**Exhibit 99.2**

 

#  

| **Legal Notice – Forward-Looking  Information** |
|------------------------------------------------------|

 

Thisannual report contains forward-looking information. You can usually identifythis information by such words as "*plan*,"**"*anticipate*,""*forecast*," "*believe*," "*target*," "*intend*," "*expect*," "*estimate*," "*budget*" orother terms that suggest future outcomes or references to outlooks.Forward-looking information in this annual report includes references to:

 
| ·                 business  strategies and goals 

 

·                 future  investment decisions 

 

·                 outlook  (including operational updates and strategic milestones)

 

·                 future  capital, exploration and other expenditures

 

·                 future  cash flows 

 

·                 future  resource purchases and sales 

 

·                 anticipated  construction and repair activities

 

·                 anticipated  turnarounds at refineries and other facilities

 

·                 anticipated  refining margins

 

·                 future  oil and natural gas production levels and the sources of their growth

 

·                 project  development, and expansion schedules and results

 

·                 future  exploration activities and results, and dates by which certain areas may be developed  or come on-stream |   | ·                 anticipated  retail throughputs

 

·                 anticipated  pre-production and operating costs

 

·                 reserves  and resources estimates

 

·                 future  royalties and taxes payable 

 

·                 production  life-of-field estimates

 

·                 natural  gas export capacity

 

·                 future  financing and capital activities (including purchases of Petro-Canada common  shares under the Company's normal course issuer bid (NCIB) program)

 

·                 contingent  liabilities (including potential exposure to losses related to retail  licensee agreements)

 

·                 the  impact and cost of compliance with existing and potential environmental  regulations 

 

·                 future  regulatory approvals 

 

·                 expected  rates of return |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Suchforward-looking information is based on a number of assumptions and analysismade by the Company. These assumptions and analysis are described ingreater detail throughout this annual report and include, without limitation,assumptions with respect to future commodity prices, the state of the economy,required capital expenditures, levels of cash flow, regulatory requirements,industry capacity, the results of exploration and development drilling and theability of suppliers to meet commitments.

 

Unduereliance should not be placed on forward-looking information. Suchforward-looking information is subject to known and unknown risks anduncertainties which may cause actual results, levels of activity andachievements to differ materially from those expressed or implied by suchinformation. Such risks and uncertainties include, but are not limited to:

 
| ·                 changes  in industry capacity

 

·                 imprecise  reserves estimates of recoverable quantities of oil, natural gas and liquids  from resource plays, and other sources not currently classified as reserves

 

·                 the  effects of weather and climate conditions

 

·                 the results  of exploration and development drilling, and related activities

 

·                 the  ability of suppliers to meet commitments

 

·                 decisions  or approvals from administrative tribunals 

 

·                 risks  associated with domestic and international oil and natural gas operations

 

·                 changes  in general economic, market and business conditions |   | ·                 competitive  action by other companies

 

·                 fluctuations  in oil and natural gas prices 

 

·                 changes  in refining and marketing margins 

 

·                 the  ability to produce and transport crude oil and natural gas to markets 

 

·                 fluctuations  in interest rates and foreign currency exchange rates 

 

·                 actions  by governmental authorities (including changes in taxes, royalty rates and  resource-use strategies) 

 

·                 changes  in environmental and other regulations 

 

·                 international  political events 

 

·                 nature  and scope of actions by stakeholders and/or the general public |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Manyof these and other similar factors are beyond the control of Petro-Canada.Petro-Canada discusses these factors in greater detail in filings with theCanadian provincial securities commissions and the United States (U.S.)Securities and Exchange Commission (SEC). See also "Risk Management –Risks Relating to Petro-Canada's Business" in this annual report for adiscussion of factors that could impact Petro-Canada's operations or results.

 

 
| **** | 2008 Annual Report**PETRO-CANADA** | **1** |
|------|------------------------------------|-------|

 

 

Readersare cautioned that this list of important factors affecting forward-lookinginformation is not exhaustive. Furthermore, the forward-looking information inthis annual report is made as of February 23, 2009 and, except as requiredby applicable law, will not be publicly updated or revised. This cautionarystatement expressly qualifies the forward-looking information in this annualreport.

 

### **Petro-Canadadisclosure of reserves**

###  

Petro-Canada'squalified reserves evaluators prepare the reserves estimates the Company uses.The Canadian provincial securities commissions do not consider Petro-Canada'sreserves staff and management as independent of the Company. Petro-Canada hasobtained an exemption from certain Canadian reserves disclosure requirements thatallows Petro-Canada to make disclosure in accordance with SEC standards wherenoted in this annual report. This exemption allows comparisons with U.S. andother international issuers.

 

Asa result, Petro-Canada formally discloses its proved reserves data using U.S.requirements and practices, and these may differ from Canadian domesticstandards and practices. The use of the terms such as "*probable,*"**"*possible,*"**"*resources*" and "*life-of-fieldproduction*" in this annual report does not meet the SECguidelines for SEC filings. To disclose reserves in SEC filings, oil andnatural gas companies must prove they are economically and legally producibleunder existing economic and operating conditions. Note that when the termbarrels of oil equivalent (boe) is used in this annual report, it may bemisleading, particularly if used in isolation. A boe conversion ratio of sixthousand cubic feet (Mcf) to one barrel (bbl) is based on an energy equivalencyconversion method. This method primarily applies at the burner tip and does notrepresent a value equivalency at the wellhead. The table below describes theindustry definitions that Petro-Canada currently uses:

 
| **Definitions Petro-Canada uses**                                                            | ** ** | **Reference**                                                                                                                                                                                                                                      |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                         |       |                                                                                                                                                                                                                                               |
| Proved oil and natural gas reserves (includes  both proved developed and proved undeveloped) |       | SEC reserves definition (Accounting  Rules Regulation S-X 210.4-10, U.S. Financial Accounting Standards Board  (FASB) Statement No. 69)                                                                                                  |
|                                                                                         |       |                                                                                                                                                                                                                                               |
|                                                                                         |       | SEC Guide 7 for Oil Sands Mining                                                                                                                                                                                                                   |
|                                                                                         |       |                                                                                                                                                                                                                                               |
| Unproved reserves, probable and possible reserves                                            |       | Canadian Securities Administrators: Canadian Oil  and Gas Evaluation (COGE) Handbook, Vol. 1 Section 5 prepared by the Society  of Petroleum Evaluation Engineers (SPEE) and the Canadian Institute of Mining  Metallurgy and Petroleum (CIM) |
|                                                                                         |       |                                                                                                                                                                                                                                               |
| Contingent and Prospective Resources                                                         |       | Petroleum Resources Management System: Society of  Petroleum Engineers, SPEE, World Petroleum Congress and American Association  of Petroleum Geologist definitions (approved March 2007)                                                     |
|                                                                                         |       |                                                                                                                                                                                                                                               |
|                                                                                         |       | Canadian Securities Administrators: COGE Handbook  Vol. 1 Section 5                                                                                                                                                                           |
|                                                                                         |       |                                                                                                                                                                                                                                               |

 

Althoughthe Society of Petroleum Engineers resource classification has categories of 1C,2C and 3C for Contingent Resources, and low, best and high estimates forProspective Resources, Petro-Canada will only refer to the unrisked 2C forContingent Resources and the partially risked best estimate for ProspectiveResources when referencing resources in this annual report. Estimates ofresources in this annual report include contingent resources that have not beenadjusted for risk based on the chance of development and partially riskedprospective resources that have been risked for chance of discovery, but havenot been risked for chance of development. Such estimates are not estimates ofvolumes that may be recovered and actual recovery is likely to be less and maybe substantially less or zero. If a discovery is made, there is no certainty thatit will be developed or, if it is developed, there is no certainty as to thetiming of such development.

 

CanadianOil Sands represents approximately 68% of Petro-Canada's total for Contingentand Prospective Resources. The balance of Petro-Canada's resources is spreadout across the business, most notably in the North American frontier andInternational areas. Also, when Petro-Canada references resources for theCompany, unrisked Contingent Resources are approximately 70% of the Company'stotal resources and partially risked Prospective Resources are approximately30% of the Company's total resources.

 

 
| **2** | **PETRO-CANADA**2008 Annual Report |  |
|-------|------------------------------------|--|

 

 

Cautionarystatement: In the case of discovered resources or a subcategory of discoveredresources other than reserves, there is no certainty that it will becommercially viable to produce any portion of the resources. In the case ofundiscovered resources or a subcategory of undiscovered resources, there is nocertainty that any portion of the resources will be discovered. If discovered,there is no certainty that it will be commercially viable to produce anyportion of the resources.

 

Formovement of resources to reserves categories, all projects must have aneconomic depletion plan and may require:

 

·                   additional delineation drillingand/or new technology for unrisked Contingent Resources

 

·                   exploration success with respectto partially risked Prospective Resources

 

·                   project sanction and regulatoryapprovals

 

Reservesand resources information contained in this annual report is as at December 31,2008.

 

 
| **** | 2008 Annual Report **PETRO-CANADA** | **3** |
|------|-------------------------------------|-------|

# ** **

 

# **Management's Discussion and Analysis**

* *

*ThisManagement's Discussion and Analysis (MD&A), dated effective as of February 23,2009, should be read in conjunction with the audited Consolidated FinancialStatements and Notes for the year ended December 31, 2008, included withinthis 2008 annual report and the 2008 Annual Information Form (AIF).Financial data has been prepared in accordance with Canadian generally acceptedaccounting principles (GAAP), unless otherwise specified. All dollar values areCanadian (Cdn) dollars, unless otherwise indicated. All oil and natural gasproduction and reserves volumes are stated before deduction of royalties,unless otherwise indicated. Graphs accompanying the text portray performance ofthe Company within its “value drivers,” which are the key measures ofperformance in each segment of Petro-Canada's business. A glossary of financialterms, ratios and acronyms can be found on page 114 of this report.*

 

## **BUSINESS ENVIRONMENT**

 

Themajor economic factors influencing Petro-Canada's upstream financialperformance include crude oil and natural gas prices and foreign exchange,particularly the Cdn dollar/U.S. dollar rates (US). Crude oil and natural gasprices are affected by a number of factors, including the balance of supply anddemand, weather and political events. Economic factors influencing Downstreamfinancial performance include the level and volatility of crude oil prices,industry refining margins, levels of crude oil price differentials, demand forrefined petroleum products, the degree of market competition and foreignexchange, particularly the Cdn dollar/U.S. dollar rates.

 

### **Business Environment in 2008**

 

The year 2008 was one of the mostvolatile on record for oil markets. The first half of the year saw significantupward momentum in oil prices as weak supply growth fell short of robust demandgrowth in non-Organization of Economic Co-operation and Development (OECD)countries. Economic momentum slowed dramatically in the second half of the yearas the global financial crisis intensified, depressing crude oil demandappreciably. By the end of 2008, demand was negative. The swings in oil pricesthrough 2008 were also accompanied by record inflows, followed by recordoutflows, of investment dollars from commodity market funds. The price of NorthSea Brent (Dated Brent) opened the year at just under $100 US/barrel (bbl), 
| climbed to record highs of over  $140 US/bbl in early July, and then fell steadily to under $45 US/bbl by  early December. Despite the declines in the latter half of the year, the annual  average price of Dated Brent was the highest ever at $96.99 US/bbl,  approximately one-third above the 2007 average.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|  

In 2008, the international  light/heavy crude (Dated Brent/Mexican Maya) price differential averaged  $13.15 US/bbl, somewhat wider than the $12.67 US/bbl posted in 2007.  Canadian light/heavy crude (Edmonton Light/Western Canada Select (WCS))  spreads narrowed in 2008 to $19.91 Cdn/bbl from $24.07 Cdn/bbl in 2007.  Canadian heavy crudes continued to be sold at a greater discount to light  crudes, compared with international heavy crudes. This is due to Canadian  heavy crude oil production growing at a faster rate than North American  investment to convert refineries to process heavy feedstock. The Canadian  discount narrowed in 2008, however, as the supply of competing heavy oil  imports from Mexico and Venezuela declined.

 

North American natural gas prices  were very volatile in 2008. Natural gas prices at the Henry Hub ranged from  over $13.50 US/million British thermal units (MMBtu) in July to under  $6.50 US/MMBtu in November. Overall, Henry Hub prices averaged  $8.95 US/MMBtu in 2008, about 30% higher than in 2007. The increase was  due to higher crude oil prices, which raised the cost of distillate fuels that  in turn competed with natural gas. In 2008, the Canadian natural gas price at  the AECO-C hub rose 23%, somewhat less than U.S. prices, as the strength of  the |   |   |

 

 

 
| **8** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|-------|------------------------------------------------------|--|

 

 
| Canadian dollar in the first half  of the year offset some of the gains in natural gas prices.

 

The Canadian dollar was also  extremely volatile in 2008, falling from parity with the U.S. dollar in the  first half of the year to under 80 cents US by December. Overall,  the Canadian dollar averaged 94 cents US in 2008, compared with 93 cents  US in 2007. The strength of the Canadian currency in the first half of the  year reduced some of the impact of stronger international prices on Canadian  crude oil and natural gas prices. Similarly, the decline in the Canadian  dollar in the second half of the year offset some of the impact from the  declines in international crude oil and natural gas prices.

 

In the downstream sector, refined  petroleum products sales in Canada increased by 0.5% in 2008, compared with a  gain of 3.4% in 2007. Demand growth in 2008 was relatively stronger in Canada  than in the U.S., but momentum slowed steadily through the year. The New York  Harbor 3-2-1 crack spread, an indicator of overall refining margins,  averaged $9.58 US/bbl in 2008, compared with $14.15 US/bbl in 2007.  Declines in gasoline cracking margins more than offset gains in distillate  cracking margins. With the exception of relatively brief hurricane-induced  spikes in September, gasoline cracking margins were pressured downward by  declining U.S. consumption. Distillate margins rose markedly, averaging over  $19.61 US/bbl, as strong demand for diesel fuel from non-OECD countries  and commodity producers led to sharply higher product exports from  the U.S. |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|

##### *Commodity Price Indicators and ExchangeRates*

 
| *(averages for the years indicated)*    | ** ** | ** ** | ** ** | **2008**   | ** ** | 2007   |   | 2006   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|--------|--------|--------|------------|
| Crude oil  price indicators*(per bbl)*                      | * *   | * *   |       |       |       |   |   |   |       |
| Dated Brent at Sullom Voe                                   |       | **US$**    | ** ** | **96.99**  |       | 72.52  |   | 65.14  |       |
| West Texas  Intermediate (WTI) at Cushing                   |       | **US$**    | ** ** | **99.65**  |       | 72.31  |   | 66.22  |       |
| WTI/Dated  Brent price differential                         |       | **US$**    | ** ** | **2.66**   |       | (0.21  | )      | 1.08   |       |
| Dated  Brent/Mexican Maya price differential                |       | **US$**    | ** ** | **13.15**  |       | 12.67  |   | 13.94  |       |
| Edmonton  Light                                             |       | **Cdn$**   | ** ** | **102.83** |       | 76.84  |   | 73.23  |       |
| Edmonton  Light/WCS (heavy) price differential              |       | **Cdn$**   | ** ** | **19.91**  |       | 24.07  |   | 22.40  |       |
| Natural gas  price indicators                               |       |       |       |       |       |   |   |   |       |
| Henry Hub*(per MMBtu)*                                      | * *   | **US$**    | ** ** | **8.95**   |       | 6.92   |   | 7.26   |       |
| AECO-C spot  *(per thousand cubic feet – Mcf)*         | * *   | **Cdn$**   | ** ** | **8.47**   |       | 6.89   |   | 7.28   |       |
| Henry  Hub/AECO basis differential *(per MMBtu)*            | * *   | **US$**    | ** ** | **1.15**   |       | 0.80   |   | 1.09   |       |
| New York  Harbor 3-2-1 refinery crack spread *(per bbl)**1* | * *   | **US$**    | ** ** | **9.58**   |       | 14.15  |   | 9.80   |       |
| US$/Cdn$ exchange  rate                                |       | **US$**    | ** ** | **0.94**   |       | 0.93   |   | 0.88   |       |

 

1       On January 1,2007, the New York Harbor 3-2-1 crack spread calculation changed. It is nowbased on Reformulated Gasoline Blendstock for Oxygenate Blending (RBOB)gasoline (the base for blending gasoline with 10% denatured ethanol) as opposedto conventional gasoline. Due to this change in specification, the 2007 and2008 crack spread values are not directly comparable to 2006 values.

 

 
| **** | Management's Discussion and Analysis**PETRO-CANADA** | **9** |
|------|------------------------------------------------------|-------|

 

 

### **CompetitiveConditions**

 

Itis increasingly challenging for the energy sector to find new sources of oiland natural gas. Petro-Canada is well positioned to successfully increaseproduction of oil and natural gas and compete for new opportunities that couldcomplement existing upstream resources. The Company has an estimated 14 billionbarrels of oil equivalent (boe) of resources from which to develop newproduction, with approximately 68% of the resources located in Alberta's oilsands. With upstream business operations in Canada and internationally, theCompany has the flexibility to pursue a wide range of opportunities. While theCompany has significant operational scope, as measured by production levels, itremains a mid-sized global company. This means Petro-Canada has the operationalcapability and balance sheet strength to invest in large projects, but smallerinvestments can also have a meaningful impact on the Company's productionlevels and financial returns.

 

Petro-Canadais well positioned to compete in the petroleum product refining and marketingbusiness in Canada. Petro-Canada has the second largest downstream business inCanada and is the “brand of choice.” The Company conducts business in thedownstream throughout Canada as an integrated business unit and participates inthe refining, distribution and marketing of petroleum products. The Companyalso offers a wide range of ancillary non-petroleum goods and services, such asconvenience retailing, automotive repair and car washes.

 

TheCompany's strong financial position, track record of successfully executinglarge capital projects and depth of management experience should enable it tocontinue to compete effectively in the current business environment.

 

 

### **Outlook for BusinessEnvironment in 2009**

 

Pricesfor energy commodities are expected to remain volatile in 2009, reflecting thehigh degree of uncertainty associated with the global financial crisis and theunprecedented scale and scope of official stimulus measures being implementedaround the world. On the demand side, the world economy has moved intorecession in 2009 following one of the strongest and longest global expansionssince the Second World War.

 

Theglobal financial crisis has led to a marked increase in the cost and a largedecrease in the availability of capital. The petroleum industry is highlycapital intensive, requiring significant reinvestment rates in order tomaintain output to offset natural reservoir declines. Reduced cash flows fromlower commodity prices coupled with capital constraints will lead to lowersupply growth over the coming years. Supply may also be influenced by theOrganization of the Petroleum Exporting Countries (OPEC) production decisions.

 

Morestringent environmental regulations are anticipated which, relative to thesituation, will slow the growth rate of energy demand by directly or indirectlyincreasing the cost of consuming fossil fuels.

 

Thereare several downside risks for North American natural gas markets in 2009.Higher residential demand due to colder-than-normal temperatures this winteracross most of North America has been offset by very weak industrial demand,the latter of which is expected to persist until the economy recovers. Slowereconomic growth in both Europe and Asia, where relatively higher natural gasprices attracted virtually all of the global liquefied natural gas (LNG) supplyin 2008, could push some of these shipments back into the U.S. market in 2009.U.S. domestic natural gas supply rose strongly over the past year owing toinnovative applications of horizontal drilling and fracturing technologies innon-conventional reservoirs (especially shale and tight-sands gas deposits).Although drilling activity declined sharply alongside the collapse in commodityprices and rising cost of capital, this is not expected to reverse the upwardtrend in domestic supplies until late 2009 at the earliest.

 

Barringrefinery mishaps or accidents of nature, 2009 refining margins in thedownstream are expected to be weaker than in 2008. North American refinedpetroleum products demand will likely remain well below aggregate refiningcapacity until the economy begins to recover.

 

Finally,the Canadian dollar is expected to remain loosely correlated with crude oilprices in 2009, providing some offset to fluctuations in international crudeoil and natural gas prices.

 

 
| **10** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|--------|------------------------------------------------------|--|

 

###  

### **EconomicSensitivities**

 

Thefollowing table illustrates the estimated after-tax effects that changes incertain factors would have had on Petro-Canada's 2008 net earnings had thesechanges occurred.

 

 

##### *Sensitivities Affecting Net Earnings*

 
| Factor1, 2                                                                                                     |       | Change (+) |                               | Annual Net   Earnings   Impact |         | Annual Net   Earnings   Impact |       |
|----------------------------------------------------------------------------------------------------------------|------------|------------|------------------------------------|--------------------------------|--------------|--------------------------------|------------|
| * *                                                                                                       | * *   | * *   | *(millions of Canadian   dollars)* |                           | *($/share)*3 |                           |
| **Upstream**                                                                                                   | ** ** | ** ** | ** **                         | ** **                     | ** **   | ** **                     | ** ** |
| Price received for crude oil and natural  gas liquids (NGL)4                                                   |       | $          | 1.00/bbl                           |                           | $            | 54                             |       | $ | 0.11 |   |
| Price received for natural gas                                                                                 |       | $          | 0.25/Mcf                           |                           | 30           |                           | 0.06       |   |
| Exchange  rate: US$/Cdn$ refers to impact on upstream earnings5                                           |       | $          | 0.01                               |                           | (60          | )                              | (0.12      | ) |
| Crude oil and NGL production *(barrels/day – b/d)*                                                        |       | 1,000 b/d  |                               | 15                             |         | 0.03                           |       |
| Natural gas production *(million cubic feet/day – MMcf/d)*                                                |       | 10 MMcf/d  |                               | 11                             |         | 0.02                           |       |
| **Downstream**                                                                                                 | ** ** | ** ** | ** **                         | ** **                     | ** **   | ** **                     | ** ** |
| New York Harbor 3-2-1 crack spread                                                                             |       | $          | 1.00 US/bbl                        |                           | 22           |                           | 0.05       |   |
| Chicago 3-2-1 crack spread                                                                                     |       | $          | 1.00 US/bbl                        |                           | 20           |                           | 0.04       |   |
| Seattle 3-2-1 crack spread                                                                                     |       | $          | 1.00 US/bbl                        |                           | 9            |                           | 0.02       |   |
| WTI/Dated Brent price differential                                                                             |       | $          | 1.00 US/bbl                        |                           | 25           |                           | 0.05       |   |
| Dated Brent/Maya FOB price  differential                                                                       |       | $          | 1.00 US/bbl                        |                           | 5            |                           | 0.01       |   |
| WTI/synthetic price differential                                                                               |       | $          | 1.00 US/bbl                        |                           | 14           |                           | 0.03       |   |
| Exchange  rate: US$/Cdn$ refers to impact on downstream cracking margins and crude  price differentials6  |       | $          | 0.01                               |                           | (11          | )                              | (0.02      | ) |
| Natural gas fuel cost – AECO  natural gas price                                                           |       | $          | 1.00  Cdn/Mcf                      |                           | (10          | )                              | (0.02      | ) |
| Asphalt –% of Maya crude oil price                                                                        |       | 1%         |                               | 2                              |         | –                         |       |
| Heavy fuel oil –% of WTI crude oil  price                                                                 |       | 1%         |                               | 2                              |         | –                         |       |
| **Corporate**                                                                                                  | ** ** | ** ** | ** **                         | ** **                     | ** **   | ** **                     | ** ** |
| Exchange  rate: US$/Cdn$ refers to impact of the revaluation of U.S.  dollar-denominated, long-term debt7 |       | $          | 0.01                               |                           | $            | 31                             |       | $ | 0.06 |   |

 

1       Theimpact of a change in one factor may be compounded or offset by changes inother factors. This table does not consider the impact of anyinter-relationship among the factors.

2       Theimpact of these factors is illustrative.

3       Pershare amounts are based on the number of shares outstanding at December 31,2008.

4       Thissensitivity is based upon an equivalent change in the price of WTI and DatedBrent.

5       Astrengthening Canadian dollar compared with the U.S. dollar has a negativeeffect on upstream net earnings.

6       Astrengthening Canadian dollar compared with the U.S. dollar has a negativeeffect on downstream cracking margins and crude price differentials.

7       Astrengthening Canadian dollar versus the U.S. dollar has a positive effect oncorporate earnings with respect to the Company's U.S. dollar-denominated debt.The impact refers to gains or losses on $2.9 billion US of the Company's U.S.dollar-denominated long-term debt and interest costs on U.S. dollar-denominateddebt. Gains or losses on $1.1 billion US of the Company's U.S.dollar-denominated long-term debt, associated with the self-sustaining Internationalbusiness segment and the U.S. Rockies operations included in the North AmericanNatural Gas business segment, are deferred and included as part of shareholders'equity.

 

 
| **** | Management's Discussion and Analysis**PETRO-CANADA** | **11** |
|------|------------------------------------------------------|--------|

## ** **

 

## **BUSINESS STRATEGY**

 

### **Value Proposition and Strategy**

 

Thevalue proposition Petro-Canada offers to its investors can best be summarizedas “Integrated Value from a Diversified Resource Base.” The Company's businessstrategy continues to be:

 

·       improving theprofitability of the base business 

**·**          meetingannual production guidance

·           selecting the rightassets to develop and then driving for first quartile performance1

 

·       taking adisciplined approach to profitable growth 

·           leveraging existingassets

·           accessing newopportunities with a focus on long-life assets

·           building a balancedexploration program

 

TheCompany believes its structure and scope strategically position Petro-Canada todeliver long-term shareholder value. With a base in Canada, Petro-Canada issituated in a stable, resource-rich and demand-driven market. Anever-increasing international presence and integration across businessesprovide the Company access to more value-adding growth opportunities and anability to better manage risk through a diversified portfolio. As a mid-sizedglobal company, even smaller sized investments can have a material impact.Through its major growth projects, Petro-Canada has visible and flexible growthover the next several years. The Company remains committed to developing energyresources responsibly and providing growth opportunities for employees.

 

 

### ***Execution of theStrategy in 2008***

 

### **Improving Base Business Profitability**

 

For2008, Petro-Canada focused on two areas to deliver improved base businessprofitability, delivering upstream production in line with updated annualguidance and continuing to improve safety and reliability performance. Safety,reliability and cost management are measures that are continuously tracked,reported and improved upon.

 

Througha focus on execution, the Company achieved upstream production at the high endof its guidance range of 400,000 to 420,000 barrels of oil equivalent/day(boe/d) in 2008. This strong production growth was largely due to strongreliability at most of the Company's major facilities.

 

WesternCanada natural gas processing facilities operated at reliability rates of 99%.The two Downstream refineries and lubricants plant had a combined reliabilityindex of 86. The lower Downstream reliability in 2008 was due to unplannedoutages at the Edmonton refinery. The most significant improvements in 2008were at the Terra Nova facility and the Oil Sands' MacKay River *in situ* operation, with reliabilities of 90% and 97%,respectively. The Company has a continued focus to improve facility reliabilityin 2009.

 

Corporate-wide,Petro-Canada views safety as an indicator of operational excellence. TheCompany has a Zero-Harm philosophy. This means the Company believes thatwork-related injuries and illnesses are foreseeable and preventable. TheCompany is committed to maintaining a first quartile safety record. In 2008,Petro-Canada achieved a Total Recordable Injury Frequency (TRIF) of 0.73, a 16%improvement over the previous year, and one of the best safety records in thesector.

 

Managingcosts is another key to improving base business profitability. Petro-Canada hasa disciplined approach to financial management with efforts constantly madeacross the Company to responsibly manage expenses and improve efficiencies.Petro-Canada entered 2009 with a strong liquidity position, providing theCompany with flexibility to execute its capital program.

 

----

1  References to first quartileoperations in this report do not refer to industry-wide benchmarks or externallyknown measures. The Company has a variety of internal metrics that define andtrack first quartile operational performance.

 

 
| **12** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|--------|------------------------------------------------------|--|

 

 

##### *Maintaining Financial Discipline and Flexibility*

 
| PRIORITY                                                                 | ** ** | ** ** | 2008 GOALS                                                                                                                                                                                                                                                                           | ** ** | ** ** | 2008 RESULTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** ** | **2009 GOALS**                                                                                                                                                                                                                                                                                                   | ** ** |
|--------------------------------------------------------------------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|  

Fund Capital  Expenditures with  Cash Flow and Debt  As Required |       |       |  

·   fund $5.3 billion capital expenditure  program through a combination of  cash flow and access to capital  markets, as needed

 

·   prioritize execution of projects

 

·   maintain investment grade credit ratings |       |       |  

·   funded capital expenditure program of $6.4  billion from liquidity sources

 

·   exercised flexibility within major  projects in response to business  environment

 

·   maintained investment grade credit  ratings of Baa2 from Moody's  Investors Services (Moody's), BBB  from Standard & Poor's (S&P) and A (low) from DBRS Limited (DBRS)

 

·   ended 2008 strong, with debt levels at 23.5%  of total capital and a ratio of  0.7  times debt-to-cash flow from  operating activities

 

·   maintained adequate liquidity, with a year-end  cash balance of $1.4 billion and unutilized credit facility capacity of $4.7  billion

  |       |       |  

·   fund $4.0 billion capital expenditure  program from expected cash flow,  cash on hand and accessing balance sheet strength, as needed

 

·   manage operating and capital costs  within budgets

 

·   maintain investment-grade credit  ratings |       |
|  

Fund Profitable  Growth                                          |       |       |  

·   identify and invest in long-life assets                                                                                                                                                                                                                        |       |       |  

·   made final investment decision (FID)  on Syria Ebla gas project, signed  Libya Exploration and Production  Sharing Agreements (EPSAs), funded Edmonton refinery conversion project (RCP)  and received approval for North Amethyst portion of White Rose  Extensions

 

·   postponed making FID on Fort Hills Phase 1,  MacKay River expansion (MRX) and Montreal coker

                                                                                                                                                                                                                                                                                                                                                  |       |       |  

·   invest in additional growth  opportunities when there is a strong  business case                                                                                                                                                                                                           |       |
|  

Return Cash to  Shareholders                                     |       |       |  

·   regularly review the dividend strategy to  align with financial and growth objectives and shareholder  expectations

 

·   buy back shares, when appropriate  with priority to first fund profitable  growth                              |       |       |  

·   increased quarterly dividend by 54% to  $0.20/share 

 

·   renewed normal course issuer bid  (NCIB) program in June 2008,  entitling the Company to purchase up to 5 of the outstanding common  shares, subject to certain conditions

 

·   purchased zero shares during 2008

                                                                                                                                                                                                                                                                                                                                                                                                                      |       |       |  

·   regularly review the dividend strategy to  align with financial and growth objectives, and shareholder  expectations

 

·   buy back shares when appropriate,  with priority to first fund profitable  growth                                                         |       |

 

 

### **Long-Term Profitable Growth**

 

Addingnew material opportunities is fundamental to long-term growth. In 2008, one ofPetro-Canada's priorities was to advance its seven major growth projects.Highlights included completing construction of the Edmonton RCP, signing sixnew Libya EPSAs and making a FID on the Syria Ebla gas development. In the EastCoast business, project partners received regulatory approval for the NorthAmethyst development of the White Rose Extensions project to proceed. TheCompany also completed preliminary front-end engineering and design (FEED) workon the Fort Hills project, received regulatory approval for expansion of theMacKay River facility and progressed engineering on the Montreal coker project.

 

Inpursuing these growth projects, Petro-Canada is seeking to increase therelative proportion of long-life resources in the portfolio as a means todeliver sustainable cash flow and earnings. With the exception of the WhiteRose Extensions, all of

 

 
| **** | Management's Discussion and Analysis******PETRO-CANADA** | **13** |
|------|----------------------------------------------------------|--------|

** **

 

thesemajor growth projects are considered long-life assets. In the upstream,Petro-Canada defines long-life assets as those projects that have more than 10years of peak production and sustainable cash flow. In the Downstream,refineries and gasoline stations share the same long-life characteristics.These kinds of assets provide sustainable cash flow and make the Company lessdependent on exploration success for growth. The Company also seeks to expandlong-life assets from existing infrastructure.

 

##### *Long-Life Production (%)*

 

In2008, about 30% of Petro-Canada's production came from assets consideredlong-life. Successful execution of the business strategy will mean a higherproportion of long-life resources in the future.

 

 

Alongwith long-life assets, the Company pursues profitable growth through a balancedexploration program. A balanced exploration program is one that provides abalanced risk/reward profile and that collectively adds to reserves over time.In 2008, Petro-Canada and its partners drilled 14 exploration wells.

 

Fiveof these wells were completed as discoveries and two were completed assuccessful appraisal wells. Drilling of an Alaskan well was suspended, andthere is a plan for re-entry in 2009. Six wells were abandoned as dry holes ornon-commercial discoveries and were written off. At year-end 2008, operationscontinued on one well.

 

Thistable represents exploration in International, East Coast Canada, Alaska andthe Northwest Territories (NWT) but does not include Western Canada and U.S.Rockies.

 
| ** **                    | ** ** | **2008 Results**            | ** ** | 2009 Outlook                             |       |
|-------------------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|
| *(number of wells)* | ** ** | **Discoveries –  Oil** | ** ** | **Discoveries –  Natural Gas** | ** ** | **Still being  evaluated** | ** ** | **Dry and  abandoned** | ** ** | ** ** | ** ** |
| North Sea                     | ** ** | **2**                            | ** ** | **2**                                         | ** ** | **–** | ** ** | **2** |   | 4 |   |
| Syria                         | ** ** | **–**                       | ** ** | **–**                                    | ** ** | **–** | ** ** | **–** |   | – |   |
| Libya                         | ** ** | **1**                            | ** ** | **–**                                    | ** ** | **–** | ** ** | **–** |   | 4 |   |
| Trinidad  and Tobago          | ** ** | **–**                       | ** ** | **4**                                         | ** ** | **–** | ** ** | **2** |   | – |   |
| Alaska                        | ** ** | **–**                       | ** ** | **1**                                         | ** ** | **1** | ** ** | **–** |   | 3 |   |
| NWT                           | ** ** | **–**                       | ** ** | **–**                                    | ** ** | **–** | ** ** | **1** |   | – |   |
| East Coast  Canada            | ** ** | **–**                       | ** ** | **–**                                    | ** ** | **–** | ** ** | **–** |   | 1 |   |
| Total1                        | ** ** | **3**                            | ** ** | **7**                                         | ** ** | **1** | ** ** | **5** |   | 12 |   |

 

1  Two wells were carried over into 2008 from2007.

 

 
| **14** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|--------|------------------------------------------------------|--|

** **

 

**Following our Principles for Responsible Investment and Operations**

 
|  | Our principles guide our actions and track our performance in the  areas of business conduct, community support, environment, working conditions  and human rights.

 

Petro-Canada's Community Partnerships  Program supports significant community initiatives relating to key business  areas. Education and capacity building are themes that underpin all the  Company's investments. The Company's community initiatives aim to create  long-term programs with a measurable investment return for the Company and  its partners.

 

There is a growing concern about the impact the energy sector has on  the environment. The Company shares this concern and actively seeks to  minimize the impact of Petro-Canada's operations on land, water and air. The  Company's areas of focus are use of water, and management of greenhouse gas  (GHG) emissions and air emissions.

 

Petro-Canada had approximately 6,100 employees and many contractors  working on its behalf at year-end 2008. In 2008, Petro-Canada recruited more  than 950 new employees. The Company is committed to providing them with a  safe and rewarding place to work where they can learn and make a difference. |
|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

##### *Following our Principles for Responsible Investment andOperations*

 
| PRIORITY                 |       |       | PRINCIPLES                                                                                                                                                                                                                                                                               |       |       | 2008  GOALS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |       | 2008  RESULTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | ** ** | **2009 GOALS**                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------------------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  

Business Conduct | ** ** | ** ** |  

·   comply with  applicable laws  and regulations

 

·   apply our  Code of Business  Conduct wherever we  operate

 

·   seek  contractors, suppliers  and agents whose practices  are consistent with our  principles | ** ** | ** ** |  

·   update Code  of Business  Conduct and introduce  interactive web-based  training on the new Code of Business Conduct

 

·   continue to  strengthen  communication of Code of  Business Conduct  expectations with an  increasing contractor  workforce

 

·   improve new  employee  orientation process across  the Company to emphasize Zero-Harm and Total Loss Management (TLM) culture  and principles

 

·   implement  online TLM  training to strengthen  employee understanding

  | ** ** | ** ** |  

·   updated  Code of Business  Conduct

 

·   interactive  web-based training completed by 4,419  employees and 408  contractors

 

·   delivered  workshop-style anti-corruption training at nine Company locations, training both  employees and  contractors

 

·   implemented  new employee  orientation process,  integrating TLM and Zero-  Harm to reduce the risk of  loss or injury

 

·   conducted  online TLM training modules in four priority elements for 4,869  employees

 

·   developed  online training to  strengthen risk assessment  capability

  | ** ** | ** ** |  

·   update  policy for the  Prevention of Improper  Payments

 

·   introduce  interactive web-  based training on the Policy for the Prevention  of Improper Payments

 

·   review and  update the  Company's anti-trust and fair competition  compliance program

 

·   integrate  risk assessment  methodology into all TLM  processes, including the  event management  system |

 

 
| **** | Management's Discussion and Analysis******PETRO-CANADA** | **15** |
|------|----------------------------------------------------------|--------|

** **

 

##### *Following our Principles for Responsible Investment andOperations (continued)*

 
| PRIORITY            |   | PRINCIPLES |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 2008  GOALS |   | 2008  RESULTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **2009 GOALS** |
|---------------------|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|
|  

Community   |   |       |  

·   strive  within our sphere of  influence to ensure a fair  share of benefits to  stakeholders impacted by  our activities

 

·   conduct  meaningful and  transparent consultation with  all stakeholders

 

·   endeavour  to integrate our activities with, and participate in, local communities as  good corporate citizens                                                                              |        |   |  

·   improve the  consistency  and capability relative to  engaging with stakeholders

 

·   solicit  feedback from  external stakeholders  regarding the effectiveness  of the Company's  interactions

 

·   initiate  and implement a  social investment program  that is integral to the Libya  EPSAs

 

·   introduce a  number of new  key community  partnerships in our  education, environment and  local community support  areas

 

·   advance  Olympic initiatives  in anticipation of the 2010   Winter Olympics

  |       |           |  

·   delivered  training based on  Stakeholder and Community  Engagement principles to 134  stakeholder practitioners  across all business units

 

·   integrated  stakeholder issue  management system into key  projects and emergency  response plans

·   solicited  focused stakeholder  feedback on specific projects

 

·   piloted a  World Business  Council for Sustainable  Development (WBCSD)  framework to guide  investment proposals for  Libya sustainable  development program

 

·   extended  long-term  sponsorships, introduced new  community partnerships and  deepened existing  partnerships

 

·   supported  the Canadian  Olympic and Paralympic  teams in Beijing, and  announced Petro-Canada  Athlete Family Program for  2010 Games in Vancouver

 

·   launched  Employee Olympic  Centre website 

  |   |   |  

·   continue to  broaden  stakeholder engagement  capability across operational  roles and with contractors

 

·   update TLM  standards and  audit criteria to reflect  stakeholder management  framework expectations

 

·   integrate  stakeholder  engagement practices into  North African development  and exploration projects

 

·   work  jointly with the Libya  National Oil Corporation  (NOC) on identifying projects for the Libya  sustainable development  program

 

·   enhance  content of key  community partnerships,  identify synergies and  increase stakeholder  awareness of initiatives

 

·   launch 2010  Olympic  glassware campaign to  support Canadian athletes,  and develop operations plan  to “Fuel the Games" in  Vancouver |
|  

Environment |   |       |  

·   conduct our  activities with  sound environmental  management and  conservation practices

 

·   strive to  minimize the  environmental impact of our  operations

 

·   work  diligently to prevent  any risk to community health  and safety from our  operations or our products

 

·   seek  opportunities to transfer expertise in  environmental protection to  host communities |        |   |  

·   integrate  Water Principles  into the environmental  stewardship process

 

·   pilot  carbon intensity  performance measures

 

·   continue to  review internal  and external GHG  mitigation opportunities

 

·   meet 2008  auditable  emissions reporting  requirements

 

·   commence  development of  second phase of  environmental information  management system for  water and waste  management

 

·   advance  major water-  related community  partnership projects                           |       |           |  

·   experienced  43 environmental  regulatory exceedances,  compared with 21 in 2007

 

·   advanced  water management  plans through water risk  assessments based on Water  Principles

 

·   made  limited progress on  carbon performance  measures

 

·   strengthened  resources and  capability in managing carbon  mitigation opportunities

 

·   participated  in Alberta carbon  market

 

·   complied  with Alberta  regulations for verified  emissions reporting

 

·   improved  emission  functionality of first phase of  environmental information  management system

 

·   created  program content and  materials for major water  partnerships 

  |   |   |  

·   reinforce senior  management focus on  environmental regulatory  exceedances in 2009

 

·   develop and integrate  relevant water measurement  and reporting functionality  into next phase of  environmental information  management system

 

·   pursue  viable opportunities  to purchase carbon credits

 

·   participate  in WBCSD  protocol development to  better understand  Petro-Canada's broader  GHG emissions footprint

 

·   initiate  work on development  of ecosystem principles

 

·   build  strength in water  partnerships and promote  publicly |

 

 
| **16** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|--------|------------------------------------------------------|--|

** **

 

##### *Following our Principles for Responsible Investment andOperations (continued)*

 
| PRIORITY                                     |   | PRINCIPLES |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 2008 GOALS |   | 2008 RESULTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | ** ** | **2009 GOALS** |
|----------------------------------------------|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|
|  

Working  Conditions and Human Rights |   |       |  

·   provide a healthy, safe and  secure work environment

 

·   honour internationally  accepted labour standards  prohibiting child labour,  forced labour and  discrimination in  employment

 

·   respect freedom of  association and expression in the workplace

 

·   not be complicit in human  rights abuses

 

·   support and respect the  protection of human rights  within our sphere of  influence |       |   |  

·   establish enterprise-wide  contractor engagement  process for selection,  performance monitoring  and management

 

·   attract 925 new employees

 

·   develop capability in  managing the social issues of a temporary foreign workforce

 

·   pilot a social risk  assessment that will apply to new operations

 

·   enhance management,  systems and work  processes related to  process safety

 

·   strengthen process for  communicating and  learning from internal high potential and serious events |       |           |  

·   achieved  TRIF of 0.73 in  2008, compared with 0.87 in 2007

 

·   experienced a contractor  work-related fatality at the  Edmonton RCP in September 2008

 

·   assessed current state, and best practices for contractor engagement  and identified quick wins

 

·   attracted 951 new employees

 

·   assessed and developed  mitigation plans for social  risks related to bringing  temporary foreign workers  into Oil Sands project camps

 

·   developing  standards,  incorporating process safety  criteria into TLM audits and  capturing event data

 

·   established a formal process for reviewing  internal and external  events and ensuring  that learnings reach the  front line

 

·   conducted  emergency  response exercises in four out of five business groups

  |   |   |  

·   develop  enterprise-wide  training for front-line  supervisors to enhance their ability to execute work safely

 

·   develop processes, tools  and expectations for  stronger contractor  engagement on safety

 

·   enhance  emergency  response advisor capability  through increased training

 

·    upgrade  emergency  response command centre  facility

 

·   implement new corporate  standards for management  of change and process  safety competency

 

·   integrate  use of social risk  assessment process into  project delivery model

 

·   review  and strengthen  Company's human rights  management framework |
|                                              |        |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |            |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |            |                |  |  |  |  |

 

 

### **Business Strategy Looking Forward**

 

Keypriorities for Petro-Canada in 2009 are striving to ensure that existingfacilities run safely, reliably and efficiently through excellent execution andprudently managing the Company's financial strength. This same focus onexecution and cost management will apply to the advancement of Petro-Canada'smajor projects over the next several years. Capital expenditures are expectedto be $4.0 billion in 2009, down 38% from 2008, reflecting the Company's focuson the preservation of cash. In 2009, growth highlights are expected to includemoving the Company's Board of Directors-approved projects (Libya EPSAs, whichcame on-stream in 2008, the North Amethyst portion of the White Rose Extensionsproject and the Syria Ebla gas development) ahead, as originally planned.

 

| **Major Approved Project**

  |   | **Target On-Stream Date**

  |   |
|----------------------------------------------|--------|---------------------------------------------|--------|
| Libya EPSAs

                           |   | 2008

                                 |   |
| White Rose  Extensions

                |   | 2009

                                 |   |
| Syria Ebla  Gas Development

           |   | 2010

                                 |   |

 

Thethree unsanctioned projects (Montreal coker, MRX and Fort Hills Phase 1) are onhold until the commodity and financial markets strengthen. The Company isreworking costs to improve project economics.

 

TheCompany also plans on drilling up to 12 exploration wells in the North Sea,Libya, East Coast Canada and the Alaska Foothills.

 

 
| **** | Management's Discussion and Analysis******PETRO-CANADA** | **17** |
|------|----------------------------------------------------------|--------|

** **

 

## **RISK MANAGEMENT**

## ** **

### **Risks Relating to Petro-Canada'sBusiness**

###  

Petro-Canada'sresults are impacted by several risks and management's strategies for handlingthese risks. Management believes each major risk requires a unique responsebased on Petro-Canada's business strategy and financial tolerance. Some riskscan be effectively managed through internal controls, business processes,insurance and hedging. Hedging is used in limited circumstances, mainly tomitigate Downstream risks associated with refinery feedstock costs.Petro-Canada's business risks include, but are not limited to, the followingitems. These risks could have a material adverse effect on the Company'sbusiness, financial conditions and results of operations.

 

##### *A substantial orextended decline in crude oil or natural gas prices could have a materialadverse effect on Petro-Canada.*

##### * *

TheCompany's financial condition depends substantially on the market prices ofcrude oil and natural gas. Fluctuations in crude oil or natural gas pricescould have a material adverse effect on Petro-Canada's financial condition, aswell as the value and amount of the Company's reserves. Prices for crude oiland natural gas fluctuate in response to changes in the supply of and demandfor crude oil and natural gas, market uncertainty and a variety of otherfactors beyond Petro-Canada's control. These factors include, but are notlimited to, the actions of OPEC, world economic conditions, governmentregulation, political developments, the foreign supply of oil, the price offoreign imports, the availability of alternate fuel sources and weatherconditions. Canadian natural gas prices are primarily affected by NorthAmerican supply and demand, weather conditions, the level of industryinventories, political events, and, to a lesser extent, the price of alternatesources of energy.

 

Anysubstantial or extended decline in the prices of crude oil or natural gas couldresult in a delay or cancellation of existing or future drilling, developmentor construction programs, curtailment in production at some properties andunused long-term transportation commitments.

 

Themargins realized for Petro-Canada's refined products are also affected byfactors such as crude oil price fluctuations due to the impact on refineryfeedstock costs, third-party refined product purchases and the demand forrefined petroleum products. The Company's ability tomaintain product margins in an environment of higher feedstock costs dependsupon its ability to pass higher costs on to customers.

 

##### *Petro-Canada'soperations are subject to physical damage, business interruption and casualtylosses.*

##### * *

Petro-Canadais subject to the operating risks associated with exploring for, and producing,oil and natural gas, as well as operating midstream and downstream facilities.These risks include blowouts, explosions, fires, gaseous leaks, equipmentfailures, migration of harmful substances, adverse weather conditions and oilspills. These risks could cause personal injury, could result in damage ordestruction to oil and natural gas wells, formations, production facilities,other property and equipment, and the environment, and could interruptoperations. In addition, Petro-Canada's operations are subject to the risksrelated to transporting, processing and storing of oil, natural gas and otherrelated products, drilling of oil and natural gas wells, and operating anddeveloping oil and natural gas properties.

 

##### *Factors that affectPetro-Canada's ability to execute projects could adversely affect businessresults.*

##### * *

Petro-Canadamanages a variety of projects to support operations and future growth.Significant project cost overruns could make certain projects uneconomic. TheCompany's ability to execute projects depends upon numerous factors, which mayinclude, but are not limited to, changes in project scope, labour availabilityand productivity, staff resourcing, availability and cost of material andservices, design and/or construction errors, delays in regulatory approvals,the ability of partners to deliver on project commitments and access to capitalfunding. As a result, Petro-Canada may not be able to execute projects on time,on budget or at all.

 

##### *Fluctuations inexchange rates create foreign currency exposure.*

##### * *

Dueto the fact that energy commodity prices are primarily in U.S. dollars,Petro-Canada's revenue stream is affected by the Cdn/U.S. dollar exchange rate.The Company's net earnings are negatively affected by a strengthening Canadiandollar. Petro-Canada is also exposed to fluctuations in other foreign currencies,such as the euro and British pounds sterling.

##### * *

 
| **18** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|--------|------------------------------------------------------|--|

** **

 

##### *Reduced liquidity incapital markets can limit the availability of capital and raise borrowingcosts.*

##### * *

From time to time,Petro-Canada accesses the debt and/or equity markets to raise capital. Thereasons may include, among other things, the need to raise financing for newoperations, mergers, acquisitions and expansions.  Reduced liquidity in the capital markets mayrestrict the Company's ability to raise the required financing and/or maysignificantly increase the associated cost of that capital.  An inability to raise capital couldjeopardize the ability of the Company to undertake a certain project and ahigher cost of capital would reduce the profitability of that project.

 

##### *A failure to acquire orfind additional reserves would cause a decline in Petro-Canada's reserves andproduction levels.*

##### * *

TheCompany's future oil and natural gas reserves and production and, therefore,cash flows, are highly dependent upon success in exploiting Petro-Canada'scurrent reserves and resources base and acquiring or discovering additionalreserves and resources. Without reserves additions through exploration, acquisitionor development activities, Petro-Canada's reserves and production will declineover time. Exploring for, developing or acquiring reserves is capitalintensive. To the extent cash flows from operations are insufficient to fundthe Company's capital expenditures and external sources of capital becomelimited or unavailable, Petro-Canada's ability to make the necessary capitalinvestments to maintain oil and natural gas reserves will be impaired. Costs tofind and develop or acquire additional reserves also depend on success rates,which vary over time.

##### * *

##### *Petro-Canada's oil andnatural gas reserves data and future net revenue estimates are subject tovariability.*

 

Thereare many uncertainties inherent in estimating quantities of oil and natural gasreserves, including many factors beyond the Company's control. Estimates ofeconomically recoverable oil and natural gas reserves are based upon a numberof variables and assumptions. These include geoscientific interpretation,commodity prices, operating and capital costs and historical production fromproperties. These estimates have some degree of uncertainty and reservesclassifications are best estimates. For these reasons, estimates of theeconomically recoverable oil and natural gas reserves attributed to propertiesand classification of reserves based on recovery risk may vary substantially.Petro-Canada's actual production, revenues, taxes and development and operatingexpenditures related to reserves may vary materially from estimates.

 

##### *Changes in governmentalregulation affecting the oil and natural gas industry could have a materialadverse impact on Petro-Canada.*

##### * *

Thepetroleum industry is subject to regulation and intervention by governments,including the awarding of exploration and production interests, the impositionof specific drilling obligations, environmental protection controls, regulationof the development and abandonment of fields (including restrictions onproduction) and, possibly, expropriation or cancellation of contract rights. Aswell, governments may regulate or intervene on prices, taxes, royalties and theexportation of oil and natural gas. Regulations may be changed in response toeconomic or political conditions. New regulations or changes to existingregulations that affect the oil and natural gas industry could reduce demandfor natural gas or crude oil and increase Petro-Canada's costs.

 

##### *Petro-Canada's foreignoperations may expose the Company to risks, which could negatively affectresults of operations.*

##### * *

TheCompany has operations in a number of countries with different political,economic and social systems. As a result, Petro-Canada's operations and relatedassets are subject to a number of risks, which may include, among other things,currency restrictions and exchange rate fluctuations, loss of revenue, propertyand equipment as a result of expropriation, nationalization, war, insurrectionand geopolitical and other political risks, increases in taxes and governmentalroyalties, renegotiation of contracts with governmental entities andquasi-governmental agencies, changes in laws and policies governing operationsof foreign-based companies, economic and legal sanctions (such as restrictionsagainst countries that the U.S. government may deem to sponsor terrorism) andother uncertainties arising from foreign government sovereignty overPetro-Canada's international operations. If a dispute arises in Petro-Canada'sforeign operations, the Company may be subject to the exclusive jurisdiction offoreign courts or may not be able to subject foreign persons to thejurisdiction of a court in the U.S. or Canada.

 

TheCompany has operations in Libya, which is a member of OPEC. Petro-Canada mayoperate in other OPEC-member countries in the future. Production in thosecountries may be constrained by OPEC quotas.

 

 
| **** | Management's Discussion and Analysis******PETRO-CANADA** | **19** |
|------|----------------------------------------------------------|--------|

** **

##### * *

##### *Petro-Canada's oil andnatural gas production and refining operations impact communities andsurrounding environments.*

##### * *

Thoseimpacted by Petro-Canada's operations can become concerned over the use ofresources, such as land and water, the perceived or real threat to humanhealth, the potential impact on biodiversity, and/or possible societal changesto surrounding communities. The Company must secure and maintain formalregulatory approvals and licences in order to conduct operations. In addition,broader societal acceptance of Petro-Canada's activities is necessary forresource development. An inability for the Company to secure local communitysupport, necessary regulatory approvals and licences, and broader societalacceptance can result in projects being delayed or stopped, resulting in higherproject costs. Lack of local community and stakeholder support can lead topressure to limit or shut down operations.

 

##### *Petro-Canada is subject to environmentallegislation in all jurisdictions where it operates. Changes in this legislationcould negatively affect the Company's results of operations.*

##### * *

Petro-Canadais subject to environmental regulation under a variety of Canadian, U.S. andother foreign, federal, provincial, territorial, state and municipal laws andregulations. This is collectively referred to below as environmentallegislation.

 

Environmentallegislation imposes, among other things, restrictions, liabilities andobligations in connection with the generation, handling, use, storage,transportation, treatment and disposal of hazardous and non-hazardoussubstances, including natural resources and waste, and in connection withspills, releases and emissions of various substances to the environment.Environmental legislation requires that wells, facility sites and otherproperties associated with Petro-Canada's operations be operated, maintained,abandoned and reclaimed to the satisfaction of the applicable regulatoryauthorities. Certain types of operations, including exploration and developmentprojects, and changes to certain existing projects, may require submitting andseeking the approval of environmental impact assessments (EIAs) or permitapplications. Complying with environmental legislation can require significantexpenditures, including costs for cleanup and damages due to contaminatedproperties. Failure to comply with environmental legislation may result infines and penalties. Petro-Canada is also exposed to civil and criminalliability for environmental matters, including private parties commencingactions, new theories of liability and new heads of damages. Although it is notexpected that the costs of complying with environmental legislation or dealingwith environmental liabilities, as they are known today, will have a materialadverse effect on Petro-Canada's financial condition or results of operations,no assurance can be made that the costs of complying with future environmentallegislation will not have a material effect.

 

Petro-Canadaoperates in jurisdictions that have regulated or have proposed to regulateindustrial GHG emissions. Jurisdictions that currently regulate GHG emissionsinclude Alberta and the European Union. Jurisdictions that have proposed toregulate GHG emissions include the U.S., British Columbia (B.C.), Quebec,Ontario and Canada. Those jurisdictions that have announced the intent toregulate GHG emissions support cap-and-trade systems and, in some cases, havealso proposed implementing complementary measures, including low carbon fuelstandards. To date, these jurisdictions have started or have announced plans tostart consultations on the design of their regulations, as well as explore opportunitiesto harmonize regulations across jurisdictions within North America.Petro-Canada participates in these consultations, either directly or throughindustry associations. In 2007, Petro-Canada established an internal seniormanagement team to steward these activities and, in 2008, this organization wasenhanced by creating the role of Director, Climate Change. While thesejurisdictions have not published details on their proposed regulations or ontheir compliance mechanisms, many, most notably the U.S., have identified theimportance of balancing the environment, economy and energy security whendeveloping regulations. While it is premature to predict what impact theseanticipated regulations may have on Petro-Canada and the broader oil and gas sector,Petro-Canada will likely face increased capital and operating costs in order tocomply with these regulations, and these costs could be material. Petro-Canadais actively following policy development to ensure the Company is prepared tooperate within a new framework.

 

##### *Reduced assetreliability could adversely affect Petro-Canada's business.*

##### * *

Petro-Canadaoperates facilities in both the upstream and downstream sectors of theindustry. A reduction in the reliability of these facilities as a result of, butnot limited to, damage to equipment, plant or material, loss of productioncapability or operational integrity, or the extension of shutdown time couldcontribute to reduced profitability.

 

##### *Counterpartiesexposure.*

##### * *

Petro-Canadais exposed to credit risk, and operational risk associated with counterparties'abilities to fulfil their obligations to the Company.

 

 
| **20** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|--------|------------------------------------------------------|--|

 

 
| **CONSOLIDATED FINANCIAL  RESULTS**
 
**Analysis of Consolidated Earnings and Cash Flow**** ****Consolidated Financial Results**** **
On  January 31, 2006, Petro-Canada closed the sale of the Company's  producing assets in Syria. These assets and associated results are reported  as discontinued operations and are excluded from continuing operations. | ****

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

 

 
| *(millions of Canadian dollars, unless otherwise indicated)* | ** **     | **2008**   |       | 2007       |   | 2006      |       |
|--------------------------------------------------------------|----------------|------------|------------|------------|--------|-----------|------------|
| **Net earnings**                                             | ** **     | **$**      | **3,134**  | ** ** | **$**  | **2,733** | ** ** | **$** | **1,740** | ** ** |
| Net  earnings from discontinued operations                   | ** **     | **–** |       | –     |   | 152       |       |
| **Net earnings from continuing operations**                  | ** **     | **$**      | **3,134**  | ** ** | **$**  | **2,733** | ** ** | **$** | **1,588** | ** ** |
| Earnings  per share from continuing operations*(dollars)*    | *–* basic | ** ** | **$**      | **6.47**   |   | $         | 5.59       |   | $ | 3.15 |   |
|                                                         | – diluted | ** ** | **6.43**   |       | 5.53   |      | 3.11       |   |
| Earnings  per share*(dollars)*                               | *–*basic  | ** ** | **$**      | **6.47**   |   | $         | 5.59       |   | $ | 3.45 |   |
|                                                         | – diluted | ** ** | **6.43**   |       | 5.53   |      | 3.41       |   |
| Cash flow  from continuing operating activities 1            | ** **     | **6,522**  |       | 3,339      |   | 3,608     |       |
| Debt                                                         | ** **     | **4,749**  |       | 3,450      |   | 2,894     |       |
| Cash and  cash equivalents 2                                 | ** **     | **1,445**  |       | 231        |   | 499       |       |
| Average  capital employed 2                                  | ** **     | **$**      | **17,772** |       | $      | 14,328    |       | $ | 12,868 |   |
| Return on  capital employed (%) 2                            | ** **     | **18.6**   |       | 19.8       |   | 14.3      |       |
| Return on  equity (%) 2                                      | ** **     | **22.9**   |       | 24.5       |   | 17.5      |       |

 

1       Cash flow fromcontinuing operating activities in 2007 was reduced by the payment of $1,145million after-tax to settle the hedged portion of Buzzard production.

 

2       Includes discontinuedoperations.

 

 
| **2008 Compared with 2007**** **
Net earnings increased 15% to $3,134 million in 2008, compared  with $2,733 million in 2007. Higher realized crude oil prices, lower  other expenses and lower tax adjustments contributed to the increase. These  factors were partially offset by foreign currency translation losses, weaker  Downstream refining margins, increased operating and general and  administrative (G&A) expenses, higher exploration and depreciation,  depletion and amortization (DD&A) expenses and lower upstream production.

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

 

 
| **** | Management's Discussion and Analysis******PETRO-CANADA** | **21** |
|------|----------------------------------------------------------|--------|

** **

 

In2008, net earnings included a number of items: a foreign currency translationloss on long-term debt of $606 million, a $255 million charge due todeclining crude oil feedstock costs while using a "first-in, first-out"(FIFO) method for valuing inventories in the Downstream, charges due to thedeferral of the Fort Hills FID of $156 million, a $215 million income taxrecovery, a $126 million recovery related to the mark-to-market of stock-basedcompensation, a $52 million charge for asset impairment, $29 million ininsurance proceeds, a $20 million insurance premium surcharge and a gain onsale of assets of $4 million.

 

In2007, net earnings included a number of items: net losses on the derivativecontracts associated with the hedged portion of Buzzard production of$331 million, a foreign currency translation gain on long-term debt of$208 million, a $191 million income tax recovery, a $97 million charge forasset impairment, a gain on sale of assets of $58 million, a$54 million charge related to the mark-to-market of stock-basedcompensation, $30 million in insurance proceeds and a $7 million insurancepremium recovery.

 

 

### **Quarterly Information**

###  

##### *Consolidated Quarterly Financial Results*

 
| ** **                                                    |           |             |            | **2008**         |            |             |            |             |             | 2007         |        |         |        |
|---------------------------------------------------------------|----------------|------------------|-----------------|------------------|-----------------|------------------|-----------------|------------------|------------------|--------------|-------------|--------------|-------------|
| *(millions of Canadian dollars,  unless otherwise indicated)* | ** **     | **Quarter 1**    | ** **      | **Quarter 2**    | ** **      | **Quarter 3**    | ** **      | **Quarter 4**    |             | Quarter 1    |        | Quarter 2    |        | Quarter 3 |   | Quarter 4 |   |
| Total  revenue                                                | ** **     | **$ 6,586** | ** **      | **$ 7,646** | ** **      | **$ 8,286** | ** **      | **$ 5,267** | ** **       | $ 4,841 |        | $ 5,478 |        | $ 5,497 |   | $ 5,434 |   |
| Net  earnings                                                 | ** **     | **1,076**        | ** **      | **1,498**        | ** **      | **1,251**        | ** **      | **(691**         | **)**            | 590          |        | 845          |        | 776 |   | 522 |   |
| Cash flow  from (used in) operating activities1               | ** **     | **1,435**        | ** **      | **2,479**        | ** **      | **1,279**        | ** **      | **1,329**        | ** **       | 1,166        |        | 1,435        |        | 1,340 |   | (602 | ) |
| Earnings  per share*(dollars)*                                |           |             |            |             |            |             |            |             | ** **       |         |        |         |        |   |   |   |   |
|                                                          | – basic   | ** **       | **$ 2.22** | ** **       | **$ 3.10** | ** **       | **$ 2.58** | ** **       | **$ (1.43** | **)**        | $ 1.19 |         | $ 1.71 |   | $ 1.59 |   | $ 1.08 |   |
|                                                          | – diluted | ** **       | **$ 2.20** | ** **       | **$ 3.07** | ** **       | **$ 2.56** | ** **       | **$ (1.43** | **)**        | $ 1.18 |         | $ 1.70 |   | $ 1.58 |   | $ 1.07 |   |

 

1       Cashflow from (used in) continuing operating activities in the fourth quarter of2007 was significantly reduced due to the payment of $1,145 millionafter-tax to settle the hedged portion of Buzzard production.

 

Revenueand net earnings variances from quarter to quarter resulted mainly fromfluctuations in commodity prices and refinery cracking margins, the impact onproduction and processed volumes from maintenance and other shutdowns at majorfacilities, and the level of exploration drilling activity. For furtheranalysis of quarterly results, refer to Petro-Canada's quarterly reports toshareholders available on the Company's website at www.petro-canada.ca.

 

 
| **22** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|--------|------------------------------------------------------|--|

** **

 

## **LIQUIDITY AND CAPITALRESOURCES**

 

##### *Summary of Cash Flows*

 
| *(millions of Canadian dollars)*                              | ** ** | **2008**   |       | 2007       |       | 2006       |       |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Cash flow from continuing  operating activities**           | ** ** | **$**      | **6,522**  | ** ** | **$**      | **3,339**  | ** ** | **$** | **3,608** | ** ** |
| Cash flow from discontinued operating activities              | ** ** | **–** |       | –     |       | 15         |       |
| Net cash inflows (outflows) from:                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| – investing activities                                   | ** ** | **(5,384** | **)**      | (3,647     | )          | (2,738     | )          |
| – financing activities                                   | ** ** | **76**     |       | 40         |       | (1,175     | )          |
| Increase (decrease) in cash and cash equivalents              | ** ** | **$**      | **1,214**  |       | $          | (268       | )          | $ | (290 | ) |
| **Cash and cash equivalents at  end of year**                 | ** ** | **$**      | **1,445**  | ** ** | **$**      | **231**    | ** ** | **$** | **499** | ** ** |
| **Cash and cash equivalents –  discontinued operations** | ** ** | **$**      | **–** | ** ** | **$**      | **–** | ** ** | **$** | **–** | ** ** |

 

In 2008, cash flow from continuingoperating activities was $6,522 million ($13.47/share), compared with $3,339million ($6.83/share) in 2007. The increase in cash flow was primarily due tohigher net earnings and a decrease in the operating working capital deficiency.In 2007, cash flow was significantly reduced due to the payment of$1,145 million after-tax to settle the hedged portion of Buzzard production.

 

 

##### *Financial Ratios*

 
| ** **                                                       |       | **2008** |   | 2007   |   | 2006   |   |
|------------------------------------------------------------------|------------|----------|--------|--------|--------|--------|--------|
| Interest coverage from continuing operations*(times)*1           |       |     |   |   |   |   |   |
| Net earnings basis                                               | ** ** | **21.5** |   | 26.0   |   | 19.2   |   |
| EBITDAX basis1                                                   | ** ** | **31.3** |   | 39.2   |   | 27.0   |   |
| Cash flow basis                                                  | ** ** | **33.7** |   | 27.2   |   | 27.1   |   |
| Debt-to-cash flow from continuing operating  activities*(times)* | ** ** | **0.7**  |   | 1.0    |   | 0.8    |   |
| Debt-to-debt plus equity*(%)*                                    | ** ** | **23.5** |   | 22.5   |   | 21.7   |   |

 

1       Refer to theGlossary of Terms, Ratios and Acronyms on page 114 for methods ofcalculation.

 
| Petro-Canada's  financing strategy is designed to maintain financial strength and flexibility  to support profitable growth in all business environments. Two key measures  that Petro-Canada uses to measure the Company's overall financial strength  are debt-to-cash flow from continuing operating activities and debt-to-debt  plus equity. Petro-Canada's debt-to-cash flow from continuing operating  activities ratio, the key short-term measure, was 0.7 times at  December 31, 2008, down from 1.0 times at year-end 2007. This was well  within the Company's long-term range of no more than 2.0 times.  Debt-to-debt plus equity, the long-term measure for capital structure, was  23.5% at year-end 2008, up from 22.5% at year-end 2007. This was below the  long-term range of 25% to 35% for both years, providing the financial flexibility  to fund the Company's capital program and profitable growth opportunities. In  the future, from time to time, Petro-Canada may exceed long-term ranges for  short periods of time, but always with the goal to return back to within the  long-term ranges. Financial covenants associated with the Company's various  debt arrangements are reviewed regularly and controls are in place to  maintain compliance with these covenants. The Company complied with all  financial covenants as at December 31, 2008. |   |  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--|

 

 
|  | Management's Discussion and Analysis**PETRO-CANADA** | **23** |
|--|------------------------------------------------------|--------|

 

 

### **Operating Activities**

###  

Excluding cash and cash equivalents,short-term notes payable and the current portion of long-term debt, theoperating working capital deficiency was $46 million at December 31,2008, compared with an operating working capital deficiency of $565 million at December 31,2007. The working capital deficiency was lower at December 31, 2008,primarily due to the increase in inventories from adoption of the FIFO methodfor valuing inventories, the increase to accounts receivable resulting from theeffective unwinding of the accounts receivable securitization program and thedecrease in accounts payable and accrued liabilities due to the recoveryrelated to the mark-to-market valuation of stock-based compensation.

 

 

#### **Investing Activities**

#### ** **

##### *Capital and ExplorationExpenditures*

 
| *(millions of Canadian dollars)*                         |       | 2009 Outlook | ** ** | **2008**   |       | 2007       |       | 2006       |       |
|----------------------------------------------------------|------------|--------------|------------|------------|------------|------------|------------|------------|------------|
| **Upstream**                                             |       |         |       |       |       |       |       |       |       |
| North American Natural Gas                               |       | $            | 580        | ** ** | **$**      | **1,023**  |       | $          | 866        |   | $ | 788 |   |
| Oil Sands                                                |       | 985          | ** ** | **1,063**  |       | 779        |       | 377        |       |
| *International &  Offshore*                     |       |         |       |       |       |       |       |       |       |
| East Coast Canada                                        |       | 530          | ** ** | **276**    |       | 159        |       | 256        |       |
| International1                                           |       | 1,270        | ** ** | **2,115**  |       | 762        |       | 760        |       |
| ** **                                               | ** ** | **$**        | **3,365**  | ** ** | **$**      | **4,477**  | ** ** | **$**      | **2,566**  | ** ** | **$** | **2,181** | ** ** |
| **Downstream**                                           | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Refining and Supply                                      |       | $            | 460        | ** ** | **$**      | **1,651**  |       | $          | 1,214      |   | $ | 1,038 |   |
| Sales and Marketing                                      |       | 70           | ** ** | **156**    |       | 155        |       | 142        |       |
| Lubricants                                               |       | 30           | ** ** | **27**     |       | 27         |       | 49         |       |
| ** **                                               | ** ** | **$**        | **560**    | ** ** | **$**      | **1,834**  | ** ** | **$**      | **1,396**  | ** ** | **$** | **1,229** | ** ** |
| **Shared Services**                                      | ** ** | **$**        | **35**     | ** ** | **$**      | **33**     | ** ** | **$**      | **26**     | ** ** | **$** | **24** | ** ** |
| **Total property, plant and  equipment and exploration** | ** ** | **$**        | **3,960**  | ** ** | **$**      | **6,344**  | ** ** | **$**      | **3,988**  | ** ** | **$** | **3,434** | ** ** |
| Other assets                                             |       | –       | ** ** | **29**     |       | 121        |       | 50         |       |
| **Total continuing operations**                          | ** ** | **$**        | **3,960**  | ** ** | **$**      | **6,373**  | ** ** | **$**      | **4,109**  | ** ** | **$** | **3,484** | ** ** |
| Discontinued operations                                  |       | $            | –     | ** ** | **$**      | **–** |       | $          | –     |   | $ | 1 |   |
| **Total**                                                | ** ** | **$**        | **3,960**  | ** ** | **$**      | **6,373**  | ** ** | **$**      | **4,109**  | ** ** | **$** | **3,485** | ** ** |

 

1       Internationalexcludes capital expenditures related to the Syrian producing assets, whichwere sold in 2006 and are reflected as discontinued operations.

 
| Capital and exploration  expenditures were $6,373 million in 2008, up 55% compared with  $4,109 million in 2007, mainly reflecting higher investment in Libya,  the Oil Sands and the Edmonton RCP.

 

In 2009, spending on new growth  projects is expected to decrease substantially. Approximately half of planned  capital expenditures support delivering profitable new growth and funding  exploration and new ventures. This is down by more than $2 billion,  compared with the same categories in 2008. The remaining half of 2009 planned  capital expenditures is directed toward replacing reserves in core areas,  enhancing existing assets, improving base business profitability and  complying with new regulations.

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

 

 
| **24** | **PETRO-CANADA**Management's Discussion and  Analysis |  |
|--------|-------------------------------------------------------|--|

 

 

 

#### **Financing Activities and Dividends**

#### ** **

##### *Sources of Capital Employed*

 
| *(millions of Canadian dollars)*          | ** ** | **2008**   |       | 2007   |   | 2006   |   |
|-------------------------------------------|------------|------------|------------|--------|--------|--------|--------|
| Short-term notes payable                  | ** ** | **$**      | **–** |   | $      | 109    |   | $ | – |   |
| Long-term debt, including current portion | ** ** | **4,749**  |       | 3,341  |   | 2,894  |   |
| Shareholders' equity                      | ** ** | **15,475** |       | 11,870 |   | 10,441 |   |
| **Total**                                 | ** ** | **$**      | **20,224** |   | $      | 15,320 |   | $ | 13,335 |   |

 

Total debt increased to$4,749 million at December 31, 2008, compared with$3,450 million at the previous year end. The increase in debt occurred dueto a debt issuance in the second quarter of 2008, as well as the impact of aweakening Canadian dollar.

 

 

#### **2008 Financing Activities**

#### ** **

During 2008, Petro-Canada increasedits syndicated committed credit facilities from $2,200 million to$3,570 million. At December 31, 2008, the Company's syndicatedbilateral demand credit facilities totalled $777 million. A total of$348 million of the Company's credit facilities was used for letters ofcredit and overdraft coverage. Subsequent to December 31, 2008, theCompany's liquidity was increased by $244 million through the addition of abilateral committed credit facility. The syndicated facilities, which are inplace until 2013, may also be used to provide liquidity support to a commercialpaper program. The Company had no commercial paper outstanding at December 31,2008 and does not plan to issue commercial paper in the near term.

 

In 2008, the Company issued $600million US of 10-year notes, bearing interest at the rate of 6.05% per year,and $900 million US of 30-year notes, bearing interest at the rate of6.80% per year, under its previously filed base shelf prospectus. The baseshelf prospectus provides for the offering of up to $4 billion US of debtsecurities in Canada or the U.S. over the course of a 25-month period from March 31,2008.

 

During 2008, the Company's $480 millionaccounts receivable securitization program was effectively unwound because itwas no longer a cost-effective means of borrowing. The program remainsoutstanding as a liquidity source until June 24, 2009.

 

As at December 31, 2008, thecredit ratings of the Company's unsecured long-term debt securities were Baa2with a stable outlook by Moody's, BBB with a stable outlook by S&P and A(low) with a Negative Trend by DBRS. Petro-Canada's short-term debt securitiesare rated R-1 (low) with a Negative Trend by DBRS. A Positive or NegativeTrend is not an indication that a rating change is imminent. Rather, a Positiveor Negative Trend represents an indication that there is a greater likelihoodthat the rating could change in the future than would be the case if a StableTrend was assigned to the security. A credit rating is not a recommendation tobuy, sell or hold securities and may be subject to revision or withdrawal atany time by the rating organization.

 

The Company's financial capacity andflexibility remain strong despite the recent turmoil in the financial markets.This is due to the Company's continuing ability to generate cash flow, havingaccess to existing cash balances and significant credit facility capacity, andrequiring no near-term refinancing. For 2009, the Company expects to cover itscapital program with cash flow, cash and, if necessary, from available creditfacilities. The Company will monitor energy and financial markets through theyear and take advantage of the flexibility in its capital program to paceprojects and adjust capital expenditures accordingly.

 

 
|  | Management's Discussion and Analysis**PETRO-CANADA** | **25** |
|--|------------------------------------------------------|--------|

 

 

##### *Returning Cash to Shareholders*

##### * *

Petro-Canada's priority uses of cashare to fund the capital program and profitable growth opportunities, and thento return cash to shareholders through dividends and a share buyback program.

 

Petro-Canada regularly reviews itsdividend strategy to ensure the alignment of the dividend policy withshareholder expectations, and financial and growth objectives. Consistent withthis objective, on July 23, 2008, the Company declared a 54% increase inits quarterly dividend to $0.20/share, commencing with the dividend payable on October 1,2008. Total dividends paid in 2008 were $320 million ($0.66/share), comparedwith $255 million ($0.52/share) in 2007.

 

Petro-Canada's current NCIB programentitles the Company to repurchase up to 5% of its outstanding common sharesfrom June 22, 2008 to June 21, 2009, subject to certain conditions.Throughout the year 2008, the Company did not repurchase any of its shares,compared with 16 million in 2007. Future share repurchases will depend onexcess cash available after consideration of the Company's priority uses ofcash.

 
| ** ** | ** ** | **Shares Repurchased** | ** ** | **Average  Price ($/share)** | ** ** | **     Total  Cost** | ** ** |
|------------|------------|------------------------|------------|------------------------------|------------|-----------------------------------------------|------------|
| **Period** | ** ** | **2008**               |       | 2007                         | ** ** | **2008**                                      |       | 2007 | ** ** | **2008** |   | 2007 |   |
| Full  year | ** ** | **–**             |       | 15,998,000                   | ** ** | **$**                                         | **–** |   | $ | 52.42 | ** ** | **$** | **–** |   | $ | 839 million |   |
|            |            |                        |            |                              |            |                                               |            |  |  |  |  |  |  |  |  |  |  |

##### * *

 

##### *Off Balance Sheet*

##### * *

The Company has certain retaillicensee and wholesale marketing agreements that would constitute variableinterest entities as described in Note 29 to the Consolidated FinancialStatements. These entities are not consolidated because Petro-Canada is not theprimary beneficiary and, therefore, consolidation is not required. The Company'smaximum exposure to losses from these arrangements would not be material. Otheroff balance sheet activities are limited to the accounts receivablesecuritization program, which does not meet the criteria for consolidation andpursuant to which there are no amounts currently outstanding.

 

 

##### *Pension Plans*

##### * *

At year-end 2008, Petro-Canada'sdefined benefit pension plans were under funded by $407 million, compared withan under funded position of $282 million at year-end 2007. For both thedefined benefit and defined contribution pension plans, the Company made cashcontributions of $67 million and recorded a pension expense of $93 millionbefore-tax in 2008. This compares with $121 million of cash contributionsand $81 million before-tax of pension expense in 2007. The Company expectsto make pension contributions of approximately $62 million in 2009.

 

 
| **26** | **PETRO-CANADA**Management's Discussion and  Analysis |  |
|--------|-------------------------------------------------------|--|

 

 

##### *Contractual Obligations – Summary*

 
| ** **                             | **Payments due by period** |
|----------------------------------------|----------------------------|
| *(millions of Canadian dollars)*       | ** **                 | **Total** |   | 2009 |   | 2010-2011 |   | 2012-2013 |   | 2014 and thereafter |   |
| Unsecured debentures and senior notes1 | ** **                 | **$** | **10,729** |   | $ | 305 |   | $ | 610 |   | $ | 975 |   | $ | 8,839 |   |
| Capital lease obligations1             | ** **                 | **119** |   | 11 |   | 22 |   | 24 |   | 62 |   |
| Operating leases                       | ** **                 | **2,082** |   | 484 |   | 516 |   | 213 |   | 869 |   |
| Transportation agreements              | ** **                 | **1,436** |   | 197 |   | 332 |   | 230 |   | 677 |   |
| Product purchase/delivery obligations  | ** **                 | **12,733** |   | 3,361 |   | 3,242 |   | 1,918 |   | 4,212 |   |
| Exploration work commitments2          | ** **                 | **769** |   | 381 |   | 291 |   | 85 |   | 12 |   |
| Asset retirement obligations           | ** **                 | **5,389** |   | 54 |   | 106 |   | 119 |   | 5,110 |   |
| Other long-term obligations3, 4        | ** **                 | **3,786** |   | 661 |   | 1,600 |   | 473 |   | 1,052 |   |
| **Total contractual obligations**      | ** **                 | **$** | **37,043** |   | $ | 5,454 |   | $ | 6,719 |   | $ | 4,037 |   | $ | 20,833 |   |

 

1       Obligationsinclude related interest.

 

2       Excludesother amounts related to the Company's expected future capital spending.Capital spending plans are reviewed and revised annually to reflectPetro-Canada's strategy, operating performance and economic conditions. Forfurther information regarding future capital spending plans, refer to thebusiness segment and investing activities discussions in the 2008 MD&A.

 

3       Includesprocessing agreement with Suncor Energy Inc., Libya EPSA signature bonus, FortHills purchase obligation, pension funding obligations for the periods prior tothe Company's next required pension plan valuation and other obligations.Pension obligations beyond the next required pension valuation date wereexcluded due to the uncertainty as to the amount or timing of theseobligations.

 

4       Petro-Canadais involved in litigation and claims associated with normal operations.Management is of the opinion that any resulting settlements would notmaterially affect the financial position of the Company. The table excludesamounts for these contingencies due to the uncertainty as to the amount ortiming of any settlements.

 

During 2008, Petro-Canada's totalcontractual obligations increased by $5.3 billion, mainly due to an additional$1.5 billion US of unsecured senior notes issued in May, losses on thetranslation of foreign currency denominated unsecured debentures and seniornotes and increased estimates for asset retirement obligations. This waspartially offset by decreased product purchase obligations.

 

 
|  | Management's Discussion and Analysis******PETRO-CANADA** | **27** |
|--|----------------------------------------------------------|--------|

 

 

## **UPSTREAM**

## ** **

**Petro-Canada'supstream operations consisted of three business units in 2008: North AmericanNatural Gas, with production in Western Canada and the U.S. Rockies; Oil Sandswith operations in northeast Alberta; and International & Offshore.International & Offshore has two segments: East Coast Canada, withthree major developments offshore Newfoundland and Labrador; and International,where the Company is active in two core areas: North Sea and OtherInternational (Libya, Syria and Trinidad and Tobago). The diverse asset baseprovides a balanced portfolio and a platform for long-term growth.**

 

 

### **North American Natural Gas**

###  

#### **BusinessSummary and Strategy**

#### ** **

| North  American Natural Gas explores for and produces natural gas, crude oil and NGL  in Western Canada and the U.S. Rockies. This business also markets natural  gas in North America and has established resources in Alaska, the NWT and  Arctic Islands. |                                                                                        |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                         |
| The  North American Natural Gas strategy is to be a significant market participant  by accessing new and diverse natural gas supply sources in North America. Key  features of the strategy include:                                                         |
|                                                                                                                                                                                                                                                         |
| ·                                                                                                                                                                                                                                                       | optimizing core  properties in Western Canada and in the U.S. Rockies                  |
|                                                                                                                                                                                                                                                         |
| ·                                                                                                                                                                                                                                                       | targeting 50% to 60% reserves replacement                                              |
|                                                                                                                                                                                                                                                         |
| ·                                                                                                                                                                                                                                                       | increasing focus on unconventional exploration in Western Canada and  the U.S. Rockies |
|                                                                                                                                                                                                                                                         |                                                                                   |
| ·                                                                                                                                                                                                                                                       | building the northern resource base for long-term growth                               |

 

 

##### *North American Natural Gas Financial Results*

 
| *(millions of Canadian dollars)*                 | ** ** | **2008**  |        | 2007    |        | 2006    | ** ** |
|-----------------------------------------------------------------|------------|-----------|-------------|---------|-------------|---------|------------|
| Net  earnings                                                   | **$**      | **344**   | ** $** | **191** | ** $** | **405** | ** ** |
| Cash flow  from continuing operating activities                 | **$**      | **1,055** |  $     | 725     |  $     | 651     |       |
| Expenditures  on property, plant and equipment and exploration1 | **$**      | **1,023** |  $     | 866     |  $     | 788     |       |
| Total  assets                                                   | **$**      | **4,605** |  $     | 4,119   |  $     | 4,151   |       |

 

1       In 2008,Petro-Canada made a small acquisition of oil production and exploration landlocated in the Denver-Julesburg Basin.

 

 

#### **2008Compared with 2007**

#### ** **

*North American Natural Gas contributed $344 million ofnet earnings, up significantly from $191 million in 2007. Strong naturalgas prices, higher U.S. Rockies production and lower exploration expenses werepartially offset by lower Western Canada production, increased operating costsand increased DD&A expenses.*

 

Netearnings in 2008 included a loss on sale of assets of $91 million, acharge of $28 million for a discontinued pilot project in northern B.C. and acharge of $24 million related to accumulated project development costs for theproposed LNG re-gasification facility at Gros-Cacouna, Quebec, which has beenpostponed due to global LNG business conditions. Net earnings in 2007 includeda $97 million charge related to the impairment of coal bed methane (CBM) assetsin the U.S. Rockies, a $41 million gain on sale of assets and an $8million income tax recovery.

 

 
| **28** | **PETRO-CANADA**Management's Discussion and  Analysis |  |
|--------|-------------------------------------------------------|--|

 

 

NorthAmerican Natural Gas production was strong in 2008 due to increased productionin the U.S. Rockies and strong performance in Western Canada, whichsignificantly offset natural declines. Oil and natural gas production averaged665 million cubic feet of gas equivalent/day (MMcfe/d) in 2008, comparedwith 674 MMcfe/d in 2007, as natural declines in Western Canada werepartially offset by U.S. Rockies production growth. Natural gas commodityprices remained strong over the course of 2008. The North American realizednatural gas price averaged $8.05/Mcf in 2008, up 28% from $6.30/Mcfin 2007.

 

 

#### **2008Operating Review and Strategic Initiatives**

#### ** **

TheNorth American Natural Gas business is selectively investing to optimize theexisting core assets in Western Canada and the U.S. Rockies, focusingexploration in these basins and building the northern resource base for thelonger term.

 

 

 

***2008Operating Review***

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

 
| ** **                                                            |       | **2008**   |    | 2007   |    | 2006   |   |
|-----------------------------------------------------------------------|------------|------------|---------|--------|---------|--------|--------|
| Production  net*(MMcfe/d)*                                            |       |       |    |   |    |   |   |
| Western  Canada                                                       | ** ** | **562**    |    | 590    |    | 646    |   |
| U.S.  Rockies                                                         | ** ** | **103**    |    | 84     |    | 55     |   |
| Total North  American Natural Gas production net                      | ** ** | **665**    |    | 674    |    | 701    |   |
| Western  Canada realized natural gas price*($/Mcf)*                   | **$**      | **8.28**   |  $ | 6.48   | $       | 6.88   |   |
| U.S.  Rockies realized natural gas price*($/Mcf)*                     | **$**      | **6.63**   |  $ | 4.88   |  $ | 6.36   |   |
| Western  Canada operating and overhead costs                          | **$**      | **1.72**   |  $ | 1.50   |  $ | 1.31   |   |
| *  ($/thousand cubic feet of gas equivalent – $/Mcfe)* | ** ** | ** ** |    |   |    |   |   |
| U.S.  Rockies operating and overhead costs *($/Mcfe)*                 | **$**      | **2.26**   |  $ | 2.21   |  $ | 2.29   |   |

##### * *

##### * *

##### *Western Canada*

##### * *

WesternCanada production averaged 562 MMcfe/d in 2008, down 5% from 590 MMcfe/din 2007. Exploration and development drilling activity in Western Canadaresulted in 292 successful wells (gross), for an overall success rate of 97%in 2008. Western Canada realized natural gas price was $8.28/Mcf in 2008,compared with $6.48/Mcf in 2007. Western Canada operating and overhead costswere $1.72/Mcfe in 2008, up from $1.50/Mcfe in the previous year. The operatingand overhead cost increase in Western Canada reflected industry-wide costpressures for materials, fuel and labour, combined with lower production.

 

##### * *

| **** | Management's Discussion and Analysis **PETRO-CANADA** | **29** |
|------|-------------------------------------------------------|--------|

 

 

##### *U.S. Rockies*

##### * *

U.S.Rockies production averaged 103 MMcfe/d in 2008, up 23% from 84 MMcfe/d in2007. The increase reflected the ramp up of production from CBM fields in thePowder River Basin and increased drilling activity in the Denver-JulesburgBasin. Exploration and development drilling activity in the U.S. Rockies during2008 resulted in 287 gross wells, up from 150 wells in 2007. U.S. Rockiesrealized natural gas price was $6.63/Mcf in 2008, up 36% from $4.88/Mcf in2007. U.S. Rockies operating and overhead costs were $2.26/Mcfe in 2008, upfrom $2.21/Mcfe in 2007 due to industry-wide cost pressures for materials, fueland labour.

 

 

##### ***2008 Strategic Initiatives***

##### * *

InWestern Canada, the Company continued its planned shallow tight gas drillingprogram in the Medicine Hat, Alberta area, drilling 271 wells in 2008. Thebusiness expects to drill another 280 wells in 2009. In the other core areas ofB.C. and Alberta, the Company continued to optimize existing fields, with thedrilling of more than 30 exploration and development wells in 2008. As part ofthe Company's ongoing optimization of its portfolio of assets, Petro-Canadacompleted the sale of its Minehead assets in Western Canada, resulting in aloss on sale of $153 million before-tax ($112 million after-tax). The sale ofthese assets is aligned with the business unit's strategy to continuouslyoptimize the assets in its portfolio.

 

During2008, the Company and its joint venture partners advanced its explorationactivities in Alaska with a two-well program. The Kwijika well drilled in theNWT was dry and abandoned.

 

TheCompany sees long-term potential for the development of Arctic Island naturalresources discovered in the 1970s and 1980s. The two largest assetsPetro-Canada holds in the region are the Drake and Hecla fields on MelvilleIsland. In 2008, a small team advanced a feasibility study to the point whereuncertainty regarding regulatory approval timing was identified as asignificant issue. The Company will continue to work with governments andstakeholders to streamline this process but, in the meantime, the Company hasslowed down Arctic Island efforts.

 

Capitalexpenditures in 2008 totalled $1,023 million, with $451 million forexploration and development of natural gas in Western Canada, $498 million forU.S. Rockies exploration and development, and $74 million for other natural gasopportunities in North America.

 

 

#### **Outlook**

#### ** **

| **Production expectations in 2009** | **Capital spending plans in 2009**1                                                                                    |
|-------------------------------------|------------------------------------------------------------------------------------------------------------------------|
| ** **                          | ** **                                                                                                             | ** ** | ** ** |
| ·                              | production is expected to average about  570 MMcfe/d  net of natural gas, crude oil and NGL                       | **·** | capital program of approximately $580 million is  planned for North American Natural Gas |
| ** **                          |                                                                                                                   | ** ** | ** ** |
| **Action plans in 2009**            | ** **                                                                                                             | **·** | approximately $320 million for replacing reserves  and maintenance in Western Canada and U.S. Rockies |
|                                | ** **                                                                                                             | ** ** | ** ** |
| **·**                          | drill approximately 304 gross wells in  Western Canada and approximately 241 gross wells in the U.S. Rockies | ** ** | **·** | approximately $180 million for growth  opportunities in the U.S. Rockies |
| ** **                          |                                                                                                                   | ** ** | ** ** | ** ** |
| **·**                          | three-well program planned for the Alaska  Foothills                                                                   | ** ** | **·** | approximately $40 million directed to exploration  and developing long-term supply opportunities in the Far North |
| ** **                          |                                                                                                                   | ** ** | ** ** |   |
| ** **                          |                                                                                                                   | ** ** | **·** | approximately $40 million to enhance existing  assets, comply with regulations and improve base business profitability |

 
| 1 | Petro-Canada will monitor energy and financial  markets through 2009 and take advantage of the flexibility in its capital  program to pace projects and adjust capital expenditures, as necessary. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 
| **30** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|--------|------------------------------------------------------|--|

##### * *

 

##### *Link to Petro-Canada's Corporate and StrategicPriorities*

##### * *

The North American Natural Gas business is alignedwith Petro-Canada's strategic priorities as outlined by its progress in 2008and goals for 2009.

 
| PRIORITY                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 2008 GOALS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 2008  RESULTS | ** ** | **2009 GOALS** |
|----------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|------------|----------------|
|                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |          | ** ** | ** **     |
| Delivering  Profitable Growth with a Focus on 

Operated, Long-Life Assets | **  ****·****  **continue to selectively  optimize Western Canada core assets 

** **

**  ****·****  **continue U.S. Rockies  CBM and tight natural gas development

** **

**  ****·****  **target 50% to 60%  reserves replacement from these core assets

** **

**  ****·****  **focus exploration  activity in Western Canada, with increasing emphasis on the U.S.

** **

**  ****·****  **advance exploration  prospects in the NWT and Alaska

** **

**  ****·****  **initiate an Arctic LNG  feasibility study | **  ****·****  **implemented drilling  and optimization initiatives, resulting in lower decline rates 

** **

**  ****·****  **drilled 287 gross wells  in the U.S. Rockies 

** **

**  ****·****  **continued to increase  exploration focus in the U.S. Rockies and B.C. shale gas

** **

**  ****·****  **participated in three  wells in Alaska and NWT, resulting in one gas discovery, one dry and  abandoned and one suspended as planned

** **

**  ****·****  **progressed Arctic LNG  feasibility study, encountering uncertainty with regard to regulatory  approval timing

** ** | **  ****·****  **continue to optimize  Western Canada and U.S. core assets 

** **

**  ****·****  **target 50% to 60%  reserves replacement from core assets 

** **

**  ****·****  **focus exploration  activity in Western Canada and U.S. Rockies with an emphasis on  unconventional exploration 

** **

**  ****·****  **advance exploration  prospects in Alaska |
|                                                                       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Driving  for First Quartile Operation of Our Assets                        | **  ****·****  **continue to focus on  safety and reliability performance

** **

**  ****·****  **continue to leverage  costs through strategic alliances and preferred suppliers                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | **  ****·****  **maintained reliability  of 99% at Western Canada natural gas processing facilities

** **

**  ****·****  **delivered value to the organization through preferred supplier  relationships, while continuing to ensure competitive supply costs through  selective bidding

                                                                                                                                                                                                                                                                                                                                                                                                | **  ****·****  **continue to focus on  safety and reliability performance 

** **

**  ****·****  **continue to leverage  costs through strategic alliances and preferred suppliers

** **

**  ****·****  **renegotiate contracts  to reflect economic environment                                                                                                                                     |
|                                                                       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Continuing  to Work at Being a Responsible Company                         | **  ****·****  **continue to focus on  TRIF and maintain low regulatory exceedances

** **

**  ****·****  **conduct internal  stakeholder engagement training for project managers and other key business  roles

** **

**  ****·****  **strengthen approach to  investigating and learning from events                                                                                                                                                                                                                                                                                                            | **  ****·****  **TRIF decreased to 1.31,  compared with 1.54 in 2007 

** **

**  ****·****  **experienced eight environmental  regulatory exceedances in 2008, compared with three in 2007

** **

**  ****·****  **conducted training for  stakeholder practitioners, project managers and key contractors 

** **

**  ****·****  **set up a formal process  to identify and communicate key learnings from significant events                                                                                                                                                                                                    | **  ****·****  **pursue initiatives  aimed at developing front-line supervisory capability in safety management

** **

**  ****·****  **develop a water  management plan for operations in areas of water scarcity and develop  measures related to usage and capacity of the source

** **

**  ****·****  **continually improve  community emergency response programs                               |

###  

###  

| **** | Management's Discussion and Analysis **PETRO-CANADA** | **31** |
|------|-------------------------------------------------------|--------|

 

 

### **Oil Sands**

###  

#### **BusinessSummary and Strategy**

 
| Petro-Canada  estimates that it has 1.21 billion bbls of total Oil Sands proved plus  probable reserves and 9.52 billion bbls of total Oil Sands Contingent  and Prospective Resources. The Company's major Oil Sands interests include a  12% ownership in the Syncrude joint venture (an oil sands mining operation  and upgrading facility), 100% ownership of the MacKay River *in situ* bitumen development (a steam-assisted gravity  drainage (SAGD) operation), a 60% ownership in and operatorship of the  proposed Fort Hills oil sands mining project, and extensive oil sands acreage  considered prospective for *in situ*  development of bitumen resources. |                                                                                                                                                                                              |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| The Oil Sands  strategy for profitable growth includes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                         |
| ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | integrated  development of resources to maximize leverage of infrastructure and to  promote long-term stability of financial returns                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                         |
| ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | being positioned  to capture the value opportunities inherent in long-life projects                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                         |
| ·                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | applying  a phased and disciplined approach to development of capital-intensive  projects to allow rigorous cost management and to create opportunities to  benefit from evolving technology |

 

TheCompany has chosen to participate in the full oil sands value chain due to itsresource potential and strong position with bitumen upgrading capacity.Petro-Canada has processing capacity through Syncrude and Suncor Energy Inc. In2008, the Company converted the conventional crude oil train at its Edmontonrefinery to refine oil sands-based feedstock from northern Alberta. Thisconversion, along with the existing synthetic crude supply, resulted in therefinery being able to run on an exclusive diet of oil sands-based feedstock.This connection between resource and upgrading capacity should provide moreeconomic certainty in a business where volatile light/heavy differentialsaffect bitumen pricing.

 

 

##### *Oil Sands Financial Results*

 
| *(millions of Canadian dollars)*                               | ** ** | **2008**  |    | 2007    |        | 2006    |       |
|----------------------------------------------------------------|------------|-----------|---------|---------|-------------|---------|------------|
| **Net earnings**                                               | **$**      | **334**   | **$**   | **316** | ** $** | **245** | ** ** |
| Cash flow  from continuing operating activities                | **$**      | **622**   |  $ | 512     |  $     | 499     |       |
| Expenditures  on property, plant and equipment and exploration | **$**      | **1,063** |  $ | 779     |  $     | 377     |       |
| Total  assets                                                  | **$**      | **4,566** |  $ | 3,659   |  $     | 2,885   |       |

#### ** **

 

#### **2008Compared with 2007**

#### ** **

*OilSands contributed a record $334 million of net earnings, up 6% from $316million in 2007. Higher realized prices at Syncrude and MacKay River, inaddition to stronger MacKay River production were partially offset by lowerSyncrude production and increased operating costs at both Syncrude and MacKayRiver.*

 

Netearnings in 2008 included charges due to the deferral of the Fort Hills FID of$156 million. Net earnings in 2007 included a $62 million income taxrecovery.

 

 

----

| 1 |   | These reserves numbers represent the sum of oil sands mining and oil  and gas activities, including probable reserves, and are presented before  royalties. Reporting reserves in this manner does not conform to SEC  standards and is for general supplemental information only. |
|---|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2 |   | 25% of total Oil Sands resources are risked Prospective Resources and  75% are Contingent Resources. See "Legal Notice – Petro-Canada  disclosure of reserves" for additional risks to develop resources.                                                           |

 

 
| **32** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|--------|------------------------------------------------------|--|

 

 

Strongproduction and reliability at MacKay River were highlights of 2008 performance.Syncrude realized price for synthetic crude oil averaged $106.63/bbl in 2008,up from $79.20/bbl in 2007. MacKay River realized price for bitumen averaged$60.26/bbl in 2008, compared with $28.23/bbl in 2007. Oil Sands productionaveraged 59,900 b/d net in 2008, compared with 56,900 b/d net in 2007.

 

 

#### **2008Operating Review and Strategic Initiatives**

 

 

***2008Operating Review***

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

 
| ** **                                          |       | **2008**   |    | 2007   |    | 2006   |   |
|-----------------------------------------------------|------------|------------|---------|--------|---------|--------|--------|
| Production  net *(b/d)*                             |       |       |    |   |    |   |   |
| Syncrude                                            | ** ** | **34,700** |    | 36,600 |    | 31,000 |   |
| MacKay  River                                       | ** ** | **25,200** |    | 20,300 |    | 21,200 |   |
| Total Oil  Sands production net                     | ** ** | **59,900** |    | 56,900 |    | 52,200 |   |
| Syncrude  realized crude price*($/bbl)*             | **$**      | **106.63** | $       | 79.20  |  $ | 72.13  |   |
| MacKay  River realized bitumen price *($/bbl)*      | **$**      | **60.26**  |  $ | 28.23  |  $ | 28.93  |   |
| Syncrude  operating and overhead costs*($/bbl)*     | **$**      | **37.79**  |  $ | 26.94  |  $ | 30.00  |   |
| MacKay  River operating and overhead costs*($/bbl)* | **$**      | **24.65**  |  $ | 20.97  |  $ | 17.83  |   |

 

Syncrude'sproduction averaged 289,000 b/d gross (34,700 b/d net) in 2008,compared with 305,000 b/d gross (36,600 b/d net) in 2007. Syncrudeproduction was negatively impacted by turnarounds at Cokers 8-1 and 8-2 in2008. Higher unit operating costs were mainly due to lower production, highercosts associated with moving additional overburden to increase exposed minableore inventory, higher maintenance costs and higher natural gas costs. The totalroyalty paid in 2008 equated to a rate of 14% of gross revenues. In the fourthquarter, Petro-Canada and its partners in Syncrude concluded negotiations withthe Government of Alberta regarding the province's desire for Syncrude to moveto the New Alberta Royalty Framework recommendations in advance of the expiryof its existing royalty agreement in 2015.

 

MacKayRiver's average production increased to 25,200 b/d in 2008, up 24%compared with 20,300 b/d in 2007. Higher production reflected increasedreliability and capacity at MacKay River. MacKay River reliability averaged 97%in 2008, up from 87% in 2007, when operational upsets occurred. Unit operatingand overhead costs increased by 18% in 2008, averaging $24.65/bbl, comparedwith $20.97/bbl in 2007. Higher unit operating costs were due to highermaintenance and repair costs, a major turnaround and higher natural gas costs,partially offset by increased production for the year.

 

 
| **** | Management's Discussion and Analysis **PETRO-CANADA** | **33** |
|------|-------------------------------------------------------|--------|

 

 

##### ***2008 Strategic Initiatives***

##### * *

Inthe first quarter of 2008, Petro-Canada received regulatory approval for theproposed MacKay River 40,000 b/d *in situ*expansion project. The MRX project is on hold until commodity prices andfinancial markets strengthen. Petro-Canada ispursuing cost-saving opportunities, including using international engineering,procurement and construction (EPC) contractors on a lump-sum basis.

 

In June 2007,Petro-Canada and its Fort Hills partners completed and announced the designbasis and initiated the detailed FEED for Fort Hills Phase 1, which consists ofthe proposed Fort Hills mine and upgrader. At the completion of the FEED phasein September 2008, the estimated costs to complete the project increasedby approximately 50%. The FID on the mining portion of the project is beingdeferred until the extension of the Fort Hills mine leases is resolved, costscan be reduced and commodity prices and financial markets strengthen. In 2008,the Fort Hills upgrader portion of the project was put on hold, and a decisionon whether to proceed with the upgrader will be made at a later date. Bitumenproduction from the first phase of the mine is expected to be about 160,000 b/dgross (96,000 b/d net).

 

TheFort Hills Energy Limited Partnership has entered into an agreement, subject tothe FID, with Enbridge Pipelines (Athabasca) Inc. to develop pipeline andterminalling facilities to meet the requirements of the Fort Hills mine Phase 1and subsequent phases of the project.

 

Thepartners selected Sturgeon County, 40 kilometres northeast of Edmonton, as thelocation for the proposed upgrading facility to process bitumen from the FortHills mine. The upgrader will use delayed coking technology to convert FortHills' bitumen into light synthetic crude oil. Late in 2006, Petro-Canada filedthe regulatory application for the Fort Hills upgrader. Conditional EnergyResources Conservation Board (ERCB) regulatory approval was received in January 2009.While the upgrader investment decision is being delayed, FEED is being fullycompleted and some long-lead equipment already ordered will be received andsecurely stored. The upgrader will remain in a holding status that permits re-engagement.

 

In two of the Oil Sands leases granted to the FortHills Energy Corporation by the Alberta government, there are severalconditions, including a production milestone requiring that a mine be completedand producing 100,000 b/d gross (60,000 b/d net) of bitumen by mid-2011. Discussionsare in progress with the Government of Alberta to amend the two Oil Sandsleases. In the event that an amendment is not achieved and that the Fort HillsPartnership is unable to meet the existing conditions associated with the twoleases, the Alberta government may impose a performance deposit or cancel thetwo leases if the performance deposit is not provided within the applicabletime period.

 

OilSands capital expenditures of $1,063 million in 2008 included$751 million for the Fort Hills project, $41 million for the MRX,$168 million for MacKay River, $90 million at the Syncrude operationsand $13 million for other Oil Sands projects.

 

#### **Outlook**

#### ** **

| **Production expectations in 2009** |                                                                                                                                                 | **Capital spending plans in 2009**1 |
|-------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------|
| **·**                          | Petro-Canada's share of Syncrude production is  expected to average 38,000 b/d net                                                              | ** **                          | **·** | capital program of approximately $985 million is  planned for Oil Sands |
| ** **                          |                                                                                                                                                 | ** **                          | ** ** | ** ** |
| **·**                          | MacKay River bitumen production is expected to  average 27,000 b/d net, which includes two major 10- to 15-day planned  maintenance turnarounds | ** **                          | ** ** | **·** | approximately $745 million for new growth  opportunities, the majority of which is to advance the Fort Hills project  (forecast to be $348 million) and for facilities, drilling and infrastructure  for the MRX project (forecast to be $325 million) |
| **Growth plans**                    | ** **                                                                                                                                           | ** **                          | ** ** | ** ** |
| **·**                          | work to improve reliability at Syncrude and  MacKay River                                                                                       | ** **                          | ** ** | **·** | approximately $210 million to enhance existing  operations, |
| ** **                          |                                                                                                                                                 | ** **                          | ** ** | ** ** | comply with regulations and improve the base  business |
| **·**                          | progress SAGD technology through research and  development                                                                                           | ** **                          | ** ** | ** ** | profitability at Syncrude and MacKay River |
| ** **                          |                                                                                                                                                 | ** **                          | ** ** | ** ** |   |
| ** **                          |                                                                                                                                                 | ** **                          | ** ** | **·** | approximately $30 million to replace reserves  through ongoing pad development at MacKay River |
| ** **                          |                                                                                                                                                 | ** **                          | ** ** | ** ** | ** ** |

 
| 1 |   | Petro-Canada will monitor energy and financial  markets through 2009 and take advantage of the flexibility in its capital  program to pace projects and adjust capital expenditures, as necessary. |
|---|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 
| **34** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|--------|------------------------------------------------------|--|

 

 

OilSands production is expected to increase to 65,000 b/d net in 2009,compared with actual production of 59,900 b/d net in 2008. Higher expectedproduction in 2009 is due to higher volumes anticipated at both Syncrude andMacKay River. The total Syncrude royalty payable in 2009 is expected to beapproximately 12% of gross bitumen revenue, depending on crude prices. Thetotal MacKay River royalty payable in 2009 is expected to be approximately 2%of gross bitumen revenue, depending on crude prices.

 

Withthe completion of the Fort Hills Phase 1 and MRX projects, Petro-Canada’sproduction from Oil Sands is expected to grow to more than 200,000 b/dnet. Beyond that, the Company has the potential to grow the Oil Sands businessto approximately 300,000 b/d net. Petro-Canada is focused on capturing theopportunities in its Oil Sands strategy, including taking advantage of alow-cost environment, while addressing the challenges of environmental andstakeholder issues. As an experienced and responsible operator, Petro-Canada iswell positioned to meet these challenges.

 

 

##### *Link to Petro-Canada’s Corporate andStrategic Priorities*

##### * *

The Oil Sands business is aligned with Petro-Canada’s strategicpriorities as outlined by its progress in 2008 and goals for 2009.

 
| **PRIORITY**                                                             | **2008 GOALS** | **2008 RESULTS** | **2009 GOALS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------------------------------------------------------------------------|----------------|------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                               | ** **     | ** **       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Delivering  Profitable Growth with a Focus on Operated, Long-Life Assets |           |             | ·          complete Fort Hills FEED  and make FID in the third quarter of 2008

 

·          order long-lead items for  Fort Hills project

 

·          continue to ramp up  Syncrude Stage III expansion

 

·          receive regulatory  decision on MRX project 

 

·          continue to advance MRX  project in preparation for the FID in the first quarter of 2009

 

·          receive regulatory  decision on the Fort Hills upgrader

  |   |   | ·          completed Fort Hills  Phase 1 FEED 

 

·          deferred making the FID  for Fort Hills mine due to more than a 50% increase from initial project cost  estimates and market conditions 

 

·          delayed the investment  decision on the Fort Hills upgrader 

 

·          revisiting Fort Hills  FEED and ordering of long-lead items for the Fort Hills upgrader 

 

·          received regulatory  approval of the Fort Hills amended mine processes and tailings locations 

 

·          Syncrude production  decreased due to two planned turnarounds at two cokers, and operational  upsets 

 

·          received regulatory  approval on MRX project in the first quarter of 2008 

 

·          received fixed bids  from three international engineering firms for the MRX project 

 

·          deferred making the FID  for MRX due to market conditions 

 

·          received regulatory  approval of Fort Hills upgrader in January 2009 

 

·          reached a Syncrude  royalty agreement along with its partners, with the Province of Alberta |   |   | ·          complete a new estimate  for the Fort Hills mine costs by taking advantage of the current market  softness

 

·          take delivery of some  long-lead equipment for the Fort Hills upgrader and secure the asset for  future re-activation

 

·          maintain spending  discipline for 2009 capital commitments

 

·          position MRX for sanction  once commodity and financial markets improve

 

·          continue to ramp up  Syncrude Stage III expansion toward its design capacity |
|                                                                     |           |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |   |

##### * *

 
|  | *Management's Discussion and Analysis*******PETRO-CANADA ****    ****35** |
|--|----------------------------------------------------------------------------------------------------|

 

 

##### *Link to Petro-Canada’sCorporate and Strategic Priorities (continued)*

 
| **PRIORITY**                                               | **2008 GOALS** | **2008 RESULTS** | **2009 GOALS**                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------------------------------------------------------------|----------------|------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                 | ** **     | ** **       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Driving  for First Quartile Operation of Our Assets        |           |             | ·   ramp up MacKay River production to hit 30,000 b/d and increase  reliability to greater than 90% 

 

·   commence shipping MacKay River bitumen to the Edmonton refinery  after it has been upgraded into synthetic crude oil at Suncor 

 

·   decrease Syncrude non-fuel unit operating costs by 10%, compared  with 2007

                                                                 |   |   | ·   achieved 97% reliability at  MacKay River

 

·   achieved daily throughput average of 30,000 b/d for 30 days at  MacKay River 

 

·   achieved record average production of 25,200 b/d at MacKay River  

 

·   commenced shipping of MacKay River bitumen to Suncor for  processing and subsequent shipping to the Edmonton refinery, effective  January 1, 2009 

 

·   experienced higher Syncrude non-fuel unit operating costs due to  lower production and higher maintenance costs |   |   | ·   maintain MacKay River production at 27,000 b/d and reliability  above 95% 

 

·   optimize the integration of MacKay River bitumen and Suncor  processing through to the Edmonton refinery 

 

·   work through the Syncrude joint venture owners to improve  reliability and lower operating and sustaining capital costs |
|  

Continuing  to Work at Being a Responsible Company |           |             |  

·   drive for continuous improvement  in safety

 

·   continue relevant and  transparent engagement with key stakeholders to obtain approval for the Fort  Hills upgrader and mine expansion

 

·   develop capability in  managing the social issues of a temporary foreign workforce  

 

·   pursue research on practical  solutions for tailings management

  |   |   |  

·   TRIF decreased in 2008 to 0.67,  compared with 0.75 in 2007

 

·   experienced 20 environmental  regulatory exceedances in 2008, compared with six in 2007

 

·   received regulatory approval  for the Fort Hills mine amendment without a hearing

 

·   received regulatory approval for the Fort Hills upgrader in  January 2009 

 

·   implemented a risk  assessment to understand and mitigate the social risks related to bringing  temporary foreign workers into oil sands project camps  

 

·   pursuing research and industry  solutions to tailings management continues to be a priority |   |   |  

·   incorporate zero-liquid  discharge into MRX facility design

 

·   implement performance  measures aimed at lowering environmental regulatory exceedances  

 

·   better understand how to manage the language and cultural  aspects of the safety of foreign contract workers on Petro-Canada’s sites |

### ** **

 
| ***36***** ****    PETRO-CANADA**Management's Discussion and Analysis |   |
|------------------------------------------------------------------------------------------------|--------|

### ** **

### *** ***

### ***International & Offshore***

### ** **

### **East Coast Canada**

### ** **

#### **Business Summary and Strategy**

#### ** **

| Petro-Canada has a strong position in every major producing oil  development off Canada’s east coast. The Company holds a 20% interest in  Hibernia, a 27.5% interest in White Rose1 and a 22.7% interest in Hebron, and is the  operator of Terra Nova with a 34% interest.

 

The East Coast Canada strategy is to deliver reliable and profitable  production well into the next decade, leveraging the existing infrastructure  while pursuing profitable development opportunities. Key features of the  strategy include:

 

·       delivering top quartile  operating performance

 

·       sustaining profitable  production through reservoir extensions and add-ons

 

·       pursuing high potential, near  field development and exploration projects

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

 

##### *East Coast Canada Financial Results*

 

 
| *(millions of  Canadian dollars)*                              | ** ** | **2008** |      | 2007       |   | 2006      | ** ** |
|----------------------------------------------------------------|------------|----------|-----------|------------|--------|-----------|------------|
| **Net earnings**                                               | ** ** | **$**    | **1,368** | ** ** | **$**  | **1,229** | ** ** | **$** | **934** | ** ** |
| Cash flow from continuing operating  activities                | ** ** | **$**    | **1,850** |       | $      | 1,491     |       | $ | 1,129 |   |
| Expenditures on property, plant and  equipment and exploration | ** ** | **$**    | **276**   |       | $      | 159       |       | $ | 256 |   |
| Total assets                                                   | ** ** | **$**    | **2,149** |       | $      | 2,345     |       | $ | 2,465 |   |

#### ** **

 

#### **2008 Compared with 2007**

#### ** **

*EastCoast Canada contributed a record $1,368 million of net earnings, up 11%from $1,229 million in 2007. Strong realized prices and reliability werepartially offset by decreased production due to natural declines, increasedroyalties and increased DD&A expenses.*

 

Netearnings in 2008 included $29 million of insurance proceeds related tohistorical mechanical failures on the Terra Nova Floating Production, Storageand Offloading (FPSO) vessel. Net earnings in 2007 included a $52 millionincome tax recovery and $27 million of insurance proceeds.

 

In2008, realized crude oil prices remained strong, while production decreased.East Coast Canada realized crude prices averaged $99.13/bbl in 2008, up from$75.87/bbl in 2007. East Coast oil production averaged 90,500 b/d in 2008,down from 98,700 b/d in 2007. Decreased production reflected naturaldeclines in all East Coast assets. Additionally, pack ice at the White Rosefield in the second quarter of 2008 caused production deferments and drillingdelays.

 

#### ****

| 1 | Petro-Canada’s working interest in the White Rose  Extensions is 26.125% after the Newfoundland and Labrador Energy Corporation  (NALCOR) acquired its 5% working interest effective with the signing of the  final project agreements in February 2009. There is no change to the  White Rose 27.5% working interest for the original field development as  NALCOR is not a partner. |
|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 
|  | *Management's Discussion and Analysis***PETRO-CANADA ****    ****37** |
|--|------------------------------------------------------------------------------------------------|

 

#### ** **

#### **2008 Operating Review and StrategicInitiatives**

#### ** **

##### ***2008 Operating Review***

 
| **** | **** |
|------|------|

 
| ** **                              |       | **2008**   | ** ** | 2007   | ** ** | 2006   |   |
|-----------------------------------------|------------|------------|------------|--------|------------|--------|--------|
| Production  net *(b/d)*                 |       |       |       |   |       |   |   |
| Hibernia                                | ** ** | **27,800** |       | 26,900 |       | 35,700 |   |
| Terra  Nova                             | ** ** | **34,900** |       | 39,500 |       | 12,800 |   |
| White  Rose                             | ** ** | **27,800** |       | 32,300 |       | 24,200 |   |
| Total  East Coast Canada production net | ** ** | **90,500** |       | 98,700 |       | 72,700 |   |
| Average  realized crude price *($/bbl)* | ** ** | **$**      | **99.13**  |   | $          | 75.87  |   | $ | 71.12 |   |
| Operating  and overhead costs *($/bbl)* | ** ** | **$**      | **5.92**   |   | $          | 4.86   |   | $ | 7.71 |   |

 

Hiberniaproduction averaged 139,000 b/d gross (27,800 b/d net) in 2008, up from 134,500b/d gross (26,900 b/d net) in 2007, reflecting excellent reliability, asuccessful well workover campaign and the addition of two new wells. Thesefactors offset natural reservoir declines. Hibernia had a 30-day maintenanceturnaround in 2007, but no turnaround in 2008. The total royalty paid atHibernia in 2008 equated to a rate of 5% of gross revenues.

 

AtTerra Nova, production averaged 102,700 b/d gross (34,900 b/d net),compared with 116,200 b/d gross (39,500 b/d net) in 2007. Terra Novaproduction was lower in 2008 due to a planned 16-day maintenance turnaround andnatural reservoir declines. In 2008, the Terra Nova FPSO operated at solidreliability of 90%, a 4% improvement over 2007. In December 2006, theTerra Nova FPSO experienced a mechanical issue in a swivel connection on theturret system that supports water injection to the reservoir. A repair wascompleted in December 2006 and production returned to normal rates.Performance of the water injection swivel was satisfactory throughout 2008.Contingency plans have been developed and parts have been sourced for themodification or replacement of the swivel in the event performancedeteriorates. In 2008, Terra Nova achieved tier II payout, thereby increasingroyalties to 42.5% of net revenues. The total royalty paid at Terra Nova in2008 equated to a rate of 37% of net revenues.

 

WhiteRose production averaged 101,100 b/d gross (27,800 b/d net), comparedwith 117,500 b/d gross (32,300 b/d net) in 2007. White Rose production wasimpacted by pack ice in the field in the second quarter that caused productionshut-ins and delayed development drilling. In 2008, White Rose achieved tier IIpayout, thereby increasing royalties to 30% of net revenues. The total royaltypaid in 2008 equated to a rate of 27% of net revenues.

 

EastCoast Canada operating and overhead costs averaged $5.92/bbl in 2008, up from$4.86/bbl in 2007. Unit operating costs for East Coast Canada increased as aresult of lower production and higher operating expenses in the year.

 

##### ***2008Strategic Initiatives***

##### * *

In August 2008,the Hebron partners reached an agreement with the Government of Newfoundlandand Labrador on commercial terms that will allow development activities toproceed for Hebron. The partners also agreed to transfer operatorship fromChevron Canada Ltd. to ExxonMobil.

 
| ***38*****     PETRO-CANADA**Management's Discussion and Analysis |   |
|--------------------------------------------------------------------------------------------|--------|

 

 

In September 2007,the Government of Newfoundland and Labrador approved the Canada-Newfoundlandand Labrador Offshore Petroleum Board (C-NLOPB) recommendation to permitdevelopment of the South White Rose Extension. Subsequently, the White Rosepartners reached an agreement in principle with the province on fiscal andother terms for the White Rose Extensions development, incorporating the SouthWhite Rose Extension, North Amethyst and West White Rose satellite fields. Thisactivity was concluded in December 2007 when Petro-Canada and its partnerssigned a formal agreement with the province for the development of theseoilfields. North Amethyst will be developed initially, with first oil targetedfor late 2009. The development of the West White Rose satellite is expected tofollow. FEED for the North Amethyst portion of the project is complete anddetailed design, procurement and fabrication are underway, with necessarylong-lead equipment and drilling commitments in hand. In April 2008, theproject received regulatory and government approval to proceed.

 

Capitalexpenditures for exploration and development of crude oil offshore Canada’seast coast were $276 million in 2008, including $208 million relatedto the development of the White Rose oilfield, $45 million for Hiberniadevelopment drilling, $14 million for Terra Nova and $9 million relatingto exploration drilling and preliminary Hebron activities.

 

 

#### **Outlook**

 
| **Production expectations  in 2009**

 

**·****        **East Coast production is expected to  average 68,000 b/d net, reflecting 28-day planned turnarounds at both  Terra Nova and White Rose, and a 21-day planned turnaround at Hibernia

** **

**·****        **East Coast’s objective is to achieve  greater than 90% reliability at Terra Nova

** **

**Growth  plans**

** **

**·****      **begin development drilling in the White  Rose Extensions’ North Amethyst satellite field and achieve first oil

** **

**·****      **advance Hibernia Southern Extension  development plan discussions with the Government of Newfoundland and Labrador  to facilitate project planning and approvals

** **

**·****      **drill an exploration well in the Jeanne  d’Arc Basin on the Ballicatters prospect | ** ** | **·****        **advance the Hebron project for regulatory  approval in the 2010 time frame

 

**·****        **advance the development concept for West  White Rose

 

**Capital  spending plans in 2009**1

 

·        capital program of  approximately $530 million is planned for East Coast

 

·         approximately $490 million is  expected to be spent primarily on advancing the White Rose Extensions  developments and drilling to replace reserves at Hibernia, Terra Nova and  White Rose

 

·         approximately $40 million is  planned for investments in new growth opportunities and exploration |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 
| 1 | Petro-Canada will monitor energy and financial  markets through 2009 and take advantage of the flexibility in its capital  program to pace projects and adjust capital expenditures, as necessary. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

EastCoast Canada production is expected to be 68,000 b/d in 2009, comparedwith actual production of 90,500 b/d in 2008. The 2009 production estimatereflects natural declines and maintenance turnarounds at all three East Coastassets. The 28-day White Rose maintenance shutdown is concurrent with a 101-dayshutdown of the south drill centre to tie in the White Rose Extensions’satellites. Beyond 2009, the East Coast Canada business intends to offsetnatural declines in the main reservoirs and sustain profitable production byadding production from reservoir extensions and satellite tie-ins. The Hebronproject remains a significant resource the Company also wants to see developed.

 

 
|  | *Management's Discussion and Analysis***PETRO-CANADA ****    ****39** |
|--|------------------------------------------------------------------------------------------------|

 

 

*Link toPetro-Canada's Corporate and Strategic Priorities*

 

The East Coast Canada business isaligned with Petro-Canada's strategic priorities as outlined by its progress in2008 and goals for 2009.

 
| **PRIORITY**                                                             | ** ** | **2008 GOALS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **2008 RESULTS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **2009 GOALS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                               | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** |
| Delivering Profitable  Growth with a Focus on Operated, Long-Life Assets | ** ** | **·****  **advance White Rose  Extensions development toward regulatory approval and FID in 2008, with first  oil targeted for late 2009

 

**·****  **commence development  drilling for the White Rose Extensions project

 

**·****  **achieve binding formal  agreements and re-establish the Hebron project team, with the goal of  submitting the project for regulatory approval in the 2010 time frame

 

**·****  **advance the Hibernia  Southern Extension growth project               | ** ** | **·****  **achieved internal and  regulatory approval for North Amethyst portion of the White Rose Extensions  in 2008; on track for first oil in late 2009

 

**·****  **drilled a pilot well in  North Amethyst  for the White Rose  Extensions project

 

**·****  **signed binding formal  agreements for Hebron

 

**·****  **filed a development  plan amendment application for the Hibernia Southern Extension project                                                                                                                                                                                                                                                                                               | ** ** | **·****  **drill two development  wells in the main Terra Nova field

 

**·****  **drill exploration well  in Ballicatters prospect

 

**·****  **achieve formal  agreement for Hibernia Southern Extension development

 

**·****  **advance the target  Hebron first oil date

 

**·****  **achieve first oil at  North Amethyst and finalize development concept for West White Rose                                                                                                                                                                        | ** ** |
|                                                                     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |
|                                                                     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |
| Driving for First  Quartile Operation of Our Assets                      | ** ** | **·****  **achieve and maintain greater  than 90% reliability at Terra Nova

 

**·****  **finalize Terra Nova  swivel repair plans

 

**·****  **complete 16-day  turnarounds at Terra Nova and partner-operated White Rose                                                                                                                                                                                                                                                                                             | ** ** | **·****  **achieved 90%  reliability at Terra Nova

 

**·****  **put in place all swivel  contingency plans and materials, if repair/replacement is required

 

**·****  **completed Terra Nova  and White Rose turnarounds on time                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | ** ** | **·****  **maintain greater than  90% reliability at Terra Nova and close process safety gaps

 

**·****  **complete 28-day  turnarounds at Terra Nova and White Rose, and 21-day turnaround at Hibernia

 

**·****  **identify and implement  opportunities to reduce administrative and operating costs across the  business                                                                                                                                                                                                                                                                           | ** ** |
|                                                                     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |
|                                                                     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |
| Continuing to Work at  Being a Responsible Company                       | ** ** | **·****  **continue to reduce  injuries and illnesses through implementation of Exposure Based Safety  program and first aid reduction initiatives

 

**·****  **enhance focus on  process safety management

 

**·****  **continue to implement  loss containment improvement plan

 

**·****  **continue to enhance  produced water management

 

**·****  **integrate stakeholder  management process and tools and streamline with regulatory processes and  requirements | ** ** | **·****  **TRIF increased to 2.5,  compared with 0.5 in 2007

 

**·****  **achieved lower combined  first aids, medical aids and restricted work cases in 2008, compared with  2007

 

**·****  **scored 93% on TLM  process safety audit

 

**·****  **recorded one  environmental regulatory exceedance, compared with zero in 2007

 

**·****  **improved produced water  quality

 

**·****  **trained more than 60  employees on stakeholder information management system

 

**·****  **successfully completed  an on-water oil spill countermeasure exercise

 

**·****  **successfully completed  Terra Nova operations authorization | ** ** | **·****  **develop action plan to  address injury frequency

 

**·****  **develop gap closure  plan and stewardship to address process safety and TLM self-assessment gap

 

**·****  **implement continuous  improvement initiatives relating to oil spill response

 

**·****  **develop and implement  GHG emissions reduction strategy and continue initiatives to improve flare  management and produced water quality

 

**·****  **support research and  development initiatives that have personal safety, environmental  and community benefits  | ** ** |
|                                                                     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** |

### ** **

 
| **40** | **Petro****-CANADA**Management's  Discussion and Analysis |  |
|--------|-----------------------------------------------------------|--|

 

 

***International &Offshore***

 

**International**

 

For reporting purposes, Petro-Canada has consolidated itsInternational activities into two core areas: the North Sea (the United Kingdom(U.K.), the Netherlands and Norway sectors) and Other International areas(Libya, Syria, and offshore Trinidad and Tobago).

 

 

**Business Summary andStrategy**

 
| International is  concentrating on countries and regions where material positions may be built,  with a particular focus  on increasing the proportion of long-life assets in the portfolio. These  regions include the North Sea, Libya, Syria, and Trinidad and Tobago.

 

Petro-Canada's International strategy capitalizes on the strengths of a mid-sized  exploration and production company, which is big enough to execute large  scale projects and agile enough to develop smaller projects that can still  create significant value, such as the Company's concentric developments  around the Triton hub in the North Sea. Key features of  the International strategy are:

 

·      expanding and exploiting the existing  portfolio

 

·      targeting new growth opportunities

 

·      executing a substantial and balanced  exploration program |  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|

 

In 2005, Petro-Canada reached an agreement to sell theCompany's mature producing assets in Syria. The sale was closed on January 31,2006. These assets and associated results are reported as discontinuedoperations and excluded from continuing operations.

 

 

*International FinancialResults*

 
| *(millions of Canadian  dollars)*                                                         | ** ** | **2008** |      | 2007       |   | 2006    |       |
|-------------------------------------------------------------------------------------------|------------|----------|-----------|------------|--------|---------|------------|
| **Net earnings (loss) from  continuing operations**                                       | ** ** | **$**    | **1,684** | ** ** | **$**  | **374** | ** ** | **$** | **(206** | **)** |
| Cash flow from continuing operating  activities1                                          | ** ** | **$**    | **2,380** |       | $      | 220     |       | $ | 840 |   |
| Expenditures on property, plant  and equipment and exploration from continuing operations | ** ** | **$**    | **2,115** |       | $      | 762     |       | $ | 760 |   |
| Total assets from continuing  operations                                                  | ** ** | **$**    | **8,277** |       | $      | 5,180   |       | $ | 6,031 |   |

 

1      International cash flow from continuingoperating activities in 2007 was reduced by the payment of $1,145 millionafter-tax to settle the hedged portion of Buzzard production.

### ** **

 
| **** | Management's Discussion and Analysis **Petro****-CANADA** | **41** |
|------|-----------------------------------------------------------|--------|

 

 

**2008 Compared with 2007**

 

*International contributed a record$1,684 million of net earnings, up 350% compared with net earnings of$374 million in 2007. Higher realized prices and production were partiallyoffset by higher exploration and DD&A expenses.*

 

Net earnings from continuing operations in 2008 included a$227 million income tax recovery and an $88 million gain on the sale ofnon-core assets. Net earnings from continuing operations in 2007 included netlosses on the derivative contracts associated with the hedged portion ofBuzzard production of $331 million, a $30 million income tax recovery, a$9 million gain on the sale of non-core assets and $5 million in insuranceproceeds from the Scott platform fire.

 

Late in 2007, the Company entered into derivative contractsto close out the hedged portion of its Buzzard production from January 1,2008 to December 31, 2010. Under the terms of the contracts, the Companyrepurchased 30,688,000 bbls of Dated Brent crude oil at an average price ofapproximately $85.79 US/bbl, resulting in a reduction in cash flow of $1,145million after-tax.

 

International production from continuing operations averaged157,200 boe/d net in 2008, compared with 150,500 boe/d net in 2007.The increase was primarily due to additional North Sea production.International crude oil and NGL realized prices from continuing operationsaveraged $98.25/bbl and natural gas realized prices averaged $10.15/Mcf in2008, compared with $75.90/bbl and $6.46/Mcf, respectively, in 2007. Operatingand overhead costs from continuing operations averaged $7.33/boe in 2008, down20% compared with $9.12/boe in 2007, due to lower operating expenses related tonew EPSAs in Libya.

 

International capital expenditures from continuingoperations in 2008 were $2,115 million, with $281 million directed tothe North Sea region, primarily for the Buzzard enhancement project, and$1,834 million invested in Other International, primarily related to thesignature bonus payment in Libya and the Ebla gas development in Syria.

 

**2008Operating Review and Strategic Initiatives**

** **

***2008 Operating Review***

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

 
| ** **                                                                     |       | **2008**   |        | 2007   |   | 2006    |   |
|--------------------------------------------------------------------------------|------------|------------|-------------|--------|--------|---------|--------|
| Production from  continuing operations net (*boe/d*)                           |       |       |        |   |   |    |   |
| North Sea                                                                      | ** ** | **97,700** |        | 91,000 |   | 43,700  |   |
| Other International                                                            | ** ** | **59,500** |        | 59,500 |   | 59,900  |   |
| Total International production  net                                            | ** ** | ** ** | **157,200** |   |   | 150,500 |   |   | 103,600 |   |
| Average realized crude oil and  NGL price from continuing operations (*$/bbl*) | ** ** | **$**      | **98.25**   |   | $      | 75.90   |   | $ | 72.69 |   |
| Average realized  natural gas price from continuing operations *($/Mcf)*       | ** ** | **$**      | **10.15**   |   | $      | 6.46    |   | $ | 7.64 |   |
| Operating and  overhead costs from continuing operations*($/boe)*              | ** ** | **$**      | **7.33**    |   | $      | 9.12    |   | $ | 7.61 |   |

### ** **

 
| **42** | **Petro****-CANADA**Management's  Discussion and Analysis |  |
|--------|-----------------------------------------------------------|--|

 

 

*North Sea*

 

Petro-Canada's North Sea production averaged97,700 boe/d net in 2008, compared with 91,000 boe/d net in 2007.Additional production from Buzzard and Saxon and full-year production from DeRuyter and L5b-C were partially offset by natural declines and problems withtwo producing wells in the Triton area. North Sea crude oil and NGL realizedprices averaged $97.76/bbl and natural gas averaged $12.15/Mcf in 2008,compared with $75.12/bbl and $7.94/Mcf, respectively, in 2007.

 

During 2008, Petro-Canada continued to leverage its existinginfrastructure through concentric development near core areas and through newdiscoveries.

 

In the U.K. sector of the North Sea, the Buzzarddevelopment, in which the Company has a 29.9% interest, achieved first oil in January 2007and ramped up to peak production of 220,000 boe/d gross (65,700 boe/d net) in July 2007.

 

Sections of the Buzzard fieldcontain higher than expected levels of hydrogen sulphide. In order to meet thecrude quality requirements of the Forties pipeline system, the partners areinstalling additional sulphur handling equipment on the facility.  This work is on schedule for installation inlate 2010 or early 2011.

 

U.K. exploration success continued in 2008 with thenon-operated Pink discovery, located in Block 20/1 North, where thenon-operated Golden Eagle discovery was drilled in late 2006. Together with itsjoint venture partners, the Company is evaluating more explorationopportunities in the immediate area, with a view to optimizing the developmentplan for the discovered resources. Petro-Canada holds a 25% working interest inthe Golden Eagle discovery and a 33% interest in the Pink discovery.

 

In the Netherlands sector of the North Sea, oil productioncomes from the Petro-Canada operated Hanze and De Ruyter platforms. The Companyhas a 45% working interest in Hanze and a 54.07% working interest in De Ruyter.At a current combined grossproduction rate of approximately 25,000 boe/d, these assets were the largestsource of domestic oil in the Netherlands in 2008.

 

The major source of the Company's natural gas production inthe Netherlands is from the L5b-L8b non-operated natural gas area (Petro-Canadaworking interest of approximately 30%), with net production of approximately 33 MMcf/d.

 

In the Netherlands sector of the North Sea, the Company, asoperator with a 50% working interest, drilled a successful exploration well in2008: van Ghent. The Company drilled two successful exploration wells in 2007,van Nes and van Brakel, as operator with a 50% and 60% working interest, respectively.Both van Nes and van Brakel were suspended as gas discoveries. As all threewells are in the vicinity of the De Ruyter development, the potential to tiethese wells back to De Ruyter is being assessed.

 

In the third quarter of 2008, the Company completed a salesand purchase agreement with Bayerngas Norge AS for the sale of all the Company'sinterests in Denmark for net proceeds of $140 million, resulting in a $107million ($82 million after-tax) gain on the sale of these assets. The sale ofall of Petro-Canada's interests in Denmark is consistent with the International &Offshore business unit strategy to optimize the portfolio by reducingparticipation in countries where the Company cannot foresee developing amaterial position.

 

In 2008, the Company was awarded four additional productionlicences in the 2007 Awards in Predefined Areas round in Norway. Petro-Canadais operator of five of the 17 licences in Norway.

### ** **

 
| **** | Management's Discussion and Analysis **Petro****-CANADA** | **43** |
|------|-----------------------------------------------------------|--------|

 

 

*OtherInternational*

 

Libya

 

Petro-Canada is one of the larger producers in Libya throughits 50% interest in Harouge Oil Operations, a joint venture with the NOC. In2008, Petro-Canada's production from continuing operations in Libyaaveraged 48,800 boe/d net, up 2% from 47,700 boe/d net in 2007. Inearly January 2009, the NOC advised the Company that production fromPetro-Canada's Libya EPSAs will be limited to 85,000 b/d gross (42,500 b/d net)due to the quota agreed to by OPEC producers in December 2008.

 

Libyan crude oil and NGL realized prices averaged$101.97/bbl in 2008, compared with $77.26/bbl in 2007. Petro-Canada'sproduction is currently sold on contract to the NOC. In 2008, 12 developmentwells were completed in the producing fields in Libya, consisting of 11production wells and one injection well. Additionally, one appraisal well wasdrilled. A further five development wells were being drilled at year end.

 

Petro-Canada is the operator, with a 50% working interest,of Block 137 in the Sirte Basin. In 2008, the Company completed 2D and 3Dseismic acquisitions and is evaluating the data in preparation for drilling anexploration well.

 

In June 2008, Petro-Canada signed six new EPSAs withthe Libya NOC to replace its existing concession agreements. The new EPSAs wereratified as of the signing, with an effective date of January 1, 2008.Following ratification of the new agreements, a payment of $500 million US,representing 50% of the signature bonus, was made to the Libya NOC in July 2008,with the remainder to be paid between 2009 and 2013.

 

The new EPSAs will run for 30 years and enable the Companyand the NOC to jointly design and implement the redevelopment of the existingfields in the Sirte Basin. Petro-Canada and the NOC will each pay one-half ofdevelopment expenditures, which are expected to total up to $7 billion USgross over the term of the licences. It is expected that the investment willdouble existing production to 200,000 boe/d gross (100,000 boe/d net).

 

Under the new agreements, the Company is the explorationoperator and has committed to fully fund an exploration program at an estimatedcost of $460 million US over a five-year period. Petro-Canada has started toacquire 3D seismic over the new EPSA acreage and expects to start explorationdrilling in 2009.

 

Following the signing of the new EPSAs, work beganimmediately on building the management, technical and administration staffnecessary for the successful execution of the new exploration and developmentprograms. By the end of 2008, four seismic crews had been deployed in the SirteBasin and planning was well underway to begin exploration drilling in thesecond half of 2009. In theredevelopment program, priority is being given to the Amal field, where acomprehensive field development plan is expected to be completed in 2009. Workis also underway to identify opportunities to increase production in the nearterm through well reactivations and workovers.

 

 

Syria

 

In 2008, the Company completed FEED and undertook 2D and 3Dseismic operations for the Ebla gas project. The Ebla gas project is expectedto produce an estimated 80 MMcf/d of natural gas from the Ash Shaer andCherrife natural gas fields, with first gas anticipated in 2010. The EPCcontract for the project's production facilities was awarded and constructionwas 50% complete at the end of 2008. The Ebla gas project progressed on timeand on budget.

 

The Company believes there is significant upside potentialin the Ebla gas fields. A 3D seismic survey program to map the known reservoirand new structures over 900 square kilometres is underway, and is expected tobe completed during the second quarter of 2009. Two drilling rigs are nowworking on the Ebla gas project and first gas is targeted for mid-2010.

 

The Company is building an exploration position in Syria bysecuring Block II, where two exploration wells were drilled in 2008, and bycontinuing negotiations on two further exploration blocks.

### ** **

 
| **44** | **Petro****-CANADA**Management's Discussion and Analysis |  |
|--------|----------------------------------------------------------|--|

 

 

Trinidad and Tobago

 

In 2008, Petro-Canada's share of Trinidad and Tobagooffshore production averaged 64 MMcf/d net, down from 71 MMcf/d netin 2007. Decreased production reflected additional maintenance at the AtlanticLNG plant, rebalancing of mutual aid production among producers to the AtlanticLNG plant and several brief shutdowns of the North Coast Marine Area (NCMA-1)asset to prepare for the startup of the new Poinsettia field. Trinidad and Tobagorealized prices for natural gas averaged $7.15/Mcf in 2008, compared with$4.34/Mcf in 2007.

 

The Company holds a 17.3% working interest in the NCMA-1offshore natural gas development project, where first gas was achieved in late2006. Development of the Poinsettia field, with a platform and pipelinetie-back to the Hibiscus platform, was carried out on schedule during 2008.First gas is planned for the first quarter of 2009 from one subsea well, andsix platform wells will commence drilling in the third quarter of 2009.

 

In 2008, Petro-Canada completed its eight-well explorationprogram in Block 22 and Block 1a/1b, which yielded four material discoveries(two on Block 22 and two on Block 1a). The Company expects to develop astrategy to commercialize these discoveries in 2009.

 

 

Other

 

In July 2008, Petro-Canadaconverted its existing reconnaissance licence in southern Morocco to anexploration permit. The Company's partners in the exploration licence includeGerman company RWE and the Moroccan National Office of Hydrocarbons.

** **

** **

**Outlook**

** **
| **Production expectations in 2009**

 

·   North Sea oil and gas production to average  85,000 boe/d net

 

·    Other International oil and gas  production to average 52,000 boe/d net

 

**Growth plans**

 

·   advance  the redevelopment and exploration programs in Libya

 

·   achieve  scheduled milestones for the Syria Ebla gas project

 

·   develop  a commercialization strategy for discoveries in Trinidad and Tobago

 

·   carry  out a successful exploration program |   | **Capital spending plans in 2009****1**

 

·    capital program of approximately $1,270  million is planned for International

 

·  approximately $670 million,  primarily for new growth projects in Syria and Libya

 

·      approximately $470 million for  reserves replacement spending in core areas, primarily at Buzzard, Guillemot  West and Saxon

 

·      approximately $130 million for  exploration |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 
| 1 | Petro-Canada will  monitor energy and financial markets through 2009 and take advantage of the  flexibility in its capital program to pace projects and adjust capital  expenditures, as necessary. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

International production from continuing operations isexpected to be 137,000 boe/d net in 2009, lower than production levels of157,200 boe/d net in 2008. Lower expected production in 2009 reflects a28-day planned turnaround at Buzzard, announced OPEC production target cuts andnatural declines in several fields.

### ** **

 
| **** | Management's Discussion and Analysis **Petro****-CANADA** | **45** |
|------|-----------------------------------------------------------|--------|

 

 

*Link toPetro-Canada's Corporate and Strategic Priorities*

 

The Internationalbusiness is aligned with Petro-Canada's strategic priorities as outlined by itsprogress in 2008 and goals for 2009.

 
| PRIORITY                                                                 |   | 2008 GOALS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 2008 RESULTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **2009 GOALS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** |
|--------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** |
| Delivering Profitable  Growth with a Focus on Operated, Long-Life Assets |   | **·****  **evaluate 2007  exploration results and deliver 2008 exploration program

 

**·****  **develop a transition  plan for the Libya Concession Development project

 

**·****  **develop a detailed  exploration program in Libya

 

**·****  **award EPC contract for  Syria Ebla gas project and finalize commercial agreements

 

**·****  **spud first well for the  Syria Ebla gas project

 

**·****  **evaluate opportunities  to commercialize Trinidad and Tobago gas discoveries, subject to exploration  results |   | **·****  **drilled 13 exploration wells, with nine wells completed as discoveries,  four wells abandoned as dry holes and one well still drilling at year end

 

**·****  **signed six new EPSAs  with the Libya NOC, adding reserves and extending terms by an expected 30  years with improved commercial terms

 

**·****  **commenced 3D seismic  program in Libya

 

**·****  **completed 50% of Syria  Ebla gas project

 

**·****  **commenced seismic and  development drilling on the Syria Ebla gas project

 

**·****  **participated in four  gas discoveries in Trinidad and Tobago and began study of commercialization  options

  | ** ** | **·****  **continue appraisal and  development planning for the U.K. and the Netherlands exploration discoveries

 

**·****  **drill up to three  exploration wells in the U.K. and Norway depending on rig availability

 

**·****  **continue Libya  exploration 3D seismic program and start exploration drilling program

 

**·****  **prepare and submit  redevelopment plans for the Libya Amal field and pursue early production  gains across the new contract areas

 

**·****  **complete the Syria Ebla  seismic program and continue development drilling and construction of the  Syria Ebla gas plant with a first gas target of mid-2010

 

**·****  **develop appraisal and  commercialization strategies for the Trinidad and Tobago discoveries | ** ** |
|                                                                     |   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** |
|                                                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |
| Driving for First Quartile Operation of Our Assets                       |   | **·****  **maintain excellent  production efficiency at the Petro-Canada operated De Ruyter and Hanze  platforms

 

**·****  **deliver plateau level  production at Buzzard while the enhancement program is implemented                                                                                                                                                                                                                                                                                                                                                                                              |   | **·****  **delivered 97%  reliability at both De Ruyter and Hanze facilities

 

**·****  **Buzzard achieved  average production of 205,000 boe/d gross (61,300 boe/d net), in line with  plateau production expectations

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **·****  **maintain greater than 90% reliability at Hanze and De Ruyter and  drill a Hanze Pliocene development well

 

**·****  **develop and implement  Triton de-bottlenecking and reliability improvement plans

 

**·****  **identify and implement  opportunities to reduce administrative and  operating costs across the business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** |
|                                                                     |   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** |
|                                                                     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |
| Continuing to Work at Being a Responsible Company                        |   | **·****  **continue to work with  contractors to reduce injuries and illnesses

 

**·****  **continue to improve TLM  systems and processes in Libya

 

**·****  **complete the EIA for  the Ebla gas project in Syria

 

**·****  **continue to develop  stakeholder management processes to maintain positive outcomes with key  stakeholders                                                                                                                                                                                                                             |   | **·****  **TRIF was 0.62, a  decrease of 56% compared with 1.42 in 2007

 

**·****  **held Zero-Harm  conference for major contractors in the Netherlands and Syria

 

**·****  **experienced one  environmental regulatory exceedance, compared with zero in 2007

 

**·****  **established fully  capable Environment Safety and Social Responsibility (ES&SR)  organizations in Libya and Syria

 

**·****  **completed the EIA for  the Syria Ebla gas project

 

**·****  **addressed local  stakeholder concerns in Trinidad and Tobago (impact on fishing activities)  and in Syria (feeding grounds of Northern Bald Ibis)                      | ** ** | **·****  **focus on contractor  management to improve safety performance, with particular emphasis in Syria  and Libya on land transport safety

 

**·****  **monitor water  consumption required to support Syria and Libya activities and identify  opportunities to reduce water use

 

**·****  **continue stakeholder  engagement training in Syria and Libya and support implementation of  processes and tools                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** |
|                                                                     |   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** |

### ** **

 
| **46** | **Petro****-CANADA**Management's  Discussion and Analysis |  |
|--------|-----------------------------------------------------------|--|

 

 

 

##### *Discontinued Operations*

 

On January 31, 2006, Petro-Canadacompleted the sale of the Company's producing assets in Syria to a jointventure of companies owned by India's Oil and Natural Gas Corporation Limitedand the China National Petroleum Corporation for net proceeds of $640 million.The sale resulted in a gain on disposal of $134 million recorded in the firstquarter of 2006. This sale aligned with Petro-Canada's strategy to increase theproportion of long-life and operated assets within its portfolio. Petro-Canada'sactivities in Syria remain part of the Other International producing region,with an active exploration program in Block II and the addition of theEbla gas project in Syria during 2006.

 

Producingassets in Syria are presented as discontinued operations in the ConsolidatedFinancial Statements. Petro-Canada's net earnings from discontinued operationsin 2006 were $152 million and included a gain on disposal of $134 million.Summary information is presented below. Additional information concerningPetro-Canada's discontinued operations can be found in Note 5 to theConsolidated Financial Statements.

 

 

##### *Discontinued Financial Results*

 
| *(millions of Canadian dollars, unless otherwise noted)*       | ** ** | ** ** | **2008**   |       |       | 2007       |   |       | 2006       |       |
|----------------------------------------------------------------|------------|------------|------------|------------|------------|------------|--------|------------|------------|------------|
| **Net earnings from discontinued operations**                  | ** ** | ** ** | **$**      | **–** | ** ** | ** ** | **$**  | **–** | ** ** | ** ** | **$** | **152** | ** ** |
| Cash flow  from discontinued operating activities              | ** ** | ** ** | **$**      | **–** |       |       | $      | –     |       |       | $ | 15 |   |
| Expenditures  on property, plant and equipment and exploration | ** ** | ** ** | **$**      | **–** |       |       | $      | –     |       |       | $ | 1 |   |
| Total  assets                                                  | ** ** | ** ** | **$**      | **–** |       |       | $      | –     |       |       | $ | – |   |
| Total volumes*(boe/d)*                                         |       |       |       |       |       |       |   |       |       |       |
| – net before  royalties                                   | ** ** | ** ** | **–** |       |       | –     |   |       | 5,500      |       |
| – net after  royalties                                    | ** ** | ** ** | **–** |       |       | –     |   |       | 1,400      |       |
| Average realized crude oil and NGL price*($/bbl)*              | ** ** | ** ** | **$**      | **–** |       |       | $      | –     |       |       | $ | 71.84 |   |
| Average realized natural gas price*($/Mcf)*                    | ** ** | ** ** | **$**      | **–** |       |       | $      | –     |       |       | $ | 7.94 |   |

 

 
| **** | Management's Discussion and Analysis **PETRO-CANADA** | **47** |
|------|-------------------------------------------------------|--------|

 

### **Upstream Production**

 

#### **2008 Compared with 2007**

 

In 2008, Petro-Canada's production of crude oil, NGL and natural gasaveraged 418,000 boe/d net, flat compared with 2007.

 
| *** ***                                  | ** ** | ** **                       | ** ** | ** **    | ** ** | ** ** | ***International &  Offshore*** | ** ** | ** **        | ** ** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------|------------|------------|------------------------------------------|------------|-------------------|------------|------------|
| **2008 Average Daily Production Volumes Net** | ** ** | **North  American  Natural Gas** | ** ** | **Oil Sands** | ** ** | ** ** | **East  Coast  Canada**                  | ** ** | **International** | ** ** | ** ** | **Total** | ** ** |
| **Crude oil, NGL and bitumen*****(b/d)*       |       |                             |       |          |       |       |                                     |       |              |       |       |   |   |
| – net before royalties                   | ** ** | **13,100**                       | ** ** | **25,200**    | ** ** | ** ** | **90,500**                               | ** ** | **137,200**       | ** ** | ** ** | **266,000** | ** ** |
| – net after royalties                    | ** ** | **9,900**                        | ** ** | **25,000**    | ** ** | ** ** | **68,600**                               | ** ** | **119,400**       | ** ** | ** ** | **222,900** | ** ** |
| **Synthetic crude oil*****(b/d)*              | ** ** | ** **                       | ** ** | ** **    | ** ** | ** ** | ** **                               | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** |
| – net  before royalties                  | ** ** | **–**                       | ** ** | **34,700**    | ** ** | ** ** | **–**                               | ** ** | **–**        | ** ** | ** ** | **34,700** | ** ** |
| – net after  royalties                   | ** ** | **–**                       | ** ** | **29,700**    | ** ** | ** ** | **–**                               | ** ** | **–**        | ** ** | ** ** | **29,700** | ** ** |
| **Natural gas*****(MMcf/d)*                   | ** ** | ** **                       | ** ** | ** **    | ** ** | ** ** | ** **                               | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** |
| – net  before royalties                  | ** ** | **586**                          | ** ** | **–**    | ** ** | ** ** | **–**                               | ** ** | **120**           | ** ** | ** ** | **706** | ** ** |
| – net after  royalties                   | ** ** | **466**                          | ** ** | **–**    | ** ** | ** ** | **–**                               | ** ** | **119**           | ** ** | ** ** | **585** | ** ** |
| **Total volumes*****(boe/d)*                  | ** ** | ** **                       | ** ** | ** **    | ** ** | ** ** | ** **                               | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** |
| – net  before royalties                  | ** ** | **110,800**                      | ** ** | **59,900**    | ** ** | ** ** | **90,500**                               | ** ** | **157,200**       | ** ** | ** ** | **418,400** | ** ** |
| – net after  royalties                   | ** ** | **87,600**                       | ** ** | **54,700**    | ** ** | ** ** | **68,600**                               | ** ** | **139,200**       | ** ** | ** ** | **350,100** | ** ** |

 

 
| *** ***                                  | ** ** | ** **                       | ** ** | ** **    | ** ** | ** ** | ***International &  Offshore*** | ** ** | ** **        | ** ** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------|------------|------------|------------------------------------------|------------|-------------------|------------|------------|
| **2007 Average Daily Production Volumes Net** | ** ** | **North  American  Natural Gas** | ** ** | **Oil Sands** | ** ** | ** ** | **East  Coast  Canada**                  | ** ** | **International** | ** ** | ** ** | **Total** | ** ** |
| **Crude oil, NGL and bitumen*****(b/d)*       |       |                             |       |          |       |       |                                     |       |              |       |       |   |   |
| – net  before royalties                  |       | 12,500                           |       | 20,300        |       |       | 98,700                                   |       | 129,000           |       |       | 260,500 |   |
| – net after  royalties                   |       | 9,500                            |       | 20,100        |       |       | 84,400                                   |       | 124,700           |       |       | 238,700 |   |
| **Synthetic crude oil*****(b/d)*              |       |                             |       |          |       |       |                                     |       |              |       |       |   |   |
| – net before royalties                   |       | –                           |       | 36,600        |       |       | –                                   |       | –            |       |       | 36,600 |   |
| – net after royalties                    |       | –                           |       | 31,100        |       |       | –                                   |       | –            |       |       | 31,100 |   |
| **Natural gas*****(MMcf/d)*                   |       |                             |       |          |       |       |                                     |       |              |       |       |   |   |
| – net before royalties                   |       | 599                              |       | –        |       |       | –                                   |       | 129               |       |       | 728 |   |
| – net after royalties                    |       | 471                              |       | –        |       |       | –                                   |       | 123               |       |       | 594 |   |
| **Total volumes*****(boe/d)*                  |       |                             |       |          |       |       |                                     |       |              |       |       |   |   |
| – net before royalties                   |       | 112,300                          |       | 56,900        |       |       | 98,700                                   |       | 150,500           |       |       | 418,400 |   |
| – net after royalties                    |       | 88,000                           |       | 51,200        |       |       | 84,400                                   |       | 145,200           |       |       | 368,800 |   |

 

 
| **48** | **PETRO-CANADA**Management's Discussion and  Analysis |  |
|--------|-------------------------------------------------------|--|

 

##### ***2009Production Outlook***

 
| In  2008, production of crude oil, NGL and natural gas averaged 418,000 boe/d  net, which was at the high end of the Company's 2008 guidance.   Upstream production is expected to decrease  in 2009, due to large facility turnarounds in East Coast Canada and  International, natural declines in East Coast Canada and Western Canada,  cutbacks to 2009 planned capital expenditures that affect near-term  production and OPEC quota restraints in Libya. Offsetting these decreases is  the expectation of higher Oil Sands production. Production is expected to  average in the range of 345,000 boe/d to 385,000 boe/d in 2009. The  production guidance range was expanded to reflect market uncertainty in the  current environment, the potential impact on near-term production if low  commodity prices persist or worsen, and whether further reductions to capital  expenditures are needed.

  |   | **** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

Factorsthat may impact production during 2009 include reservoir performance, drillingresults, facility reliability, changes in OPEC production quotas and thesuccessful execution of planned turnarounds.

 

 

##### *Consolidated Production Net*

 
| *(thousands of boe/d)*                   | * *     | 2008 Outlook *(+/-)*As at July 24,**2008 |         | 2008 Actual  | *** *** | **2009 Outlook*(+/-)*As at January  29, 2009** | *** *** |
|------------------------------------------|--------------|----------------------------------------------------|--------------|--------------|--------------|------------------------------------------------|--------------|
| **North American Natural Gas**           | ** **   | ** **                                         | ** **   | ** **   | ** **   | ** **                                     | ** **   |
| Natural gas                              |         | 94                                                 |         | 98           | ** **   | **81**                                         | ** **   |
| Liquids                                  |         | 12                                                 |         | 13           | ** **   | **14**                                         | ** **   |
| **Oil Sands**                            | ** **   | ** **                                         | ** **   | ** **   | ** **   | ** **                                     | ** **   |
| Syncrude                                 |         | 35                                                 |         | 35           | ** **   | **38**                                         | ** **   |
| MacKay  River                            |         | 25                                                 |         | 25           | ** **   | **27**                                         | ** **   |
| ***International &  Offshore*** | *** *** | *** ***                                       | *** *** | *** *** | *** *** | *** ***                                   | *** *** |
| **East Coast Canada**                    |         | 87                                                 |         | 90           | ** **   | **68**                                         | ** **   |
| **International**                        | ** **   | ** **                                         | ** **   | ** **   | ** **   | ** **                                     | ** **   |
| North Sea                                |         | 94                                                 |         | 98           | ** **   | **85**                                         | ** **   |
| Other  International                     |         | 58                                                 |         | 59           | ** **   | **52**                                         | ** **   |
| **Total**                                |         | 400 – 420                                     |         | 418          | ** **   | **345 – 385**                             | ** **   |

 

 
| **** | Management's Discussion and Analysis **PETRO-CANADA** | **49** |
|------|-------------------------------------------------------|--------|

 

### **Reserves Summary**

 

TheCompany's reserves data and reserves quantities are determined by Petro-Canada'sstaff of qualified reserves evaluators using corporate-wide policies,procedures and practices. These reserves policies, procedures and practicesconform with the U.S. Securities and Exchange Commission (SEC) standards, aswell as with the requirements in Canada, and the Association of ProfessionalEngineers, Geologists and Geophysicists of Alberta's Standard of Practice forthe Evaluation of Oil and Gas Reserves for Public Disclosure. Petro-Canada alsoemploys independent third parties to evaluate, audit and/or review its reservesprocesses and estimates. In 2008, 49% of North American (excluding Oil Sands)and 60% of International proved reserves were assessed by independent reservesevaluators. Also in 2008, 100% of Oil Sands bitumen proved reserves wereaudited and 100% of Oil Sands mining proved reserves were reviewed byindependent reserves evaluators. The independent reserves evaluators concludedthat the Company's year-end reserves estimates were reasonable.

 

Petro-Canada'sproved reserves table that conforms to SEC standards for Oil and Gas activitiescan be found on page 104.

 

*Thefollowing table and the accompanying narrative do not conform to SEC standardsand are for supplemental general information. The reporting of working interestreserves before royalties and MMboe do not conform to SEC standards.*

 
| **December 31, 2008  Consolidated Reserves – for Oil and  Gas Activities** | ** ** | **Proved  liquids** | ** ** | **Proved  gas**                    | ** ** | **2008 Proved  reserves  additions  liquids**1 | ** ** | **2008 Proved  reserves  additions  gas**1 | ** ** | **Proved**2 | ** **  | **2008 Proved  reserves  additions**1 | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------|------------|-------------|-------------|---------------------------------------|------------|
| *(working interest before royalties)*                                                | * *   | *(MMbbls)*          | * *   | *(Billion cubic  feet – Bcf)* | * *   | *(MMbbls)*                                     | * *   | *(Bcf)*                                    | * *   | *(MMboe)*   | * *    | *(MMboe)*                             | * *   |
| North American Natural Gas                                                           |       | 42                  |       | 1,274                              |       | 2                                              |       | 9                                          |       | 254         |        | 3                                     |       |
| Oil Sands3                                                                           |       | 258                 |       | –                             |       | (9                                             | )          | –                                     |       | 258         |        | (9                                    | )          |
| *International & Offshore*                                                  |       |                |       |                               |       |                                           |       |                                       |       |        |        |                                  |       |
| East Coast Canada                                                                    |       | 81                  |       | –                             |       | 14                                             |       | –                                     |       | 81          |        | 14                                    |       |
| International                                                                        |       | 290                 |       | 220                                |       | 89                                             |       | (16                                        | )          | 327         |        | 87                                    |       |
| **Total**                                                                            | ** ** | **671**             | ** ** | **1,494**                          | ** ** | **96**                                         | ** ** | **(7**                                     | **)**      | **920**     | ** **  | **95**                                | ** ** |
| **Production net**                                                                   | ** ** | **(97**             | **)**      | **(258**                           | **)**      | ** **                                     | ** ** | ** **                                 | ** ** | **(140**    | **) ** | ** **                            | ** ** |

 
| 1 | Proved  reserves additions are the sum of revisions of previous estimates, net  purchases/sales, and discoveries, extensions and improved recovery.                                                                                                                                                                                  |
|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2 | At  year-end 2008, 54% of proved reserves were classified as proved developed  reserves. Of the total proved undeveloped reserves, 96% were associated with  large projects currently producing or under active development, including  Buzzard, Syncrude, MacKay River, Hibernia, Terra Nova, and Trinidad and  Tobago natural gas. |
| 3 | Oil  Sands proved reserves excluded reserves from Syncrude, which is considered a  mining activity by the SEC.                                                                                                                                                                                                                       |

 

Atyear-end 2008, the Company had 920 MMboe of proved reserves from oil and gasactivities, compared with 965 MMboe at the end of 2007.

 
| **December 31, 2008   Reserves – for Syncrude Mining Operation** | ** ** | **Proved  liquids** | ** ** | **2008 Proved reserves  additions liquids**1 | ** ** |
|----------------------------------------------------------------------------|------------|---------------------|------------|----------------------------------------------|------------|
| *(working interest before royalties)*                                      | * *   | *(MMbbls)*          | * *   | *(MMbbls)*                                   | * *   |
| Reserves of  synthetic crude oil                                           |       | 366                 |       | 29                                           |       |
| Production  net                                                            |       | (13                 | )          |                                         |       |

 
| 1 | Proved  reserves additions are the sum of revisions of previous estimates, net  purchases/sales, and discoveries, extensions and improved recovery. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------|

 

At year-end 2008, the Company had 366 MMbbls of proved reserves from OilSands mining operations, compared with 350 MMbbls at year-end 2007.

 

 
| **50** | **PETRO-CANADA**Management's Discussion and  Analysis |  |
|--------|-------------------------------------------------------|--|

 

*Thefollowing table and the accompanying narrative do not conform to SEC standardsand are for supplemental general information. Working interest reserves beforeroyalties, MMboe and combining oil and gas and oil sands mining activities donot conform to SEC standards.*

 
| **December 31, 2008  Consolidated Reserves – for Oil and  Gas and Oil Sands Mining Activities** | ** ** | **Proved  liquids** | ** ** | **Proved  gas** | ** ** | **2008 Proved  reserves  additions  liquids**1 | ** ** | **2008 Proved  reserves  additions  gas**1 | ** ** | **Proved**2 | ** ** | **2008 Proved  reserves  additions**1 | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------|------------|------------------------------------------------|------------|--------------------------------------------|------------|-------------|------------|---------------------------------------|------------|
| *(working interest before royalties)*                                                                     | * *   | *(MMbbls)*          | * *   | *(Bcf)*         | * *   | *(MMbbls)*                                     | * *   | *(Bcf)*                                    | * *   | *(MMboe)*   | * *   | *(MMboe)*                             | * *   |
| North  American Natural Gas                                                                               |       | 42                  |       | 1,274           |       | 2                                              |       | 9                                          |       | 254         |       | 3                                     |       |
| Oil Sands3                                                                                                |       | 624                 |       | –          |       | 20                                             |       | –                                     |       | 624         |       | 20                                    |       |
| *International & Offshore*                                                                       |       |                |       |            |       |                                           |       |                                       |       |        |       |                                  |       |
| East Coast  Canada                                                                                        |       | 81                  |       | –          |       | 14                                             |       | –                                     |       | 81          |       | 14                                    |       |
| International                                                                                             |       | 290                 |       | 220             |       | 89                                             |       | (16                                        | )          | 327         |       | 87                                    |       |
| **Total**                                                                                                 | ** ** | **1,037**           | ** ** | **1,494**       | ** ** | **125**                                        | ** ** | **(7**                                     | **)**      | **1,286**   | ** ** | **124**                               | ** ** |
| **Production net**                                                                                        | ** ** | **(110**            | **)**      | **(258**        | **)**      | ** **                                     | ** ** | ** **                                 | ** ** | **(153**    | **)**      | ** **                            | ** ** |

 
| 1 | Proved  reserves additions are the sum of revisions of previous estimates, net  purchases/sales, and discoveries, extensions and improved recovery.                                                                                                                                                                                  |
|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2 | At  year-end 2008, 54% of proved reserves were classified as proved developed  reserves. Of the total proved undeveloped reserves, 96% were associated with  large projects currently producing or under active development, including  Buzzard, Syncrude, MacKay River, Hibernia, Terra Nova, and Trinidad and  Tobago natural gas. |
| 3 | Oil  Sands proved reserves included reserves from Syncrude and MacKay River.                                                                                                                                                                                                                                                         |

 

Petro-Canada'sobjective is to replace reserves over time through exploration, development andacquisition. The Company believes that, due to the specific nature of itsupstream portfolio and attributes of its probable reserves, the combination ofproved plus probable reserves provides the best perspective of Petro-Canada'sreserves.

 

In2008, proved reserves additions totalled 124 MMboe, excluding 2008 productionof 153 MMboe net. As a result, total proved reserves decreased to 1,286 MMboeat year-end 2008, compared with 1,315 MMboe at year-end 2007. This decreaseincluded a (37) MMboe revision associated with the lower 2008 year-endcrude oil prices, compared with 2007 year-end prices. The majority of the loweryear-end prices negatively impacted the North American Natural Gas andInternational business units and are reflected in the volume numbers listedbelow.

 

TheNorth American Natural Gas business added 3 MMboe of proved reserves additionsin 2008. Reserves additions were due to exploration and development activity,partially offset by technical revisions related to reservoir performance andthe year-end price impact.

 

In2008, 20 MMbbls of proved reserves were added in Oil Sands.1 At Syncrude, 29 MMbbls were added to provedreserves as a result of a planned mine extension. At MacKay River, delineationdrilling resulted in a revision of (9) MMbbls of proved reserves.

 

InEast Coast Canada, a total of 14 MMbbls were added to proved reservesduring 2008, due to ongoing development well drilling and productionperformance at White Rose, Terra Nova and Hibernia.

 

Internationalproved reserves increased by 87 MMboe in 2008, due primarily to developmentactivity at Buzzard and the contract extensions in Libya, partially offset bythe year-end price impact.

 

Furtherdetail on Petro-Canada's reserves is provided in the reserves table at the endof this report (see pages 103 to 107).

 

 

----

| 1 | Oil  Sands proved reserves include reserves from Syncrude and MacKay River. Syncrude  is an oil sands mining operation. Oil sands mining is not an oil and gas  activity as defined by the SEC. The oil sands mining proved reserves are  estimated in accordance with the SEC Industry Guide 7. |
|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 
| **** | Management's Discussion and Analysis **PETRO-CANADA** | **51** |
|------|-------------------------------------------------------|--------|

 

 

### **Downstream**

 

#### **Business Summary and Strategy**

 
| Petro-Canada has the second largest  downstream business and is the "brand of choice" in Canada. In  2008, Petro-Canada accounted for approximately 13% of the total refining  capacity in Canada and about 15% of total petroleum products sold in Canada. 

 

Downstream operations include two  refineries - one in  Edmonton and one in Montreal - with a total daily rated capacity of 40,500 cubic  metres/day (m3/d)  (255,000 b/d), a lubricants plant that is the largest producer of  lubricant-base stocks in Canada, a network of 1,323 retail service stations,  Canada's largest national commercial road transport network of  233 locations and a robust bulk fuel sales channel.

 

The strategy in the Downstream  business is to increase the profitability of the base business through  effective capital investment and disciplined management of controllable  factors. The Downstream business goal is to deliver superior returns and  growth, including a 12% return on capital employed (ROCE) based on a  mid-cycle business environment. Key features of the strategy include:

 

·      achieving  and maintaining first quartile operating performance in all areas

 

·      managing  and reducing costs, with a specific focus on reducing feedstock costs

 

·      growing  revenue

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

Thetrend toward increased heavy crude production globally has resulted in anincreased need for refining capacity that can process this feedstock. As aresult, Petro-Canada converted the conventional crude oil train at its Edmontonrefinery to refine oil sands-based feedstock, and the Company is consideringconstruction of a 25,000 b/d coker at its Montreal refinery. An investmentdecision on a new coker at the Montreal refinery is on hold, pending suitableproject costs and return to a more stable financial market.

 

 

##### *Downstream Financial Results*

 
| *(millions of Canadian dollars)*                | ** ** | ** ** | **2008** |       |       | 2007       |   |    | 2006       |       |
|-------------------------------------------------|------------|------------|----------|------------|------------|------------|--------|---------|------------|------------|
| **Net earnings**                                | ** ** | ** ** | **$**    | **–** | ** ** | ** ** | **$**  | **629** | ** ** | ** ** | **$** | **473** | ** ** |
| Cash flow  from continuing operating activities | ** ** | ** ** | **$**    | **464**    |       |       | $      | 994     |       |       | $ | 835 |   |
| Expenditures  on property, plant and equipment  | ** ** | ** ** | **$**    | **1,834**  |       |       | $      | 1,396   |       |       | $ | 1,229 |   |
| Total  assets                                   | ** ** | ** ** | **$**    | **10,057** |       |       | $      | 7,989   |       |       | $ | 6,649 |   |

 

 
| **52** | **PETRO-CANADA**Management's Discussion and  Analysis |  |
|--------|-------------------------------------------------------|--|

 

 

#### **2008 Compared with 2007**

 
| *Downstream contributed net  earnings of $nil in 2008, down significantly from $629 million in 2007. Net  earnings were impacted by a weaker business environment for gasoline cracking  margins, a change in inventory accounting methodology and lower refinery  yields predominantly at Edmonton due to planned turnaround activity to tie in  and ramp up the new RCP units and unplanned operational upsets.*

* *

Net earnings in 2008  included an $8 million insurance premium surcharge, partially offset by a $4  million gain on the sale of assets and a $2 million income tax recovery. Net  earnings in 2007 included a $34 million income tax recovery and a $7 million  gain on the sale of assets. |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|

 

In 2008, Refining and Supply had a net loss of $205 million,compared with net earnings of $446 million in 2007. The net loss in 2008reflected lower gasoline cracking margins, the negative impact from decliningcrude oil feedstock costs while using a FIFO inventory valuation methodologyand lower refinery yields predominantly at Edmonton due to planned turnaroundactivity to tie in the new RCP units and unplanned upsets.

 

Total sales of refined products decreased by 1% compared with 2007. Thedecreased volumes reflected lower Marketing sales, which were impacted by aslowdown in demand and reduced low-margin Refinery and Supply sales, partiallyoffset by higher lubricants sales volumes.

 

In 2008, Marketing contributed net earnings of $205 million,compared with $183 million in 2007. Improved margins were partially offsetby increased operating expenses for distribution and costs related to higherfuel prices and lower volume.

 

Total Downstream operating, marketing, and G&A unit costs of 9.2cents/litre in 2008 were up compared with 2007. The increase mainly reflectedhigher maintenance and repair activity, planned turnarounds and higher salariesand wage costs.

 

 

#### **2008 Operating Review and StrategicInitiatives**

#### ** **

Petro-Canada is well positioned with the supply capability to optimizeprofitability within a range of future business environment scenarios.

 

 

##### *Refining andSupply*

##### * *

| In 2008, the business processed an average of  36,000 m3/d of  crude oil, down from 40,100 m3/d in  2007. The overall utilization rate at Petro-Canada's two refineries averaged  89% in 2008, down from 99% in 2007. The decrease was largely due to planned  turnaround activity associated with the Edmonton RCP and subsequent ramp up  activity, and in part to unplanned outages at the Edmonton refinery in the  third quarter.

 

Overall plant reliability is a critical component  of success in the refining business. In 2008, the overall refinery  reliability index was 84. This is down from 2007 due to unplanned outages at  the Edmonton refinery in the third quarter. |   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|

 

 
| **** | Management's Discussion and Analysis**PETRO-CANADA** | **53** |
|------|------------------------------------------------------|--------|

 

 

At the Edmonton refinery, construction was completed on the RCP toupgrade and refine oil sands-based feedstock. This project came on-stream inthe fourth quarter of 2008. At its Montreal refinery, the Company furtheredwork to evaluate the feasibility of adding a 25,000 b/d coker to therefinery. An investment decision on a new coker at the Montreal refinery is onhold, pending suitable project costs and return to a more stable financial market.

 

 

##### *Marketing*

 
| Total Downstream sales decreased to an average  52,400 m3/d in  2008, compared with 53,300 m3/d in  2007. Decreased volumes reflect lower Marketing sales impacted by a slowdown  in demand and reduced low-margin refinery and supply sales, partially offset  by higher lubricants sales volumes.

 

In the retail business, Petro-Canada led the  industry in key urban market metrics, focusing on selective representation  and site development and generating high site throughputs. Within the Company's  network, annual sales averaged 6.1 million litres per site. In 2008, the  Company also continued to expand its independent retail network. |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

Petro-Canada continued to expand its non-petroleum revenue base. Thisincluded advancing previously launched product offerings and implementing newproducts, such as the Fuel Savings Reward Card and car wash Seasons' Passes.The business continued to expand the Neighbours fresh food offering and theindustry-leading GLIDE Autowash offering. Despite a challenging businessenvironment in 2008, year-over-year convenience store sales grew by 1% whilesame-store sales declined by 1%, compared with 2007.

 

In 2008, the wholesale PETRO-PASS network, which includes 233 truck stopfacilities, continued to be the leading national marketer of fuel in thecommercial road transport segment in Canada. This distribution network wasupgraded during the year.

 

##### *Lubricants*

##### * *

| Overall sales of lubricants totalled  850 million litres in 2008, an increase of 9% compared with sales  volumes of 778 million litres in 2007. The increase in sales volumes was  primarily due to higher process fluid, white oil, base oil and commercial and  industrial product sales, partially offset by lower wax and automotive  product sales.

 

Sales into high value product segments grew to  635 million litres, a 13% increase compared with 2007. High value product  segments now represent 75% of total sales. Over the past five years, sales of  high value products have grown by approximately 26%. |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

Lubricants is positioned for profitable future growth as tougher productperformance and environmental standards increase global demand for higherquality base oils and finished products like those produced at the Mississauga,Ontario lubricants plant. In 2008, Lubricants advanced product development andcommercialization of its new eco-friendly lawn care product lines, receivingU.S. National Environmental Protection Agency approval for sales into the U.S.market. Product launch plans are currently underway. Also in 2008, Lubricantsobtained a business licence to begin direct sales into the China market.

 

Downstream capital expenditure of $1,834 million in 2008 included $1,651million in Refining and Supply, predominantly associated with the Edmonton RCPof $1,198 million, $156 million in Sales and Marketing and $27 million inLubricants.

 

 
| **54** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|--------|------------------------------------------------------|--|

 

#### ** **

#### **Outlook**

 
| **Growth plans** |       | **Capital spending plans in 2009**1                                                                                          |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------|
|             | ** ** |                                                                                                                         |   |   |   |
| •           | ** ** | increase service station network effectiveness, with a focus on  increasing non-petroleum revenue                            |   | • | capital program of approximately $560 million is planned for the  Downstream |
|             |       |                                                                                                                         |   |   |   |
| •           | ** ** | build wholesale  volumes primarily through the commercial road transport and bulk fuels sales  channels                      |   | ** ** | •         approximately $325 million focused on new  growth projects, such as the possible Montreal coker |
|             |       |                                                                                                                         |   |   |   |
| •           | ** ** | increase sales of high quality, higher value lubricants through  expansion into new markets and introduction of new products |   | ** ** | •         approximately $105 million to enhance  existing operations, including reliability and safety improvements at  Downstream facilities and site enhancement within the retail and wholesale  networks |
|             | ** ** |                                                                                                                         |   |   |   |
|             | ** ** |                                                                                                                         |   |   | •         approximately $60 million to improve  profitability in the base business, including continued development of the  retail and wholesale network and a number of refinery improvement programs |
|             | ** ** |                                                                                                                         |   |   |   |
|             | ** ** |                                                                                                                         |   |   | •         approximately $70 million for regulatory  compliance projects and safety upgrade programs |

 
| 1 | Petro-Canada will monitor energy and  financial markets through 2009 and take advantage of the flexibility in its  capital program to pace projects and adjust capital expenditures, as  necessary. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Downstream investment is focused on growth and improving base businessprofitability. The Edmonton RCP project is expected to add earnings and cashflow with the first full year in 2009.

 

Based on the current mid-cycle business environment, the Downstreambusiness delivered a mid-cycle ROCE of just under 10% in 2008. Over time, it isanticipated that improvement in the base business and growth projects,including the Edmonton RCP, will help drive the mid-cycle ROCE to 12%.

 

 
| **** | Management's Discussion and Analysis**PETRO-CANADA** | **55** |
|------|------------------------------------------------------|--------|

##### * *

 

##### *Linkto Petro-Canada's Corporate and Strategic Priorities*

##### * *

The Downstream business is aligned with Petro-Canada's strategicpriorities as outlined by its progress in 2008 and goals for 2009.

 
| PRIORITY                                                                         |   |   | 2008 GOALS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | 2008 RESULTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | ** ** | **2009 GOALS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|----------------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  

Delivering Profitable Growth with a Focus on Operated,  Long-Life Assets |   |   |  

•         advance Montreal coker,  with FID expected in the second quarter of 2008 

 

•         complete Edmonton RCP  for startup in the fourth quarter of 2008

 

•         continue to invest in  smaller scale refinery yield and reliability improvement projects

 

•         selectively invest in  retail and wholesale assets |   |   |  

•         completed FEED for  proposed 25,000 b/d Montreal coker; FID for project was delayed due to market  conditions

 

•         completed construction  of the Edmonton RCP and started up in the fourth quarter

 

•         invested $41 million in  smaller scale refinery yield and reliability improvement projects

 

•         made selective  investments in retail and wholesale assets

                                                                |       |       |  

•         review costs for  Montreal coker project and position it for sanction when commodity and  financial markets improve

 

•         realize value of the  Edmonton RCP investment

 

•         prudently manage  refinery capital expenditure spending consistent with economic conditions

 

•         selectively invest in  retail and wholesale assets

                                                                                                                                                                              |
|  

Driving for First Quartile Operation of Our Assets                       |   |   |  

•         continue to focus on  safety and refinery reliability, with increased focus on process safety

 

•         reduce feedstock costs

 

•         increase retail  non-petroleum revenue

 

•         grow high value  lubricants sales volumes                                                                                  |   |   |  

•         achieved a combined  reliability index of 84 at the Company's two refineries

 

•         began processing lower  cost oil sands-based feedstock at completed Edmonton RCP

 

•         grew convenience store  sales by 1%, while same-store sales declined by 1% compared with 2007

 

•         increased high value  lubricants sales volumes by 13%

                                                                                                   |       |       |  

•         continue to focus on  personal and process safety, refinery reliability and environmental  responsibility

 

•         reduce feedstock costs

 

•         increase retail  non-petroleum revenue

 

•         grow high value  lubricants sales volumes                                                                                                                                                                                                                                                                                    |
|  

Continuing to Work at Being a Responsible Company                        |   |   |  

•         maintain focus on TRIF  and regulatory compliance exceedances

 

•         assess highest risk  retail sites for safety and security enhancements

 

•         assess water use at  retail and wholesale facilities and  review current management activities in high risk areas                                                                                                 |   |   |  

•         TRIF decreased to 0.60,  compared with 0.64 in 2007

 

•         recorded 13  environmental regulatory exceedances, compared with 12 in 2007

 

•         completed safety and  security assessments at retail sites and implemented upgrades based on  priority profile

 

•         assessed water quality  risks and identified highest risk retail and wholesale facilities and  developed water quality management plans based on corporate water principles |       |       |  

•         execute drinking water  management plans for high risk wholesale and retail facilities and develop  criteria to audit success

 

•         employ Life-Cycle Value  Assessment (LCVA) to help inform decisions regarding waste management and  minimization at refineries

 

•         maintain  focus on energy efficiency and GHG mitigation opportunities and establish a  baseline for new Edmonton refinery configuration

 

•         maintain focus on TRIF  and integrate new measures related to process safety activities

  |

 

 
| **56** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|--------|------------------------------------------------------|--|

 

 

### **Shared Services andEliminations**

###  

Shared Services and Eliminations includes investment income, interestexpense, foreign currency translation and general corporate revenue andexpenses.

 

 

##### *Shared Servicesand Eliminations Financial Results*

 
| *(millions of Canadian dollars)*                          | ** ** | **2008**                                                 |   | 2007                                                                       |       | 2006                                                 |       |
|-----------------------------------------------------------|------------|----------------------------------------------------------|--------|----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Net loss**                                              | ** ** | **$       (596**      | **)**  | **$           (6)** | ** ** | **$       (263)** | ** ** |
| Cash flow  from (used in) continuing operating activities | ** ** | **$        151** |   | $**       **(603)                       |       | $**       **(346) |       |

#### ** **

 

#### **2008 Compared with 2007**

#### ** **

Shared Services and Eliminations recorded a net loss of$596 million in 2008, compared with a loss of $6 million in 2007.

 

The 2008 net loss included a $606 million foreign currency translationgain on long-term debt, a $126 million recovery related to the mark-to-marketvaluation of stock-based compensation and an $18 million income tax recovery.The 2007 net loss included a $208 million foreign currency translation gain onlong-term debt, a $54 million charge related to the mark-to-market valuation ofstock-based compensation and a $5 million income tax recovery.

 

 

#### **Fourth Quarter 2008**

#### ** **

For a discussion and analysis of the Company's fourth quarter 2008performance and results, see Petro-Canada's MD&A for that period, which isincorporated herein, by reference.

#### *** ***

 
| **** | Management's Discussion and Analysis **PETRO-CANADA** | **57** |
|------|-------------------------------------------------------|--------|

 

###  

### **Financial Reporting**

###  

#### **Critical Accounting Estimates**

#### ** **

Thepreparation of the Company's financial statements requires management to adoptaccounting policies that involve the use of significant estimates andassumptions. These estimates and assumptions are developed based on the bestavailable information and are believed by management to be reasonable under theexisting circumstances. New events or additional information may result in therevision of these estimates over time. The Audit, Finance and Risk Committee ofthe Board of Directors regularly reviews the Company's critical accountingpolicies and any significant changes thereto. A summary of the significantaccounting policies used by Petro-Canada can be found in Note 1 to the 2008Consolidated Financial Statements. The following discussion outlines whatmanagement believes to be the most critical accounting policies involving theuse of significant estimates or assumptions.

 

 

##### *Property, Plant andEquipment/Depreciation, Depletion and Amortization*

##### * *

Investmentsin exploration and development activities, including *in situ*oil sands activities, are accounted for under the successful efforts method.Under this method, the acquisition costs of unproved acreage; the costs ofexploratory wells pending determination of proved reserves; and the costs ofwells, which are assigned proved reserves and development costs, includingcosts of all wells, are capitalized. The cost of unsuccessful wells and allother exploration costs, including geological and geophysical costs, arecharged to earnings as incurred. Acquisition, exploration and development ofoil sands mining activities are capitalized when costs are recoverable anddirectly result in an identifiable future benefit. Capitalized costs of oil andgas producing properties, including *in situ* oilsands properties and oil sands mining properties, are depreciated and depletedusing the unit of production method based upon estimated reserves (seeEstimated Oil and Gas Reserves discussion on page 59). Reserves estimatescan have a significant impact on net earnings, because they are a key componentin the calculation of depreciation and depletion related to the capitalizedcosts of property, plant and equipment. A revision in reserves estimates couldresult in a higher or lower depreciation and depletion charge to net earnings.A downward revision in reserves could result in a writedown of oil and gasproducing properties as part of the impairment assessment (see Asset Impairmentdiscussion below).

 

 

##### *Asset Retirement Obligations*

##### * *

TheCompany currently records the obligation for estimated asset retirement costsat fair value when incurred. Factors that can affect the fair values of theobligations include the expected costs to be incurred, the useful lives of theassets and discount rates applied. Cost estimates are influenced by factorssuch as the number and type of assets subject to asset retirement obligations,the extent of work required and changes in environmental legislation. Arevision to the estimated costs to be incurred, useful lives of the assets ordiscount rates applied could result in an increase or decrease in the totalobligation, which would change the amount of amortization and accretion expenserecognized in net earnings over time.

 

 

##### *Asset Impairment*

##### * *

Producingproperties and significant unproved properties are assessed annually, or aseconomic events dictate, for potential impairment. Impairment is assessed bycomparing the estimated net undiscounted future cash flows with the carryingvalue of the asset. The cash flows used in the impairment assessment requiremanagement to make assumptions and estimates about recoverable reserves (seeEstimated Oil and Gas Reserves discussion on page 59), future commodityprices and operating costs. Changes in any of the assumptions, such as adownward revision in reserves, a decrease in future commodity prices or anincrease in operating costs, could result in an impairment of an asset'scarrying value.

 

 

##### *PurchasePrice Allocation*

##### * *

Businessacquisitions are accounted for by the purchase method of accounting. Under thismethod, the purchase price is allocated to the assets acquired and theliabilities assumed based on the fair value at the time of the acquisition. Theexcess purchase price over the fair value of identifiable assets andliabilities acquired is goodwill. The determination of fair value oftenrequires management to make assumptions and estimates about future events. Theassumptions and estimates with respect to

 

 
| **58** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|--------|------------------------------------------------------|--|

 

 

determiningthe fair value of property, plant and equipment acquired generally require themost judgment and include estimates of reserves acquired (see Estimated Oil andGas Reserves discussion below), future commodity prices and discount rates.Changes in any of the assumptions or estimates used in determining the fairvalue of acquired assets and liabilities could impact the amounts assigned toassets, liabilities and goodwill in the purchase price allocation. Future netearnings can be affected as a result of changes in future depreciation anddepletion, asset impairment or goodwill impairment.

 

 

##### *Goodwill Impairment*

##### * *

Goodwillis subject to impairment tests annually, or as economic events dictate, bycomparing the fair value of the reporting unit to its carrying value, includinggoodwill. If the fair value of the reporting unit is less than its carryingvalue, a goodwill impairment loss is recognized as the excess of the carryingvalue of the goodwill over the fair value of the goodwill. The determination offair value requires management to make assumptions and estimates aboutrecoverable reserves (see Estimated Oil and Gas Reserves discussion below),future commodity prices, operating costs, production profiles and discountrates. Changes in any of these assumptions, such as a downward revision inreserves, a decrease in future commodity prices, an increase in operating costsor an increase in discount rates, could result in an impairment of all or aportion of the goodwill carrying value in future periods.

 

 

##### *Estimated Oil and GasReserves*

##### * *

Reservesestimates, although not reported as part of the Company's ConsolidatedFinancial Statements, can have a significant effect on net earnings as a resultof their impact on depreciation and depletion rates, asset impairments andgoodwill impairments (see discussion of these items above and on page 58).The Company's staff of qualified reserves evaluators performs internalevaluations on all of its oil and gas reserves on an annual basis usingcorporate-wide policies, procedures and practices. Independent qualifiedpetroleum reservoir engineering consultants also conduct annual evaluations,technical audits and/or reviews of a significant portion of the Company'sreserves and audit the Company's reserves policies, procedures and practices.In addition, the Company's contract internal auditors test the non-engineeringmanagement control processes used in establishing reserves. However, theestimation of reserves is an inherently complex process, requiring significantjudgment. Estimates of economically recoverable oil and gas reserves are basedupon a number of variables and assumptions, such as geoscientificinterpretation, economic conditions, commodity prices, operating and capitalcosts, and production forecasts, all of which may vary considerably from actualresults. These estimates are expected to be revised upward or downward overtime as additional information such as reservoir performance become availableor as economic conditions change.

 

 

##### *Employee FutureBenefits*

##### * *

TheCompany maintains defined benefit pension plans and provides certainpost-retirement benefits to qualifying retirees. The cost of pension and otherpost-retirement benefits are actuarially determined by an independent actuaryusing the projected benefit method, pro-rated based on service. Thedetermination of these costs requires management to estimate or makeassumptions regarding the expected plan investment performance, salary escalation,retirement ages of employees, expected health care costs, employee turnover anddiscount rates. Changes in these estimates or assumptions could result in anincrease or decrease to the accrued benefit obligation and the related costsfor both pensions and other post-retirement benefits.

 

 

##### *IncomeTaxes*

##### * *

TheCompany follows the liability method of accounting for income taxes, wherebyfuture income taxes are recognized based on the differences between thecarrying amounts of assets and liabilities reported in the financial statementsand their respective tax bases. The determination of the income tax provisionis an inherently complex process, requiring management to interpret continuallychanging regulations and to make certain judgments. While income tax filingsare subject to audits and reassessments, management believes adequate provisionhas been made for all income tax obligations. However, changes in theinterpretations or judgments may result in an increase or decrease in theCompany's income tax provision in the future.

 

 
| **** | Management's Discussion and Analysis **PETRO-CANADA** | **59** |
|------|-------------------------------------------------------|--------|

 

 

##### *Contingencies*

##### * *

TheCompany is involved in litigation and claims in the normal course ofoperations. Management is of the opinion that any resulting settlements wouldnot materially affect the financial position of the Company as at December 31,2008. However, the determination of contingent liabilities relating tolitigation and claims is a complex process that involves judgments as to theoutcomes and interpretation of laws and regulations. Changes in the judgmentsor interpretations may result in an increase or decrease in the Company'scontingent liabilities in the future.

 

 

### **International Financial Reporting Standards(IFRS)**

###  

During 2008, the Canadian Accounting Standards Board(AcSB) confirmed that publicly accountable enterprises will be required toadopt International Financial Reporting Standards (IFRS) in place of CanadianGAAP for interim and annual reporting purposes. The required changeover date isfor fiscal years beginning on or after January 1, 2011.

 

The Company has commenced the process to transition fromcurrent Canadian GAAP to IFRS. It has established a project plan and a projectteam. The project team is led by finance management and includesrepresentatives from various areas of the organization, as necessary, to planfor and achieve a smooth transition to IFRS.

 

The project plan consists of three phases: initiation,detailed assessment and design and implementation. The Company has completedthe first phase, which involved the development of a detailed timeline forassessing resources and training and the completion of a high level review ofthe major differences between current Canadian GAAP and IFRS. Education andtraining sessions for employees throughout the organization and discussionswith the Company's external auditors have commenced and will continuethroughout the subsequent phases. Regular reporting is provided to the Company'ssenior executive management and to the Audit, Finance and Risk Committee  of the Board of Directors.

 

The Company is currently engaged in the detailedassessment and design phase of the project. The detailed assessment and designphase involves establishing work teams to complete a comprehensive analysis ofthe impact of the IFRS differences identified in the initial scopingassessment. In addition, an initial evaluation of IFRS 1 transition exemptionsand an analysis of financial systems will be performed.

 

During the implementation phase, the Company willexecute the required changes to business processes, financial systems,accounting policies, disclosure controls and internal controls over financialreporting.

 

At this time, the impact on financial statementsis not reasonably determinable.

 

 

### **Share Data**

###  

Theauthorized share capital of Petro-Canada consists of an unlimited number ofcommon shares and an unlimited number of preferred shares issuable in seriesdesignated as either senior preferred shares or junior preferred shares. As at February 27, 2009,there were 484,852,311 common shares outstanding and no preferred sharesoutstanding. For details of the Company's share capital and stock optionsoutstanding at December 31, 2008, refer to Notes 23 and 24 of the2008 Consolidated Financial Statements.

 

 

### **Additional Information**

###  

Copiesof this MD&A and the following Consolidated Financial Statements, as wellas the Company's latest AIF and Management Proxy Circular, may be obtained fromthe Company's website at www.petro-canada.ca or by mail upon request from theCorporate Secretary, 150 – 6 Avenue S.W., Calgary, Alberta, T2P 3E3. Otherdisclosure documents, and any reports, statements or other information filed byPetro-Canada with the Canadian provincial securities commissions or othersimilar regulatory authorities, are accessible through the Internet on theCanadian System for Electronic Document Analysis and Retrieval, which iscommonly known by the acronym SEDAR, and located at www.sedar.com. SEDAR is theCanadian equivalent of the U.S. SEC's Electronic Data Gathering, Analysis, andRetrieval System, which is commonly known by the acronym EDGAR, and located atwww.sec.gov.

 

 
| **60** | **PETRO-CANADA**Management's Discussion and Analysis |  |
|--------|------------------------------------------------------|--|