wrigley,
third-party host facilities were damaged.  These deep-water  fields are expected
to resume  production  this year, but timing is uncertain due to our reliance on
third-party  repairs.  Our Green Canyon 6, 50 and 137  deep-water  fields remain
shut-in following the destruction of a third-party  processing platform.  We are
currently  evaluating  alternative  production  options for these fields. On the
shelf at Vermilion  321/340,  there was substantial damage to the lower decks of
some of the  platforms.  We do not  expect  production  at this  location  to be
restored  until 2009.  Production  from these  deep-water  and shelf  fields was
approximately 5,600 boe/d prior to Hurricane Ike.

                                       36
<PAGE>

On the shelf, initial assessments indicate minor damage to a number of our other
production facilities and subject to completing underwater assessments;  we will
make the necessary repairs and expect to restore production later this year.

For the fourth quarter,  we expect our production  volumes in the Gulf of Mexico
to range between  10,000 and 20,000 boe/d.  Production  volumes are dependant on
the timing of repair work and the readiness of third-party infrastructure,  such
as production platforms and pipelines.  We carry insurance coverage for physical
damage caused by hurricanes, subject to certain deductibles and limits.

OTHER  COUNTRIES
Production  from the Guando  field in Colombia  averaged  5,700 boe/d during the
quarter, consistent with the prior quarter. Seven wells were shut in as a result
of landslides  earlier in the year.  Three of these wells have been brought back
on stream in the third  quarter.  Work is underway to bring the remaining  wells
back on stream. Under the terms of our license, our interest in the Guando field
will  decrease by half to 10% once the field has  produced  60 million  barrels,
likely in mid 2009. This will reduce our share of reported production volumes.

LONG LAKE BITUMEN
Long Lake SAGD  production  continues to ramp up as we convert  wells to bitumen
production from steam  circulation and as the reliability of the SAGD facilities
improves.  The bitumen  reservoir is performing  well,  the  reliability  of our
surface  facilities is  improving,  steam  injection  rates are at their highest
levels since SAGD start up and production rates are increasing. In the field, 45
of the total 81 well pairs have now been  converted  to SAGD  operations,  gross
production  rates  averaged  15,200  bbls/d for the first  half of  October  and
recently exceeded 19,000 bbls/d (9,500 bbls/d, net to us). Bitumen production is
expected to continue to increase  during the fourth  quarter.  We are completing
commissioning  activities  for the  upgrader  and we expect  to begin  producing
premium synthetic crude oil in the fourth quarter.

SYNCRUDE
Syncrude   production  was  20%  higher  than  the  previous  quarter  following
completion of a turnaround on Coker 8-1 and from performing maintenance activity
on other  units in the second  quarter.  Third  quarter  production  was reduced
slightly in July for a sulphur plant shutdown and again in September to complete
a turnaround  on Coker 8-2.  Production  was 9% lower than the third  quarter of
last year as a result of these production outages.


                                       37
<PAGE>

<TABLE>
<CAPTION>
COMMODITY PRICES
                                                                          Three Months                Nine Months
                                                                      Ended September 30         Ended September 30
                                                                       2008         2007         2008          2007
--------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>           <C>         <C>            <C>
CRUDE OIL AND NGLS
     West Texas Intermediate (WTI) (US$/bbl)                         117.98        75.38       113.29         66.19
                                                               -----------------------------------------------------

     Differentials (1) (US$/bbl)
        Heavy Oil                                                     17.74        23.04        20.55         19.87
        Mars                                                           5.38         5.83         6.42          4.58
        Masila                                                         5.01         0.66         3.75         (0.22)
        Dated Brent (Brent)                                            3.20         0.51         2.27         (0.94)

     Producing Assets (Cdn$/bbl)
        United Kingdom                                               114.89        78.06       108.21         73.08
        Yemen                                                        115.92        78.27       110.46         72.65
        Canada                                                        97.91        46.76        85.69         43.43
        United States                                                122.46        74.43       110.29         65.90
        Other Countries                                              120.11        76.29       108.03         68.42
        Syncrude                                                     126.56        82.09       120.12         76.77

     Corporate Average (Cdn$/bbl)                                    115.56        75.86       108.36         70.17
                                                               -----------------------------------------------------

NATURAL GAS
     New York Mercantile Exchange (NYMEX) (US$/mmbtu)                  8.95         6.24         9.73          7.02
     AECO (Cdn$/GJ)                                                    8.76         5.32         8.13          6.46
                                                               -----------------------------------------------------

     Producing Assets (Cdn$/mcf)
        Canada                                                         8.00         5.17         8.33          6.48
        United States                                                 10.14         6.75        10.28          8.03
        United Kingdom                                                 7.53         4.99         7.11          4.13

     Corporate Average (Cdn$/mcf)                                      8.65         5.80         9.03          6.95
                                                               -----------------------------------------------------

NEXEN'S AVERAGE REALIZED OIL AND GAS PRICE (Cdn$/boe)                106.22        69.82        99.64         65.96
                                                               -----------------------------------------------------

AVERAGE FOREIGN EXCHANGE RATE
     Canadian to US Dollar (US$)                                     0.9599       0.9573       0.9817        0.9052
                                                               -----------------------------------------------------
</TABLE>

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

HIGHER REALIZED COMMODITY PRICES INCREASED QUARTERLY NET INCOME BY $703 MILLION
Average commodity prices reduced slightly in the third quarter from their record
levels.  WTI  decreased  5% from the second  quarter but was 57% higher than the
same period last year.  Similarly,  Brent crude oil prices were down 5% from the
previous  quarter  but 53% higher  than the third  quarter of 2007.  We realized
$115.56/bbl for our crude oil sales in the quarter.  This was only 2% lower than
the previous quarter as the decrease in benchmark commodity prices was mitigated
somewhat by the strengthening US dollar relative to the Canadian dollar.

While our third  quarter  realized  gas price  decreased  15% from the  previous
quarter,  NYMEX fell 22%. As the US dollar  strengthened  against  the  Canadian
dollar in the third  quarter,  it  partially  offset  the  NYMEX  decline.  When
compared to the third  quarter of 2007,  our  realized  gas price was 49% higher
while NYMEX prices  increased  43%.  AECO natural gas prices  increased 65% from
last year but were consistent with the second quarter averaging $8.76/GJ.

Compared to the previous quarter, the US dollar has strengthened relative to the
Canadian  dollar.  As a result,  our net sales  increased by  approximately  $63
million  and  our  realized  crude  oil  and  natural  gas  price  increased  by
approximately $3.51/bbl and $0.26/mcf, respectively.


                                       38
<PAGE>

CRUDE OIL REFERENCE PRICES
Crude oil prices remained  volatile during the third quarter.  WTI ranged from a
high of  US$147.27/bbl  in July down to a low of US$90.51/bbl in September.  The
quarterly average WTI price was  US$117.98/bbl but trended downwards  throughout
the quarter to finish at US$100.64/bbl.

Some of the factors  that  contributed  to the strength in crude oil prices this
year include:  1) continuing  strong  demand from emerging  markets,  2) limited
supply  growth,  3) low  OPEC  spare  capacity,  4)  geopolitical  concerns,  5)
inflation  fears,  6) a weaker US dollar,  and 7)  investment  money  flows into
commodities.  Higher  prices were  considered  necessary  to ration  demand in a
supply-constrained environment where much of the non-OECD demand growth has been
reduced.  As crude prices  increased,  many countries,  including China,  India,
Vietnam,  Indonesia and Sri Lanka, had to reduce price subsidies  because of the
increased fiscal strain.

Recently the factors driving the strength in crude oil prices have diminished as
a result of the global  financial  market turmoil and fears of a global economic
recession.  The instability of world financial  markets presents a major risk to
future global economic growth and the demand for commodities, including oil.

As commodity prices declined over the quarter,  inflation  concerns  diminished.
Central banks have shifted their focus from controlling inflation to stimulating
and  stabilizing the economy.  Futures  positions used as a hedge against the US
dollar and inflation were unwound as expectations  of slower  European  economic
growth caused the US dollar to strengthen.  Hedge and mutual fund  liquidations,
de-leveraging by financial  institutions,  and counterparties reducing exposures
with troubled  financial  players also  contributed to the downward  pressure on
prices.

Normal factors that impact crude oil prices such as geopolitical  unrest and the
threat of hurricane  damage in the Gulf of Mexico had a minimal impact on price.
Significant  political  events such as  Russia's  invasion of Georgia and Iran's
continued nuclear program did little to move price. There was also little impact
on commodity  prices from  Hurricanes Ike and Gustav,  which caused  substantial
damage  to  producing  assets  in the Gulf of  Mexico.  These  events  have been
overshadowed by the global financial market instability.

CRUDE OIL DIFFERENTIALS
In Canada,  heavy oil differentials  averaged  US$17.74/bbl (15% of WTI) for the
quarter,  compared to  US$23.04/bbl  (31% of WTI) for the third quarter of 2007.
Heavy oil differentials  continued to trade at tight levels to WTI due to strong
demand for heavier  crudes and lower supply levels from delays in the ramp up of
oil sands projects.

In the US Gulf  Coast,  the Mars  differential  continued  to tighten and is now
narrower than historic levels, averaging US$5.38/bbl (5% of WTI) for the quarter
compared  to  US$5.83/bbl  (8% of WTI) in the third  quarter of 2007.  The Yemen
Masila  differential  widened relative to WTI, with Masila trading at a discount
of  US$5.01/bbl  compared to a discount of  US$0.66/bbl  in the third quarter of
2007.  The  weakening  Brent crude price  compared to WTI  contributed  to wider
Masila differentials, as Masila is typically priced off of Brent.

The Brent/WTI  differential widened during the quarter,  with Brent trading at a
discount to WTI of  US$3.20/bbl,  compared to a discount of US$0.51/bbl  for the
third  quarter of 2007.  The  differential  was volatile  during the quarter and
Brent  occasionally  traded at a premium  to WTI.  Shipping  displacements  as a
result of storms  increased  already high  transportation  costs and continue to
support wider differentials.

NATURAL GAS REFERENCE PRICES
NYMEX natural gas prices  averaged  US$8.95/mmbtu  for the quarter,  compared to
US$6.24/mmbtu for the third quarter of 2007. Similar to oil prices,  natural gas
prices  peaked early in the quarter.  Prices fell  subsequently  throughout  the
quarter and  stabilized in the $7 to $8 range in September.  Some of the factors
contributing  to lower natural gas prices include 1) lower crude oil prices,  2)
unstable  financial  markets,  3) reduced power generation  demand due to colder
August  weather in North  America,  and 4) supply  increases  in North  American
unconventional  tight  sand/shale gas production.  Leading up to the price peak,
domestic  supply  forecasts  were lower than estimates of demand and natural gas
prices rose on expectations that the North American  consumers would have to pay
higher  gas prices to attract  LNG  cargoes  from  Europe.  However,  unexpected
unconventional supply growth in North America has made this unlikely in the near
term.


                                       39
<PAGE>

<TABLE>
<CAPTION>
OPERATING COSTS

                                                                                          Three Months              Nine Months
                                                                                      Ended September 30       Ended September 30
(Cdn$/boe)                                                                             2008         2007       2008          2007
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>           <C>       <C>            <C>
Operating costs based on our working interest production before royalties (1)
      Conventional Oil and Gas                                                         8.75         7.81       8.38          7.93
      Synthetic Crude Oil
         Syncrude                                                                     32.40        22.37      37.22         25.20
      Average Oil and Gas                                                             10.90         9.26      10.70          9.44
                                                                               ---------------------------------------------------

Operating costs based on our net production after royalties
      Conventional Oil and Gas                                                        10.38         9.60      10.09          9.84
      Synthetic Crude Oil
         Syncrude                                                                     39.23        26.73      44.01         29.31
      Average Oil and Gas                                                             12.96        11.34      12.87         11.65
                                                                               ---------------------------------------------------
</TABLE>
Note:
(1) Operating costs per boe are our total oil and gas operating costs divided by
    our working interest  production before royalties.  We use production before
    royalties to monitor our performance  consistent with other Canadian oil and
    gas companies.


HIGHER OIL AND GAS OPERATING COSTS  DECREASED  NET INCOME FOR THE QUARTER BY $34
MILLION
Operating costs have increased $34 million or 16% from the prior year, primarily
due to  higher  expenditures  at  Syncrude  and  turnaround  costs for our Scott
platform in the North Sea.

In the UK North Sea, costs increased $16 million over last year. The majority of
these additional expenses were due to platform  maintenance at Scott and sub-sea
maintenance in the Telford field.  These costs added  $0.22/boe to our corporate
average.  Slightly  higher  transportation  tariffs  for  the  Buzzard  platform
increased  costs;  however,  as many of Buzzard's  operating  costs are fixed in
nature, the higher production levels reduced our corporate average by $0.11/boe.

In Yemen,  we continue to incur  expenditures  on maintaining  existing wells to
maximize  reserve  recoveries and slow the natural declines of the mature field.
These costs,  combined with declining  production  rates,  increased the average
operating  cost by  $0.30/boe.  In the Gulf of Mexico,  higher  lease  operating
costs,  additional surface facility maintenance and other expenses increased our
costs  relative  to last year.  Lower  production  as a result of the  hurricane
activity and the higher costs increased our corporate average by $0.75/boe.

In Canada, our operating costs last year included $7 million of expenses for the
Balzac  gas plant  turnaround  expenditures  that were not  incurred  this year.
However,  higher costs were experienced this year in our heavy oil operations as
a result of industry cost inflation,  expenses  related to new wells,  down hole
maintenance  in our  conventional  gas  assets,  and higher  activity in our CBM
operations.  Overall,  the change in operating costs and higher production rates
in Canada reduced our corporate average by $0.20/boe.

At Syncrude, operating costs increased $15 million over last year as a result of
four  factors:  1)  temporary  contracting  costs to increase  the  mineable ore
inventory for bitumen supply; 2) purchasing  additional  third-party  bitumen to
upgrade; 3) higher natural gas prices, and 4) unscheduled  maintenance expenses.
These higher expenses,  combined with lower production,  increased our corporate
average by $0.90/boe.

US-dollar  denominated  operating  costs were lower when  translated to Canadian
dollars  as a result of the  weaker US  dollar.  This  decreased  our  corporate
average by $0.17/boe for the quarter.


                                       40
<PAGE>

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

                                                                                Three Months                Nine Months
                                                                            Ended September 30         Ended September 30
(Cdn$/boe)                                                                   2008         2007         2008          2007
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>          <C>          <C>           <C>
DD&A based on our working interest production before royalties (1)
      Conventional Oil and Gas                                              16.08        14.89        15.05         15.12
      Synthetic Crude Oil
         Syncrude                                                            6.10         6.40         6.47          6.59
      Average Oil and Gas                                                   15.17        14.05        14.36         14.58
                                                                     -----------------------------------------------------

DD&A based on our net production after royalties
      Conventional Oil and Gas                                              19.08        18.29        18.13         18.77
      Synthetic Crude Oil
         Syncrude                                                            7.38         7.65         7.65          7.67
      Average Oil and Gas                                                   18.03        17.21        17.27         17.74
                                                                     -----------------------------------------------------
</TABLE>
Note:
(1) DD&A per boe is our DD&A for oil and gas  operations  divided by our working
    interest production before royalties.  We use production before royalties to
    monitor  our  performance   consistent  with  other  Canadian  oil  and  gas
    companies.


HIGHER OIL AND GAS DD&A DECREASED NET INCOME FOR THE QUARTER BY $32 MILLION
Our DD&A  expense was higher than last year,  primarily  as the result of higher
sales  volumes in our North Sea  operations.  UK crude oil and natural gas sales
volumes were 27% higher than last year, increasing our quarterly DD&A expense by
$41 million.

Our  production  mix between areas  continues to change as a result of declining
production  rates in our Yemen  operations,  which  have  been  offset by strong
volumes from our North Sea assets.  This change in production  mix has increased
our overall corporate average rate by $0.55/boe.  Depletion rates at Buzzard are
higher than our corporate  average as they include our  acquisition  and project
completion costs.

In the Gulf of Mexico,  reserve  revisions at the end of 2007 resulted in higher
depletion  rates,  increasing our corporate  average rate by $0.55/boe from last
year. However,  our total DD&A expense was $10 million lower in the quarter as a
result of lower production rates caused by hurricane activity.

In  Canada,   our  CBM  projects  in  central  Alberta  continue  to  experience
differences  between  the  timing  of  capital  expenditures  on new  wells  and
facilities and the  recognition of associated  reserves.  This results in higher
depletion rates earlier in a field's life and increased our quarterly  corporate
average DD&A rate by $0.22/boe  from last year. We expect our depletion rate for
our CBM projects to decline over time as we recognize additional proved reserves
as we gain additional  production experience to support increasing the estimated
recovery factor of the gas in place.

The stronger Canadian dollar relative to the same period last year decreased our
corporate average by $0.37/boe,  as depletion of our international and US assets
is denominated in US dollars.


                                       41
<PAGE>

<TABLE>
<CAPTION>
EXPLORATION EXPENSE

                                                                    Three Months               Nine Months
                                                                 Ended September 30         Ended September 30
(Cdn$/million)                                                    2008         2007         2008          2007
---------------------------------------------------------------------------------------------------------------
<S>                                                                <C>          <C>          <C>           <C>
Seismic                                                             38           19           72            79
Unsuccessful Exploration Drilling                                   50           31          101            85
Other                                                               24           17           72            57
                                                             --------------------------------------------------
Total Exploration Expense                                          112           67          245           221
                                                             ==================================================

New Growth Exploration                                             126          170          446           377
Geological and Geophysical Costs                                    38           19           72            79
                                                             --------------------------------------------------
Total Exploration Expenditures                                     164          189          518           456
                                                             ==================================================

Exploration Expense as a % of Exploration Expenditures              68%          35%          47%           48%
                                                             --------------------------------------------------
</TABLE>

HIGHER EXPLORATION EXPENSE DECREASED NET INCOME FOR THE QUARTER BY $45 MILLION
Our exploration program continues to focus on our two primary exploration areas:
the North Sea and the Gulf of  Mexico.  Our third  quarter  exploration  expense
includes costs related to unsuccessful drilling.

In the Gulf of Mexico,  we expensed $26 million of costs for the  Fredericksburg
well, located in the deep water. This well was drilled to a depth of 24,560 feet
but failed to encounter commercial  hydrocarbons and was subsequently abandoned.
We are  continuing  to evaluate  our Cote De Mer prospect in the Gulf of Mexico,
but drilling was suspended during the quarter due to Hurricanes Gustav and Ike.

In the UK, we wrote off our  Yeoman  well for $6  million  upon  evaluating  our
development  options for the discovery.  Future  development of Yeoman relied on
the success of other exploration wells in the area. With no immediate success in
the vicinity, we have no further plans to pursue development of the area.

Elsewhere  in the UK North Sea, we made a discovery  at Blackbird in the quarter
and drilled successful exploration and sidetrack wells at Pink. We are currently
evaluating development opportunities for the Blackbird and Pink discoveries.  We
have  an  80%  and  46%  operated   working  interest  in  Blackbird  and  Pink,
respectively.

Exploration  expense in the Norwegian North Sea included $32 million to complete
our summer seismic  programs.  Our exploration  activity in Norway is focused on
acquiring and processing  seismic data that will enable us to identify  drilling
opportunities on our newly acquired blocks.


                                       42
<PAGE>

<TABLE>
<CAPTION>
ENERGY MARKETING

                                                                         Three Months               Nine Months
                                                                      Ended September 30         Ended September 30
(Cdn$/millions, except as indicated)                                   2008         2007         2008          2007
--------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>          <C>          <C>           <C>
      Physical Sales (1)                                             16,479       11,579       48,987        33,980
      Physical Purchases (1)                                        (16,255)     (11,424)     (48,077)      (33,308)
      Net Financial Transactions (1)                                    239           64         (365)           78
      Change in Fair Market Value of Inventory                         (314)           -         (164)            -
                                                                 ---------------------------------------------------
Net Revenue                                                             149          219          381           750
      Transportation Expense                                           (197)        (211)        (536)         (620)
      Other                                                               7            6           19            10
                                                                 ---------------------------------------------------
NET MARKETING REVENUE                                                   (41)          14         (136)          140
                                                                 ===================================================

CONTRIBUTION TO NET MARKETING REVENUE BY REGION
      North America                                                     (53)          23         (131)          115
      Asia                                                                2            3           10             8
      Europe                                                             10          (12)         (15)           17
                                                                 ---------------------------------------------------
NET MARKETING REVENUE                                                   (41)          14         (136)          140
      Depreciation, Depletion, Amortization and Impairment               (4)          (3)         (11)          (10)
      General and Administrative                                          4          (15)         (63)          (68)
      Allowance for Doubtful Receivables                                (38)           -          (38)            -
                                                                 ---------------------------------------------------
MARKETING CONTRIBUTION TO INCOME BEFORE INCOME TAXES                    (79)          (4)        (248)           62
                                                                 ===================================================

NORTH AMERICA
      NATURAL GAS
      Physical Sales Volumes (2)  (bcf/d)                               7.0          6.1          7.0           5.5
      Transportation Capacity (bcf/d)                                   2.1          2.5          2.1           2.5
      Storage Capacity (bcf)                                           49.3         43.0         49.3          43.0
      Financial Volumes (3) (bcf/d)                                    12.5         21.9         19.2          21.8

      CRUDE OIL
      Physical Sales Volumes (2) (mbbls/d)                              626          651          623           658
      Storage Capacity (mbbls)                                        3,242        2,554        3,242         2,554
      Financial Volumes (3) (mbbls/d)                                 1,454        2,404        1,429         2,276

      POWER
      Physical Sales Volumes (2) (MW/d)                               4,610        4,494        4,792         4,436
      Generation Capacity (MW/hr)                                       177          177          177           177

ASIA
      Physical Sales Volumes (2) (mbbls/d)                              166          152          194           169
      Financial Volumes (3) (mbbls/d)                                   365          195          324           229

EUROPE
      Financial Volumes (3) (mbbls/d)                                   216          462          970           407

VALUE-AT-RISK
      Quarter-end                                                        27           34           27            34
      High                                                               33           38           40            38
      Low                                                                19           28           19            24
      Average                                                            29           33           31            31
                                                                 ---------------------------------------------------
</TABLE>
Notes:
(1) Marketing's   physical   sales,   physical   purchases   and  net  financial
    transactions  are reported net on the  Unaudited  Consolidated  Statement of
    Income as marketing and other.
(2) Excludes  intra-segment  transactions.  Physical volumes  represent  amounts
    delivered during the quarter.
(3) Financial volumes represent amounts traded during the quarter.

                                       43
<PAGE>

LOWER CONTRIBUTION FROM ENERGY MARKETING DECREASED NET INCOME BY $55 MILLION
Over the last few months,  we have been  realigning our strategies and positions
to better  support our core  physical  business as a  producer/marketer.  We are
working to reduce our trading  levels and the overall size of our North American
business. We are exiting positions that do not support our realigned focus. This
is reflected in the quarterly financial results.

The overall  quarterly  contribution from North America is down due to losses in
our natural gas business,  which were partially offset by a strong  contribution
from our crude oil business:

    o   Losses  in our  natural  gas  business  occurred  as we worked to reduce
        trading  exposures  and to  protect  the  value of some of our  physical
        capacity  contracts.   Narrowing  spreads  between  supply  regions  and
        consuming  markets  generated losses on certain physical basis contracts
        (commodity purchase and/or sales contract) over the next three years. We
        also recognized losses on natural gas financial  contracts used to hedge
        our physical transportation capacity contracts.  The offsetting gains on
        our physical  capacity  contracts  cannot be  recognized  until they are
        used.

    o   Crude oil gains were driven primarily  through  blending  activities and
        moving  of  product  between  markets.  Our  liquids  business  has been
        realizing the benefit of a clear focus on a physical  marketing strategy
        over the last twelve months.

Compared to the same time last year,  our North  American  natural gas and crude
oil  financial   trading  volumes  are  down  by  approximately   43%  and  40%,
respectively.  Our European business has also seen improvements in their results
with a clearer  focus on our  physical  producer/marketer  model.  We have added
physical  capacity  contracts,  both storage and  transportation,  in the UK and
continental Europe.

In September,  Lehman Brothers filed for bankruptcy  protection and our exposure
to them in our trading  operations  was  approximately  $38 million.  The entire
amount was written off in the quarter  however we continue to pursue recovery of
these  amounts.  Given  current  conditions  in credit  markets,  we are closely
monitoring  credit  exposures.  The  majority  of our  counterparties  are  with
integrated oil companies, crude oil refiners & marketers and large utilities.

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

<TABLE>
<CAPTION>
COMPOSITION OF NET MARKETING REVENUE

                                                             Three Months         Nine Months
                                                        Ended September 30   Ended September 30
(Cdn$/millions)                                             2008      2007      2008       2007
------------------------------------------------------------------------------------------------
<S>                                                          <C>         <C>    <C>         <C>
Trading Activities                                           (49)        6      (157)       127
Other Activities                                               8         8        21         13
                                                       -----------------------------------------
Net Marketing Revenue                                        (41)       14      (136)       140
                                                       =========================================
</TABLE>

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

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


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

                                       44
<PAGE>

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

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

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

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

At September 30, 2008, the fair value of our derivative  contracts in our energy
marketing trading  activities was $92 million.  These  derivatives  economically
hedge our physical storage and transportation  contracts which cannot be carried
at fair value until they are used.  Below is a breakdown of the derivative  fair
value by valuation method and contract maturity.

<TABLE>
<CAPTION>
(Cdn$ millions)                                                                          MATURITY
--------------------------------------------------------------------------------------------------------------------
                                                                Less than                          More than
                                                                   1 year   1-3 years    4-5 years   5 years  Total
                                                                ----------------------------------------------------
<S>                                                             <C>          <C>         <C>       <C>        <C>
   Level 1 - Actively Quoted Markets                                  101          56          (21)        -    136
   Level 2 - Based on Other Observable Pricing Inputs                 (45)         (3)           4         -    (44)
   Level 3 - Based on Unobservable Pricing Inputs                       2          (2)           -         -      -
                                                                ----------------------------------------------------
Total                                                                  58          51          (17)        -     92
                                                                ====================================================
</TABLE>

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

(Cdn$ millions)                                                                                               Total
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                                           <C>
Fair Value at December 31, 2007                                                                                   6
   Change in Fair Value of Contracts                                                                             (1)
   Net Losses (Gains) on Contracts Closed                                                                        99
   Changes in Valuation Techniques and Assumptions (1)                                                          (12)
                                                                                                           ---------
Fair Value at September 30, 2008                                                                                 92
                                                                                                           =========
</TABLE>
Note:
(1) Our valuation methodology has been applied consistently in each period, with
    the  exception of two  portfolio  level  reserves  that were included in the
    first  quarter  of 2008 to  account  for:  a) credit  risk  associated  with
    counterparty default; and b) liquidity risk in our portfolio.

The fair values of our  derivative  contracts  will be realized over time as the
related contracts  settle.  Until then, the value of certain contracts will vary
with forward commodity prices and price  differentials.  The average term of our
derivative  contracts is approximately 1.5 years. Those maturing beyond one year
primarily relate to North American natural gas positions.


                                       45
<PAGE>

CHEMICALS

LOWER CHEMICALS CONTRIBUTION DECREASED NET INCOME BY $18 MILLION
Canexus'  results  increased over last year due to higher North American  sodium
chlorate  and  chlor-alkali  sales  volumes,  as well as strong  sales  pricing.
However,  these  gains  were  offset by  foreign  exchange  losses on  US-dollar
denominated  debt.  Sales  volumes  and prices in our sodium  chlorate  business
increased 8% and 10%, respectively, while chlor-alkali sales volumes and pricing
increased 3% and 16%, respectively.  Our operations in Brazil remain strong as a
result of continued  demand from Aracruz  Cellulose,  our primary  customer.  In
Brazil,  chlorate and chlor-alkali  prices  increased 21% and 20%,  respectively
from a year ago. Chlorate sales volumes increased 17% and chlor-alkali increased
8% over the same period.

Operating  expenses  increased  from a year  ago due to:  1)  higher  costs  for
electricity and natural gas; and 2) higher  production  volumes.  Electricity is
the  most   significant   operating  cost  in  producing   sodium  chlorate  and
chlor-alkali products.  Chemicals net income includes foreign exchange losses of
$16 million (2007 - gains of $11 million) on Canexus US-dollar denominated debt.

CORPORATE EXPENSES

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

                                                                              Three Months            Nine Months
                                                                           Ended September 30     Ended September 30
(Cdn$/millions)                                                             2008         2007        2008       2007
---------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>           <C>        <C>        <C>
General and Administrative Expense before Stock-Based Compensation           100           84         286        263
Stock-Based Compensation (1)                                                (408)         (77)       (121)       (16)
                                                                       ----------------------------------------------
Total General and Administrative Expense                                    (308)           7         165        247
                                                                       ==============================================
</TABLE>
Note:
(1) Includes  expenses relating to the tandem option plan, stock options for our
    US-based employees and stock appreciation rights.

LOWER G&A COSTS INCREASED QUARTERLY NET INCOME BY $315 MILLION
We account for our stock-based  compensation  programs using the intrinsic-value
method and  therefore  fluctuating  share prices  create  volatility  in our net
income.  During the quarter,  we recovered a substantial portion of the non-cash
stock-based compensation costs that were previously expensed, as our share price
decreased  39% from the end of the  previous  quarter.  In the third  quarter of
2007, we also had a recovery of  stock-based  compensation  expense as our share
price  decreased  8%. Cash  payments  made in  connection  with our  stock-based
compensation  programs  during the quarter  amounted  to $2 million  (2007 - $29
million) and year-to-date payments totaled $89 million (2007 - $116 million).

<TABLE>
<CAPTION>
INTEREST AND FINANCING COSTS

                                                                              Three Months            Nine Months
                                                                           Ended September 30     Ended September 30
(Cdn$/millions)                                                             2008         2007        2008       2007
---------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>           <C>        <C>        <C>
Interest                                                                      80           85         235        258
      Less: Capitalized Interest                                             (64)         (45)       (176)      (124)
                                                                       ----------------------------------------------
Net Interest Expense                                                          16           40          59        134
                                                                       ==============================================
</TABLE>

LOWER NET INTEREST EXPENSE INCREASED NET INCOME BY $24 MILLION
Our financing costs were substantially unchanged from the third quarter of 2007.
Interest  capitalized on our Long Lake development project increased $11 million
from the same period in 2007.  The  remainder  of the  increase  in  capitalized
interest  from last year relates to our oil and gas  developments  at Ettrick in
the North Sea and at Usan,  offshore  West  Africa.  We will cease  capitalizing
interest on Ettrick and Long Lake Phase 1 once they are substantially  complete.
Our net interest  expense should  increase once these  development  projects are
brought on stream.


                                       46
<PAGE>

<TABLE>
<CAPTION>
INCOME TAXES

                                                                              Three Months            Nine Months
                                                                           Ended September 30     Ended September 30
(Cdn$/millions)                                                             2008         2007        2008       2007
---------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>           <C>        <C>        <C>
Current                                                                      (26)         136         817        347
Future                                                                       645          142         583        303
                                                                       ----------------------------------------------
Total Provision for Income Taxes                                             619          278       1,400        650
                                                                       ==============================================

Effective Tax Rate (%)                                                        41%          40%         42%        42%
                                                                       ----------------------------------------------
</TABLE>

HIGHER  TAXES  DECREASED  NET  INCOME BY $341  MILLION,  WHILE THE  YEAR-TO-DATE
EFFECTIVE TAX RATE REMAINS AT 42%
Our provision for income taxes  increased  $341 million as compared to the third
quarter of 2007,  although our current  income taxes  decreased by $162 million.
Record commodity prices, combined with strong production at Buzzard, resulted in
higher earnings in the UK which are taxable at 50%. During the third quarter, we
completed an internal  reorganization  and  financing of our assets in the North
Sea which  provided us an  additional  one-time  tax  deduction in the UK. This,
together  with  falling  commodity  prices,  will  cause our  expected  2008 tax
liability to be lower than previously expected. As a result, we have reduced our
current tax expense for the period by approximately $514 million. Our income tax
provision also includes current taxes in Yemen and Colombia.

<TABLE>
<CAPTION>
OTHER

                                                                              Three Months            Nine Months
                                                                           Ended September 30     Ended September 30
(Cdn$/millions)                                                             2008         2007        2008       2007
---------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>           <C>        <C>        <C>
Increase/(Decrease) in Fair Value of Crude Oil Put Options                     9          (11)         (1)       (31)
                                                                       ----------------------------------------------
</TABLE>

During the first  quarter of 2008,  we  purchased  put options on  approximately
70,000 bbls/d of our 2009 crude oil production.  These options establish a 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.  In
September 2008, Lehman Brothers filed for bankruptcy  protection,  which impacts
approximately 36% (or 25,000 bbls/d) of our 2009 put options. The carrying value
of these put  options  have been  reduced to nil. At  September  30,  2008,  the
remaining  options had a fair value of $13 million,  resulting in  recognizing a
gain of $9  million  in the  quarter.  During  the third  quarter  of 2007,  the
decrease  in fair value  resulted  from a loss in value of crude oil put options
purchased for 2008 production.


                                       47
<PAGE>

LIQUIDITY

<TABLE>
<CAPTION>
CAPITAL STRUCTURE

                                                                           September 30      December 31
(Cdn$ millions)                                                                    2008             2007
---------------------------------------------------------------------------------------------------------
<S>                                                                               <C>              <C>
NET DEBT (1)
     Bank Debt                                                                    1,257              413
     Senior Notes                                                                 3,956            3,758
                                                                       ----------------------------------
       Senior Debt                                                                5,213            4,171
     Subordinated Debt                                                              473              439
                                                                       ----------------------------------
       Total Debt                                                                 5,686            4,610
     Less: Cash and Cash Equivalents                                             (1,772)            (206)
                                                                       ----------------------------------
TOTAL NET DEBT                                                                    3,914            4,404
                                                                       ==================================

SHAREHOLDERS' EQUITY (2)                                                          7,263            5,610
                                                                       ==================================
</TABLE>
Notes:
(1) Includes all of our debt and is calculated as long-term  debt and short-term
    borrowings less cash and cash equivalents.
(2) At  September  30,  2008 there  were  520,969,101  common  shares and US$460
    million of unsecured subordinated securities outstanding. These subordinated
    securities  may be redeemed  by issuing  common  shares at our option  after
    November 8, 2008. The number of shares issuable  depends on the common share
    price on the redemption date.

NET DEBT

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

<TABLE>
<CAPTION>
(Cdn$ millions)
---------------------------------------------------------------------------------------------------------
<S>                                                                                                <C>
Cash Flow from Operating Activities                                                                3,299
Capital Investment                                                                                (2,149)
                                                                                            -------------
   Excess of Cash Flow over Capital Investment                                                     1,150

Dividends on Common Shares                                                                           (66)
Issue of Common Shares                                                                                48
Foreign Exchange Translation of US-dollar Denominated Debt and Cash                                 (295)
Long-Term Capital Prepayments                                                                        (68)
Repurchase of Common Shares                                                                         (300)
Other                                                                                                 21
                                                                                            -------------
Decrease in Net Debt                                                                                 490
                                                                                            =============
</TABLE>

<TABLE>
<CAPTION>
CHANGE IN WORKING CAPITAL

                                                       September 30        December 31
(Cdn$ millions)                                                2008               2007            Change
---------------------------------------------------------------------------------------------------------
<S>                                                           <C>                  <C>             <C>
Cash and Cash Equivalents                                     1,772                206             1,566
Restricted Cash                                                  65                203              (138)
Accounts Receivable                                           4,369              3,502               867
Inventories and Supplies                                        813                659               154
Accounts Payable and Accrued Liabilities                     (4,475)            (4,135)             (340)
Income Taxes Payable                                            (70)               (45)              (25)
Other                                                            69                 22                47
                                                      ---------------------------------------------------
Net Working Capital                                           2,543                412             2,131
                                                      ===================================================
</TABLE>

Our cash and cash equivalents are  significantly  higher than at year end due to
higher  operating cash flows and borrowings made on our term credit  facilities.
Record  commodity  prices and strong  production  volumes  contributed to higher
operating cash flows. We also completed an internal reorganization and financing
of our assets in the North Sea during the  quarter,  which  required  us to draw
down approximately US$1 billion under our term credit facilities.  This provided
us with additional one-time tax deductions in the UK. Since the beginning of the
year,  accounts  receivable and payable for our Energy Marketing group increased
$580  million and $465  million,  respectively.  These  increases  are driven by
record  commodity prices which increase the value of our purchases and sales for
both  physical  and  financial  contracts.  The value of our  commodity  trading
inventory  is carried at fair value and was higher  than year end as a result of

                                       48
<PAGE>

strong  crude oil  prices and higher gas  volumes  in  storage.  We reduced  the
accrual for stock-based  compensation  programs by $226 million during the year,
as our share price decreased 23% since year end.

OUTLOOK FOR REMAINDER OF 2008

We expect  our 2008 full  year  production  to be  slightly  below our  previous
guidance of between  260,000 and 280,000  boe/d before  royalties.  We expect to
generate  approximately  $4.4  billion  in cash  flow  (before  remediation  and
geological and geophysical expenditures) in 2008.

Our future  liquidity  and ability to fund capital  requirements  are  generally
dependent upon operating cash flows, our existing cash on hand and our committed
credit facilities. Given the long cycle time of some of our development projects
and  volatile  commodity  prices,  it is not  unusual  in any year  for  capital
expenditures to exceed our cash flow. Changes in commodity prices,  particularly
crude oil as it represents over 80% of our production,  can impact our operating
cash flows. We use short-term  contracts to sell the majority of our oil and gas
production,  exposing us to short-term price movements. A US$1/bbl change in WTI
increases  or  decreases  our 2008 cash flow by  approximately  $39 million ($10
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  $42 million ($8 million  for the  remainder  of the year).  While
commodity prices can fluctuate  significantly in the short term, we believe that
over the longer term,  commodity  prices will  increase as a result of growth in
world  demand and delays or  shortages  in supply  growth.  We believe  that our
existing  liquidity and balance sheet  capacity  provides us with the ability to
fund our obligations during periods of lower commodity prices.

During  the  first  nine  months  of  2008,  our  cash  flow  exceeded   capital
expenditures.  We used free cash flow to repay  debt,  buy back shares and build
cash. We currently  have $1.8 billion of cash and cash  equivalents  on hand. We
also maintain significant undrawn committed credit facilities.  At September 30,
2008, we had unsecured term credit  facilities of US$3 billion in place that are
available until 2012, of which US$1 billion was drawn and $458 million were used
to  support  outstanding  letters  of credit.  We also have  approximately  $657
million of  undrawn,  uncommitted,  unsecured  credit  facilities,  of which $30
million were used to support  outstanding  letters of credit. The average length
to  maturity  of our  public  debt is  approximately  20 years and our  earliest
maturities  comprise our term credit  facilities.  In June 2008,  we repaid $125
million of maturing medium-term notes using cash on hand.

During the quarter,  we received  approval from the Toronto Stock Exchange (TSX)
for a Normal  Course  Issuer  Bid  (Bid).  Under  the  Bid,  we are  allowed  to
repurchase for  cancellation up to 10% of our public float of common shares,  or
approximately 53 million common shares. Purchases under the Bid commenced August
6, 2008 and can be made until August 5, 2009.  During the quarter,  we purchased
10 million common shares at an average price of $30.05/share for a total cost of
$300 million.

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  10-K.  During  2008,  we
entered  into   additional   work   commitments   of  $740   million   including
non-discretionary   capital   spending   for   drilling,   seismic,   facilities
construction and other development commitments in our international  operations.
In  addition,  the  development  of the Usan  field,  offshore  Nigeria  has now
commenced.  As a result, we entered into additional work commitments  related to
the  development  of the Usan field  totaling  $860  million  over the next four
years. There have been no other significant developments since year end.

CONTINGENCIES

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


NEW ACCOUNTING PRONOUNCEMENTS

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

                                       49
<PAGE>

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


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. 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  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.

In October  2008,  FASB  issued FSP FAS 157-3,  DETERMINING  THE FAIR VALUE OF A
FINANCIAL  ASSET WHEN THE MARKET FOR THAT  ASSET IS NOT  ACTIVE.  This  position
clarifies the  application  of FASB statement 157 in a market that is not active
and provides an example to illustrate  key  considerations  in such a situation.
This  position is effective  upon the issuance date of October 10, 2008. We have
reviewed  the position  and have  determined  that the impact of adoption is not
material on our results of operation or financial position.


EQUITY SECURITY REPURCHASES

In July,  we received  approval  from the Toronto  Stock  Exchange  for a Normal
Course Issuer Bid that allows us to repurchase  up to  approximately  53 million
common  shares  during the period from August 6, 2008 to August 5, 2009.  During
the quarter, we repurchased and subsequently cancelled  approximately 10 million
common shares for proceeds of $300 million.

<TABLE>
<CAPTION>
SUMMARY OF QUARTERLY RESULTS

                                                               Three Months Ended
                                              |                                  |
                                         2006 |                 2007             |             2008
(Cdn$ millions)                           Dec |    Mar      Jun      Sep      Dec|     Mar       Jun     Sep
--------------------------------------------------------------------------------------------------------------
<S>                                       <C>    <C>      <C>      <C>      <C>      <C>       <C>     <C>
Net Sales                                 920    1,140    1,399    1,446    1,598    1,870     2,071   2,213

Net Income                                 77      121      368      403      194      630       380     886
                                       -----------------------------------------------------------------------

Earnings per Common Share ($/share)
     Basic                               0.15     0.23      0.70     0.77    0.37      1.19     0.72    1.68
     Diluted                             0.14     0.22      0.68     0.75    0.36      1.17     0.70    1.66
                                       -----------------------------------------------------------------------
</TABLE>


                                       50
<PAGE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain  statements in this report,  including  those  appearing in MANAGEMENT'S
DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND  RESULTS OF  OPERATIONS,
constitute "forward-looking statements" (within the meaning of the United States
PRIVATE  SECURITIES  LITIGATION  REFORM ACT OF 1995,  Section  21E of the United
States  SECURITIES  EXCHANGE  ACT OF 1934,  as  amended,  and Section 27A of the
United  States   SECURITIES  ACT  OF  1933,  as  amended)  or   "forward-looking
information" (within the meaning of applicable Canadian securities legislation).
Such  statements or  information  (together  "forward-looking  statements")  are
generally   identifiable  by  the  forward-looking   terminology  used  such  as
"ANTICIPATE",  "BELIEVE",  "INTEND",  "PLAN",  "EXPECT",  "ESTIMATE",  "BUDGET",
"OUTLOOK", "FORECAST" or other similar words, and include statements relating to
or  associated  with  individual  wells,  regions or  projects.  Any  statements
regarding the following are forward-looking statements:

o   future crude oil, natural gas or chemicals prices;

o   future production levels;

o   future cost recovery oil revenues from our Yemen operations;

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

o   future earnings;

o   future asset dispositions;

o   future sources of funding for our capital program;

o   future debt levels;

o   availability of committed credit facilities;

o   possible commerciality;

o   development plans or capacity expansions;

o   future ability to execute dispositions of assets or businesses;

o   future cash flows and their uses;

o   future drilling of new wells;

o   ultimate recoverability of current and long-term assets;

o   ultimate recoverability of reserves or resources;

o   expected finding and development costs;

o   expected operations costs;

o   future demand for chemical products;

o   estimates on a per share basis;

o   sales;

o   future expenditures and future allowances relating to environmental matters;

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

o   changes in any of the foregoing.

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

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

o   market prices for oil and gas and chemical products;

o   our ability to explore, develop, produce and transport crude oil and natural
    gas to markets;

o   the results of exploration and development drilling and related activities;

o   volatility in energy trading markets;

o   foreign-currency exchange rates;

o   economic  conditions  in the  countries  and  regions  in  which we carry on
    business;

o   governmental  actions  including  changes to taxes or royalties,  changes in
    environment and other laws and regulations;

o   renegotiations of contracts;

o   results of litigation, arbitration or regulatory proceedings; and

o   political uncertainty,  including actions by terrorists,  insurgent or other
    groups, or other armed conflict, including conflict between states.

                                       51
<PAGE>

These risks, uncertainties and other factors 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 an assessment of all information at that time.

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


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

In light of current  market  conditions,  we have  increased  our  monitoring of
credit exposure.  We review our  counterparty  credit risks daily to effectively
limit  our  exposures.  In  September,  Lehman  Brothers  filed  for  bankruptcy
protection and our exposure at the time was approximately $38 million, net. This
amount was written off in the quarter  however we continue to pursue recovery of
these amounts.

At September 30, 2008:

    o   over 96% of our credit exposures were investment grade;

    o   approximately  85% of our  credit  exposures  were with  integrated  oil
        companies, crude oil refiners and marketers and large utilities; and

    o   only two counterparties  individually made up more than 5% of our credit
        exposure,  and one of these  counterparties made up more than 10% of our
        credit  exposure.  Both  counterparties  are super major  integrated oil
        companies with strong investment grade ratings.


Further  information  presented on market risks can be found in Item 7A on pages
72 - 74 in our 2007 Annual  Report on Form 10-K and have 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.  During the third quarter of 2008, our Director of Internal
Audit  transferred  to our UK division and a new Director of Internal  Audit was
appointed.  There has not been any change in the Company's internal control over

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<PAGE>

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


                                     PART II


ITEM 1.  LEGAL PROCEEDINGS

Information  in  response  to this item is included in Part I, Item 1 in Note 18
"Commitments,  Contingencies  and  Guarantees"  and is incorporated by reference
into Part II of this Quarterly Report on form 10-Q.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

<TABLE>
<CAPTION>
Issuer Purchases of Equity Securities (1)
                                                                                                       (d) Maximum number (or)
                                                                                 (c) Total number  of       approximate dollar
                                                                                 shares  (or   units)      value of shares (or
                               (a) Total  number of                              purchased as part of   units) that may yet to
                                  shares (or units)   (b) Average price paid     publicly   announced       be purchased under
Period                                    purchased      per share (or unit)        plans or programs        plans or programs
-------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                   <C>                         <C>                    <C>
July 1 - 31, 2008                                 -                        -                        -                        -
August 1 - 31, 2008                       6,200,000                   $31.78                6,200,000               46,714,046
September 1 - 30, 2008                    3,786,800                   $27.22                3,786,800               42,927,246
                             -------------------------------------------------------------------------
Total                                     9,986,800                   $30.05                9,986,800
                             =========================================================================
</TABLE>

(1) On July 30, 2008 we announced by news release that we had received  approval
from the Toronto  Stock  Exchange for a Normal  Course  Issuer Bid to enable the
repurchase  of up to a maximum  of  52,914,046  common  shares for the period of
August 6, 2008 to August 5, 2009.

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

None

ITEM 6.  EXHIBITS

10.52    Amended  and  Restated  Agreement  Respecting  Change of  Control  and
         Executive  Benefit Plan  Entitlements  with  Executive  Officers dated
         during August and September, 2008.

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

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

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

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

SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on October 30, 2008.

                                           NEXEN INC.


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


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



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