Exhibit 99.1

---







|Management, Audit, Finance and Risk Committee, and Auditor Reports
|------------------------------------------------------------------
|                                                                  

Management's Responsibility for the Financial Statements and Report on Internal Control over Financial Reporting

The preparation and presentation of the Company's Consolidated Financial Statements and the overall quality of the Company's financial reporting are the
responsibility of management. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) and necessarily include estimates, which are based
on management's best judgments. Information contained elsewhere in the Annual Report is consistent, where applicable, with that contained in the financial statements.

Management
is also responsible for establishing and maintaining a system of internal controls over financial reporting to provide reasonable assurance that assets are safeguarded and that reliable
financial information is produced for preparation of financial statements. Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on
the framework in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that the Company's system of internal control over financial reporting was effective as at December 31, 2007.

Due
to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also, projections of any evaluation of the effectiveness of
internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

Deloitte &
Touche LLP, the Company's Independent Registered Chartered Accountants, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial
reporting as of December 31, 2007. Deloitte & Touche LLP also audited the Company's Consolidated Financial Statements for the year ended December 31, 2007.

The
Board of Directors is responsible for overseeing management's performance of its responsibilities for financial reporting and internal control. The Board of Directors exercises this responsibility
with the assistance of the Audit, Finance and Risk Committee of the Board of Directors.

|SIGNATURE                             |  | SIGNATURE                                           
|------------------------------------- |  | ----------------------------------------------------
|Ron A. Brenneman                      |  | E. F. H. Roberts                                    
|President and Chief Executive Officer |  | Executive Vice-President and Chief Financial Officer
|February 14, 2008                     |  | February 14, 2008                                   

2007 Annual
ReportPETRO-CANADA        61

---



Audit, Finance and Risk Committee of the Board of Directors

The Audit, Finance and Risk Committee (the Committee), which is composed of not fewer than three (currently five) independent directors, assists the Board
of Directors in the discharge of its responsibility for overseeing management's performance of the financial reporting and internal control responsibilities. The Committee reviews the annual and
quarterly Consolidated Financial Statements, accounting policies and the overall quality of the Company's financial reporting, and the financial information contained in prospectuses and in reports
filed with regulatory authorities, as required. The Committee also reviews and makes recommendations to the Board of Directors regarding financial matters and oversees the process that management has
in place to identify business risks. The Committee members are all independent pursuant to National Instrument 52-110 (NI 52-110), NYSE Corporate Governance
Standards and the Sarbanes-Oxley Act of 2002 (SOX), and are financially literate, with one member who has been recognized as a "financial expert" in accordance with SOX requirements.

With
respect to the external auditors, the Committee reviews and approves the terms of engagement, the scope and plan for the external audit, and reviews the results of the audit and the Reports of
the Independent Registered Chartered Accountants. The external auditors report to the Committee. The Committee discusses the external auditors' independence from management and the Company with the
auditors and receives written confirmation of their independence. The Committee also recommends to the Board of Directors the external auditors to be appointed by the shareholders and approves in
advance fees for the external auditors' services.

With
respect to the contract auditor's engagement to provide internal audit services, the Committee reviews the engagement contract, reviews and approves the scope and plan for the internal audit,
receives periodic reports and reviews significant findings and recommendations. The contract auditor reports to the Committee.

Senior
management, the external auditors and the contract auditor attend all Audit, Finance and Risk Committee meetings and each is provided with the opportunity to meet privately with
the Committee.

SIGNATURE

Paul D. MelnukChairman of the Audit, Finance and Risk Committee
February 14, 2008

62PETRO-CANADA2007
Annual Report

---



Report of Independent Registered Chartered Accountants

To the Board of Directors and Shareholders of Petro-Canada:

We have audited the internal control over financial reporting of Petro-Canada and subsidiaries (the "Company") as of December 31, 2007, based on criteria
established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management's Responsibility for the Financial Statements and Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over
financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing
similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal
Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We
have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the Consolidated
Financial Statements as at and for the year ended December 31, 2007 of the Company and our report dated February 14, 2008 expressed an unqualified opinion on those financial statements
and included a separate report titled Comments by Independent Registered Chartered Accountants on Canada-United States of America Reporting Difference referring to changes in accounting
principles.

GRAPHIC

Independent
Registered Chartered Accountants
Calgary, Canada
February 14, 2008

2007 Annual
ReportPETRO-CANADA        63

---



Report of Independent Registered Chartered Accountants

To the Board of Directors and Shareholders of Petro-Canada:

We have audited the accompanying Consolidated Balance Sheet of Petro-Canada and subsidiaries (the "Company") as at December 31, 2007 and 2006, and the related
Consolidated Statements of Earnings, Comprehensive Income, Retained
Earnings and Cash Flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.

With
respect to the financial statements for the years ended December 31, 2007 and 2006, we conducted our audits in accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States). With respect to the financial statements for the year ended December 31, 2005, we conducted our audit in
accordance with Canadian generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.

In
our opinion, these Consolidated Financial Statements present fairly, in all material respects, the financial position of Petro-Canada and subsidiaries as at December 31, 2007 and 2006 and
the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with Canadian generally accepted accounting principles.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2007, based on the criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 14, 2008 expressed an unqualified opinion on the Company's internal control over financial reporting.

GRAPHIC

Independent
Registered Chartered Accountants
Calgary, Canada
February 14, 2008

Comments by Independent Registered Chartered Accountants on Canada-United States of America Reporting Difference

The standards of the Public Company Accounting Oversight Board (United States) require the addition of an explanatory paragraph when there are changes in
accounting principles that have a material effect on the comparability of the Company's
financial statements, such as the changes described in Note 2 to the Consolidated Financial Statements. Although we conducted our audits in accordance with both Canadian generally
accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), our report to the board of directors and shareholders on the Consolidated
Financial Statements of Petro-Canada, dated February 14, 2008, is expressed in accordance with Canadian reporting standards which do not require a reference to such changes in accounting
principles in the auditors' report when the change is properly accounted for and adequately disclosed in the financial statements.

GRAPHIC

Independent
Registered Chartered Accountants
Calgary, Canada
February 14, 2008

64PETRO-CANADA2007
Annual Report

---







|Consolidated Statement of Earnings
|----------------------------------
|                                  

(stated in millions of Canadian dollars, except per share amounts)

|For the years ended December 31,                                              |  |   | 2007   |   |   | 2006   |   |   | 2005   |  
|----------------------------------------------------------------------------- |  | - | ------ | - | - | ------ | - | - | ------ | -
|                                                                              | 
|Revenue                                                                       |  |   |        |   |   |        |   |   |        |  
|Operating                                                                     |  | $ | 21,710 |   | $ | 18,911 |   | $ | 17,585 |  
|Investment and other income (expense)(Note 5)                                 |  |   | (460   | ) |   | (242   | ) |   | (806   | )
|                                                                              | 
|                                                                              |  |   | 21,250 |   |   | 18,669 |   |   | 16,779 |  
|                                                                              | 
|Expenses                                                                      |  |   |        |   |   |        |   |   |        |  
|Crude oil and product purchases                                               |  |   | 10,291 |   |   | 9,649  |   |   | 8,846  |  
|Operating, marketing and general                                              |  |   | 3,552  |   |   | 3,180  |   |   | 2,962  |  
|Exploration(Note 14)                                                          |  |   | 490    |   |   | 339    |   |   | 271    |  
|Depreciation, depletion and amortization(Notes 6 and 14)                      |  |   | 2,091  |   |   | 1,365  |   |   | 1,222  |  
|Unrealized gain on translation of foreign currency denominated long-term debt |  |   | (246   | ) |   | (1     | ) |   | (88    | )
|Interest                                                                      |  |   | 165    |   |   | 165    |   |   | 164    |  
|                                                                              | 
|                                                                              |  |   | 16,343 |   |   | 14,697 |   |   | 13,377 |  
|                                                                              | 
|Earnings from Continuing Operations Before Income Taxes                       |  |   | 4,907  |   |   | 3,972  |   |   | 3,402  |  
|                                                                              | 
|Provision for Income Taxes(Note 7)                                            |  |   |        |   |   |        |   |   |        |  
|Current                                                                       |  |   | 1,797  |   |   | 2,073  |   |   | 1,794  |  
|Future                                                                        |  |   | 377    |   |   | 311    |   |   | (85    | )
|                                                                              | 
|                                                                              |  |   | 2,174  |   |   | 2,384  |   |   | 1,709  |  
|                                                                              | 
|Net Earnings from Continuing Operations                                       |  |   | 2,733  |   |   | 1,588  |   |   | 1,693  |  
|                                                                              | 
|Net Earnings from Discontinued Operations(Note 4)                             |  |   |       |   |   | 152    |   |   | 98     |  
|                                                                              | 
|Net Earnings                                                                  |  | $ | 2,733  |   | $ | 1,740  |   | $ | 1,791  |  
|                                                                              | 
|Earnings per Share from Continuing Operations(Note 8)                         |  |   |        |   |   |        |   |   |        |  
|Basic                                                                         |  | $ | 5.59   |   | $ | 3.15   |   | $ | 3.27   |  
|                                                                              | 
|Diluted                                                                       |  | $ | 5.53   |   | $ | 3.11   |   | $ | 3.22   |  
|                                                                              | 
|Earnings per Share(Note 8)                                                    |  |   |        |   |   |        |   |   |        |  
|Basic                                                                         |  | $ | 5.59   |   | $ | 3.45   |   | $ | 3.45   |  
|                                                                              | 
|Diluted                                                                       |  | $ | 5.53   |   | $ | 3.41   |   | $ | 3.41   |  
|                                                                              | 

|Consolidated Statement of Comprehensive Income(Note 2)
|------------------------------------------------------
|                                                      

(stated in millions of Canadian dollars)

|For the years ended December 31,       |                                                   |   | 2007  |      |   | 2006  |     |   | 2005  |     
|-------------------------------------- | ------------------------------------------------- | - | ----- | ---- | - | ----- | --- | - | ----- | ----
|                                       |                                                  
|Net earnings                           |                                                   | $ | 2,733 |      | $ | 1,740 |     | $ | 1,791 |     
|Other comprehensive income, net of tax |                                                   |   |       |      |   |       |     |   |       |     
|                                       | Change in foreign currency translation adjustment |   |       | (260 | ) |       | 363 |   |       | (588
|                                       |                                                  
|Comprehensive income                   |                                                   | $ | 2,473 |      | $ | 2,103 |     | $ | 1,203 |     
|                                       |                                                  

See accompanying Notes to Consolidated Financial Statements

2007 Annual
ReportPETRO-CANADA        65

---



|Consolidated Statement of Cash Flows
|------------------------------------
|                                    

(stated in millions of Canadian dollars)

|For the years ended December 31,                                                        |                                                                               |   | 2007   |       |   | 2006   |       |   | 2005   |      
|--------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | - | ------ | ----- | - | ------ | ----- | - | ------ | -----
|                                                                                        |                                                                              
|Operating Activities                                                                    |                                                                               |   |        |       |   |        |       |   |        |      
|Net earnings                                                                            |                                                                               | $ | 2,733  |       | $ | 1,740  |       | $ | 1,791  |      
|Less: Net earnings from discontinued operations                                         |                                                                               |   |       |       |   | 152    |       |   | 98     |      
|                                                                                        |                                                                              
|Net earnings from continuing operations                                                 |                                                                               |   | 2,733  |       |   | 1,588  |       |   | 1,693  |      
|Items not affecting cash flow from continuing operating activities:                     |                                                                               |   |        |       |   |        |       |   |        |      
|                                                                                        | Depreciation, depletion and amortization                                      |   |        | 2,091 |   |        | 1,365 |   |        | 1,222
|                                                                                        | Future income taxes                                                           |   |        | 377   |   |        | 311   |   |        | (85  
|                                                                                        | Accretion of asset retirement obligations(Note 19)                            |   |        | 70    |   |        | 54    |   |        | 50   
|                                                                                        | Unrealized gain on translation of foreign currency denominated long-term debt |   |        | (246  | ) |        | (1    | ) |        | (88  
|                                                                                        | Gain on sale of assets(Note 5)                                                |   |        | (81   | ) |        | (30   | ) |        | (48  
|                                                                                        | Unrealized losses related to Buzzard derivative contracts(Note 23)            |   |        |      |   |        | 259   |   |        | 889  
|                                                                                        | Other                                                                         |   |        | 9     |   |        | 18    |   |        | 14   
|Settlement of Buzzard derivative contracts(Note 23)                                     |                                                                               |   | (1,481 | )     |   |       |       |   |       |      
|Exploration expenses(Note 14)                                                           |                                                                               |   | 290    |       |   | 123    |       |   | 140    |      
|Proceeds from sale of accounts receivable(Note 10)                                      |                                                                               |   |       |       |   |       |       |   | 80     |      
|Increase in non-cash working capital related to continuing
operating activities(Note 9) |                                                                               |   | (423   | )     |   | (79    | )     |   | (84    | )    
|                                                                                        |                                                                              
|Cash flow from continuing operating activities                                          |                                                                               |   | 3,339  |       |   | 3,608  |       |   | 3,783  |      
|                                                                                        |                                                                              
|Cash flow from discontinued operating activities(Note 4)                                |                                                                               |   |       |       |   | 15     |       |   | 204    |      
|                                                                                        |                                                                              
|Cash flow from operating activities                                                     |                                                                               |   | 3,339  |       |   | 3,623  |       |   | 3,987  |      
|                                                                                        |                                                                              
|Investing Activities                                                                    |                                                                               |   |        |       |   |        |       |   |        |      
|Expenditures on property, plant and equipment and exploration(Note 14)                  |                                                                               |   | (3,988 | )     |   | (3,435 | )     |   | (3,606 | )    
|Proceeds from sale of assets(Note 4)                                                    |                                                                               |   | 183    |       |   | 688    |       |   | 81     |      
|Increase in other assets                                                                |                                                                               |   | (121   | )     |   | (50    | )     |   | (70    | )    
|Decrease in non-cash working capital related to investing activities(Note 9)            |                                                                               |   | 279    |       |   | 59     |       |   | 237    |      
|                                                                                        |                                                                              
|Cash flow used in investing activities                                                  |                                                                               |   | (3,647 | )     |   | (2,738 | )     |   | (3,358 | )    
|                                                                                        |                                                                              
|Financing Activities                                                                    |                                                                               |   |        |       |   |        |       |   |        |      
|Increase (decrease) in short-term notes payable(Note 17)                                |                                                                               |   | 109    |       |   |       |       |   | (303   | )    
|Proceeds from issue of long-term debt(Note 17)                                          |                                                                               |   | 995    |       |   |       |       |   | 762    |      
|Repayment of long-term debt                                                             |                                                                               |   | (7     | )     |   | (7     | )     |   | (6     | )    
|Proceeds from issue of common shares(Note 20)                                           |                                                                               |   | 37     |       |   | 44     |       |   | 64     |      
|Purchase of common shares(Note 20)                                                      |                                                                               |   | (839   | )     |   | (1,011 | )     |   | (346   | )    
|Dividends on common shares                                                              |                                                                               |   | (255   | )     |   | (201   | )     |   | (181   | )    
|                                                                                        |                                                                              
|Cash flow from (used in) financing activities                                           |                                                                               |   | 40     |       |   | (1,175 | )     |   | (10    | )    
|                                                                                        |                                                                              
|Increase (Decrease) in Cash and Cash Equivalents                                        |                                                                               |   | (268   | )     |   | (290   | )     |   | 619    |      
|Cash and Cash Equivalents at Beginning of Year                                          |                                                                               |   | 499    |       |   | 789    |       |   | 170    |      
|                                                                                        |                                                                              
|Cash and Cash Equivalents at End of Year(Note 12)                                       |                                                                               | $ | 231    |       | $ | 499    |       | $ | 789    |      
|                                                                                        |                                                                              
|Cash and Cash Equivalents  Discontinued Operations(Note 4)                             |                                                                               | $ |       |       | $ |       |       | $ | 68     |      
|                                                                                        |                                                                              
|Cash and Cash Equivalents  Continuing Operations                                       |                                                                               | $ | 231    |       | $ | 499    |       | $ | 721    |      
|                                                                                        |                                                                              

See accompanying Notes to Consolidated Financial Statements

66PETRO-CANADA2007
Annual Report

---



|Consolidated Balance Sheet
|--------------------------
|                          

(stated in millions of Canadian dollars)

|As at December 31,                              |                                         |   | 2007   |      |   | 2006  
|----------------------------------------------- | --------------------------------------- | - | ------ | ---- | - | ------
|                                               
|Assets                                          |                                         |   |        |      |   |       
|Current Assets                                  |                                         |   |        |      |   |       
|Cash and cash equivalents(Note 12)              |                                         | $ | 231    |      | $ | 499   
|Accounts receivable(Note 10)                    |                                         |   | 1,973  |      |   | 1,600 
|Income taxes receivable                         |                                         |   | 280    |      |   |      
|Inventories(Note 13)                            |                                         |   | 668    |      |   | 632   
|Future income taxes(Note 7)                     |                                         |   | 26     |      |   | 95    
|                                               
|                                                |                                         |   | 3,178  |      |   | 2,826 
|Property, Plant and Equipment, Net(Note 14)     |                                         |   | 19,497 |      |   | 18,577
|Goodwill(Note 15)                               |                                         |   | 731    |      |   | 801   
|Other Assets(Notes 2 and 16)                    |                                         |   | 446    |      |   | 442   
|                                               
|                                                |                                         | $ | 23,852 |      | $ | 22,646
|                                               
|Liabilities and Shareholders' Equity            |                                         |   |        |      |   |       
|Current Liabilities                             |                                         |   |        |      |   |       
|Accounts payable and accrued liabilities        |                                         | $ | 3,512  |      | $ | 3,319 
|Income taxes payable                            |                                         |   |       |      |   | 22    
|Short-term notes payable(Note 17)               |                                         |   | 109    |      |   |      
|Current portion of long-term debt(Note 17)      |                                         |   | 2      |      |   | 7     
|                                               
|                                                |                                         |   | 3,623  |      |   | 3,348 
|Long-Term Debt(Notes 2 and 17)                  |                                         |   | 3,339  |      |   | 2,887 
|Other Liabilities(Note 18)                      |                                         |   | 717    |      |   | 1,826 
|Asset Retirement Obligations(Note 19)           |                                         |   | 1,234  |      |   | 1,170 
|Future Income Taxes(Note 7)                     |                                         |   | 3,069  |      |   | 2,974 
|Commitments and Contingent Liabilities(Note 24) |                                         |   |        |      |   |       
|Shareholders' Equity                            |                                         |   |        |      |   |       
|Common shares(Note 20)                          |                                         |   | 1,365  |      |   | 1,366 
|Contributed surplus(Note 20)                    |                                         |   | 24     |      |   | 469   
|Retained earnings                               |                                         |   | 10,692 |      |   | 8,557 
|Accumulated other comprehensive income(Note 2)  |                                         |   |        |      |   |       
|                                                | Foreign currency translation adjustment |   |        | (211 | ) |       
|                                               
|                                                |                                         |   | 11,870 |      |   | 10,441
|                                               
|                                                |                                         | $ | 23,852 |      | $ | 22,646
|                                               

|Consolidated Statement of Retained Earnings
|-------------------------------------------
|                                           

(stated in millions of Canadian dollars)

|For the years ended December 31,                               |  |   | 2007   |   |   | 2006  |   |   | 2005  |  
|-------------------------------------------------------------- |  | - | ------ | - | - | ----- | - | - | ----- | -
|                                                               | 
|Retained Earnings at Beginning of Year                         |  | $ | 8,557  |   | $ | 7,018 |   | $ | 5,408 |  
|Cumulative effect of adopting new accounting standards(Note 2) |  |   | 8      |   |   |      |   |   |      |  
|Net earnings                                                   |  |   | 2,733  |   |   | 1,740 |   |   | 1,791 |  
|Dividends on common shares                                     |  |   | (255   | ) |   | (201  | ) |   | (181  | )
|Excess cost for normal course issuer bid(Note 20)              |  |   | (351   | ) |   |      |   |   |      |  
|                                                               | 
|Retained Earnings at End of Year                               |  | $ | 10,692 |   | $ | 8,557 |   | $ | 7,018 |  
|                                                               | 

See accompanying Notes to Consolidated Financial Statements
Approved on behalf of the Board of Directors

|SIGNATURE        |  | SIGNATURE        
|---------------- |  | -----------------
|Ron A. Brenneman |  | Brian F. MacNeill
|Director         |  | Director         

2007 Annual
ReportPETRO-CANADA        67

---







|Notes to Consolidated Financial Statements
|------------------------------------------
|                                          

(stated in millions of Canadian dollars, unless otherwise
stated)

Note 1Summary of Significant Accounting Policies









68PETRO-CANADANotes to
Consolidated Financial Statements

---

















Notes to Consolidated Financial
StatementsPETRO-CANADA        69

---









70PETRO-CANADANotes to
Consolidated Financial Statements

---







Notes to Consolidated Financial
StatementsPETRO-CANADA        71

---









72PETRO-CANADANotes to
Consolidated Financial Statements

---





Note 2Changes in Accounting Policies

The Company adopted Canadian Institute of Chartered Accountants (CICA) Handbook Section 1506,Accounting Changes;
Section 1530,Comprehensive Income; Section 3855,Financial
Instruments  Recognition and Measurement; Section 3861,Financial
Instruments  Presentation and Disclosure; Section 3865,Hedges; and Emerging
Issues Committee (EIC) Abstract 160,Stripping Costs Incurred in the Production Phase of a Mining Operation, on January 1, 2007.

As
a result of adopting CICA Section 1530,Comprehensive Income, a new Statement of Comprehensive Income forms part of the Company's Consolidated
Financial Statements. Gains and losses from the translation into Canadian dollars of assets and
liabilities, including associated long-term debt, of the Company's self-sustaining foreign operations are now presented as a separate component of other comprehensive income
(loss) in the Consolidated Statement of Comprehensive Income. Accumulated other comprehensive income (loss) is presented as a separate component of shareholders' equity in the Consolidated Balance
Sheet. Previously, these gains and losses were deferred and included in the foreign currency translation adjustment as part of shareholders' equity.

As
a result of adopting CICA Section 3855,Financial Instruments  Recognition and Measurement,
long-term debt is measured at fair value when initially recognized and, after initial recognition, at amortized cost using the effective interest method. Transaction costs and premiums or
discounts directly attributable to the issuance of long-term debt are now added to the fair value on initial recognition. Previously, these amounts were deferred and amortized using the
straight line method over the term of the debt. Unamortized amounts were separately presented in other assets on the Consolidated Balance Sheet. In accordance with the transitional provisions, prior
periods have not been restated as a result of adopting this new accounting standard, with the exception of amounts related to foreign currency translation adjustments. To recognize the cumulative
prior period effect, the following balance sheet categories were impacted on January 1, 2007:

|                              |  |   | Increase (Decrease) |  
|----------------------------- |  | - | ------------------- | -
|                              | 
|Other assets                  |  | $ | (101                | )
|Long-term debt                |  |   | (112                | )
|Future income taxes liability |  |   | 3                   |  
|Retained earnings             |  |   | 8                   |  
|                              | 

|
|

There is no other material impact on the Consolidated Financial Statements for adoption of these new standards.

Notes to Consolidated Financial
StatementsPETRO-CANADA        73

---





Note 3Segmented Information from Continuing Operations

The Company is an integrated oil and gas company with activities spanning both the upstream and downstream sectors of the industry. The Company conducts its business through
five major operating business segments along with Shared Services. Upstream activities are conducted through four business segments, which include North American Natural Gas, Oil Sands, East Coast
Canada and International. Downstream operations comprise the fifth business segment.

Upstream
operations include the exploration, development, production, transportation and marketing of crude oil, natural gas and natural gas liquids and oil sands. The North American Natural Gas
segment includes activity in Western Canada, the U.S. Rockies, the Mackenzie Delta/Corridor, and Alaska. The Oil Sands segment includes interests in the Syncrude oil sands mining operation, the
MacKay Riverin situoil sands operation, and the Fort Hills oil sands mining and upgrading project. The East Coast Canada segment comprises activity
offshore Newfoundland and Labrador, and includes interests in the Hibernia, Terra Nova, and White Rose oilfield operations. The International segment includes activity in the United Kingdom
(U.K.), the Netherlands, Trinidad and Tobago, Libya, Norway and Syria. The producing assets in Syria, previously included in the International segment, have been accounted for as a discontinued
operation (Note 4).

The
Downstream business segment includes the purchase and sale of crude oil, the refining of crude oil products and the distribution and marketing of these and other purchased products.

Financial
information by business segment is presented in the following table as though each segment was a separate business entity. Inter-segment transfers of products, which are accounted for at
market value, are eliminated on consolidation. Shared Services includes investment income, interest expense, unrealized gains or losses on foreign currency denominated long-term debt and
general corporate revenue and expenses. Shared Services assets are principally cash and cash equivalents and other general corporate assets.

74PETRO-CANADANotes to
Consolidated Financial Statements

---



|                                                                              |  | Upstream |      
|----------------------------------------------------------------------------- |  | -------- | -----
|
|                                                                              |  |          | 2007 
|                                                                              | 
|Revenue1                                                                      |  |          |      
|Sales to customers                                                            |  | $        | 1,347
|Investment and other income (expense)2                                        |  |          | 66   
|Inter-segment sales                                                           |  |          | 324  
|                                                                              | 
|Segmented revenue                                                             |  |          | 1,737
|                                                                              | 
|Expenses                                                                      |  |          |      
|Crude oil and product purchases                                               |  |          | 240  
|Inter-segment transactions                                                    |  |          | 10   
|Operating, marketing and general                                              |  |          | 491  
|Exploration                                                                   |  |          | 192  
|Depreciation, depletion and amortization(Note 6)                              |  |          | 584  
|Unrealized gain on translation of foreign currency denominated long-term debt |  |          |     
|Interest                                                                      |  |          |     
|                                                                              | 
|                                                                              |  |          | 1,517
|                                                                              | 
|Earnings (loss) from continuing operations before income taxes                |  |          | 220  
|                                                                              | 
|Provision for income taxes                                                    |  |          |      
|Current                                                                       |  |          | 183  
|Future(Note 7)                                                                |  |          | (154 
|                                                                              | 
|                                                                              |  |          | 29   
|                                                                              | 
|Net earnings (loss) from continuing operations                                |  | $        | 191  
|                                                                              | 
|Capital and exploration expenditures from continuing operations               |  |          |      
|Property, plant and equipment and exploration expenditures(Note 14)           |  | $        | 866  
|Other assets                                                                  |  |          | 7    
|                                                                              | 
|                                                                              |  | $        | 873  
|                                                                              | 
|Cash flow from (used in) continuing operating activities                      |  | $        | 725  
|                                                                              | 
|Total assets from continuing operations                                       |  | $        | 4,119
|                                                                              | 

Notes to Consolidated Financial
StatementsPETRO-CANADA        75

---



|                                                                              |  | Upstream |      
|----------------------------------------------------------------------------- |  | -------- | -----
|
|
|                                                                              |  |          | 2007 
|                                                                              | 
|Revenue1                                                                      |  |          |      
|Sales to customers                                                            |  | $        | 2,708
|Investment and other income (expense)2                                        |  |          | (18  
|Inter-segment sales                                                           |  |          | 477  
|                                                                              | 
|Segmented revenue                                                             |  |          | 3,167
|                                                                              | 
|Expenses                                                                      |  |          |      
|Crude oil and product purchases                                               |  |          | 736  
|Inter-segment transactions                                                    |  |          | 8    
|Operating, marketing and general                                              |  |          | 228  
|Exploration                                                                   |  |          | 13   
|Depreciation, depletion and amortization(Note 6)                              |  |          | 410  
|Unrealized gain on translation of foreign currency denominated long-term debt |  |          |     
|Interest                                                                      |  |          |     
|                                                                              | 
|                                                                              |  |          | 1,395
|                                                                              | 
|Earnings (loss) from continuing operations before income taxes                |  |          | 1,772
|                                                                              | 
|Provision for income taxes                                                    |  |          |      
|Current                                                                       |  |          | 653  
|Future(Note 7)                                                                |  |          | (110 
|                                                                              | 
|                                                                              |  |          | 543  
|                                                                              | 
|Net earnings (loss) from continuing operations                                |  | $        | 1,229
|                                                                              | 
|Capital and exploration expenditures from continuing operations               |  |          |      
|Property, plant and equipment and exploration expenditures(Note 14)           |  | $        | 159  
|Other assets                                                                  |  |          | 2    
|                                                                              | 
|                                                                              |  | $        | 161  
|                                                                              | 
|Cash flow from (used in) continuing operating activities                      |  | $        | 1,491
|                                                                              | 
|Total assets from continuing operations                                       |  | $        | 2,345
|                                                                              | 

76PETRO-CANADANotes to
Consolidated Financial Statements

---



|                                                                              |  | Downstream |        | Shared Services |  
|----------------------------------------------------------------------------- |  | ---------- | ------ | --------------- | -
|                                                                              |  |            | 2007   |                 |  
|                                                                              | 
|Revenue1                                                                      |  |            |        |                 |  
|Sales to customers                                                            |  | $          | 13,347 |                 | $
|Investment and other income (expense)2                                        |  |            | (12    | )               |  
|Inter-segment sales                                                           |  |            | 18     |                 |  
|                                                                              | 
|Segmented revenue                                                             |  |            | 13,353 |                 |  
|                                                                              | 
|Expenses                                                                      |  |            |        |                 |  
|Crude oil and product purchases                                               |  |            | 8,787  |                 |  
|Inter-segment transactions                                                    |  |            | 1,853  |                 |  
|Operating, marketing and general                                              |  |            | 1,525  |                 |  
|Exploration                                                                   |  |            |       |                 |  
|Depreciation, depletion and amortization(Note 6)                              |  |            | 299    |                 |  
|Unrealized gain on translation of foreign currency denominated long-term debt |  |            |       |                 |  
|Interest                                                                      |  |            |       |                 |  
|                                                                              | 
|                                                                              |  |            | 12,464 |                 |  
|                                                                              | 
|Earnings (loss) from continuing operations before income taxes                |  |            | 889    |                 |  
|                                                                              | 
|Provision for income taxes                                                    |  |            |        |                 |  
|Current                                                                       |  |            | 232    |                 |  
|Future(Note 7)                                                                |  |            | 28     |                 |  
|                                                                              | 
|                                                                              |  |            | 260    |                 |  
|                                                                              | 
|Net earnings (loss) from continuing operations                                |  | $          | 629    |                 | $
|                                                                              | 
|Capital and exploration expenditures from continuing operations               |  |            |        |                 |  
|Property, plant and equipment and exploration expenditures(Note 14)           |  | $          | 1,396  |                 | $
|Other assets                                                                  |  |            | 30     |                 |  
|                                                                              | 
|                                                                              |  | $          | 1,426  |                 | $
|                                                                              | 
|Cash flow from (used in) continuing operating activities                      |  | $          | 994    |                 | $
|                                                                              | 
|Total assets from continuing operations                                       |  | $          | 7,989  |                 | $
|                                                                              | 

Notes to Consolidated Financial
StatementsPETRO-CANADA        77

---



|                                                                              |  | Consolidated |       
|----------------------------------------------------------------------------- |  | ------------ | ------
|                                                                              |  |              | 2007  
|                                                                              | 
|Revenue1                                                                      |  |              |       
|Sales to customers                                                            |  | $            | 21,710
|Investment and other income (expense)2                                        |  |              | (460  
|Inter-segment sales                                                           |  |              |      
|                                                                              | 
|Segmented revenue                                                             |  |              | 21,250
|                                                                              | 
|Expenses                                                                      |  |              |       
|Crude oil and product purchases                                               |  |              | 10,291
|Inter-segment transactions                                                    |  |              |      
|Operating, marketing and general                                              |  |              | 3,552 
|Exploration                                                                   |  |              | 490   
|Depreciation, depletion and amortization(Note 6)                              |  |              | 2,091 
|Unrealized gain on translation of foreign currency denominated long-term debt |  |              | (246  
|Interest                                                                      |  |              | 165   
|                                                                              | 
|                                                                              |  |              | 16,343
|                                                                              | 
|Earnings (loss) from continuing operations before income taxes                |  |              | 4,907 
|                                                                              | 
|Provision for income taxes                                                    |  |              |       
|Current                                                                       |  |              | 1,797 
|Future(Note 7)                                                                |  |              | 377   
|                                                                              | 
|                                                                              |  |              | 2,174 
|                                                                              | 
|Net earnings (loss) from continuing operations                                |  | $            | 2,733 
|                                                                              | 
|Capital and exploration expenditures from continuing operations               |  |              |       
|Property, plant and equipment and exploration expenditures(Note 14)           |  | $            | 3,988 
|Other assets                                                                  |  |              | 121   
|                                                                              | 
|                                                                              |  | $            | 4,109 
|                                                                              | 
|Cash flow from (used in) continuing operating activities                      |  | $            | 3,339 
|                                                                              | 
|Total assets from continuing operations                                       |  | $            | 23,852
|                                                                              | 

Geographic Information from Continuing Operations

|         |  | 2007 |          | 2006 |   | 2005        
|-------- |  | ---- | -------- | ---- | - | ------------
|         |  |      | Revenues |      |   | Total Assets
|        
|Canada   |  | $    | 17,897   |      | $ | 17,020      
|Foreign1 |  |      | 3,353    |      |   | 6,832       
|        
|         |  | $    | 21,250   |      | $ | 23,852      
|        

78PETRO-CANADANotes to
Consolidated Financial Statements

---





Note 4Discontinued Operations

On January 31, 2006, the Company completed the sale of its producing assets in Syria for net proceeds of $640 million, resulting in a gain on sale of
$134 million.

The
accounting for discontinued operations results in a reduction of the Consolidated Statement of Earnings balances as follows:

|                                                          |  |   | 2007 |  |   | 2006 |  |   | 2005
|--------------------------------------------------------- |  | - | ---- |  | - | ---- |  | - | ----
|                                                         
|Revenue1                                                  |  | $ |     |  | $ | 168  |  | $ | 464 
|Expenses                                                  |  |   |      |  |   |      |  |   |     
|Operating, marketing and general                          |  |   |     |  |   | 6    |  |   | 104 
|Depreciation, depletion and amortization                  |  |   |     |  |   |     |  |   | 145 
|                                                         
|                                                          |  |   |     |  |   | 6    |  |   | 249 
|                                                         
|Earnings from discontinued operations before income taxes |  |   |     |  |   | 162  |  |   | 215 
|Provision for income taxes                                |  |   |     |  |   | 10   |  |   | 117 
|                                                         
|Net earnings from discontinued operations                 |  | $ |     |  | $ | 152  |  | $ | 98  
|                                                         

Note 5Investment and Other Income (Expense)

Investment and other income (expense) includes net losses related to the Buzzard derivative contracts (Note 23) of $535 million
(2006  $259 million; 2005  $889 million) and net gains on sales of assets of $81 million
(2006  $30 million; 2005  $48 million) for the year ended December 31, 2007.

Note 6Asset Write-Downs

In 2007, the Company recognized a $150 million ($97 million after-tax) impairment expense due to a write-down of its coal bed methane
assets in the U.S. Rockies' Powder River Basin. The assets have been written down to management's best estimate of fair value based on a discounted future cash flow valuation. These assets form
part of the Company's North American Natural Gas business segment. The impairment expense is included in depreciation, depletion and amortization in the Consolidated Statement of Earnings.

Notes to Consolidated Financial
StatementsPETRO-CANADA        79

---



Note 7Income Taxes

The computation of the provision for income taxes is as follows:

|                                                                                                  |                                                                            |   | 2007  |      |   | 2006  |      |   | 2005  |     
|------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | - | ----- | ---- | - | ----- | ---- | - | ----- | ----
|                                                                                                  |                                                                           
|Earnings from continuing operations before income taxes                                           |                                                                            | $ | 4,907 |      | $ | 3,972 |      | $ | 3,402 |     
|Add (deduct):                                                                                     |                                                                            |   |       |      |   |       |      |   |       |     
|                                                                                                  | Non-deductible royalties and other payments to provincial governments, net |   |       |     |   |       | 61   |   |       | 393 
|                                                                                                  | Resource allowance                                                         |   |       |     |   |       | (158 | ) |       | (413
|                                                                                                  | Non-taxable foreign exchange                                               |   |       | (126 | ) |       | (1   | ) |       | (45 
|                                                                                                  | Other                                                                      |   |       | (26  | ) |       | (24  | ) |       | 5   
|                                                                                                  |                                                                           
|Earnings from continuing operations as adjusted before income taxes                               |                                                                            | $ | 4,755 |      | $ | 3,850 |      | $ | 3,342 |     
|                                                                                                  |                                                                           
|Canadian federal income tax rate                                                                  |                                                                            |   | 38.0% |      |   | 38.0% |      |   | 38.0% |     
|                                                                                                  |                                                                           
|Income tax on earnings from continuing operations as adjusted at Canadian federal income tax rate |                                                                            | $ | 1,807 |      | $ | 1,463 |      | $ | 1,270 |     
|Provincial income taxes                                                                           |                                                                            |   | 372   |      |   | 295   |      |   | 325   |     
|Federal  abatement and other credits                                                             |                                                                            |   | (446  | )    |   | (262  | )    |   | (378  | )   
|Current income tax increase due to provincial reassessments                                       |                                                                            |   |      |      |   | 70    |      |   |      |     
|Future income tax increase (decrease) due to Canadian federal and provincial rate changes         |                                                                            |   | (155  | )    |   | (63   | )    |   | 6     |     
|Future income tax increase (decrease) due to foreign rate changes                                 |                                                                            |   | (36   | )    |   | 242   |      |   |      |     
|Higher foreign income tax rates                                                                   |                                                                            |   | 622   |      |   | 627   |      |   | 482   |     
|Income tax credits and other                                                                      |                                                                            |   | 10    |      |   | 12    |      |   | 4     |     
|                                                                                                  |                                                                           
|Provision for income taxes                                                                        |                                                                            | $ | 2,174 |      | $ | 2,384 |      | $ | 1,709 |     
|                                                                                                  |                                                                           
|Effective income tax rate on earnings from continuing operations before income taxes              |                                                                            |   | 44.3% |      |   | 60.0% |      |   | 50.2% |     
|                                                                                                  |                                                                           

The provision for income taxes is comprised of:

|                                 |          |   | 2007  |       |   | 2006  |       |   | 2005  |      
|-------------------------------- | -------- | - | ----- | ----- | - | ----- | ----- | - | ----- | -----
|                                 |         
|Current                          |          |   |       |       |   |       |       |   |       |      
|                                 | Canadian |   | $     | 257   |   | $     | 801   |   | $     | 769  
|                                 | Foreign  |   |       | 1,541 |   |       | 1,272 |   |       | 1,025
|Future                           |          |   |       |       |   |       |       |   |       |      
|                                 | Canadian |   |       | 443   |   |       | 62    |   |       | (113 
|                                 | Foreign  |   |       | (67   | ) |       | 249   |   |       | 28   
|                                 |         
|Total provision for income taxes |          | $ | 2,174 |       | $ | 2,384 |       | $ | 1,709 |      
|                                 |         

80PETRO-CANADANotes to
Consolidated Financial Statements

---



The provisions for current and future income taxes include tax recoveries (expenses), which are largely due to reductions in the Canadian federal and provincial
income tax rates. These amounts have been allocated to the business segments as follows:

|                                 |                   |   | 2007 |    |   | 2006 |      |   | 2005 |   
|-------------------------------- | ----------------- | - | ---- | -- | - | ---- | ---- | - | ---- | --
|                                 |                  
|North American Natural Gas       |                   | $ | 8    |    | $ | 6    |      | $ | (2   | ) 
|Oil Sands                        |                   |   | 62   |    |   | 44   |      |   |     |   
|International & Offshore         |                   |   |      |    |   |      |      |   |      |   
|                                 | East Coast Canada |   |      | 52 |   |      | 37   |   |      | (2
|                                 | International1    |   |      | 30 |   |      | (306 | ) |      |  
|Downstream                       |                   |   | 34   |    |   | 41   |      |   | (2   | ) 
|Shared Services2                 |                   |   | 5    |    |   | (71  | )    |   |     |   
|                                 |                  
|Total provision for income taxes |                   | $ | 191  |    | $ | (249 | )    | $ | (6   | ) 
|                                 |                  

The following table summarizes the temporary differences that give rise to the net future income tax assets and liabilities:

|                                      |                                                    |   | 2007  |       |   | 2006  |       
|------------------------------------- | -------------------------------------------------- | - | ----- | ----- | - | ----- | ------
|                                      |                                                   
|Future income tax liabilities         |                                                    |   |       |       |   |       |       
|                                      | Property, plant and equipment                      |   | $     | 3,626 |   | $     | 3,919 
|                                      | Partnership income1                                |   |       | 362   |   |       | 367   
|                                      | Other assets                                       |   |       | 78    |   |       | 75    
|Future income tax assets              |                                                    |   |       |       |   |       |       
|                                      | Asset retirement obligations and other liabilities |   |       | (495  | ) |       | (1,010
|                                      | Inventories                                        |   |       | (256  | ) |       | (212  
|                                      | Other                                              |   |       | (272  | ) |       | (260  
|                                      |                                                   
|Future income tax liability           |                                                    |   | 3,043 |       |   | 2,879 |       
|Less: Current future income tax asset |                                                    |   | (26   | )     |   | (95   | )     
|                                      |                                                   
|Net future income tax liability       |                                                    | $ | 3,069 |       | $ | 2,974 |       
|                                      |                                                   

Deferred distribution taxes associated with International business operations have not been recorded. Based on current plans, repatriation of funds in excess of
foreign reinvestment will not result in material additional income tax expense.

Complex
income tax issues, which involve interpretations of continually changing regulations, are encountered in computing the provision for income taxes. Management believes that adequate provisions
have been made for all such outstanding issues and that the resolution of these issues would not materially affect the financial position or results of operations of the Company.

Notes to Consolidated Financial
StatementsPETRO-CANADA        81

---





Note 8Earnings per Share

The weighted-average number of common shares outstanding used in the calculations of basic and diluted earnings per share from continuing operations and earnings per share,
assuming that all dilutive outstanding stock options were exercised, was:

|(millions)                                                     |  | 2007  |  | 2006  |  | 2005 
|-------------------------------------------------------------- |  | ----- |  | ----- |  | -----
|                                                              
|Weighted-average number of common shares outstanding  basic   |  | 489.0 |  | 503.9 |  | 518.4
|Effect of dilutive stock options                               |  | 5.0   |  | 6.0   |  | 7.0  
|                                                              
|Weighted-average number of common shares outstanding  diluted |  | 494.0 |  | 509.9 |  | 525.4
|                                                              

There were no stock options excluded from the diluted earnings per share from continuing operations and earnings per share calculations. Stock options are
excluded when the exercise price exceeds the average share price in a respective period.

Note 9Cash Flow Information

Changes in Non-Cash Working Capital

Non-cash working capital is comprised of current assets and current liabilities, other than cash and cash equivalents and the current portion of
long-term debt.

The
(increase) decrease in non-cash working capital is comprised of:

|                                                   |  |   | 2007 |   |   | 2006 |   |   | 2005 |  
|-------------------------------------------------- |  | - | ---- | - | - | ---- | - | - | ---- | -
|                                                   | 
|Operating activities from continuing operations    |  |   |      |   |   |      |   |   |      |  
|Accounts receivable                                |  | $ | (373 | ) | $ | 17   |   | $ | (563 | )
|Inventories                                        |  |   | (36  | ) |   | (36  | ) |   | (18  | )
|Accounts payable and accrued liabilities           |  |   | 77   |   |   | 365  |   |   | 662  |  
|Income taxes payable                               |  |   | (302 | ) |   | (60  | ) |   | (190 | )
|Current portion of long-term liabilities and other |  |   | 211  |   |   | (365 | ) |   | 25   |  
|                                                   | 
|                                                   |  | $ | (423 | ) | $ | (79  | ) | $ | (84  | )
|                                                   | 
|Investing activities                               |  |   |      |   |   |      |   |   |      |  
|Accounts payable and accrued liabilities           |  | $ | 120  |   | $ | 138  |   | $ | (12  | )
|Other liabilities                                  |  |   | 159  |   |   | (79  | ) |   | 249  |  
|                                                   | 
|                                                   |  | $ | 279  |   | $ | 59   |   | $ | 237  |  
|                                                   | 

Cash Payments

Cash payments from continuing operations for interest and income taxes were as follows:

|             |  |   | 2007  |  |   | 2006  |  |   | 2005 
|------------ |  | - | ----- |  | - | ----- |  | - | -----
|            
|Interest     |  | $ | 186   |  | $ | 194   |  | $ | 186  
|Income taxes |  | $ | 2,074 |  | $ | 2,149 |  | $ | 1,972
|            

Note 10Securitization Program

Under the Company's securitization program, the Company can sell an undivided interest of eligible accounts receivable up to $500 million to a third party, on a revolving
and fully serviced basis. The service liability has been estimated to be insignificant. The Company also retains an interest in the transferred accounts receivable equal to the required reserves
amount.

82PETRO-CANADANotes to
Consolidated Financial Statements

---



As
at December 31, 2007, $480 million (December 31, 2006  $480 million) of outstanding accounts receivable had been sold under the
program for net proceeds of $479 million.

The
securitization program expires on June 24, 2009.

Note 11Fort Hills Oil Sands Mining and Upgrading Project

In June 2005, the Company acquired, for $300 million, a 60% interest in the Fort Hills oil sands mining and upgrading project which was previously wholly owned by
UTS Energy Corporation (UTS). As part of the acquisition, Petro-Canada became the project operator. To pay for the investment, Petro-Canada will fund a portion of UTS's share of the next
$2.5 billion of development capital. The acquisition cost has been discounted using an estimated payout pattern for the development capital funding and the Company's estimated cost of debt at
the time of acquisition.

In
November 2005, the Company and UTS finalized agreements with Teck Cominco Limited (Teck Cominco), whereby Teck Cominco acquired a 15% interest in the Fort Hills oil sands mining and
upgrading project with Petro-Canada and UTS holding interests of 55% and 30%, respectively.

On
November 23, 2007, the Company finalized an agreement to acquire an additional 5% working interest in the Fort Hills oil sands mining and upgrading project, bringing the Company's total
working interest to 60%. To pay for this incremental investment, the Company will fund an additional $375 million of expenditures in excess of its working interest. The acquisition cost has
been discounted to $347 million using an estimated payout pattern for the funding and the Company's estimated cost of debt at the time of acquisition. The discounted value of the acquisition
cost was recorded as $329 million in other liabilities (Note 18) and $18 million in accounts payable and accrued liabilities.

Note 12Cash and Cash Equivalents

|                       |  |   | 2007 |  |   | 2006
|---------------------- |  | - | ---- |  | - | ----
|                      
|Cash                   |  | $ | 47   |  | $ | 42  
|Short-term investments |  |   | 184  |  |   | 457 
|                      
|                       |  | $ | 231  |  | $ | 499 
|                      

Note 13Inventories

|                                            |  |   | 2007 |  |   | 2006
|------------------------------------------- |  | - | ---- |  | - | ----
|                                           
|Crude oil, refined products and merchandise |  | $ | 484  |  | $ | 455 
|Materials and supplies                      |  |   | 184  |  |   | 177 
|                                           
|                                            |  | $ | 668  |  | $ | 632 
|                                           

Notes to Consolidated Financial
StatementsPETRO-CANADA        83

---



Note 14Property, Plant and Equipment

|                           |                   | 2007 |        | 2006  |                                                      | 2007  |   | 2006  
|-------------------------- | ----------------- | ---- | ------ | ----- | ---------------------------------------------------- | ----- | - | ------
|                           |                   |      | Cost   |       | Accumulated Depreciation, Depletion and Amortization |       |   | Net   
|                          
|North American Natural Gas |                   | $    | 7,310  |       | $  3,536                                             |       | $ | 3,774 
|Oil Sands                  |                   |      | 4,359  |       | 1,011                                                |       |   | 3,348 
|International & Offshore   |                   |      |        |       |                                                      |       |   |       
|                           | East Coast Canada |      |        | 4,059 |                                                      | 2,003 |   |       
|                           | International1    |      |        | 5,689 |                                                      | 1,605 |   |       
|Downstream                 |                   |      | 9,174  |       | 3,000                                                |       |   | 6,174 
|Shared Services            |                   |      | 542    |       | 481                                                  |       |   | 61    
|                          
|                           |                   | $    | 31,133 |       | $11,636                                              |       | $ | 19,497
|                          

Property, plant and equipment net cost includes asset retirement costs of $591 million (2006  $609 million).

Interest
capitalized during 2007 amounted to $30 million (2006  $51 million; 2005  $35 million).

Costs
of $21 million (2006  $211 million) relating to North American Natural Gas operations, $1,039 million
(2006  $152 million) relating to Oil Sands operations, $120 million (2006  $62 million) relating to
East Coast Canada operations, $323 million (2006  $2,934 million) relating to the International operations, and $2,151 million
(2006  $1,044 million) relating to Downstream operations are currently not being depleted or depreciated.

Capital
leases at a net cost of $56 million (2006  $60 million) and $21 million
(2006  $23 million) are included in the assets of East Coast Canada and Oil Sands, respectively (Note 17).

Note 15Goodwill

The following table summarizes the changes in goodwill:

|                              |  | 2007 |                            | 2006
|----------------------------- |  | ---- | -------------------------- | ----
|                              |  |      | North American Natural Gas |     
|                             
|Goodwill at beginning of year |  | $    | 169                        |     
|Foreign exchange              |  |      | (25                        | )   
|                             
|Goodwill at end of year       |  | $    | 144                        |     
|                             

84PETRO-CANADANotes to
Consolidated Financial Statements

---



Note 16Other Assets

|                               |  |   | 2007 |  |   | 2006
|------------------------------ |  | - | ---- |  | - | ----
|                              
|Investments                    |  | $ | 81   |  | $ | 82  
|Accrued pension asset(Note 22) |  |   | 168  |  |   | 128 
|Deferred financing costs1      |  |   |     |  |   | 101 
|Other long-term assets         |  |   | 197  |  |   | 131 
|                              
|                               |  | $ | 446  |  | $ | 442 
|                              

Note 17Long-Term Debt

|                             |                                                 | Maturity  |      |   | 20073 |     |   | 2006  |    
|---------------------------- | ----------------------------------------------- | --------- | ---- | - | ----- | --- | - | ----- | ---
|                             |                                                
|Debentures and notes         |                                                 |           |      |   |       |     |   |       |    
|                             | 5.95% unsecured senior notes ($600 million US)  |           | 2035 |   | $     | 577 |   | $     | 699
|                             | 5.35% unsecured senior notes ($300 million US)1 |           | 2033 |   |       | 248 |   |       | 349
|                             | 7.00% unsecured debentures ($250 million US)    |           | 2028 |   |       | 237 |   |       | 291
|                             | 7.875% unsecured debentures ($275 million US)   |           | 2026 |   |       | 267 |   |       | 321
|                             | 9.25% unsecured debentures ($300 million US)    |           | 2021 |   |       | 294 |   |       | 349
|                             | 5.00% unsecured senior notes ($400 million US)  |           | 2014 |   |       | 391 |   |       | 466
|                             | 4.00% unsecured senior notes ($300 million US)1 |           | 2013 |   |       | 275 |   |       | 349
|Syndicated credit facilities |                                                 | 2012      |      |   | 995   |     |   |      |    
|Capital leases(Note 14)2     |                                                 | 2008-2022 |      |   | 57    |     |   | 70    |    
|                             |                                                
|                             |                                                 |           |      |   | 3,341 |     |   | 2,894 |    
|Current portion              |                                                 |           |      |   | (2    | )   |   | (7    | )  
|                             |                                                
|                             |                                                 |           |      | $ | 3,339 |     | $ | 2,887 |    
|                             |                                                

Interest on long-term debt, net of capitalized interest, was $151 million in 2007
(2006  $152 million; 2005  $146 million). Interest is paid semi-annually. All debentures and
notes are repayable in full upon maturity.

Except
as discussed in footnote 1 above, the fixed interest rate on all debentures and notes approximates the effective interest rate.

At
December 31, 2007, the Company had in place syndicated credit facilities totalling $2,200 million (December 31,
2006  $2,200 million), maturing in 2012. The syndicated facilities are unsecured, committed revolving facilities for general corporate purposes that bear
interest at either the lenders' rates for Canadian prime loans, U.S. base rate loans, Bankers' Acceptances rates or at London Inter-Bank Offered Rate (LIBOR) plus applicable
margins. The Company also has revolving bilateral demand credit facilities of $1,500 million at December 31, 2007 (December 31,
2006  $829 million).

A
total of $1,372 million of the credit facilities was used for Bankers' Acceptances, letters of credit and overdraft coverage at December 31, 2007.

Notes to Consolidated Financial
StatementsPETRO-CANADA        85

---



At
December 31, 2007, the Company had drawn on its syndicated credit facilities and its demand credit facilities for $995 million and $109 million, respectively, in the form of
Canadian dollar Bankers' Acceptances. The weighted-average interest rate for Bankers' Acceptances outstanding was 5.13% for the syndicated credit facilities and 4.99% for the demand
credit facilities.

Note 18Other Liabilities

|                                                                   |  |   | 2007 |  |   | 2006 
|------------------------------------------------------------------ |  | - | ---- |  | - | -----
|                                                                  
|Post-retirement benefits(Note 22)                                  |  | $ | 193  |  | $ | 182  
|Unrealized losses related to Buzzard derivative contracts(Note 23) |  |   |     |  |   | 1,252
|Fort Hills purchase obligation(Note 11)                            |  |   | 329  |  |   | 170  
|Other long-term liabilities                                        |  |   | 195  |  |   | 222  
|                                                                  
|                                                                   |  | $ | 717  |  | $ | 1,826
|                                                                  

Note 19Asset Retirement Obligations

Asset retirement obligations are recorded for obligations where the Company will be required to retire tangible long-lived assets such as well sites, offshore
production platforms, natural gas processing plants and marketing sites.

The
following table summarizes the changes in the asset retirement obligations:

|                                                  |  |   | 2007  |   |   | 2006  |  
|------------------------------------------------- |  | - | ----- | - | - | ----- | -
|                                                  | 
|Asset retirement obligations at beginning of year |  | $ | 1,237 |   | $ | 962   |  
|Obligations incurred                              |  |   | 74    |   |   | 95    |  
|Changes in estimates                              |  |   | 5     |   |   | 138   |  
|Obligations settled                               |  |   | (56   | ) |   | (55   | )
|Accretion expense                                 |  |   | 70    |   |   | 54    |  
|Foreign exchange                                  |  |   | (47   | ) |   | 43    |  
|                                                  | 
|Asset retirement obligations at end of year       |  |   | 1,283 |   |   | 1,237 |  
|Less: Current portion                             |  |   | (49   | ) |   | (67   | )
|                                                  | 
|                                                  |  | $ | 1,234 |   | $ | 1,170 |  
|                                                  | 

In determining the fair value of the asset retirement obligations, the estimated cash flows of new obligations incurred during the year have been discounted at
6.5% (2006  5.5%). The total undiscounted amount of the estimated cash flows required to settle the obligations is $4,136 million
(2006  $3,481 million). The obligations will be settled on an ongoing basis over the useful lives of the operating assets, which extend up to
50 years in the future. The current portion of asset retirement obligations is included in accounts payable and accrued liabilities.

86PETRO-CANADANotes to
Consolidated Financial Statements

---





Note 20Shareholders' Equity

Authorized

The authorized share capital is comprised of an unlimited number of:



Issued and Outstanding

Changes in common shares and contributed surplus were as follows:

|                                                            |  | 2007        |   | 2006 |       
|----------------------------------------------------------- |  | ----------- | - | ---- | ------
|                                                            |  | Shares      |   |      | Amount
|                                                            | 
|Balance at beginning of year                                |  | 497,538,385 |   | $    | 1,366 
|Issued under employee stock-option and share purchase plans |  | 1,918,734   |   |      | 43    
|Repurchased under normal course issuer bid                  |  | (15,998,000 | ) |      | (44   
|                                                            | 
|Balance at end of year                                      |  | 483,459,119 |   | $    | 1,365 
|                                                            | 

In June 2007, the Company renewed its normal course issuer bid to repurchase up to 25 million of its outstanding common shares during the period
from June 22, 2007 to June 21, 2008, subject to certain conditions. During 2007, the Company purchased 15,998,000 common shares at an average price of $52.42 per common share for
a total cost of $839 million (2006  19,778,400 common shares at an average price of $51.10 per common share for a total cost of
$1,011 million). The excess of the purchase price over the carrying amount of the shares purchased was recorded as a $444 million
(2006  $958 million) reduction of contributed surplus and a $351 million (2006  $nil) reduction of retained
earnings.

Note 21Stock-Based Compensation

Stock Options

The Company maintains a stock option plan whereby options can be granted to officers and certain employees for up to 44 million common shares. Stock
options have a term of 10 years if granted prior to 2004 and seven years if granted subsequent to 2003. All stock options vest over periods of up to four years and are exercisable at the market
prices for the shares on the dates that the options were granted.

In
2004, the Company amended the option plan to provide the holder of stock options granted subsequent to 2003 the alternative to exercise these options as a cash payment alternative (CPA). Where the
CPA is chosen, vested options can be surrendered for cancellation in return for a direct cash payment from the Company based on the excess of the then current market price over the option
exercise price.

Notes to Consolidated Financial
StatementsPETRO-CANADA        87

---



Changes
in the number of outstanding stock options were as follows:

|                             |  | 2007       |  
|---------------------------- |  | ---------- | -
|                             |  | Number     |  
|                             | 
|Balance at beginning of year |  | 20,714,733 |  
|Granted                      |  | 3,347,800  |  
|Exercised for common shares  |  | (1,918,734 | )
|Surrendered for cash payment |  | (800,685   | )
|Cancelled                    |  | (308,050   | )
|                             | 
|Balance at end of year       |  | 21,035,064 |  
|                             | 

|
|

|                             |  | 2006       |   | 2005 |                                         
|---------------------------- |  | ---------- | - | ---- | ----------------------------------------
|                             |  | Number     |   |      | Weighted-Average
Exercise Price (dollars
|                             | 
|Balance at beginning of year |  | 18,361,617 |   | $    | 24                                      
|Granted                      |  | 4,911,600  |   |      | 52                                      
|Exercised for common shares  |  | (2,177,881 | ) |      | 20                                      
|Surrendered for cash payment |  | (119,710   | ) |      | 31                                      
|Cancelled                    |  | (260,893   | ) |      | 41                                      
|                             | 
|Balance at end of year       |  | 20,714,733 |   | $    | 31                                      
|                             | 

The following stock options were outstanding as at December 31, 2007:

|Options Outstanding                |  | Options Exercisable | 
|---------------------------------- |  | ------------------- | 
|Range of Exercise Prices (dollars) |  | Number              | 
|                                   | 
|$  8 to 17                         |  | 2,927,149           | 
|18 to 23                           |  | 1,619,550           | 
|24 to 27                           |  | 2,718,440           | 
|28 to 32                           |  | 2,516,465           | 
|33 to 42                           |  | 3,415,325           | 
|43 to 57                           |  | 7,838,135           | 
|                                   | 
|$  8 to 57                         |  | 21,035,064          | 
|                                   | 

During 2007, the Company recorded compensation expense of $1 million (2006  $10 million;
2005  $10 million) relating to the 2003 stock options and $69 million (2006  $31 million;
2005  $69 million) relating to options with a CPA.

88PETRO-CANADANotes to
Consolidated Financial Statements

---



Stock Appreciation Rights (SARs)

Commencing 2007, the Company approved the issuance of SARs to certain employees, which entitle the holder to receive a cash payment equal to the difference
between the stated exercise price and the market price of the Company's common shares on date of surrender. The vesting period and other terms are similar to the terms of the Company's existing stock
option plan. At the time of grant, the exercise price approximated the market price. The following SARs have been granted:

|                             |  | 2007     
|---------------------------- |  | ---------
|                             |  | Number   
|                            
|Balance at beginning of year |  |         
|Granted                      |  | 3,786,500
|Cancelled                    |  | (127,050 
|                            
|Balance at end of year       |  | 3,659,450
|                            

During 2007, the Company recorded compensation expense of $17 million relating to SARs.

Performance Share Units (PSUs)

The Company maintains a plan for PSUs for officers and other senior management employees. Under this plan, notional share units are awarded and settled in cash
at the end of a three-year period based upon the Company's share price at that time, the value of notional dividends applied during the period and the Company's total shareholder return
relative to a peer group of North American industry competitors.

Changes
in the number of outstanding PSUs were as follows:

|                             |  | 2007 Number |   | 2006 Number |  
|---------------------------- |  | ----------- | - | ----------- | -
|                             | 
|Balance at beginning of year |  | 1,482,986   |   | 1,158,967   |  
|Granted                      |  | 247,476     |   | 385,632     |  
|Exercised                    |  |            |   |            |  
|Cancelled1                   |  | (564,418    | ) | (61,613     | )
|                             | 
|Balance at end of year       |  | 1,166,044   |   | 1,482,986   |  
|                             | 

PSUs have a three-year performance period, such that those outstanding at the end of 2007 are related to PSUs issued in 2005, 2006 and 2007 (2005
grant  582,716; 2006 grant  349,771; 2007 grant  233,557). During 2007, the Company
recorded compensation (recovery) expense relating to PSUs of $4 million (2006  $(4) million;
2005  $7 million).

Deferred Share Units (DSUs)

The Company maintains a plan for DSUs whereby executive officers are awarded DSUs and/or can elect to receive all or a portion of their annual incentive
compensation in the form of DSUs. Under this plan, notional share units are issued for the elected amount, which is based on the then current market price of the Company's common shares. Upon
termination or retirement, the units are settled in cash, which includes an amount for the value of notional dividends earned over the period the units were outstanding.

Notes to Consolidated Financial
StatementsPETRO-CANADA        89

---



The
Company's Board of Directors receives a portion of their compensation in the form of DSUs and can also elect to receive all or a portion of their remaining compensation in the form of DSUs. Under
the director program, notional share units are issued and settled in cash or common shares, including the value of notional dividends, upon ceasing to be a director.

During
2007, the Company recorded compensation expense relating to DSUs of $4 million (2006  $2 million;
2005  $13 million).

Note 22Employee Future Benefits

The Company maintains pension plans with defined benefit and defined contribution provisions and provides certain health care and life insurance benefits to its qualifying
retirees. The actuarially determined cost of these benefits is accrued over the estimated service life of employees. The defined benefit provisions are generally based upon years of service and
average salary during the final years of employment. Certain defined benefit options require employee contributions and the balance of the funding for the registered plans is provided by the Company,
based upon the advice of an independent actuary. The accrued benefit obligations and the fair value of plan assets are measured for accounting purposes at December 31 of each year. The most
recent actuarial valuation of the pension plan for funding purposes was as of December 31, 2004 and the next required valuation will be as of December 31, 2007.

The
defined contribution plan provides for an annual contribution of 5% to 8% of each participating employee's pensionable earnings.

Benefit Plan Expense

|                                                                                                                                              |  | Pension Plans |      | Other Post-Retirement Plans |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---- | --------------------------- | -
|                                                                                                                                              |  |               | 2007 |                             |  
|                                                                                                                                              | 
|(a) Defined benefit plans                                                                                                                     |  |               |      |                             |  
|Employer current service cost                                                                                                                 |  | $             | 43   |                             | $
|Interest cost                                                                                                                                 |  |               | 90   |                             |  
|Actual return on plan assets                                                                                                                  |  |               | (8   | )                           |  
|Actuarial losses (gains)                                                                                                                      |  |               | (42  | )                           |  
|                                                                                                                                              | 
|Elements of employee future benefit plan expense before adjustments to recognize the long-term nature of employee future benefit plan expense |  |               | 83   |                             |  
|Difference between actual and expected return on plan assets                                                                                  |  |               | (104 | )                           |  
|Difference between actual and recognized actuarial losses in year                                                                             |  |               | 86   |                             |  
|Amortization of transitional (asset) obligation                                                                                               |  |               | (6   | )                           |  
|                                                                                                                                              | 
|                                                                                                                                              |  |               | 59   |                             |  
|(b) Defined contribution plans                                                                                                                |  |               | 22   |                             |  
|                                                                                                                                              | 
|Total expense                                                                                                                                 |  | $             | 81   |                             | $
|                                                                                                                                              | 

90PETRO-CANADANotes to
Consolidated Financial Statements

---



Benefit Plan Funding

|                     |  | Pension Plans |      | Other Post-Retirement Plans
|-------------------- |  | ------------- | ---- | ---------------------------
|                     |  |               | 2007 |                            
|                    
|Defined contribution |  | $             | 22   |                            
|                     |  |               |      |                            
|Defined benefit      |  | $             | 99   |                            
|                    

Financial Status of Defined Benefit Plans

|                                            |  | Pension Plans |       | Other Post-Retirement Plans |  
|------------------------------------------- |  | ------------- | ----- | --------------------------- | -
|                                            |  |               | 2007  |                             |  
|                                            | 
|Fair value of plan assets                   |  | $             | 1,502 |                             | $
|Accrued benefit obligation                  |  |               | 1,784 |                             |  
|                                            | 
|Funded status  plan deficit1               |  |               | (282  | )                           |  
|Unamortized transitional (asset) obligation |  |               | (12   | )                           |  
|Unamortized net actuarial losses            |  |               | 462   |                             |  
|                                            | 
|Accrued benefit asset (liability)           |  | $             | 168   |                             | $
|                                            | 

Reconciliation of Plan Assets

|                                               |  | Pension Plans |       | Other Post-Retirement Plans |  
|---------------------------------------------- |  | ------------- | ----- | --------------------------- | -
|                                               |  |               | 2007  |                             |  
|                                               | 
|Fair value of plan assets at beginning of year |  | $             | 1,486 |                             | $
|Contributions                                  |  |               | 99    |                             |  
|Benefits paid                                  |  |               | (83   | )                           |  
|Actual gain on plan assets                     |  |               | 8     |                             |  
|Other                                          |  |               | (8    | )                           |  
|                                               | 
|Fair value of plan assets at end of year       |  | $             | 1,502 |                             | $
|                                               | 

Reconciliation of Accrued Benefit Obligation

|                                                |  | Pension Plans |       | Other Post-Retirement Plans |  
|----------------------------------------------- |  | ------------- | ----- | --------------------------- | -
|                                                |  |               | 2007  |                             |  
|                                                | 
|Accrued benefit obligation at beginning of year |  | $             | 1,786 |                             | $
|Current service cost                            |  |               | 43    |                             |  
|Interest cost                                   |  |               | 90    |                             |  
|Benefits paid                                   |  |               | (83   | )                           |  
|Actuarial losses (gains)                        |  |               | (42   | )                           |  
|Other                                           |  |               | (10   | )                           |  
|                                                | 
|Accrued benefit obligation at end of year       |  | $             | 1,784 |                             | $
|                                                | 

Notes to Consolidated Financial
StatementsPETRO-CANADA        91

---





Defined Benefit and Other Post-Retirement Plans Assumptions

|                                                         |  | 2007 |  | 2006 |  | 2005
|-------------------------------------------------------- |  | ---- |  | ---- |  | ----
|                                                        
|Year-end obligation discount rate1                       |  | 5.3% |  | 5.0% |  | 5.0%
|Accrued benefit obligation discount rate1                |  | 5.3% |  | 5.0% |  | 5.7%
|Long-term rate of return on plan assets                  |  | 7.5% |  | 7.5% |  | 7.5%
|Rate of compensation increase, excluding merit increases |  | 3.3% |  | 3.0% |  | 3.1%
|                                                        

Assumed Health and Dental Care Cost Trend Rates at December 31 are as follows:

|                                                                                         |  | 2007 |  | 2006
|---------------------------------------------------------------------------------------- |  | ---- |  | ----
|                                                                                        
|Dental care cost trend rate1                                                             |  | 4.0% |  | 3.5%
|Health care cost trend rate                                                              |  | 8.0% |  | 8.0%
|Health care cost trend rate declines to                                                  |  | 4.5% |  | 4.5%
|Year that health care cost trend rate reaches the rate which it is expected to remain at |  | 2017 |  | 2014
|                                                                                        

Sensitivity Analysis

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects for 2007:

|                                   |  |   | Increase |  |   | Decrease |  
|---------------------------------- |  | - | -------- |  | - | -------- | -
|                                   | 
|Total of service and interest cost |  | $ | 3        |  | $ | (2       | )
|Accrued benefit obligation         |  | $ | 30       |  | $ | (26      | )
|                                   | 

The Plan Assets consist of:

|               |  | Percentage of Plan Assets
at December 31,
|-------------- |  | -----------------------------------------
|Asset Category |  | 2007                                     
|              
|Equity         |  | 61%                                      
|Bonds          |  | 39%                                      
|              
|               |  | 100%                                     
|              

Note 23Financial Instruments and Derivatives

The Company is exposed to market risks resulting from fluctuations in commodity prices, foreign exchange rates and interest rates in the normal course of its business
operations. The Company monitors its exposure to market fluctuations and may use derivative contracts to manage these risks, as it considers appropriate. The Company does not use derivative contracts
for speculative purposes.

92PETRO-CANADANotes to
Consolidated Financial Statements

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Crude Oil and Products

During 2004, the Company entered into a series of derivative contracts for the future sale of Dated Brent crude oil in connection with its acquisition of an interest in the
Buzzard field in the U.K. sector of the North Sea. Some derivative contracts matured from July 1, 2007 to December 31, 2007. All remaining outstanding derivative contracts were
settled. This resulted in the following:

|                                       |  |   | 2007   |  
|-------------------------------------- |  | - | ------ | -
|                                       | 
|Unrealized losses at beginning of year |  | $ | (1,481 | )
|Net losses during current year(Note 5) |  |   | (535   | )
|Maturities1                            |  |   | 291    |  
|Settlement2                            |  |   | 1,725  |  
|                                       | 
|                                       |  | $ |       |  
|                                       | 

The Company enters into forward contracts and options to reduce exposure to Downstream margin fluctuations, including margins on fixed-price product sales, and
short-term price fluctuations on the purchase of foreign and domestic crude oil and refined petroleum products.

The
Company's outstanding derivative contracts and their related fair values at December 31, 2007 were as follows:

|                    |  | Quantity (MMbbls) |  | Maturity |  |   | Average
Price (US$/bbl) |  |   | Fair Value |  
|------------------- |  | ----------------- |  | -------- |  | - | ----------------------- |  | - | ---------- | -
|                    | 
|Crude oil purchases |  | 0.8               |  | 2008     |  | $ | 95.43                   |  | $ | (1         | )
|Crude oil sales     |  | 0.8               |  | 2008     |  | $ | 95.72                   |  | $ | 2          |  
|                    | 
|                    |  |                   |  |          |  |   |                         |  | $ | 1          |  
|                    | 

The fair value positions of outstanding derivative contracts were included in the Consolidated Balance Sheet as follows:

|                                         |  |   | December 31,
2007 |  |   | December 31,
2006
|---------------------------------------- |  | - | ----------------- |  | - | -----------------
|                                        
|Accounts receivable                      |  | $ | 1                 |  | $ |                 
|Accounts payable and accrued liabilities |  |   |                  |  |   | 233              
|Other liabilities                        |  |   |                  |  |   | 1,252            
|                                        

The fair value of these derivative contracts is based on quotes provided by brokers, which represents an approximation of amounts that would be received or paid
to counterparties to settle these instruments prior to maturity. The Company plans to hold all derivative contracts outstanding at December 31, 2007 to maturity.

Derivative
contracts and financial instruments involve a degree of credit risk. The Company manages this risk through the establishment of credit policies and limits, which are applied in the
selection of counterparties. Market risk relating to changes in value or settlement cost of the Company's derivative contracts is essentially offset by gains or losses on the underlying transaction.

In
addition to the derivative contracts described above, the Consolidated Balance Sheet includes other items considered to be financial instruments, such as cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, the Fort

Notes to Consolidated Financial
StatementsPETRO-CANADA        93

---



Hills
purchase obligation and long-term debt. The fair values of these other financial instruments included in the Consolidated Balance Sheet are as follows:

|                                                    |                                          | 2007 |                 | 2006   |  
|--------------------------------------------------- | ---------------------------------------- | ---- | --------------- | ------ | -
|                                                    |                                          |      | Carrying Amount |        |  
|                                                    |                                         
|Held-for-trading financial assets:                  |                                          |      |                 |        |  
|                                                    | Cash and cash equivalents                |      | $               | 231    |  
|Loans and receivables:                              |                                          |      |                 |        |  
|                                                    | Accounts receivable1                     |      |                 | 1,931  |  
|                                                    | Other long-term assets                   |      |                 | 197    |  
|Other financial liabilities (not held-for-trading): |                                          |      |                 |        |  
|                                                    | Accounts payable and accrued liabilities |      |                 | (3,512 | )
|                                                    | Short-term notes payable                 |      |                 | (109   | )
|                                                    | Long-term debt                           |      |                 | (3,341 | )
|                                                    | Fort Hills purchase obligation           |      |                 | (329   | )
|                                                    |                                         
|                                                    |                                          | $    | (4,932          | )      | $
|                                                    |                                         

Excluding long-term debt, the fair value of financial instruments approximates their carrying amount due to their short maturity. The fair value of
long-term debt is based on publicly quoted market values.

94PETRO-CANADANotes to
Consolidated Financial Statements

---





Note 24Commitments and Contingent Liabilities

Commitments

|                                        |  |   | 2008  |  |   | 2009  |  |   | 2010  |  |   | 2011  |  |   | 2012  |  |   | Thereafter |  |   | Total 
|--------------------------------------- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ----- |  | - | ---------- |  | - | ------
|                                       
|Operating leases                        |  | $ | 427   |  | $ | 193   |  | $ | 248   |  | $ | 101   |  | $ | 150   |  | $ | 131        |  | $ | 1,250 
|Transportation agreements               |  |   | 227   |  |   | 165   |  |   | 138   |  |   | 119   |  |   | 116   |  |   | 792        |  |   | 1,557 
|Product purchase / delivery obligations |  |   | 3,967 |  |   | 2,691 |  |   | 1,474 |  |   | 1,051 |  |   | 916   |  |   | 5,020      |  |   | 15,119
|Exploration work commitments            |  |   | 82    |  |   | 8     |  |   | 12    |  |   | 1     |  |   |      |  |   |           |  |   | 103   
|Other long-term obligations             |  |   | 36    |  |   | 214   |  |   | 226   |  |   | 210   |  |   | 206   |  |   | 1,223      |  |   | 2,115 
|                                       
|                                        |  | $ | 4,739 |  | $ | 3,271 |  | $ | 2,098 |  | $ | 1,482 |  | $ | 1,388 |  | $ | 7,166      |  | $ | 20,144
|                                       

Contingent Liabilities

The Company is involved in litigation and claims in the normal course of operations. In addition, the Company may provide indemnifications, in the normal course of operations,
that are often standard contractual terms to counterparties in certain transactions, such as purchase and sale agreements. The terms of these indemnifications will vary based upon the contract, the
nature of which prevents the Company from making a reasonable estimate of the maximum potential amounts that may be required to be paid. Management is of the opinion that any resulting settlements
relating to the litigation matters or indemnifications would not materially affect the financial position or results of operations of the Company.

Note 25Variable Interest Entities

Accounting Guideline 15 (AcG 15),Consolidation of Variable Interest Entities(VIEs), provides criteria for the
identification of VIEs and further criteria for determining what entity, if any, should consolidate them. Entities in which equity investors do not have the characteristic of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support are subject to consolidation by a company if that company
is deemed the primary beneficiary. The primary beneficiary is the party that is subject to a majority of the risk of loss from the VIEs' activities, or is entitled to receive a majority of the VIEs'
residual returns, or both. The Company has determined that certain retail licensee and wholesale marketer agreements would constitute VIEs, even though the Company has no ownership in these entities.
The Company, however, is not the primary beneficiary and, therefore, consolidation is not required. In certain of the retail licensee arrangements, the Company has provided loan guarantees. Management
is of the opinion that the Company's maximum exposure to loss from these arrangements would not be material.

Notes to Consolidated Financial
StatementsPETRO-CANADA        95

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Note 26Generally Accepted Accounting Principles in the United States

The application of United States GAAP would have the following effects on net earnings as reported:

|                                                                                                                   |                                                     | Notes |     |   | 2007  |      |   | 2006  |      |   | 2005  |     
|------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------- | ----- | --- | - | ----- | ---- | - | ----- | ---- | - | ----- | ----
|                                                                                                                   |                                                    
|Net earnings from continuing operations, as reported in the
Consolidated Statement of Earnings                     |                                                     |       |     | $ | 2,733 |      | $ | 1,588 |      | $ | 1,693 |     
|Adjustments, before income taxes                                                                                   |                                                     |       |     |   |       |      |   |       |      |   |       |     
|                                                                                                                   | Accounting for income taxes                         |       | (a) |   |       | 14   |   |       | 8    |   |       | 117 
|                                                                                                                   | Capitalization of interest and related amortization |       | (c) |   |       | 19   |   |       | 47   |   |       | 46  
|                                                                                                                   | Stock-based compensation                            |       | (f) |   |       | (31  | ) |       | (24  | ) |       |    
|                                                                                                                   | Other                                               |       | (b) |   |       | (6   | ) |       |     |   |       | 1   
|                                                                                                                   | Income taxes on above items                         |       |     |   |       | 3    |   |       | (10  | ) |       | (15 
|                                                                                                                   |                                                    
|Net earnings from continuing operations, as adjusted before cumulative effect of change in accounting policy       |                                                     |       |     |   | 2,732 |      |   | 1,609 |      |   | 1,842 |     
|                                                                                                                   |                                                    
|Net earnings from discontinued operations                                                                          |                                                     |       |     |   |      |      |   | 152   |      |   | 98    |     
|                                                                                                                   |                                                    
|Net earnings, as adjusted before cumulative effect of change in accounting policy                                  |                                                     |       |     |   | 2,732 |      |   | 1,761 |      |   | 1,940 |     
|                                                                                                                   |                                                    
|Cumulative effect of change in accounting policy, net of income taxes                                              |                                                     | (f)   |     |   |      |      |   | (14   | )    |   |      |     
|                                                                                                                   |                                                    
|Net earnings, as adjusted                                                                                          |                                                     |       |     | $ | 2,732 |      | $ | 1,747 |      | $ | 1,940 |     
|                                                                                                                   |                                                    
|Earnings from continuing operations, as adjusted before cumulative effect of change in accounting policy per share |                                                     |       |     |   |       |      |   |       |      |   |       |     
|                                                                                                                   | Basic                                               |       |     |   | $     | 5.59 |   | $     | 3.19 |   | $     | 3.55
|                                                                                                                   |                                                    
|                                                                                                                   | Diluted                                             |       |     |   | $     | 5.53 |   | $     | 3.16 |   | $     | 3.51
|                                                                                                                   |                                                    
|Earnings, as adjusted before cumulative effect of change in accounting policy per share                            |                                                     |       |     |   |       |      |   |       |      |   |       |     
|                                                                                                                   | Basic                                               |       |     |   | $     | 5.59 |   | $     | 3.49 |   | $     | 3.74
|                                                                                                                   |                                                    
|                                                                                                                   | Diluted                                             |       |     |   | $     | 5.53 |   | $     | 3.45 |   | $     | 3.69
|                                                                                                                   |                                                    
|Earnings, as adjusted per share                                                                                    |                                                     |       |     |   |       |      |   |       |      |   |       |     
|                                                                                                                   | Basic                                               |       |     |   | $     | 5.59 |   | $     | 3.47 |   | $     | 3.74
|                                                                                                                   |                                                    
|                                                                                                                   | Diluted                                             |       |     |   | $     | 5.53 |   | $     | 3.43 |   | $     | 3.69
|                                                                                                                   |                                                    

The application of United States GAAP would have the following effects on comprehensive income as reported:

|                                                                                                    |                                                                                                | Notes |     |   | 2007  |     |   | 2006  |    |   | 2005  |    
|--------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ----- | --- | - | ----- | --- | - | ----- | -- | - | ----- | ---
|                                                                                                    |                                                                                               
|Comprehensive income, net of tax, as reported in the
Consolidated Statement of Comprehensive Income |                                                                                                |       |     | $ | 2,473 |     | $ | 2,103 |    | $ | 1,203 |    
|Adjustments to net earnings, net of tax                                                             |                                                                                                |       |     |   | (1    | )   |   | 7     |    |   | 149   |    
|Adjustments to other comprehensive income, net of tax                                               |                                                                                                |       |     |   |       |     |   |       |    |   |       |    
|                                                                                                    | Additional pension liability                                                                   |       | (e) |   |       | (52 | ) |       | 42 |   |       | (65
|                                                                                                    | Unrealized loss on translation of foreign currency denominated additional capitalized interest |       | (c) |   |       | (20 | ) |       | 6  |   |       |   
|                                                                                                    |                                                                                               
|Comprehensive income, net of tax, as adjusted                                                       |                                                                                                |       |     | $ | 2,400 |     | $ | 2,158 |    | $ | 1,287 |    
|                                                                                                    |                                                                                               

96PETRO-CANADANotes to
Consolidated Financial Statements

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The application of United States GAAP would have the following effects on the Consolidated Balance Sheet as reported:

|                                              |  |                 |  | December 31, 2007 |             | December 31, 2006 |  
|--------------------------------------------- |  | --------------- |  | ----------------- | ----------- | ----------------- | -
|                                              |  | Notes           |  |                   | As
Reported |                   |  
|                                              | 
|Current assets                                |  |                 |  | $                 | 3,178       |                   | $
|Property, plant and equipment, net            |  | (a, b, c)       |  |                   | 19,497      |                   |  
|Goodwill                                      |  | (a)             |  |                   | 731         |                   |  
|Other assets                                  |  | (e, g)          |  |                   | 446         |                   |  
|Current liabilities                           |  | (f)             |  |                   | 3,623       |                   |  
|Long-term debt                                |  | (g)             |  |                   | 3,339       |                   |  
|Other liabilities                             |  | (e, f)          |  |                   | 717         |                   |  
|Asset retirement obligations                  |  |                 |  |                   | 1,234       |                   |  
|Future income taxes                           |  | (a, b, c, e, f) |  |                   | 3,069       |                   |  
|Common shares                                 |  |                 |  |                   | 1,365       |                   |  
|Contributed surplus                           |  | (d)             |  |                   | 24          |                   |  
|Retained earnings                             |  | (d)             |  |                   | 10,692      |                   |  
|Accumulated other comprehensive income (loss) |  | (e)             |  | $                 | (211        | )                 | $
|                                              | 

The Company's Consolidated Financial Statements have been prepared in accordance with Canadian GAAP, which differ in some respects from those applicable in the
United States. The following are the significant differences in accounting principles as they pertain to the accompanying Consolidated Financial Statements:





Notes to Consolidated Financial
StatementsPETRO-CANADA        97

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Note 27Recent Accounting Pronouncements

Canadian

Convergence of Canadian GAAP with International Financial Reporting Standards

In 2006, Canada's Accounting Standards Board (AcSB) ratified a strategic plan that will result in Canadian GAAP, as used by public companies, being converged with International
Financial Reporting Standards over a transitional period. The AcSB has developed

98PETRO-CANADANotes to
Consolidated Financial Statements

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and
published a detailed implementation plan, with a changeover date for fiscal years beginning on or after January 1, 2011. This convergence initiative is in its early stages as of the date of
these annual Consolidated Financial Statements. Accordingly, it would be premature to assess the impact of the initiative on the Company at this time.

Financial Instruments  Disclosures and Presentation

The AcSB has issued CICA Handbook Sections 3862 and 3863,Financial
Instruments  Disclosures, andFinancial
Instruments  Presentation. Section 3862 requires entities to provide disclosures in their financial statements that enable users to
evaluate the significance of financial instruments to the entity's financial position and performance. It also requires that entities disclose the nature and extent of risks arising from financial
instruments and how the entity manages those risks. Section 3863 establishes standards for presentation of financial instruments and non-financial derivatives and deals with the
classification of financial instruments, from the perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances
in which financial assets and financial liabilities are offset.

These
standards are both effective for fiscal years beginning on or after October 1, 2007.

Capital Disclosures

The AcSB has issued CICA Handbook Section 1535,Capital Disclosures, which requires entities to disclose their objectives,
policies and processes for managing capital and whether they are in compliance with any externally imposed capital requirements. This standard is effective for fiscal years beginning on or after
October 1, 2007.

Inventories

The AcSB has issued CICA Handbook Section 3031,Inventories. This new standard provides considerable guidance when
determining the cost of inventory. Where costs of inventory items cannot be specifically identified, costs must be assigned consistently on either a "first-in, first-out"
(FIFO) or weighted-average cost basis. A "last-in, first-out" (LIFO) cost basis is no longer acceptable. The standard is effective for fiscal years beginning on or after
January 1, 2008. The Company is adopting this standard prospectively. Converting the cost of crude oil and refined petroleum products from a LIFO to FIFO costing basis will increase
January 1, 2008 inventories by $812 million, future income tax liabilities by $256 million, and retained earnings by $556 million.

United States

Fair Value Measurements

The FASB issued Statement 157,Fair Value Measurements. This Statement defines fair value, establishes a framework for measured
fair value in GAAP and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. This Statement is
effective for fiscal years beginning after November 15, 2007. The Company is in the process of assessing the impact of this Statement.

Fair Value Option for Financial Assets and Financial Liabilities

The FASB issued Statement 159,Fair Value Option for Financial Assets and Financial Liabilities. This Standard allows for the
elective measurement of eligible financial instruments and certain other items at fair value in order to mitigate the volatility in net earnings without having to apply detailed and complex hedge
accounting rules. This Statement is effective for fiscal years beginning after November 15, 2007. The Company does not expect there to be any material impact on the Consolidated Financial
Statements upon adoption of this Standard.

Business Combinations

The FASB issued Revised Statement 141R,Business Combinations. This Standard mandates that all future business combinations be
accounted for as a purchase by one party of another; that all assets, liabilities (including liabilities related to contingent consideration) and non-controlling interest of the acquiree
be recorded at their fair value; and that all
acquisition costs be expensed. This Standard will likely impact future Consolidated Financial Statements should the Company engage in business combinations.

Notes to Consolidated Financial
StatementsPETRO-CANADA        99

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