Exhibit 1  MANAGEMENTS RESPONSIBILITY FOR THE FINANCIAL
STATEMENTS  The
preparation and presentation of the Companys consolidated financial statements
and the overall quality of the Companys financial reporting are the
responsibility of management. The financial statements have been prepared in
accordance with generally accepted accounting principles and necessarily
include estimates that are based on managements best judgements. Information
contained elsewhere in the Annual Report is consistent, where applicable, with
that contained in the financial statements.  Management is also responsible for installing and maintaining a system
of internal controls to provide reasonable assurance that assets are
safeguarded and that reliable financial information is produced for preparation
of financial statements, and believes that the system of internal controls they
have installed has operated effectively in 2003.  Deloitte & Touche LLP, a firm of chartered accountants, were
appointed by the shareholders as external auditors of the Company to conduct an
independent examination and express their opinion on the consolidated financial
statements. The Auditors Report outlines the auditors opinion and the scope
of their examination. The services provided to the Company by the external
auditors are now restricted to the audit of the consolidated financial
statements and audit-related services. The Company engaged
PricewaterhouseCoopers LLP as contract auditor to provide internal audit
services, including a review of the system of internal controls.  The Board of Directors is responsible for overseeing managements
performance of its responsibilities for financial reporting and internal
control. The Board exercises this responsibility with the assistance of the
Audit, Finance and Risk Committee of the Board.   /s/Ronald
  A. BrennemanRonald
  A. BrennemanChief Executive Officer/s/
  Ernest F.H. RobertsErnest
  F.H. RobertsSenior Vice-President and Chief Financial OfficerJanuary 28,
  2004  AUDIT, FINANCE AND RISK COMMITTEE OF THE
BOARD OF DIRECTORS  The
Audit, Finance and Risk Committee, which is composed of not fewer than three
(currently five) directors who are not employees of the Company, assists the
Board of Directors in the discharge of its responsibility for overseeing
managements performance of the financial reporting and internal control
responsibilities. The Committee reviews the annual and quarterly consolidated
financial statements, accounting policies and the overall quality of the
Companys financial reporting, and the financial information contained in
prospectuses and in reports filed with regulatory authorities, as required. The
Committee also reviews and makes recommendations to the Board regarding
financial matters and oversees the process that management has in place to
identify business risks.  With respect to the external auditors, the Committee reviews and
approves the terms of engagement, the scope and plan for the external audit and
reviews the results of the audit and the Auditors Report. The external
auditors report to the Committee and to the Board. The Committee discusses the
external auditors independence from management and the Company with the
auditors and receives written confirmation of their independence. The Committee
also recommends to the Board the external auditors to be appointed by the
shareholders and approves in advance fees for the external auditors services.  With respect to the contract auditors engagement to provide internal
audit services, the Committee reviews the engagement contract, reviews and
approves the scope and plan for the internal audit, receives periodic reports
and reviews significant findings and recommendations. The contract auditor
reports to the Committee and to the Board.  Senior management, the external auditors and the contract auditor attend
all Audit, Finance and Risk Committee meetings and each is provided with the
opportunity to meet privately with the Committee.  /s/
  Paul D. MelnukPaul
  D. MelnukChairman of the Audit, Finance and Risk CommitteeJanuary 28,
  2004  1 
   AUDITORS REPORTS  To the Shareholders of Petro-Canada:  We
have audited the consolidated balance sheet of Petro-Canada as at
December 31, 2003 and 2002 and the consolidated statements of earnings,
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our
audits.  We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at
December 31, 2003 and 2002 and the results of its operations and its cash
flows for the years then ended in accordance with Canadian generally accepted
accounting principles.  The consolidated financial statements of Petro-Canada for the year ended
December 31, 2001 were audited by other auditors who have ceased operations.
Those auditors expressed an opinion without reservation on those consolidated
financial statements in their report dated January 31, 2002. As described
in Note 2, these consolidated financial statements have been restated to give
effect to the accounting policy change relating to foreign exchange. Also, as
described in Note 3, the Company changed the presentation of its segments in
2003, and the amounts in the 2002 and 2001 financial statements relating to
segments have been restated to conform to the 2003 segment presentation. We
audited the adjustments described in Note 2 and Note 3 that were applied to
restate the 2001 consolidated financial statements. In our opinion, such
adjustments are appropriate and have been properly applied. However, we were not
engaged to audit, review or apply any procedures to the 2001 consolidated
financial statements of the Company other than with respect to such adjustments
and, accordingly, we do not express an opinion or any other form of assurance
on the 2001 financial statements taken as a whole.   /s/
  Deloitte & Touche LLPDeloitte
  & Touche LLPChartered AccountantsCalgary, AlbertaJanuary 28,
  2004  COMMENTS BY AUDITORS ON CANADA-UNITED STATES
OF AMERICA REPORTING DIFFERENCE  In the United States of America, reporting standards for auditors
require the addition of an explanatory paragraph (following the opinion
paragraph) when there are changes in accounting principles that have a material
effect on the comparability of the Companys financial statements, such as the
changes described in Note 2 to the consolidated financial statements of
Petro-Canada. Our report to the shareholders dated January 28, 2004 is
expressed in accordance with Canadian reporting standards, which do not require
a reference to such changes in accounting principles in the auditors report
when the changes are properly accounted for and adequately disclosed in the
financial statements.   /s/
  Deloitte & Touche LLPDeloitte
  & Touche LLPChartered AccountantsCalgary, AlbertaJanuary 28,
  2004  This report
set forth below is a copy of a previously issued audit report by Arthur
Andersen LLP. This report has not been reissued by Arthur Andersen LLP in
connection with its inclusion in this annual report.  To the Shareholders of Petro-Canada:  We have audited the consolidated balance sheet of Petro-Canada as at
December 31, 2001 and 2000 and the consolidated statements of earnings,
retained earnings and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits.  We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at
December 31, 2001 and 2000 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001 in
accordance with Canadian generally accepted accounting principles.   /s/
  Arthur Andersen LLPArthur
  Andersen LLPChartered AccountantsCalgary, AlbertaJanuary 31,
  2002  2 
   Consolidated
Statement of Earnings  (stated in millions of Canadian dollars)  For the years ended
  December 31,
  
  2003
  
  2002
  
  2001REVENUEOperating
  
  $
  12 209
  
  $
  9 917
  
  $
  8 582Investment and other income(Note 4)
  
  12
  
  
  
  15412 221
  
  9 917
  
  8 736EXPENSESCrude oil and product purchases
  
  5 098
  
  4 556
  
  4 687Operating, marketing and general(Note 5)
  
  2 407
  
  2 036
  
  1 670Exploration(Note
  14)
  
  271
  
  301
  
  245Depreciation, depletion and amortization(Notes 5 and 14)
  
  1 539
  
  957
  
  568Foreign currency translation(Note 6)
  
  (251
  )
  52
  
  102Interest
  
  182
  
  187
  
  1359 246
  
  8 089
  
  7 407EARNINGS BEFORE INCOME TAXES
  
  2 975
  
  1 828
  
  1 329PROVISION FOR INCOME TAXES(Note 7)Current
  
  1 247
  
  959
  
  528Future
  
  59
  
  (105
  )
  (45
  )1 306
  
  854
  
  483NET EARNINGS
  
  $
  1 669
  
  $
  974
  
  $
  846EARNINGS PER SHARE(dollars) (Note 8)Basic
  
  $
  6.30
  
  $
  3.71
  
  $
  3.19Diluted
  
  $
  6.23
  
  $
  3.67
  
  $
  3.16  Consolidated
Statement of Retained Earnings  (stated in millions of Canadian dollars)  For the years ended
  December 31,
  
  2003
  
  2002
  
  2001RETAINED EARNINGS AT BEGINNING OF YEAR
  
  $
  2 380
  
  $
  1 511
  
  $
  771Net earnings
  
  1 669
  
  974
  
  846Dividends on common shares
  
  (106
  )
  (105
  )
  (106
  )RETAINED EARNINGS AT END OF YEAR
  
  $
  3 943
  
  $
  2 380
  
  $
  1 511  3 
   Consolidated
Statement of Cash Flows  (stated in millions of Canadian dollars)  For the years ended
  December 31,
  
  2003
  
  2002
  
  2001OPERATING ACTIVITIESNet earnings
  
  $
  1 669
  
  $
  974
  
  $
  846Items not affecting cash flow(Note 9)
  
  1 432
  
  1 001
  
  597Exploration expenses(Note 14)
  
  271
  
  301
  
  245Cash flow
  
  3 372
  
  2 276
  
  1 688(Increase) decrease in non-cash working capital
  related to operating activities and other(Note 10)
  
  (164
  )
  (226
  )
  55Cash flow from operating activities
  
  3 208
  
  2 050
  
  1 743INVESTING ACTIVITIESExpenditures on property, plant and equipment and
  exploration(Note 14)
  
  (2 315
  )
  (1 861
  )
  (1 681
  )Proceeds from sales of assets
  
  165
  
  26
  
  127Increase in deferred charges and other assets, net
  
  (147
  )
  (72
  )
  (10
  )Decrease (increase) in non-cash working capital
  related to investing activities(Note
  10)
  
  94
  
  (16
  )
  96Acquisition of oil and gas operations of Veba Oil
  & Gas GmbH(Note 11)
  
  
  
  (2 234
  )
  (2 203
  )
  (4 157
  )
  (1 468
  )FINANCING ACTIVITIESProceeds from issue of long-term debt
  
  804
  
  2 100
  
  Reduction of long-term debt
  
  (1 352
  )
  (465
  )
  (475
  )Proceeds from issue of common shares
  
  50
  
  30
  
  34Dividends on common shares
  
  (106
  )
  (105
  )
  (106
  )Purchase of common shares(Note 18)
  
  
  
  
  
  (362
  )(604
  )
  1 560
  
  (909
  )INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS
  
  401
  
  (547
  )
  (634
  )CASH AND CASH EQUIVALENTS AT BEGINNING OF
  YEAR
  
  234
  
  781
  
  1 415CASH AND CASH EQUIVALENTS AT END OF YEAR(Note 12)
  
  $
  635
  
  $
  234
  
  $
  781  4 
   Consolidated
Balance Sheet  (stated in millions of Canadian dollars)  As at December 31,
  
  2003
  
  2002ASSETSCURRENT ASSETSCash and cash equivalents(Note 12)
  
  $
  635
  
  $
  234Accounts receivable
  
  1 503
  
  1 596Inventories(Note
  13)
  
  551
  
  585Prepaid expenses
  
  16
  
  192 705
  
  2 434PROPERTY, PLANT AND EQUIPMENT, NET(Note 14)
  
  10 759
  
  10 084GOODWILL(Note 11)
  
  810
  
  709DEFERRED CHARGES AND OTHER ASSETS(Note 15)
  
  316
  
  212$
  14 590
  
  $
  13 439LIABILITIES AND SHAREHOLDERS
  EQUITYCURRENT LIABILITIESAccounts payable and accrued liabilities
  
  $
  1 822
  
  $
  1 901Income taxes payable
  
  300
  
  263Current portion of long-term debt(Note 16)
  
  6
  
  3562 128
  
  2 520LONG-TERM DEBT(Note 16)
  
  2 223
  
  2 701DEFERRED CREDITS AND OTHER LIABILITIES(Note 17)
  
  688
  
  621FUTURE INCOME TAXES(Note 7)
  
  1 830
  
  1 821COMMITMENTS AND CONTINGENT LIABILITIES(Note 22)SHAREHOLDERS EQUITY(Note 18)
  
  7 721
  
  5 776$
  14 590
  
  $
  13 439  Approved
on behalf of the Board   /s/R. A.
  Brenneman
  
  /s/B. F.
  MacNeillR.
  A. Brenneman
  B.
  F. MacNeillDirector
  Director  5 
   Notes
to Consolidated Financial Statements  (tabular amounts stated in millions of Canadian dollars)  Note
1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES  (a) Basis of
PresentationThe
consolidated financial statements include the accounts of Petro-Canada and of
all subsidiary companies (the Company) and are prepared in accordance with
Canadian generally accepted accounting principles (GAAP). Differences between
Canadian and United States GAAP are explained in the Notes to the Consolidated
Financial Statements.  Substantially
all of the Companys exploration and development activities are conducted
jointly with others. Only the Companys proportionate interest in such
activities is reflected in the Consolidated Financial Statements.  The
preparation of Consolidated Financial Statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and the disclosure of contingencies. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, actual results may differ from
estimated amounts as future confirming events occur.  (b) Revenue RecognitionRevenue from the sale of crude oil, natural
gas, natural gas liquids, purchased products, and refined petroleum products is
recorded when title passes to the customer.  International
operations conducted pursuant to exploration and production sharing agreements
(EPSAs) are reflected in the Consolidated Financial Statements based on the
Companys working interest in such operations. Under the EPSAs, the Company
and other non-governmental partners pay all operating and capital costs for
exploring and developing the concessions. Each EPSA establishes specific terms
for the Company to recover these costs (Cost Recovery Oil) in accordance with
a formula that is generally limited to a specified percentage of production
during each fiscal year and to share in the production profits (Profit Oil).
Profit Oil is that portion of production remaining after deducting Cost Recovery
Oil and is shared between the joint venture partners and the government of each
country, varying with the level of production. Profit Oil that is attributable
to the government includes an amount in respect of all deemed income taxes
payable by the Company under the laws of the respective country. All other
government stakes, other than income taxes, are considered to be royalty
interests.  (c) Foreign Currency
TranslationMonetary
assets and liabilities are translated into Canadian dollars at rates of
exchange in effect at the balance sheet date. With the exception of items
pertaining to self-sustaining operations, the other assets and related
depreciation, depletion and amortization, other liabilities, revenue and other
expense items are translated into Canadian dollars at rates of exchange in
effect at the respective transaction dates. The resulting exchange gains or
losses are included in earnings.  The
Companys International operations are operated on a self-sustaining basis.
Assets and liabilities of the International business segment, including
associated long-term debt, are translated into Canadian dollars at period end
exchange rates, while revenues and expenses are converted using average rates
for the period. Gains and losses from the translation into Canadian dollars are
deferred and included in the foreign currency translation adjustment as part of
shareholders equity.  (d) Income TaxesThe Company follows the liability method of
accounting for income taxes. Under this method, future income taxes are
recognized, using substantively enacted income tax rates, based on the
differences between the carrying amounts of assets and liabilities reported in
the financial statements and their respective tax bases. The effect of a change
in income tax rates on future income tax assets and liabilities is recognized
in income in the period the change occurs.  (e) Earnings Per ShareBasic earnings per share is calculated by
dividing the net earnings available to common shareholders by the weighted
average number of common shares outstanding. Diluted earnings per share
reflects the potential dilution that would occur if stock options were
exercised. The treasury stock method is used in calculating diluted earnings
per share, which assumes that any proceeds received from the exercise of
in-the-money stock options would be used to purchase common shares at the
average market price for the period.  (f) Cash and Cash
EquivalentsCash
and cash equivalents comprise cash in banks, less outstanding cheques, and short-term
investments with a maturity of less than ninety days when purchased.  6 
   (g) InventoriesInventories are stated at the lower of cost
and net realizable value. Cost of crude oil and product purchases is determined
primarily on a last-in, first-out (LIFO) basis.  (h) InvestmentsInvestments in companies over which the
Company has significant influence are accounted for using the equity method.
Other long-term investments are accounted for using the cost method.  (i) Property, Plant and
EquipmentInvestments
in exploration and development activities are accounted for using the
successful efforts method. Under this method the acquisition cost of unproved
acreage is capitalized. Costs of exploratory wells are initially capitalized
pending determination of proved reserves and costs of wells which are assigned
proved reserves remain capitalized while costs of unsuccessful wells are
charged to earnings. All other exploration costs, including geological and
geophysical costs, are charged to earnings as incurred. Development costs,
including the cost of all wells, are capitalized.  The
interest cost of debt attributable to the construction of major new facilities
is capitalized during the construction period.  Producing
properties and significant unproved properties are assessed annually, or as
economic events dictate, for potential impairment. Impairment is assessed by
comparing the estimated net undiscounted future cash flows to the carrying
value of the asset.  (j) Depreciation, Depletion and
AmortizationDepreciation
and depletion of capitalized costs of oil and gas producing properties are
calculated using the unit of production method.  Depreciation
of other plant and equipment is provided on either the unit of production
method or the straight line method, based on the estimated service lives of the
related assets, as appropriate.  Costs
associated with significant development projects are not depleted until
commencement of commercial production.  (k) Future Removal and Site
Restoration CostsEstimated future removal and site restoration costs which are probable
and can be reasonably determined are provided for on either the unit of
production method or the straight line method, based on the estimated service
lives of the related assets, as appropriate. Future removal and site
restoration costs for inactive Downstream sites, net of expected recoveries,
are provided for at the time a decision is made to decommission the site. The
annual provision is included in operating, marketing and general expenses and
is estimated based on current costs and technology and in accordance with
existing legislation and industry practice.  (l) GoodwillGoodwill is the excess purchase price over the
fair value of identifiable assets and liabilities acquired. Goodwill impairment
is assessed annually at year end, or as economic events dictate, by comparing
the fair value of the reporting unit to its carrying value, including goodwill.
If the fair value of the reporting unit is less than its carrying value, a
goodwill impairment loss is recognized as the excess of the carrying value of
the goodwill over the fair value of the goodwill.  (m) Stock Option PlanThe Company maintains a stock option plan for
officers and certain employees as described in the Notes to the Consolidated
Financial Statements. Prior to 2003, stock options were accounted for based on
the intrinsic value of the award at grant date and as such, no compensation
expense was charged to earnings. Effective January 1, 2003 the Company
began prospectively accounting for stock options based on the fair value method
at the grant date. The compensation expense associated with options granted in
2003 is charged to earnings over the vesting period with a corresponding increase
in contributed surplus. On the exercise of stock options, consideration paid
and the associated contributed surplus is credited to common shares.  (n) Employee Future
BenefitsThe
Company records its obligations under employee benefit plans, net of plan
assets where applicable. The costs of pensions and other post-retirement
benefits are actuarially determined using the projected benefit method prorated
based on service and using managements best estimate of expected plan
investment performance, salary escalation, retirement ages of employees and
expected health care costs. For the purpose of calculating the expected return
on plan assets, those assets are measured at fair value. The accrued benefit
obligation is discounted using a market rate of interest at the beginning of
the year on high quality corporate debt instruments.  7 
   (o) Hedging and Derivative Financial
InstrumentsThe
Company may use derivative financial instruments to manage its exposure to
market risks resulting from fluctuations in foreign exchange rates, interest
rates and commodity prices. These derivative financial instruments are not used
for trading or speculative purposes.  The
Company formally documents all derivative instruments designated as hedges, the
risk management objective, and the strategy for undertaking the hedge.  Gains
and losses on derivative instruments that are designated as and determined to
be effective hedges are deferred and recognized in the period of settlement as
a component of the related transaction. The Company assesses, both at inception
and over the term of the hedging relationship, whether the derivative
instruments used in the hedging transactions are highly effective in offsetting
changes in the fair value or cash flows of hedged items. If a derivative
instrument ceases to be effective or is terminated, hedge accounting is
discontinued. The accumulated gains and losses continue to be deferred and
recognized in the Consolidated Statement of Earnings in the period of
settlement of the related transaction. Future gains or losses are recognized in
the Consolidated Statement of Earnings in the period they occur.  Derivative
instruments that are not hedges for accounting purposes are recorded at fair
value with any resulting gain or loss recognized in the Consolidated Statement
of Earnings in the current period.  Note
2  CHANGES IN
ACCOUNTING POLICIES  Effective
January 1, 2003 Petro-Canada commenced operating its International segment
on a self-sustaining basis. As a consequence, the Company prospectively changed
its accounting for the foreign currency translation of its International
business segment, and gains and losses arising from the translation of the
financial statements and associated long-term debt into Canadian dollars are
deferred and included as part of shareholders equity. The effect of this
change for the year ended December 31, 2003 was a decrease in net earnings
of $70 million. The change also resulted in an increase in property, plant and
equipment of $152 million, goodwill of $101 million and shareholders equity of
$253 million as at December 31, 2003.  During
the fourth quarter of 2003, the Company elected to begin prospectively
expensing, effective January 1, 2003, the value of stock options pursuant
to the transitional accounting provisions of the Canadian Institute of
Chartered Accountants for stock-based compensation and other stock-based
payments. As a result, stock options granted during 2003 have been accounted
for based on the fair value method at the grant date. The fair value associated
with these options is charged to earnings over the vesting period with a
corresponding increase in contributed surplus. The effect of this change for
the year ended December 31, 2003 was a decrease in net earnings of $9
million. For stock options granted in 2002, the Company elected to continue
accounting for these options based on the intrinsic value at the grant date and
to disclose the pro forma results as if the fair value method has been used.
Accordingly, the net earnings for 2002 and subsequent years of the vesting
period remain unchanged with respect to options issued in 2002 and the pro
forma results are disclosed in Note 18 to the Consolidated Financial
Statements.  Effective
January 1, 2002 the Company adopted, retroactively, the recommendations of
the Canadian Institute of Chartered Accountants on accounting for foreign
currency translation whereby exchange gains or losses on the translation of
long-term debt, excluding the long-term debt associated with the Companys
self-sustaining International business segment, are included in net earnings in
the current period. Previously, gains or losses on the translation of long-term
debt were deferred and amortized over the remaining term of the debt. The
effect of this change for the year ended December 31, 2002 was an increase
(decrease) in net earnings of $19 million (2001  $(58) million) from the net
earnings that would have been reported under the former accounting policy. The
change also resulted in a decrease in deferred charges and other assets of $187
million, a decrease in future income taxes of $3 million and a decrease in
shareholders equity of $184 million as of December 31, 2001.  8 
   Note
3  SEGMENTED
INFORMATION  Prior
to 2003, the Company reported its operating activities through two Upstream
segments and a Downstream segment. Effective January 1, 2003 the reported
segments were changed and now comprise four Upstream segments and a Downstream
segment. Prior years segmented information has been restated to conform with
the current year presentation.  Upstream
operations include the exploration, development, production, transportation and
marketing activities for crude oil, natural gas and natural gas liquids and oil
sands. The North American Gas segment includes activity in Western Canada, the
Mackenzie Delta, offshore Nova Scotia and Alaska. The East Coast Oil segment
comprises activity offshore Newfoundland and includes interests in the Hibernia
and Terra Nova oil field operations as well as an interest in the White Rose
oil field currently under development. The Oil Sands segment includes an
interest in the Syncrude oil sands mining operation as well as the MacKay River
in situ oil sands operation. The
International segment includes activity, primarily in the United Kingdom, the
Netherlands, Trinidad, Venezuela, Syria, Libya, Kazakhstan, Algeria and
Tunisia.  The
Downstream segment includes the purchase and sale of crude oil, the refining of
crude oil products and the distribution and marketing of these and other
purchased products.  All
activities, other than those relating to the Inter-national segment and Alaska,
are conducted within Canada.  Financial
information by business segment is presented in the following table as though
each segment were a separate business entity. Inter-segment transfers of
products, which are accounted for at market value, are eliminated on
consolidation. Shared Services includes investment income, interest expense,
foreign currency translation and general corporate revenue and expense. Shared
Services assets are principally cash and cash equivalents and other general
corporate assets.  UPSTREAMNORTH
  AMERICAN GAS
  
  EAST COAST
  OIL
  
  OIL SANDS2003
  
  2002
  
  2001
  
  2003
  
  2002
  
  2001
  
  2003
  
  2002
  
  2001RevenueSales to customers and other revenues
  
  $
  1 271
  
  $
  787
  
  $
  1 199
  
  $
  795
  
  $
  567
  
  $
  286
  
  $
  64
  
  $
  
  
  $
  5Inter-segment sales
  
  190
  
  183
  
  184
  
  482
  
  379
  
  102
  
  391
  
  406
  
  356Segment Revenue
  
  1 461
  
  970
  
  1 383
  
  1 277
  
  946
  
  388
  
  455
  
  406
  
  361ExpensesCrude oil and product purchases
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Inter-segment transactions
  
  7
  
  3
  
  6
  
  
  
  
  
  
  
  36
  
  
  
  Operating, marketing and general
  
  199
  
  179
  
  195
  
  112
  
  92
  
  41
  
  316
  
  238
  
  222Exploration
  
  146
  
  206
  
  144
  
  47
  
  17
  
  21
  
  23
  
  23
  
  29Depreciation, depletion and amortization
  
  263
  
  257
  
  231
  
  261
  
  220
  
  104
  
  178
  
  30
  
  32Foreign currency translation
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Interest
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  615
  
  645
  
  576
  
  420
  
  329
  
  166
  
  553
  
  291
  
  283Earnings before
  income taxes
  
  846
  
  325
  
  807
  
  857
  
  617
  
  222
  
  (98
  )
  115
  
  78Provision for
  income taxesCurrent
  
  227
  
  268
  
  483
  
  313
  
  172
  
  13
  
  (20
  )
  (26
  )
  6Future
  
  107
  
  (122
  )
  (168
  )
  (49
  )
  15
  
  41
  
  (28
  )
  62
  
  13334
  
  146
  
  315
  
  264
  
  187
  
  54
  
  (48
  )
  36
  
  19Net Earnings
  
  $
  512
  
  $
  179
  
  $
  492
  
  $
  593
  
  $
  430
  
  $
  168
  
  $
  (50
  )
  $
  79
  
  $
  59Capital and
  Exploration ExpendituresProperty, plant and equipment and
  exploration expenditures
  
  $
  560
  
  $
  530
  
  $
  548
  
  $
  344
  
  $
  289
  
  $
  279
  
  $
  448
  
  $
  462
  
  $
  304Deferred charges and other assets
  
  4
  
  (3
  )
  
  
  4
  
  
  
  
  
  
  
  
  
  Acquisition of oil and gas operations of
  Veba Oil & Gas GmbH, including goodwill
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  $
  564
  
  $
  527
  
  $
  548
  
  $
  348
  
  $
  289
  
  $
  279
  
  $
  448
  
  $
  462
  
  $
  304Cash Flow (before
  changes in non-cash working capital)
  
  $
  985
  
  $
  534
  
  $
  651
  
  $
  869
  
  $
  687
  
  $
  338
  
  $
  127
  
  $
  196
  
  $
  136Total Assets
  
  $
  2 301
  
  $
  2 240
  
  $
  2 129
  
  $
  2 247
  
  $
  2 209
  
  $
  2 090
  
  $
  1 746
  
  $
  1 473
  
  $
  899  9 
    INTERNATIONAL
  
  DOWNSTREAM
  
  SHARED
  SERVICES
  
  CONSOLIDATED2003
  
  2002
  
  2001
  
  2003
  
  2002
  
  2001
  
  2003
  
  2002
  
  2001
  
  2003
  
  2002
  
  2001RevenueSales to customers and other revenues
  
  $
  1 945
  
  $
  1 239
  
  $
  20
  
  $
  8 145
  
  $
  7 318
  
  $
  7 158
  
  $
  1
  
  $
  6
  
  $
  68
  
  $
  12 221
  
  $
  9 917
  
  $
  8 736Inter-segment sales
  
  
  
  
  
  
  
  7
  
  3
  
  6
  
  
  
  
  
  Segment Revenue
  
  1 945
  
  1 239
  
  20
  
  8 152
  
  7 321
  
  7 164
  
  1
  
  6
  
  68
  
  12 221
  
  9 917
  
  8 736ExpensesCrude oil and product purchases
  
  
  
  
  
  
  
  5 099
  
  4 556
  
  4 687
  
  (1
  )
  
  
  
  
  5 098
  
  4 556
  
  4 687Inter-segment transactions
  
  
  
  
  
  
  
  1 027
  
  968
  
  642
  
  
  
  
  
  Operating, marketing and general
  
  407
  
  288
  
  8
  
  1 299
  
  1 179
  
  1 165
  
  74
  
  60
  
  39
  
  2 407
  
  2 036
  
  1 670Exploration
  
  55
  
  55
  
  51
  
  
  
  
  
  
  
  
  
  
  
  
  
  271
  
  301
  
  245Depreciation, depletion and amortization
  
  444
  
  249
  
  7
  
  392
  
  200
  
  193
  
  1
  
  1
  
  1
  
  1 539
  
  957
  
  568Foreign currency translation
  
  
  
  
  
  
  
  
  
  
  
  
  
  (251
  )
  52
  
  102
  
  (251
  )
  52
  
  102Interest
  
  
  
  
  
  
  
  
  
  
  
  
  
  182
  
  187
  
  135
  
  182
  
  187
  
  135906
  
  592
  
  66
  
  7 817
  
  6 903
  
  6 687
  
  5
  
  300
  
  277
  
  9 246
  
  8 089
  
  7 407Earnings before income taxes
  
  1 039
  
  647
  
  (46
  )
  335
  
  418
  
  477
  
  (4
  )
  (294
  )
  (209
  )
  2 975
  
  1 828
  
  1 329Provision for income taxesCurrent
  
  644
  
  413
  
  (15
  )
  204
  
  242
  
  90
  
  (121
  )
  (110
  )
  (49
  )
  1 247
  
  959
  
  528Future
  
  88
  
  9
  
  (4
  )
  (118
  )
  (81
  )
  86
  
  59
  
  12
  
  (13
  )
  59
  
  (105
  )
  (45
  )732
  
  422
  
  (19
  )
  86
  
  161
  
  176
  
  (62
  )
  (98
  )
  (62
  )
  1 306
  
  854
  
  483Net Earnings
  
  $
  307
  
  $
  225
  
  $
  (27
  )
  $
  249
  
  $
  257
  
  $
  301
  
  $
  58
  
  $
  (196
  )
  $
  (147
  )
  $
  1 669
  
  $
  974
  
  $
  846Capital and Exploration ExpendituresProperty, plant and equipment and exploration
  expenditures
  
  $
  525
  
  $
  221
  
  $
  153
  
  $
  424
  
  $
  344
  
  $
  383
  
  $
  14
  
  $
  15
  
  $
  14
  
  $
  2 315
  
  $
  1 861
  
  $
  1 681Deferred charges and other assets
  
  
  
  
  
  (6
  )
  53
  
  27
  
  16
  
  86
  
  48
  
  
  
  147
  
  72
  
  10Acquisition of oil and gas operations of Veba Oil
  & Gas GmbH, including goodwill
  
  
  
  2 234
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  2 234
  
  $
  525
  
  $
  2 455
  
  $
  147
  
  $
  477
  
  $
  371
  
  $
  399
  
  $
  100
  
  $
  63
  
  $
  14
  
  $
  2 462
  
  $
  4 167
  
  $
  1 691Cash Flow (before changes in non-cash working capital)
  
  $
  890
  
  $
  583
  
  $
  27
  
  $
  601
  
  $
  380
  
  $
  589
  
  $
  (100
  )
  $
  (104
  )
  $
  (53
  )
  $
  3 372
  
  $
  2 276
  
  $
  1 688Total Assets
  
  $
  3 883
  
  $
  3 544
  
  $
  186
  
  $
  3 838
  
  $
  3 841
  
  $
  3 556
  
  $
  575
  
  $
  132
  
  $
  774
  
  $
  14 590
  
  $
  13 439
  
  $
  9 634  10 
   Note
4  GAINS
(LOSSES) ON DISPOSAL OF ASSETS  Investment
and other income includes net gains (losses) on disposal of $42 million (2002 
$(2) million; 2001  $49 million).  Note
5  ASSET
WRITEDOWNS  Following
a review of its Eastern Canada refining and supply operations, Petro-Canada
announced in September, 2003 it will be ceasing its Oakville refining
operations and expanding the existing terminalling facilities. The total charge
to earnings related to the shutdown, which is expected to occur
December 31, 2004, will be approximately $200 million after-tax including
approximately $160 million for asset write-downs and increased depreciation,
$20 million for de-commissioning costs and $20 million for employee related
costs. For the year ended December 31, 2003 $250 million has been recorded
to the following expenses in the Downstream segment:  Pre-Tax
  
  After TaxOperating, marketing and general expense
  (de-commissioning and employee related costs)
  
  $
  54
  
  $
  32Depreciation and amortization expense (asset
  write-downs and increased depreciation)
  
  196
  
  119$
  250
  
  $
  151  Depreciation,
depletion and amortization expense for the year ended December 31, 2003
also includes charges of $46 million ($46 million after-tax) relating to the
impairment of assets in Kazakhstan and $136 million ($82 million after-tax)
relating mainly to engineering costs incurred in finalizing the Companys
strategy for converting the Edmonton refinery to process an oil sands
feedstock. The charges were recorded in the International and Oil Sands
segments respectively.  Note
6  FOREIGN
CURRENCY TRANSLATION  Foreign
currency translation consists of:  2003
  
  2002
  
  2001(Gain) loss on translation of foreign currency
  denominated long-term debt (1)
  
  $
  (251
  )
  $
  (11
  )
  $
  102Loss on translation of International business
  segment(Note 2)
  
  
  
  63
  
  $
  (251
  )
  $
  52
  
  $
  102  
 (1)Gains or losses on foreign currency
denominated long-term debt associated with the self-sustaining International
business segment are deferred and included as part of shareholders equity.  11 
   Note
7  INCOME
TAXES  The
computation of the provision for income taxes, which requires adjustment to
earnings before income taxes for non-taxable and non-deductible items, is as
follows:  2003
  
  2002
  
  2001Earnings before income taxes
  
  $
  2 975
  
  $
  1 828
  
  $
  1 329Add (deduct):Non-deductible royalties and other payments to
  provincial governments, net
  
  392
  
  277
  
  413Resource allowance
  
  (542
  )
  (467
  )
  (476
  )Equity in earnings of affiliates
  
  (11
  )
  (9
  )
  (9
  )Non-taxable foreign exchange
  
  (237
  )
  52
  
  87Other
  
  28
  
  (3
  )
  (1
  )Earnings as adjusted before income taxes
  
  $
  2 605
  
  $
  1 678
  
  $
  1 343Canadian Federal income tax rate
  
  38.0
  %
  38.0
  %
  38.0
  %Income tax on earnings as adjusted at Canadian
  Federal income tax rate
  
  $
  990
  
  $
  638
  
  $
  510Large Corporations Tax
  
  16
  
  16
  
  15Provincial and other income taxes, net of federal
  abatement
  
  17
  
  27
  
  49Future income taxes (decrease) increase due to
  federal and provincial rate changes
  
  (45
  )
  4
  
  (61
  )Higher foreign income tax rates
  
  337
  
  176
  
  Income tax credits and other
  
  (9
  )
  (7
  )
  (30
  )Provision for income taxes
  
  $
  1 306
  
  $
  854
  
  $
  483Effective income tax rate on earnings before income
  taxes
  
  43.9
  %
  46.7
  %
  36.3
  %  Future
income taxes consists of the following future income tax liabilities (assets)
relating to temporary differences for:  2003
  
  2002Property, plant and equipment
  
  $
  1 975
  
  $
  1 992Partnership income (1)
  
  381
  
  278Inventories
  
  (134
  )
  (161
  )Deferred credits and other liabilities
  
  (224
  )
  (191
  )Deferred charges and other assets
  
  43
  
  18Loss carryforwards and other
  
  (211
  )
  (115
  )$
  1 830
  
  $
  1 821  
 (1)Taxable income for certain Canadian Upstream
activities are generated by a partnership and the related taxes will be
included in current income taxes in the next year.  Deferred distribution taxes associated with
International business operations have not been recorded. Based on current
plans, repatriation of funds in excess of foreign reinvestment will not result
in material additional tax expense.  Complex
income tax issues which involve interpretations of continually changing
regulations are encountered in computing the provision for income taxes.
Management believes that adequate provision has been made for all such
outstanding issues.  12 
   Note
8  EARNINGS
PER SHARE  The
weighted average number of common shares outstanding used in the calculation of
basic earnings per share and diluted earnings per share, assuming that all
dilutive outstanding stock options were exercised, was:  2003
  
  2002
  
  2001Average shares outstanding(millions)Basic
  
  264.9
  
  262.8
  
  264.9Diluted
  
  267.9
  
  265.7
  
  267.4  For
the year ended December 31, 2003 no stock options (2002  375 700 stock
options with an exercise price of $45.68; 2001  nil) were excluded in the
diluted earnings per share calculation. Stock options are excluded when the
exercise price exceeds the average share price in a respective period.  Note
9  ITEMS NOT
AFFECTING CASH FLOW  2003
  
  2002
  
  2001Depreciation, depletion and amortization
  
  $
  1 539
  
  $
  957
  
  $
  568Future income taxes
  
  59
  
  (105
  )
  (45
  )Provision for future removal and site restoration
  costs
  
  70
  
  27
  
  17(Gain) loss on translation of foreign currency
  denominated long-term debt
  
  (251
  )
  (11
  )
  102(Gain) loss on disposal of assets
  
  (42
  )
  2
  
  (49
  )Amortization of debt issue costs
  
  22
  
  14
  
  1Other
  
  35
  
  27
  
  3Foreign currency losses
  
  
  
  90
  
  $
  1 432
  
  $
  1 001
  
  $
  597  Note
10  (INCREASE)
DECREASE IN NON-CASH WORKING CAPITAL AND OTHER  2003
  
  2002
  
  2001Operating activities and otherAccounts receivable
  
  $
  93
  
  $
  (268
  )
  $
  465Inventories
  
  34
  
  (74
  )
  Prepaid expenses
  
  3
  
  9
  
  5Accounts payable and accrued liabilities
  
  (219
  )
  467
  
  (433
  )Income taxes payable
  
  37
  
  (313
  )
  40Current portion of long-term liabilities and other
  
  (112
  )
  (47
  )
  (22
  )$
  (164
  )
  $
  (226
  )
  $
  55Investing activitiesAccounts receivable
  
  $
  
  
  $
  
  
  $
  64Accounts payable and accrued liabilities
  
  94
  
  (16
  )
  32$
  94
  
  $
  (16
  )
  $
  96Financing activitiesAccounts receivable
  
  $
  
  
  $
  
  
  $
  2Accounts payable and accrued liabilities
  
  
  
  
  
  (2
  )$
  
  
  $
  
  
  $
    Non-cash
working capital is comprised of current assets and current liabilities other
than cash and cash equivalents and current portion of long-term debt.  13 
   Note
11  ACQUISITION
OF OIL AND GAS OPERATIONS OF VEBA OIL & GAS GMBH  On
May 2, 2002 the Company acquired the shares of companies holding the majority
of the international oil and gas operations of Veba Oil & Gas GmbH and on
December 10, 2002 the Company acquired certain of the remaining operations
which were subject to rights of first refusal. The total acquisition cost,
consisting of cash consideration and acquisition costs, was $2 234 million and
the results of these operations have been included in the consolidated
financial statements from the dates of acquisition.  The
acquisition was accounted for by the purchase method of accounting and the
allocation of fair value to the assets acquired and liabilities assumed was:  Property, plant and equipment
  
  $
  2 012Goodwill
  
  709Current assets, excluding cash of $15
  million
  
  640Deferred charges and other assets
  
  6Total assets acquired
  
  3 367Current liabilities
  
  634Future income taxes
  
  387Deferred credits and other liabilities
  
  112Total liabilities assumed
  
  1 133Net assets acquired
  
  $
  2 234  Goodwill,
which is not tax deductible, was assigned to the Companys International
business segment.  Funds
for the acquisition were provided from credit facilities arranged with certain
banks (Note 16) and from cash and cash equivalents.  Note
12  CASH AND
CASH EQUIVALENTS  Short-term
investments are considered to be cash equivalents and are recorded at cost,
which approximates market value.  2003
  
  2002Cash
  
  $
  60
  
  $
  139Less: outstanding cheques
  
  39
  
  16721
  
  (28
  )Short-term investments
  
  614
  
  262$
  635
  
  $
  234  Cash
payments for interest and income taxes were as follows:  2003
  
  2002
  
  2001Interest
  
  $
  156
  
  $
  178
  
  $
  158Income taxes
  
  $
  1 232
  
  $
  1 172
  
  $
  483  14 
   Note
13  INVENTORIES  2003
  
  2002Crude oil, refined products and merchandise
  
  $
  394
  
  $
  429Materials and supplies
  
  157
  
  156$
  551
  
  $
  585  Note
14  PROPERTY,
PLANT AND EQUIPMENT  2003
  
  2002
  
  2003
  
  2002Cost
  
  Accumulated
  Depreciation,
  Depletion and
  Amortization
  
  Net
  
  Cost
  
  Accumulated
  Depreciation,
  Depletion and
  Amortization
  
  Net
  
  Expenditures
  on Property,
  Plant and Equipment(1)UpstreamCanadaNorth American Gas
  
  $
  4 158
  
  $
  2 082
  
  $
  2 076
  
  $
  3 905
  
  $
  1 914
  
  $
  1 991
  
  $
  414
  
  $
  324East Coast Oil
  
  2 934
  
  820
  
  2 114
  
  2 637
  
  562
  
  2 075
  
  297
  
  272Oil Sands
  
  2 189
  
  563
  
  1 626
  
  1 905
  
  523
  
  1 382
  
  425
  
  439International
  
  2 898
  
  549
  
  2 349
  
  2 373
  
  296
  
  2 077
  
  470
  
  16612 179
  
  4 014
  
  8 165
  
  10 820
  
  3 295
  
  7 525
  
  1 606
  
  1 201DownstreamRefining
  
  3 167
  
  1 690
  
  1 477
  
  2 867
  
  1 423
  
  1 444
  
  303
  
  222Marketing and other
  
  2 273
  
  1 192
  
  1 081
  
  2 208
  
  1 133
  
  1 075
  
  121
  
  1225 440
  
  2 882
  
  2 558
  
  5 075
  
  2 556
  
  2 519
  
  424
  
  344Other property, plant and
  equipment
  
  449
  
  413
  
  36
  
  443
  
  403
  
  40
  
  14
  
  15$
  18 068
  
  $
  7 309
  
  $
  10 759
  
  $
  16 338
  
  $
  6 254
  
  $
  10 084
  
  $
  2 044
  
  $
  1 560  Interest
capitalized during 2003 amounted to $7 million (2002  $4 million; 2001  $16
million).  Costs
of $314 million (2002  $638 million) relating to the Upstream International
operations and $422 million (2002  $250 million) relating to non-producing
East Coast Oil projects are not currently being depleted.  Capital
leases at a net cost of $70 million (2002  $74 million) and $29 million (2002
 $31 million) are included in the assets of East Coast Oil and Oil Sands,
respectively (Note 16).  
 (1)Exploration expenses of $271 million (2002 
$301 million; 2001  $245 million) charged to earnings are reclassified from
operating activities and included with expenditures on property, plant and
equipment and exploration under investing activities in the Consolidated
Statement of Cash Flows.  Note
15  DEFERRED
CHARGES AND OTHER ASSETS  2003
  
  2002Investments
  
  $
  72
  
  $
  77Deferred pension funding
  
  49
  
  34Deferred financing costs
  
  97
  
  36Other long-term assets
  
  98
  
  65$
  316
  
  $
  212  15 
   Note
16  LONG -
TERM DEBT  Maturity
  
  2003
  
  2002Debentures and notes5.35% unsecured senior notes (1)
  (U.S. $300 million)
  
  2033
  
  $
  388
  
  $
  7.00% unsecured debentures
  (U.S. $250 million)
  
  2028
  
  323
  
  3957.875% unsecured debentures
  (U.S. $275 million)
  
  2026
  
  355
  
  4349.25% unsecured debentures
  (U.S. $300 million)
  
  2021
  
  388
  
  4744.00% unsecured senior notes (1)
  (U.S. $300 million)
  
  2013
  
  388
  
  Capital leases(Note 14)(2)
  
  2007-2017
  
  94
  
  115Acquisition credit facilities(3)
  
  2005
  
  293
  
  1 6392 229
  
  3 057Current portion
  
  
  
  (6
  )
  (356
  )$
  2 223
  
  $
  2 701  Interest
on long-term debt was $177 million in 2003 (2002  $182 million; 2001  $134
million).  
 (1)In anticipation of issuing these senior notes, the Company entered into
interest rate derivatives which resulted in effective interest rates of 6.073%
for the 5.35% notes due in 2033 and 4.838% for the 4.00% notes due in 2013. (2)The Company is party to a transportation agreement to transport bitumen
from the MacKay River production facilities to the Athabasca Pipeline Terminal.
The agreement is for an initial term of fifteen years ending in 2017 and is
extendable at the Companys option for an additional ten years. The Company is party to an agreement for the time
charter and operation of a vessel for the transportation of East Coast Canada
crude oil production. The agreement is for an initial term of 10 years ending
in 2007 and extendable at the Companys option for up to an additional 15
years. The transportation and time charter agreements are
accounted for as capital leases and have implicit rates of interest of 14.65%
and 11.90%, respectively. The aggregate remaining repayments under the
transportation and time charter agreements are $94 million, including the
following amounts in the next five years: 2004  $6 million, 2005  $7 million,
2006  $8 million, 2007  $8 million, 2008  $2 million. (3)The Company established two unsecured credit facilities with certain
banks for the acquisition of the oil and gas operations of Veba Oil & Gas
GmbH (Note 11). The credit facilities totalled $3 320 million of which $2 100
million was drawn in the form of floating rate Canadian dollar bankers
acceptances in 2002. During 2003 and 2002 the Company repaid $1 807 million and
cancelled an additional $770 million of the facilities which reduced the amount
of the facilities to $743 million at December 31, 2003, of which $293
million is outstanding and repayable in 2005.  Note
17  DEFERRED
CREDITS AND OTHER LIABILITIES  2003
  
  2002Future removal and site restoration costs
  
  $
  382
  
  $
  344Post-retirement benefits
  
  153
  
  143Long-term liabilities
  
  153
  
  134$
  688
  
  $
  621  16 
   Note
18  SHAREHOLDERS
EQUITY  2003
  
  2002Common shares
  
  $
  1 308
  
  $
  1 258Contributed surplus
  
  2 147
  
  2 138Retained earnings
  
  3 943
  
  2 380Foreign currency translation adjustment(Note 2)
  
  323
  
  $
  7 721
  
  $
  5 776   The
authorized share capital is comprised of an unlimited number of:  (a)  Preferred
shares issuable in series designated as Senior Preferred Shares (b)  Preferred
shares issuable in series designated as Junior Preferred Shares (c)  Common
shares  Changes
in common shares and contributed surplus were as follows:  2003
  
  2002Shares
  
  Amount
  
  Contributed
  Surplus
  
  Shares
  
  Amount
  
  Contributed
  SurplusBalance at beginning of year
  
  263 594 977
  
  $
  1 258
  
  $
  2 138
  
  262 191 041
  
  $
  1 228
  
  $
  2 138Issued for cash under employee stock option and
  share purchase plans
  
  1 991 116
  
  50
  
  
  
  1 403 936
  
  30
  
  Stock-based compensation
  
  
  
  
  
  9
  
  
  
  
  
  Balance at end of year
  
  265 586 093
  
  $
  1 308
  
  $
  2 147
  
  263 594 977
  
  $
  1 258
  
  $
  2 138  The
Company repurchased common shares under a Normal Course Issuer Bid that
commenced on November 1, 2000 and ended on October 31, 2001. During
2001 9 429 755 shares were purchased for a total of $362 million. The excess of
purchase cost over the carrying amount of the shares purchased was recorded as
a reduction of contributed surplus.  Stock Option Plan  The
Company maintains a stock option plan and may grant options to officers and certain
employees for up to 22 million common shares. The stock options have a term of
10 years, vest over periods of up to four years and are exercisable at the
market prices for the shares on the dates that the options were granted.  Changes
in the number of outstanding stock options were as follows:  2003
  
  2002Number
  
  Weighted-Average
  Exercise Price
  
  Number
  
  Weighted-Average
  Exercise Price(dollars)
  
  
  
  (dollars)Balance at beginning of year
  
  8 225 984
  
  $
  30
  
  7 216 770
  
  $
  26Granted
  
  2 481 000
  
  51
  
  2 482 700
  
  36Exercised
  
  (1 991 116
  )
  25
  
  (1 403 936
  )
  22Cancelled
  
  (95 275
  )
  41
  
  (69 550
  )
  30Balance at end of year
  
  8 620 593
  
  $
  37
  
  8 225 984
  
  $
  30  17 
   The
following stock options were outstanding as at December 31, 2003:  Options
  Outstanding
  
  Options
  ExercisableNumber
  
  Range of
  Exercise Prices
  
  Weighted-Average
  Life
  
  Weighted-Average
  Exercise Price
  
  Number
  
  Weighted-Average
  Exercise Price(dollars)
  
  (years)
  
  (dollars)
  
  
  
  (dollars)541 762
  
  
  $
  11 to 18
  
  4.6
  
  $
  16
  
  541 762
  
  $
  161 067 315
  
  
  19 to 25
  
  5.5
  
  21
  
  862 030
  
  212 400 592
  
  
  26 to 35
  
  7.5
  
  33
  
  960 217
  
  312 199 324
  
  
  36 to 46
  
  7.3
  
  38
  
  1 004 050
  
  382 411 600
  
  
  47 to 51
  
  9.1
  
  51
  
  
  
  8 620 593
  
  
  $
  11 to 51
  
  7.9
  
  $
  37
  
  3 368 059
  
  $
  28  The
following table presents the pro forma net earnings and the pro forma earnings
per share computed assuming the fair value based accounting method had been
used to account for the compensation cost of stock options granted in 2002.  Earnings
  per Share
  
  
  
  Earnings
  per Share2003
  Net Earnings
  
  Basic
  
  Diluted
  
  2002
  Net Earnings
  
  Basic
  
  Diluted(dollars)
  
  (dollars)
  
  
  
  (dollars)
  
  (dollars)Net earnings as reported
  
  $
  1 669
  
  $
  6.30
  
  $
  6.23
  
  $
  974
  
  $
  3.71
  
  $
  3.67Pro forma adjustment
  
  8
  
  0.03
  
  0.03
  
  6
  
  0.03
  
  0.03Pro forma net earnings
  
  $
  1 661
  
  $
  6.27
  
  $
  6.20
  
  $
  968
  
  $
  3.68
  
  $
  3.64  The
estimated fair value of stock options granted in 2003, which is charged to
earnings (Notes 1(m) and 2), was $17.50 per share. The estimated weighted
average fair value of stock options granted in 2002, which is incorporated in
the pro forma earnings information above, was $12.74 per share. The fair values
have been determined using the Black-Scholes option-pricing model with the
following assumptions:  2003
  
  2002Risk-free interest rate
  
  4.4
  %
  4.9
  %Expected hold period to exercise
  
  6 years
  
  6 yearsVolatility in the market price of common shares
  
  32
  %
  33
  %Estimated annual dividend
  
  1.4
  %
  1.4
  %  18 
   Note
19  EMPLOYEE
FUTURE BENEFITS  The
Company maintains pension plans with defined benefit and defined contribution
provisions, and provides certain health care and life insurance benefits to its
qualifying retirees. The actuarially determined cost of these benefits is
accrued over the estimated service life of employees. The defined benefit
provisions are generally based upon years of service and average salary during
the final years of employment. Certain defined benefit options require employee
contributions and the balance of the funding for the registered plans is
provided by the Company, based upon the advice of an independent actuary. The
defined contribution option provides for an annual contribution of 5% to 8% of
each participating employees pensionable earnings. Substantially all of the
pension assets are invested in equity, fixed income and other marketable
securities.  Pension
  Plans
  
  Other Post-Retirement
  PlansBenefit Plan Expense
  
  2003
  
  2002
  
  2001
  
  2003
  
  2002
  
  2001(a) Defined benefit plansEmployer current service cost
  
  $
  27
  
  $
  25
  
  $
  22
  
  $
  4
  
  $
  3
  
  $
  2Interest cost
  
  78
  
  74
  
  70
  
  12
  
  11
  
  11Expected return on plan assets
  
  (65
  )
  (83
  )
  (88
  )
  
  
  
  
  Amortization of transitional (asset)
  obligation
  
  (5
  )
  (5
  )
  (5
  )
  2
  
  2
  
  2Amortization of net actuarial losses
  
  26
  
  7
  
  
  
  
  
  
  
  61
  
  18
  
  (1
  )
  18
  
  16
  
  15(b) Defined contribution plans
  
  11
  
  10
  
  7Total expense
  
  $
  72
  
  $
  28
  
  $
  6
  
  $
  18
  
  $
  16
  
  $
  15Benefit Plan Funding
  
  $
  86
  
  $
  22
  
  $
  9
  
  $
  8
  
  $
  7
  
  $
  7  Pension
  Plans
  
  Other
  Post-
  Retirement PlansFinancial Status of Defined
  Benefit Plans
  
  2003
  
  2002
  
  2003
  
  2002Fair value of plan assets
  
  $
  1 052
  
  $
  927
  
  $
  
  
  $
  Accrued benefit obligation
  
  1 344
  
  1 206
  
  211
  
  186Funded status  plan deficit(1)
  
  (292
  )
  (279
  )
  (211
  )
  (186
  )Unamortized transitional (asset) obligation
  
  (34
  )
  (39
  )
  19
  
  21Unamortized net actuarial losses
  
  375
  
  352
  
  39
  
  22Accrued benefit asset (liability)
  
  $
  49
  
  $
  34
  
  $
  (153
  )
  $
  (143
  )Reconciliation of Plan AssetsFair value of plan assets at beginning of
  year
  
  $
  927
  
  $
  1 039
  
  $
  
  
  $
  Acquisition
  
  
  
  26
  
  
  
  Contributions
  
  86
  
  22
  
  8
  
  7Benefits paid
  
  (63
  )
  (61
  )
  (8
  )
  (7
  )Actual gain (loss) on plan assets
  
  115
  
  (91
  )
  
  
  Other
  
  (13
  )
  (8
  )
  
  
  Fair value of plan assets at end of year
  
  $
  1 052
  
  $
  927
  
  $
  
  
  $
  Reconciliation of Accrued Benefit
  ObligationAccrued benefit obligation at beginning of
  year
  
  $
  1 206
  
  $
  1 119
  
  $
  186
  
  $
  172Acquisition
  
  
  
  33
  
  
  
  Current service cost
  
  27
  
  25
  
  4
  
  3Interest cost
  
  78
  
  74
  
  12
  
  11Benefits paid
  
  (63
  )
  (61
  )
  (8
  )
  (7
  )Actuarial losses
  
  99
  
  12
  
  17
  
  7Other
  
  (3
  )
  4
  
  
  
  Accrued benefit obligation at end of year
  
  $
  1 344
  
  $
  1 206
  
  $
  211
  
  $
  186  
 (1) The pension and other post-retirement plans
included in the financial status information are not fully funded.  19 
   Defined Benefit Plan Assumptions
  
  2003
  
  2002
  
  2001Year-end obligation discount rate
  
  6.0
  %
  6.5
  %
  6.5
  %Long-term rate of return on plan assets
  
  7.5
  %
  8.0
  %
  8.0
  %Rate of compensation increase, excluding
  merit increases
  
  3.0
  %
  3.0
  %
  3.0
  %Annual increase in the per capita cost of:Medical benefits
  
  7.5
  %(1)
  7.5
  %
  7.5
  %Dental benefits
  
  3.5
  %
  3.5
  %
  3.5
  %  
 (1) 4.5% in 2009 and thereafter.  Note
20  FINANCIAL
INSTRUMENTS  The
Company is exposed to market risks resulting from fluctuations in commodity
prices, foreign exchange rates and interest rates in the course of its normal
business operations. The Company monitors its exposure to market fluctuations
and may use derivative instruments to manage these risks, as it considers
appropriate. These derivative instruments are entered into solely for hedging
purposes.  Crude Oil and Products  The
Company enters into forward contracts and options to reduce exposure to
Downstream margin fluctuations, including margins on fixed price product sales,
and short-term price fluctuations on the purchase of foreign and domestic crude
oil and refined products.  Natural Gas  The
Company enters into forward contracts to purchase natural gas to manage its
exposure on fixed price sales of natural gas and to manage its fuel costs on
fixed price product sales.  Currency  The
Company enters into forward contracts to reduce its exposure to exchange rate
movements between the Canadian dollar and the foreign currency related to fixed
price product sales. There were no currency derivatives in place as at
December 31, 2003.  Interest Rates  In
anticipation of issuing U.S. dollar notes in 2003, the Company entered into
interest rate derivatives to hedge a portion of its exposure to adverse
interest rate fluctuations. The Company also implements short duration Forward
Rate Agreements to manage interest rate exposure on floating rate debt. There
were no interest rate derivatives in place as at December 31, 2003.  20 
   The
Companys outstanding contracts for derivative instruments and the related fair
values at December 31, 2003
were as follows:  Quantity
  
  Average
  Price(1)
  
  Fair
  Value
  
  MaturityCrude Oil and Products(millions of barrels)Crude oil purchase
  
  2.2
  
  $
  35.31
  
  $
  8
  
  2004/2005Products purchase
  
  1.2
  
  $
  31.08
  
  1
  
  2004Natural Gas  (billions of cubic feet)Natural gas purchase
  
  0.4
  
  $
  6.14
  
  
  
  2004$
  9  
 (1) Canadian dollars per barrel or per thousand cubic
feet, as applicable.  Derivative
instruments involve a degree of credit risk. The Company controls this risk
through the establishment of credit policies and limits which are applied in
the selection of counterparties. Market risk relating to changes in value or
settlement cost of the Companys derivative instruments is essentially offset
by gains or losses on the hedged positions.  The
fair value, the related method of determination and the carrying value of the
Companys financial instruments were as follows:  Current Assets/Current Liabilities  The
fair value of financial instruments included in current assets and current
liabilities, excluding the current portion of long-term debt, approximates the
carrying amount of these instruments due to their short maturity.  Long-Term Debt  The
fair value of long-term debt is based on publicly quoted market values.  Derivative Instruments  The
fair value of derivative instruments, which is based on quotes provided by
brokers, represents an approximation of amounts that would be received or paid
to counterparties to settle these instruments prior to maturity. The Company
plans to hold all derivative instruments outstanding at December 31, 2003
to maturity.  2003
  
  2002Carrying
  Amount
  
  Fair Value
  
  Carrying
  Amount
  
  Fair ValueFinancial instruments included in current assets
  and current liabilities
  
  $
  316
  
  $
  316
  
  $
  (71
  )
  $
  (71
  )Long-term debt
  
  $
  (2 229
  )
  $
  (2 432
  )
  $
  (3 057
  )
  $
  (3 358
  )Derivative instruments
  
  $
  
  
  $
  9
  
  $
  
  
  $
  (5
  )  21 
   Note
21  RELATED
PARTY TRANSACTIONS  Transactions
with the Government of Canada (which holds 19% of the Companys issued shares
at December 31, 2003), its agencies and other related parties, are in the
normal course of business and are therefore on the same terms as those accorded
to non-related parties.  Note
22  COMMITMENTS
AND CONTINGENT LIABILITIES  (a)
The Company has leased property and equipment under various long-term operating
leases for periods up to 2013. The minimum annual rentals for non-cancellable
operating leases are estimated at $115 million in 2004, $90 million in 2005,
$78 million in 2006, $69 million in 2007, $60 million in 2008 and $55 million
per year thereafter until 2013.  (b)
The Company is involved in litigation and claims associated with normal
operations. Management is of the opinion that any resulting settlements would
not materially affect the financial position of the Company.  Note
23  GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED STATES  The
Companys Consolidated Financial Statements have been prepared in accordance
with Canadian GAAP, which differ in some respects from those applicable in the
United States. The following are the significant differences in accounting
principles as they pertain to the accompanying Consolidated Financial
Statements:  (a) Income TaxesThis liability method followed by the Company
differs from United States GAAP due to the application of transitional
provisions upon adoption, the use of substantive versus enacted tax rates and
the accounting for certain Canadian income tax credits and allowances.  (b) Interest
CapitalizationUnited States GAAP requires that interest be capitalized as part of the
cost of certain assets while they are being prepared for their intended use.
The Company capitalizes interest attributable to the construction of major new
facilities and does not capitalize interest on all assets that would require
interest capitalization under United States GAAP.  (c) Contributed SurplusIn prior years the Company transferred amounts
from contributed surplus to the accumulated deficit. Under United States GAAP
these transfers would not have occurred.  (d) Derivative Instruments and
HedgingUnder
United States GAAP the accounting for derivative instruments and hedging
activities is contained in the Statement of Financial Accounting Standards No.
133 (SFAS 133). SFAS 133 establishes accounting and reporting standards
requiring that all derivative instruments be recorded in the balance sheet as
either an asset or a liability measured at fair value and requires that changes
in the fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. For cash flow hedges, changes in the fair value of
the derivative instrument are recognized in net earnings in the same period as
the hedged item and any changes in the fair value prior to that period are
recognized in other comprehensive income. For fair value hedges, both the
derivative instrument and the underlying commitment are recognized on the
balance sheet at their fair value and any changes in the fair value are
recognized currently in net earnings.  (e) Minimum Pension
LiabilityUnited
States GAAP requires a minimum pension liability be recorded for underfunded
pension plans. The change in the minimum liability, representing the excess of
unfunded accumulated benefit obligations over previously recorded pension cost
liabilities, is recognized in other comprehensive income.  22 
   (f) Comprehensive IncomeUnited States GAAP utilizes the concept of
comprehensive income, which includes net earnings and other comprehensive
income. There is no similar concept under Canadian GAAP. Other comprehensive
income represents the change in equity during the period from transactions and
other events from non-owner sources and includes such items as changes in the
fair value of cash flow hedges, minimum pension liability adjustments and
certain foreign currency translation adjustments.  (g) Asset Retirement
ObligationsUnder
United States GAAP the accounting for asset retirement obligations is contained
in the Statement of Financial Accounting Standards No. 143 (SFAS 143). SFAS
143 requires companies to record the fair value of legal obligations associated
with the retirement of tangible long-lived assets. These obligations are
recorded as liabilities on a discounted basis when incurred and amounts
recorded for the related assets are increased by the amount of these
liabilities. Over time the liabilities are accreted for the change in their
present value and the initial capitalized costs are depreciated over the useful
lives of the related assets. Under current Canadian GAAP and previous United
States GAAP, asset retirement obligations are accrued on an undiscounted unit
of production or straight line basis over the life of the asset. A liability is
not recorded under either United States or Canadian GAAP for assets with an
indeterminate useful life.  SFAS
143 was effective January 1, 2003 for United States GAAP purposes and the
cumulative effect adjustment from initial application is charged to net
earnings under United States GAAP in the current year. Changes to Canadian
accounting standards, effective January 1, 2004, are expected to eliminate
this GAAP difference in future years.  The
application of United States GAAP would have the following effects on earnings
as reported:  2003
  
  2002
  
  2001Net earnings as reported in the consolidated
  statement of earnings
  
  $
  1 669
  
  $
  974
  
  $
  846Adjustments, before income taxesCapitalization of interest and related amortization
  
  21
  
  25
  
  53Accounting for income taxes
  
  (9
  )
  (111
  )
  (51
  )Asset retirement obligations
  
  (15
  )
  
  
  Other
  
  
  
  (3
  )
  (4
  )Income taxes on above items
  
  9
  
  10
  
  3Net earnings, as adjusted before cumulative effect
  of change in accounting policy
  
  1 675
  
  895
  
  847Cumulative effect of change in accounting policy,
  net of income taxes
  
  (114
  )
  
  
  Net earnings, as adjusted
  
  $
  1 561
  
  $
  895
  
  $
  847Earnings, as adjusted before cumulative effect of
  change in accounting policy per shareBasic
  
  $
  6.32
  
  $
  3.41
  
  $
  3.20Diluted
  
  $
  6.25
  
  $
  3.37
  
  $
  3.17Earnings, as adjusted per shareBasic
  
  $
  5.89
  
  $
  3.41
  
  $
  3.20Diluted
  
  $
  5.83
  
  $
  3.37
  
  $
  3.17Comprehensive IncomeNet earnings, as adjusted
  
  $
  1 561
  
  $
  895
  
  $
  847Unrealized gain (loss) on financial derivatives
  
  8
  
  4
  
  (7
  )Minimum pension liability
  
  (11
  )
  (111
  )
  Foreign currency translation adjustment
  
  323
  
  
  
  $
  1 881
  
  $
  788
  
  $
  840  23 
   The
application of United States GAAP would have the following effects on the
consolidated balance sheets as reported:  December 31,
  2003
  
  December 31,
  2002As
  Reported
  
  United
  States
  GAAP
  
  As
  Reported
  
  United
  States
  GAAPCurrent assets
  
  $
  2 705
  
  $
  2 705
  
  $
  2 434
  
  $
  2 434Property, plant and equipment, net
  
  10 759
  
  11 521
  
  10 084
  
  10 662Goodwill
  
  810
  
  789
  
  709
  
  688Deferred charges and other assets
  
  316
  
  314
  
  212
  
  209Current liabilities
  
  2 128
  
  2 119
  
  2 520
  
  2 525Long-term debt
  
  2 223
  
  2 223
  
  2 701
  
  2 701Deferred credits and other liabilities
  
  688
  
  1 209
  
  621
  
  808Future income taxes
  
  1 830
  
  2 058
  
  1 821
  
  2 073Common shares
  
  1 308
  
  1 308
  
  1 258
  
  1 258Contributed surplus
  
  2 147
  
  3 269
  
  2 138
  
  3 260Retained earnings
  
  3 943
  
  2 937
  
  2 380
  
  1 482Foreign currency translation adjustment
  
  323
  
  
  
  
  
  Accumulated other comprehensive income
  (loss)
  
  $
  
  
  $
  206
  
  $
  
  
  $
  (114
  )  Recent Accounting Pronouncements  United
States GAAP requires the disclosure of accounting pronouncements that have been
issued but are not yet effective for the Companys reporting. The following
applicable accounting pronouncement has been recently issued:  Variable Interest Entities  In
January, 2003 the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 Consolidation of Variable Interest Entities (FIN 46).
FIN 46 provides criteria for identifying variable interest entities (VIEs)
and further criteria for determining what entity, if any, should consolidate
them. In general, VIEs are entities that either do not have equity investors
with voting rights or have equity investors that do not provide sufficient
financial resources for the entity to support its activities. In
December 2003, the FASB issued FIN 46(R) to clarify some of the provisions
of FIN 46 and to exempt certain entities from its requirements. FIN 46 is
effective to the Company beginning January 1, 2004. The Company does not
expect there to be any material impact on its United States GAAP consolidated
financial
statements when FIN 46 is adopted.  24