Exhibit 99.1   PETRO-CANADA CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2004


MANAGEMENTS RESPONSIBILITYFOR 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
which are based on managements best judgments. Information contained elsewhere
in the Annual Report is consistent, where applicable, with that contained in
the financial statements.  Management is also
responsible for 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 2004.  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 only
non-audit service provided was the licensing of access to industry databases
and the Company cancelled those licences in 2004. The Company engaged
PricewaterhouseCoopers LLP as contract auditor to provide internal audit
services.  The Board of Directors is
responsible for overseeing managements performance of its responsibilities for
financial reporting and internal control. The Board of Directors exercises this
responsibility with the assistance of the Audit, Finance and Risk Committee of
the Board of Directors.  Ron A. Brenneman
  E.F.H. RobertsPresident
  and Chief Executive Officer
  Executive
  Vice-President and Chief Financial OfficerFebruary 16, 2005   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 six) 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 of Directors 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 of Directors. The Committee discusses the external auditors independence
from management and the Company with the auditors and receives written
confirmation of their independence. The Committee also recommends to the Board
of Directors the external auditors to be appointed by the shareholders and
approves in advance fees for the external auditors services.  With respect to the contract
auditors engagement to provide internal audit services, the Committee reviews
the engagement contract, reviews and approves the scope and plan for the
internal audit, receives periodic reports and reviews significant findings and
recommendations. The contract auditor reports to the Committee and to the Board
of Directors.  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.  Paul D. MelnukChairman
  of the Audit, Finance and Risk CommitteeFebruary 16, 2005  42


AUDITORS
REPORTS  To the
Shareholders of Petro-Canada:  We have audited the Consolidated
Balance Sheet of Petro-Canada as at December 31, 2004 and 2003 and the
Consolidated Statements of Earnings, Retained Earnings and Cash Flows for each
of the years in the three-year period ended December 31, 2004. 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, 2004 and 2003 and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2004 in accordance with Canadian generally
accepted accounting principles.  The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion.   Deloitte & Touche LLPChartered
  AccountantsCalgary,
  Alberta, CanadaFebruary 16, 2005  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 been
implemented in the financial statements, such as the changes described in Note
2 to the Consolidated Financial Statements of Petro-Canada. Our report to the
shareholders dated February 16, 2005 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.   Deloitte & Touche LLPChartered
  AccountantsCalgary,
  Alberta, CanadaFebruary 16, 2005  43


Consolidated Statement of Earnings  (stated in
millions of Canadian dollars, except per share amounts)  For the years ended December
  31,
  
  2004
  
  2003
  
  2002(Note 2)
  
  (Note 2)REVENUEOperating
  
  $
  14,687
  
  $
  12,887
  
  $
  10,374Investment and other income(Note 4)
  
  (310
  )
  12
  
  14,377
  
  12,899
  
  10,374EXPENSESCrude oil and product purchases
  
  6,740
  
  5,620
  
  4,837Operating, marketing and general(Note 5)
  
  2,690
  
  2,557
  
  2,222Exploration(Note 15)
  
  235
  
  271
  
  301Depreciation, depletion and amortization(Notes 5 and 15)
  
  1,402
  
  1,560
  
  977Foreign currency translation(Note 6)
  
  (77
  )
  (251
  )
  52Interest
  
  142
  
  182
  
  18711,132
  
  9,939
  
  8,576EARNINGS BEFORE INCOME TAXES
  
  3,245
  
  2,960
  
  1,798PROVISION FOR INCOME TAXES(Note
  7)Current
  
  1,461
  
  1,247
  
  959Future
  
  27
  
  63
  
  (116
  )1,488
  
  1,310
  
  843NET EARNINGS
  
  $
  1,757
  
  $
  1,650
  
  $
  955EARNINGS PER SHARE
  (Note 8)Basic
  
  $
  6.64
  
  $
  6.23
  
  $
  3.63Diluted
  
  $
  6.55
  
  $
  6.16
  
  $
  3.59  Consolidated Statement of
Retained Earnings  (stated in
millions of Canadian dollars)  For the years ended December
  31,
  
  2004
  
  2003
  
  2002(Note 2)
  
  (Note 2)RETAINED EARNINGS AT BEGINNING OF YEAR,
  as previously reported
  
  $
  3,943
  
  $
  2,380
  
  $
  1,511Retroactive application of change in
  accounting for asset retirement obligations(Note 2)
  
  (133
  )
  (114
  )
  (95
  )RETAINED EARNINGS AT BEGINNING OF YEAR, as restated
  
  $
  3,810
  
  $
  2,266
  
  $
  1,416Net earnings
  
  1,757
  
  1,650
  
  955Dividends on common shares
  
  (159
  )
  (106
  )
  (105
  )RETAINED EARNINGS AT END OF YEAR
  
  $
  5,408
  
  $
  3,810
  
  $
  2,266  44


Consolidated Statement of Cash
Flows  (stated in
millions of Canadian dollars)  For the years ended December
  31,
  
  2004
  
  2003
  
  2002(Note 2)
  
  (Note 2)OPERATING ACTIVITIESNet earnings
  
  $
  1,757
  
  $
  1,650
  
  $
  955Items not affecting cash flow from
  operating activities before changes in non-cash working capital(Note 9)
  
  1,755
  
  1,451
  
  1,020Exploration expenses(Note 15)
  
  235
  
  271
  
  301Cash flow from operating activities before
  changes in non-cash working capital
  
  3,747
  
  3,372
  
  2,276Proceeds from sale of accounts receivable(Note 11)
  
  399
  
  
  
  (Increase) decrease in other non-cash
  working capital related to operating activities(Note 10)
  
  133
  
  (164
  )
  (226
  )Cash flow from operating activities
  
  4,279
  
  3,208
  
  2,050INVESTING ACTIVITIESExpenditures on property, plant and
  equipment and exploration(Note 15)
  
  (4,073
  )
  (2,315
  )
  (1,861
  )Proceeds from sales of assets
  
  44
  
  165
  
  26Increase in deferred charges and other
  assets
  
  (36
  )
  (147
  )
  (72
  )Acquisition of Prima Energy Corporation(Note 12)
  
  (644
  )
  
  
  Acquisition of oil and gas operations of
  Veba Oil & Gas GmbH(Note 12)
  
  
  
  
  
  (2,234
  )(Increase) decrease in non-cash working
  capital related to investing activities(Note 10)
  
  10
  
  94
  
  (16
  )(4,699
  )
  (2,203
  )
  (4,157
  )FINANCING ACTIVITIESIncrease in short-term notes payable
  
  314
  
  
  
  Proceeds from issue of long-term debt
  
  533
  
  804
  
  2,100Repayment of long-term debt
  
  (299
  )
  (1,352
  )
  (465
  )Proceeds from issue of common shares
  
  39
  
  50
  
  30Purchase of common shares(Note 20)
  
  (447
  )
  
  
  Dividends on common shares
  
  (159
  )
  (106
  )
  (105
  )Increase in non-cash working capital
  related to financing activities(Note 10)
  
  (26
  )
  
  
  (45
  )
  (604
  )
  1,560INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS
  
  (465
  )
  401
  
  (547
  )CASH AND CASH EQUIVALENTS AT BEGINNING OF
  YEAR
  
  635
  
  234
  
  781CASH AND CASH EQUIVALENTS AT END OF YEAR(Note
  13)
  
  $
  170
  
  $
  635
  
  $
  234  45


Consolidated Balance Sheet  (stated in
millions of Canadian dollars)  As at December 31,
  
  2004
  
  2003(Note 2)ASSETSCURRENT ASSETSCash and cash equivalents(Note 13)
  
  $
  170
  
  $
  635Accounts receivable(Note 11)
  
  1,254
  
  1,503Inventories(Note 14)
  
  549
  
  551Prepaid expenses
  
  13
  
  161,986
  
  2,705PROPERTY, PLANT AND EQUIPMENT, NET(Note
  15)
  
  14,783
  
  10,943GOODWILL (Note 12)
  
  986
  
  810DEFERRED CHARGES AND OTHER ASSETS(Note 16)
  
  345
  
  316$
  18,100
  
  $
  14,774LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued liabilities
  
  $
  2,223
  
  $
  1,822Income taxes payable
  
  370
  
  300Short-term notes payable
  
  299
  
  Current portion of long-term debt(Note 17)
  
  6
  
  62,898
  
  2,128LONG-TERM DEBT  (Note 17)
  
  2,275
  
  2,223OTHER LIABILITIES  (Note 18)
  
  646
  
  306ASSET RETIREMENT OBLIGATIONS
  (Note 19)
  
  834
  
  773FUTURE INCOME TAXES
  (Note 7)
  
  2,708
  
  1,756COMMITMENTS AND CONTINGENT LIABILITIES(Note 25)SHAREHOLDERS EQUITY
  (Note 20)
  
  8,739
  
  7,588$
  18,100
  
  $
  14,774   Approved on behalf of the
  Board of DirectorsRon A. Brenneman
  Brian F. MacNeillDirector
  Director  46


Notes to Consolidated Financial
Statements  (stated in
millions of Canadian dollars, unless otherwise stated)  Note 1SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES  (a) Basis of
Presentation  The 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 Note 26 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 the
Consolidated Financial Statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
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. Significant estimates used in the preparation
of the financial statements include, but are not limited to, the estimates of
oil and gas reserves, asset retirement obligations, income taxes and employee
future benefits.  (b) Revenue Recognition  Revenue 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. Inter-segment
sales are accounted for at market values and included, for segmented reporting,
in revenues of the segment making the transfer and expenses of the segment
receiving the transfer; these amounts are eliminated on consolidation.  International operations
conducted pursuant to exploration and production-sharing agreements (EPSAs) are
reflected in the Consolidated Financial Statements based on the Companys
working interest in such operations. Under the EPSAs, 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 Translation  Monetary 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
business segment and the U.S. Rockies upstream operations included in the North
American Natural Gas business segment are operated on a self-sustaining basis.
Assets and liabilities of these segments, 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.  47


(d) Income Taxes  The 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 Share  Basic earnings per share are calculated by dividing the net earnings
available to common shareholders by the weighted-average number of common
shares outstanding. Diluted earnings per share reflect the potential dilution
that would occur if stock options, excluding stock options with a cash payment
alternative, 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 Equivalents  Cash and cash equivalents comprise cash in banks, less outstanding
cheques, and short-term investments with a maturity of less than 90 days when
purchased. Short-term investments are recorded at the lower of cost or market
value.  (g) Sale of Accounts Receivable  The transfers of accounts receivable are accounted for as sales, other
than the retained interest, when the Company has surrendered control over the
transferred receivables and received proceeds. Gains or losses are recognized
as other income or expenses and are dependent upon the purchase discount as
well as the previous carrying amount of the receivables transferred, which is
allocated between the receivables sold and the retained interest, based on
their relative fair values at the date of the transfer. Fair value is
determined based on the present value of future expected cash flows.  (h) Inventories  Inventories 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.  (i) Investments  Investments 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.  (j) Property, Plant and Equipment  Investments 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. 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. If required, the impairment recorded is the amount by which the carrying
value of the asset exceeds its fair value.  48


(k) Depreciation, Depletion and Amortization  Depreciation 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.  Deferred financing costs are
amortized over the term of the related liability.  Costs associated with
significant development projects are not depleted until commencement of
commercial production.  (l) Asset
Retirement Obligations  The fair values of estimated
asset retirement obligations are recorded as liabilities when incurred and the
associated cost is capitalized as part of the cost of the related asset. 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. The associated accretion is recorded in operating expense and
the depreciation is included in depreciation, depletion and amortization
expense.  Asset retirement obligations
for Downstream sites are provided when the incurrence is established as a
result of a legal obligation to restore the site or when the Company intends to
restore the site.  Asset retirement obligations
are not recorded for those assets which have an indeterminate useful life.  (m) Goodwill  Goodwill is the excess purchase price over the fair value of
identifiable assets and liabilities acquired. Goodwill impairment is assessed
annually at year end, or more frequently 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.  (n) Stock-Based Compensation  The Company maintains stock option, performance share unit and deferred
stock unit plans as described in Note 21 to the Consolidated Financial
Statements.  The Company accounts for
stock options granted prior to 2003 based on the intrinsic value at the grant
date, which does not result in a charge to earnings because the exercise price
was equal to the market price at grant date.  Stock options granted in 2003
are accounted for using the fair value method. Fair values are determined, at
the grant date, using the Black-Scholes option pricing model. The compensation
expense associated with these options 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.  Stock options granted
subsequent to 2003, which provide the holder with a cash payment alternative,
are accounted for based on the intrinsic value at each period end whereby a
liability and expense are recorded over the vesting period in the amount by
which the then current market price exceeds the option exercise price.  Performance share units
(PSUs) are accounted for on a mark-to-market basis over the term of the PSUs
whereby a liability and expense are recorded based on the number of PSUs
outstanding, the current market price of the Companys shares and the Companys
current total shareholder return relative to the selected industry peer group.  Deferred stock units (DSUs)
are accounted for on a mark-to-market basis whereby a liability and expense are
recorded each period based on the number of DSUs outstanding and the current
market price of the Companys shares.  49


(o) Employee
Future Benefits  The Companys employee future benefit programs consist of both defined
benefit and defined contribution pension plans, as well as other
post-retirement benefits as described in Note 22 to the Consolidated Financial
Statements.  The 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 pro rated 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. Company contributions to the defined contribution
plan are expensed as incurred.  (p) Hedging and Derivative Financial Instruments  The 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 speculative purposes and a system of controls is maintained that
includes a policy covering the authorization, reporting and monitoring of
derivative activity.  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
derivatives 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 designated as hedges for accounting purposes are recorded on the
Consolidated Balance Sheet at fair value with any resulting gain or loss
recognized in the Consolidated Statement of Earnings in the current period.  50


Note 2CHANGES IN ACCOUNTING
POLICIES  Asset
Retirement Obligations  Effective January 1, 2004,
the Company retroactively adopted the new standard of the Canadian Institute of
Chartered Accountants (CICA) on accounting for asset retirement obligations.
The new standard requires the fair values of asset retirement obligations to be
recorded as liabilities when incurred and the related assets be 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. Asset retirement
obligations are not recorded for those assets which have an indeterminate
useful life. The change results in a decrease in net earnings of $4 million for
the year ended December 31, 2004 (decrease in net earnings of $19 million for
the year ended December 31, 2003 and $19 million for the year ended December
31, 2002). The change also resulted, at December 31, 2004, in an increase in
asset retirement obligations of $403 million (increase of $391 million as at
December 31, 2003), an increase in property, plant and equipment of $189
million (increase of $184 million as at December 31, 2003), a decrease in
retained earnings of $137 million (decrease of $133 million as at December 31,
2003) and a decrease in future income taxes of $77 million (decrease of $74
million as at December 31, 2003).  Reclassification
of Costs  Pursuant to the new CICA
section 1100 Generally Accepted Accounting Principles, which provides
guidance on the sources to consult when selecting accounting policies, the
Company began accounting, effective January 1, 2004, for certain transportation
costs, third-party gas purchases and diluent purchases as expenses in the
Consolidated Statement of Earnings. Previously, these costs were netted against
revenue. Prior years comparatives have been restated. The change in accounting
has no effect on net earnings but has increased revenue and expenses as
follows:  2004
  
  2003
  
  2002Operating revenue
  
  $
  801
  
  $
  678
  
  $
  457Crude oil and product purchases
  
  650
  
  522
  
  281Operating, marketing and general
  
  151
  
  156
  
  176Net earnings
  
  $
  
  
  $
  
  
  $
    Hedging
Relationships  Effective January 1, 2004, the
Company adopted Accounting Guideline 13 (AcG 13) Hedging Relationships which
resulted in changes to the conditions as to when hedge accounting may be
obtained. As a result, certain of the Companys risk management derivative
instruments no longer qualify as accounting hedges and are accounted for as
required under Emerging Issues Committee (EIC) 128, Accounting for Trading,
Speculative or Non-Hedging Derivative Financial Instruments. EIC 128 requires
that all derivative instruments that do not qualify or are not designated as a
hedge under AcG 13 be recorded on the balance sheet at fair value as either an
asset or liability with changes in fair value recognized in earnings (see Note
23 to the Consolidated Financial Statements).  Employee
Future Benefits  The Company has adopted the
amendments made to CICA handbook section 3461, Employee Future Benefits. The
amendments require additional disclosures (see Note 22 to the Consolidated
Financial Statements) and have no effect on the financial results of the
Company.  51


Note 3SEGMENTED INFORMATION  The Company is an integrated
oil and gas company with a portfolio of businesses spanning both the upstream
and downstream sectors of the industry. The Company conducts its business
through five major operating business segments along with Shared Services.
Upstream activities are conducted through four business segments, which include
North American Natural Gas, East Coast Oil, Oil Sands and International; Downstream
operations comprise the fifth business segment.  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 Natural Gas segment includes activity in Western Canada, the
U.S. Rockies, the Mackenzie Delta/Corridor, Offshore Nova Scotia and Alaska.
The East Coast Oil segment comprises activity Offshore Newfoundland and
Labrador, and includes interests in the Hibernia and Terra Nova oilfield
operations as well as an interest in the White Rose oilfield currently under
development. The Oil Sands segment includes an interest in the Syncrude oil
sands mining operation as well as the MacKay River in situoil sands operation. The International segment
includes activity primarily in the United Kingdom, The Netherlands, Trinidad,
Venezuela, Syria, Libya, Algeria and Tunisia.  The Downstream business
segment includes the purchase and sale of crude oil, the refining of crude oil
products and the distribution and marketing of these and other purchased
products. Financial information by business segment is presented in the
following table as though each segment 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
  NATURAL GAS
  
  EAST COAST OIL
  
  OIL SANDS2004
  
  2003
  
  2002
  
  2004
  
  2003
  
  2002
  
  2004
  
  2003
  
  2002Revenue(1),
  (2)Sales to customers and other revenues
  
  $
  1,773
  
  $
  1,756
  
  $
  1,185
  
  $
  911
  
  $
  817
  
  $
  618
  
  $
  412
  
  $
  235
  
  $
  8Inter-segment sales
  
  215
  
  190
  
  183
  
  527
  
  482
  
  379
  
  548
  
  391
  
  406Segment revenue
  
  1,988
  
  1,946
  
  1,368
  
  1,438
  
  1,299
  
  997
  
  960
  
  626
  
  414ExpensesCrude oil and product purchases
  
  359
  
  366
  
  278
  
  
  
  
  
  
  
  291
  
  156
  
  3Inter-segment transactions
  
  9
  
  7
  
  3
  
  5
  
  
  
  
  
  49
  
  36
  
  Operating, marketing and general
  
  379
  
  330
  
  309
  
  120
  
  121
  
  141
  
  362
  
  332
  
  245Exploration
  
  119
  
  146
  
  206
  
  2
  
  47
  
  17
  
  16
  
  23
  
  23Depreciation, depletion and amortization
  
  321
  
  269
  
  264
  
  268
  
  267
  
  225
  
  69
  
  179
  
  30Foreign currency translation
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Interest
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  1,187
  
  1,118
  
  1,060
  
  395
  
  435
  
  383
  
  787
  
  726
  
  301Earnings before income taxes
  
  801
  
  828
  
  308
  
  1,043
  
  864
  
  614
  
  173
  
  (100
  )
  113Provision for income taxesCurrent
  
  330
  
  227
  
  268
  
  323
  
  313
  
  172
  
  (71
  )
  (20
  )
  (26
  )Future
  
  (29
  )
  109
  
  (128
  )
  9
  
  (46
  )
  14
  
  124
  
  (28
  )
  61301
  
  336
  
  140
  
  332
  
  267
  
  186
  
  53
  
  (48
  )
  35Net earnings
  
  $
  500
  
  $
  492
  
  $
  168
  
  $
  711
  
  $
  597
  
  $
  428
  
  $
  120
  
  $
  (52
  )
  $
  78Capital and exploration expendituresProperty, plant and equipment and
  exploration expenditures
  
  $
  724
  
  $
  560
  
  $
  530
  
  $
  278
  
  $
  344
  
  $
  289
  
  $
  399
  
  $
  448
  
  $
  462Deferred charges and other assets
  
  6
  
  4
  
  (3
  )
  1
  
  4
  
  
  
  
  
  
  
  Acquisition of oil and gas operations of
  Veba Oil & Gas GmbH, including goodwill
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Acquisition of Prima Energy Corporation, including
  goodwill
  
  644
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  $
  1,374
  
  $
  564
  
  $
  527
  
  $
  279
  
  $
  348
  
  $
  289
  
  $
  399
  
  $
  448
  
  $
  462Cash flow from operating activities before
  changes in non-cash working capital
  
  $
  940
  
  $
  985
  
  $
  534
  
  $
  996
  
  $
  869
  
  $
  687
  
  $
  334
  
  $
  127
  
  $
  196Total assets(3)
  
  $
  3,477
  
  $
  2,341
  
  $
  2,285
  
  $
  2,265
  
  $
  2,288
  
  $
  2,249
  
  $
  1,883
  
  $
  1,770
  
  $
  1,498  52


UPSTREAMINTERNATIONAL
  
  DOWNSTREAM
  
  SHARED SERVICES
  
  CONSOLIDATED2004
  
  2003
  
  2002
  
  2004
  
  2003
  
  2002
  
  2004
  
  2003
  
  2002
  
  2004
  
  2003
  
  2002Revenue(1), (2)Sales to
  customers and other revenues
  
  $
  1,851
  
  $
  1,945
  
  $
  1,239
  
  $
  9,420
  
  $
  8,145
  
  $
  7,318
  
  $
  10
  
  $
  1
  
  $
  6
  
  $
  14,377
  
  $
  12,899
  
  $
  10,374Inter-segment
  sales
  
  
  
  
  
  
  
  14
  
  7
  
  3
  
  
  
  
  
  Segment revenue
  
  1,851
  
  1,945
  
  1,239
  
  9,434
  
  8,152
  
  7,321
  
  10
  
  1
  
  6
  
  14,377
  
  12,899
  
  10,374ExpensesCrude oil and
  product purchases
  
  
  
  
  
  
  
  6,093
  
  5,099
  
  4,556
  
  (3
  )
  (1
  )
  
  
  6,740
  
  5,620
  
  4,837Inter-segment
  transactions
  
  
  
  
  
  
  
  1,241
  
  1,027
  
  968
  
  
  
  
  
  Operating,
  marketing and general
  
  437
  
  407
  
  288
  
  1,328
  
  1,293
  
  1,179
  
  64
  
  74
  
  60
  
  2,690
  
  2,557
  
  2,222Exploration
  
  98
  
  55
  
  55
  
  
  
  
  
  
  
  
  
  
  
  
  
  235
  
  271
  
  301Depreciation,
  depletion and amortization
  
  466
  
  444
  
  249
  
  277
  
  400
  
  208
  
  1
  
  1
  
  1
  
  1,402
  
  1,560
  
  977Foreign currency
  translation
  
  
  
  
  
  
  
  
  
  
  
  
  
  (77
  )
  (251
  )
  52
  
  (77
  )
  (251
  )
  52Interest
  
  
  
  
  
  
  
  
  
  
  
  
  
  142
  
  182
  
  187
  
  142
  
  182
  
  1871,001
  
  906
  
  592
  
  8,939
  
  7,819
  
  6,911
  
  127
  
  5
  
  300
  
  11,132
  
  9,939
  
  8,576Earnings
  before income taxes
  
  850
  
  1,039
  
  647
  
  495
  
  333
  
  410
  
  (117
  )
  (4
  )
  (294
  )
  3,245
  
  2,960
  
  1,798Provision
  for income taxesCurrent
  
  727
  
  644
  
  413
  
  226
  
  204
  
  242
  
  (74
  )
  (121
  )
  (110
  )
  1,461
  
  1,247
  
  959Future
  
  (52
  )
  88
  
  9
  
  (45
  )
  (119
  )
  (84
  )
  20
  
  59
  
  12
  
  27
  
  63
  
  (116
  )675
  
  732
  
  422
  
  181
  
  85
  
  158
  
  (54
  )
  (62
  )
  (98
  )
  1,488
  
  1,310
  
  843 Net
  earnings
  
  $
  175
  
  $
  307
  
  $
  225
  
  $
  314
  
  $
  248
  
  $
  252
  
  $
  (63
  )
  $
  58
  
  $
  (196
  )
  $
  1,757
  
  $
  1,650
  
  $
  955Capital
  and exploration expendituresProperty, plant
  and equipment and exploration expenditures
  
  $
  1,824
  
  $
  525
  
  $
  221
  
  $
  839
  
  $
  424
  
  $
  344
  
  $
  9
  
  $
  14
  
  $
  15
  
  $
  4,073
  
  $
  2,315
  
  $
  1,861Deferred charges
  and other assets
  
  
  
  
  
  
  
  26
  
  53
  
  27
  
  3
  
  86
  
  48
  
  36
  
  147
  
  72Acquisition of
  oil and gas operations of Veba Oil & Gas GmbH, including goodwill
  
  
  
  
  
  2,234
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  2,234Acquisition of
  Prima Energy Corporation, including goodwill
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  644
  
  
  
  $
  1,824
  
  $
  525
  
  $
  2,455
  
  $
  865
  
  $
  477
  
  $
  371
  
  $
  12
  
  $
  100
  
  $
  63
  
  $
  4,753
  
  $
  2,462
  
  $
  4,167Cash
  flow from operating activities before changes in non-cash working capital
  
  $
  1,027
  
  $
  890
  
  $
  583
  
  $
  556
  
  $
  601
  
  $
  380
  
  $
  (106
  )
  $
  (100
  )
  $
  (104
  )
  $
  3,747
  
  $
  3,372
  
  $
  2,276Total
  assets(3)
  
  $
  5,954
  
  $
  3,973
  
  $
  3,544
  
  $
  4,462
  
  $
  3,827
  
  $
  3,836
  
  $
  59
  
  $
  575
  
  $
  132
  
  $
  18,100
  
  $
  14,774
  
  $
  13,544  
 (1)There were no customers that represented 10%
or more of the Companys consolidated revenues for the periods presented. (2)North American Natural Gas revenue for 2004
includes $54 million (2003  nil; 2002  nil) attributable to the U.S. Rockies
operations. (3)North American Natural Gas assets include $919
million (2003  $6 million; 2002  $7 million) attributable to the U.S. Rockies
and Alaska operations.  53


Note 4INVESTMENT AND OTHER INCOME  Investment and other income
includes $329 million (2003  nil; 2002  nil) for unrealized losses on
derivative contracts, of which $333 million (2003  nil; 2002  nil) relates to
the outstanding Buzzard derivative contracts (see Note 23 to the Consolidated
Financial Statements), and $12 million (2003  $42 million; 2002  $(2)
million) for net gains (losses) on disposal of assets.  Note 5ASSET 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 now expected to occur in the first half of
2005, is approximately $200 million after-tax. The following expenses have been
recorded in the Downstream segment:  2004
  
  2003Pre-Tax
  
  After-Tax
  
  Pre-Tax
  
  After-TaxOperating, marketing and general expense
  (de-commissioning and employee related costs)
  
  $
  3
  
  $
  2
  
  $
  54
  
  $
  32Depreciation and amortization expense
  (asset write-downs and increased depreciation)
  
  71
  
  44
  
  196
  
  119$
  74
  
  $
  46
  
  $
  250
  
  $
  151  Depreciation, depletion and
amortization expense for the year ended December 31, 2003 also includes $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 and charges of $46 million ($46 million after-tax)
relating to the impairment of assets in Kazakhstan. The charges were recorded
in the Oil Sands and International business segments respectively.  Note 6FOREIGN CURRENCY TRANSLATION  Foreign currency translation
consists of:  2004
  
  2003
  
  2002Gain on translation of foreign currency
  denominated long-term debt(1)
  
  $
  (77
  )
  $
  (251
  )
  $
  (11
  )Loss on translation of International
  business segment(2)
  
  
  
  
  
  63$
  (77
  )
  $
  (251
  )
  $
  52  
 (1)Gains or losses on foreign currency denominated long-term debt
associated with the self-sustaining International business segment and the U.S.
Rockies operations included in the North American Natural Gas business segment
are deferred and included as part of shareholders equity. (2)Prior to 2003, the International business segment did not operate on a
self-sustaining basis. Gains and losses from translation of its financial
statements and associated long-term debt into Canadian dollars were included in
the Consolidated Statement of Earnings.  54


Note 7INCOME 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:  2004
  
  2003
  
  2002Earnings before income taxes
  
  $
  3,245
  
  $
  2,960
  
  $
  1,798Add (deduct):Non-deductible royalties and other payments
  to provincial governments, net
  
  352
  
  392
  
  277Resource allowance
  
  (512
  )
  (542
  )
  (467
  )Equity in earnings of affiliates
  
  (15
  )
  (11
  )
  (9
  )Non-taxable foreign exchange
  
  (40
  )
  (237
  )
  52Other
  
  5
  
  28
  
  (3
  )Earnings as adjusted before income taxes
  
  $
  3,035
  
  $
  2,590
  
  $
  1,648Canadian Federal income tax rate
  
  38.0
  %
  38.0
  %
  38.0
  %Income tax on earnings as adjusted at
  CanadianFederal income tax rate
  
  $
  1,153
  
  $
  984
  
  $
  626Large Corporations Tax
  
  17
  
  16
  
  16Provincial income taxes
  
  271
  
  194
  
  130Federal  abatement and other credits
  
  (274
  )
  (167
  )
  (102
  )Future income taxes (decrease) increase due
  to federal and provincial rate changes
  
  (13
  )
  (45
  )
  4Higher foreign income tax rates
  
  357
  
  337
  
  176Income tax credits and other
  
  (23
  )
  (9
  )
  (7
  )Provision for income taxes
  
  $
  1,488
  
  $
  1,310
  
  $
  843Effective income tax rate on earnings
  before income taxes
  
  45.9
  %
  44.3
  %
  46.9
  %  Future income taxes consists
of the following future income tax liabilities (assets) relating to temporary
differences for:  2004
  
  2003Property, plant and equipment
  
  $
  2,961
  
  $
  2,010Partnership income(1)
  
  404
  
  381Inventories
  
  (184
  )
  (134
  )Asset retirement obligations and other
  liabilities
  
  (318
  )
  (333
  )Deferred charges and other assets
  
  55
  
  43Resource allowance and other
  
  (210
  )
  (211
  )$
  2,708
  
  $
  1,756  
 (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 and that the resolution
of these issues would not materially affect the financial position of the
Company.  55


Note 8EARNINGS 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:  2004
  
  2003
  
  2002Average shares outstanding(millions)Basic
  
  264.6
  
  264.9
  
  262.8Diluted
  
  268.1
  
  267.9
  
  265.7  For the year ended December
31, 2004, no stock options (2003  nil stock options; 2002  375,700 stock
options with an exercise price of $45.68) were excluded from the diluted
earnings per share calculation. Stock options are excluded when the exercise
price exceeds the average share price in a respective period. The average share
price in 2002 was $42.70.  Note 9 ITEMS NOT AFFECTING CASH FLOW
FROM OPERATING ACTIVITIES BEFORE CHANGES IN NON-CASH WORKING CAPITAL  2004
  
  2003
  
  2002Depreciation, depletion and amortization
  
  $
  1,402
  
  $
  1,560
  
  $
  977Future income taxes
  
  27
  
  63
  
  (116
  )Accretion of asset retirement obligations
  
  50
  
  64
  
  37Unrealized gain on translation of foreign
  currency denominated long-term debt
  
  (77
  )
  (251
  )
  (11
  )(Gain) loss on disposal of assets
  
  (12
  )
  (42
  )
  2Amortization of debt issue costs
  
  6
  
  22
  
  14Unrealized loss associated with the Buzzard
  derivative contracts
  
  333
  
  
  
  Unrealized foreign currency losses
  
  
  
  
  
  90Other
  
  26
  
  35
  
  27$
  1,755
  
  $
  1,451
  
  $
  1,020  Note 10(INCREASE) DECREASE IN
NON-CASH WORKING CAPITAL  2004
  
  2003
  
  2002Operating activitiesAccounts receivable
  
  $
  (88
  )
  $
  93
  
  $
  (268
  )Inventories
  
  4
  
  34
  
  (74
  )Prepaid expenses
  
  6
  
  3
  
  9Accounts payable and accrued liabilities
  
  247
  
  (219
  )
  467Income taxes payable
  
  71
  
  37
  
  (313
  )Current portion of long-term liabilities
  and other
  
  (107
  )
  (112
  )
  (47
  )$
  133
  
  $
  (164
  )
  $
  (226
  )Investing activitiesAccounts payable and accrued liabilities
  
  $
  10
  
  $
  94
  
  $
  (16
  )Financing activitiesAccounts payable and accrued liabilities
  
  $
  (26
  )
  $
  
  
  $
    Non-cash working capital is
comprised of current assets and current liabilities, other than cash and cash
equivalents and the current portion of long-term debt.  56


Note 11SECURITIZATION PROGRAM  In June 2004, the Company
entered into a securitization program, expiring in 2009, to sell an undivided
interest of eligible accounts receivable up to $400 million to a third party,
on a revolving and fully serviced basis. The service liability has been
estimated to be insignificant. The Company also retains an interest in the
transferred accounts receivable equal to the required reserves amount.  The Company accounts for the
securitization program as a sale, as control over the transferred accounts
receivable is relinquished once proceeds from the third party have been
received. Gains or losses from the sale are recognized in investment and other
income.  As at December 31, 2004, $400
million of outstanding accounts receivable had been sold under the program for
net proceeds of $399 million.  Note 12BUSINESS ACQUISITIONS  Prima Energy
Corporation  On July 28, 2004, the Company
acquired all of the common shares of Prima Energy Corporation (Prima), an oil
and gas company with operations in the U.S. Rockies, for a total acquisition
cost of $644 million, net of cash acquired. The results of operations are
included in the Consolidated Financial Statements from the date of acquisition.
Funding for the acquisition was provided by a $400 million US underwritten
credit facility, cash and cash equivalents and existing committed bank credit
lines.  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 (Veba) 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. Funds for the acquisition were provided from
credit facilities arranged with certain banks and from cash and cash
equivalents.  Both acquisitions were
accounted for by the purchase method of accounting. The allocations of fair
values to the assets acquired and liabilities assumed were:  2004
  
  2002Prima
  
  VebaProperty, plant and equipment
  
  $
  688
  
  $
  2,012Goodwill
  
  193
  
  709Current assets(1)
  
  36
  
  640Deferred charges and other assets
  
  2
  
  6Total assets acquired
  
  919
  
  3,367Current liabilities
  
  41
  
  634Future income taxes
  
  217
  
  387Asset retirement obligations and other
  liabilities
  
  17
  
  112Total liabilities assumed
  
  275
  
  1,133Net assets acquired
  
  $
  644
  
  $
  2,234  
 (1)Current assets exclude cash of $74 million for Prima and $15 million for
Veba.  Goodwill, which is not tax
deductible, was assigned to the Companys North American Natural Gas business
segment for Prima and to the Companys International business segment for Veba.  57


Note 13CASH AND CASH EQUIVALENTS  2004
  
  2003Cash
  
  $
  169
  
  $
  60Less: outstanding cheques
  
  (65
  )
  (39
  )104
  
  21Short-term investments
  
  66
  
  614$
  170
  
  $
  635  Cash payments for interest
and income taxes were as follows:  2004
  
  2003
  
  2002Interest
  
  $
  165
  
  $
  156
  
  $
  178Income taxes
  
  $
  1,477
  
  $
  1,232
  
  $
  1,172  Note 14INVENTORIES  2004
  
  2003Crude oil, refined products and merchandise
  
  $
  383
  
  $
  394Materials and supplies
  
  166
  
  157$
  549
  
  $
  551  Note 15PROPERTY, PLANT AND EQUIPMENT  2004
  
  
  
  
  
  2003
  
  
  
  2004
  
  2003Accumulated
  
  
  
  
  
  Accumulated
  
  
  
  
  
  ExpendituresDepreciation,
  
  
  
  
  
  Depreciation,
  
  
  
  
  
  on Property,Depletion and
  
  
  
  
  
  Depletion and
  
  
  
  
  
  Plant andCost
  
  Amortization
  
  Net
  
  Cost
  
  Amortization
  
  Net
  
  
  
  Equipment(1),(2)UpstreamNorth American Natural Gas
  
  $
  5,521
  
  $
  2,491
  
  $
  3,030
  
  $
  4,299
  
  $
  2,184
  
  $
  2,115
  
  $
  605
  
  $
  414East Coast Oil
  
  3,274
  
  1,094
  
  2,180
  
  2,993
  
  837
  
  2,156
  
  276
  
  297Oil Sands
  
  2,417
  
  628
  
  1,789
  
  2,218
  
  568
  
  1,650
  
  383
  
  425International
  
  5,471
  
  1,011
  
  4,460
  
  2,988
  
  549
  
  2,439
  
  1,726
  
  47016,683
  
  5,224
  
  11,459
  
  12,498
  
  4,138
  
  8,360
  
  2,990
  
  1,606DownstreamRefining
  
  3,372
  
  1,220
  
  2,152
  
  3,178
  
  1,690
  
  1,488
  
  662
  
  303Marketing and other
  
  2,358
  
  1,218
  
  1,140
  
  2,284
  
  1,225
  
  1,059
  
  177
  
  1215,730
  
  2,438
  
  3,292
  
  5,462
  
  2,915
  
  2,547
  
  839
  
  424Other property, plant and equipment
  
  458
  
  426
  
  32
  
  449
  
  413
  
  36
  
  9
  
  14$
  22,871
  
  $
  8,088
  
  $
  14,783
  
  $
  18,409
  
  $
  7,466
  
  $
  10,943
  
  $
  3,838
  
  $
  2,044  
 (1)Exploration expenses of $235 million (2003  $271 million; 2002  $301
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. (2)Expenditures on property, plant and equipment and exploration for the
year ended December 31, 2004 include the Companys purchase of a 29.9% interest
in the Buzzard field and nearby exploration blocks in the U.K. sector of the
North Sea for $1,218 million ($887 million US), net of cash received.  Property, plant and equipment
net cost includes asset retirement costs of $297 million (2003  $292 million).  Interest capitalized during
2004 amounted to $20 million (2003  $7 million; 2002  $4 million).  Costs of $577 million (2003 
$422 million) relating to non-producing East Coast Oil projects, $2,587 million
(2003  $314 million) relating to the International operations and $338 million
(2003  nil) relating to U.S. Rockies operations are currently not being
depleted.  Capital leases at a net cost
of $67 million (2003  $70 million) and $27 million (2003  $29 million) are
included in the assets of East Coast Oil and Oil Sands, respectively (see Note
17 to the Consolidated Financial Statements).  58


Note 16DEFERRED CHARGES AND OTHER
ASSETS  2004
  
  2003Investments
  
  $
  78
  
  $
  72Deferred pension funding
  
  71
  
  49Deferred financing costs
  
  98
  
  97Other long-term assets
  
  98
  
  98$
  345
  
  $
  316  Note 17LONG-TERM DEBT  Maturity
  
  2004
  
  2003Debentures and notes5.35% unsecured senior notes(1)
  ($300 million US)
  
  2033
  
  $
  361
  
  $
  3887.00% unsecured debentures
  ($250 million US)
  
  2028
  
  301
  
  3237.875% unsecured debentures
  ($275 million US)
  
  2026
  
  331
  
  3559.25% unsecured debentures
  ($300 million US)
  
  2021
  
  361
  
  3885.00% unsecured senior notes(2)
  ($400 million US)
  
  2014
  
  481
  
  4.00% unsecured senior notes(1)
  ($300 million US)
  
  2013
  
  361
  
  388Capital leases(Note 15)(3)
  
  2007-2017
  
  85
  
  94Acquisition credit facilities(4)
  
  2005
  
  
  
  2932,281
  
  2,229Current portion
  
  
  
  (6
  )
  (6
  )$
  2,275
  
  $
  2,223  
 (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 established a $400 million US
underwritten credit facility to partially fund the acquisition of Prima Energy
Corporation (see Note 12 to the Consolidated Financial Statements). On November
8, 2004, the Company issued these senior notes, the proceeds of which were used
to repay the credit facility. (3)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 15
years ending in 2017 and is extendable at the Companys option for an
additional 10 years.  The
Company is party to an agreement for the time charter and operation of a vessel
for the transportation of East Coast Oil 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 $85 million, including the following amounts in the next five
years: 2005  $6 million; 2006  $7 million; 2007  $7 million; 2008  $2
million; 2009  $3 million.  (4)The Company established two unsecured credit
facilities with certain banks for the acquisition of the oil and gas operations
of Veba Oil & Gas GmbH (see Note 12 to the Consolidated Financial
Statements). The credit facilities totaled $3,320 million, of which $2,100
million was drawn in the form of floating rate Canadian dollar bankers
acceptances in 2002. At December 31, 2003, the amount of the facilities was
$743 million, of which $293 million was outstanding. During 2004, the Company
sold $400 million under a new accounts receivable securitization program (see
Note 11 to the Consolidated Financial Statements) and a portion of the proceeds
was used to repay the remaining $293 million of advances.  Interest on long-term debt, net of capitalized interest, was $132
million in 2004 (2003  $177 million; 2002  $182 million).  The Companys syndicated
operating credit facilities totaled $1,500 million to be used for general
corporate purposes.  Note 18OTHER LIABILITIES  2004
  
  2003Post-retirement benefits
  
  $
  164
  
  $
  153Unrealized loss on Buzzard derivative
  contracts
  
  333
  
  Other long-term liabilities
  
  149
  
  153$
  646
  
  $
  306  59


Note 19ASSET RETIREMENT OBLIGATIONS  Asset retirement obligations
are recorded for obligations where the Company will be required to retire
tangible long-lived assets such as well sites, offshore production platforms,
natural gas processing plants and marketing sites. Obligations are currently
not recorded for assets, principally refineries, upgrading assets and certain
gas plants, which have an indeterminate life.  The following table summarizes
the changes in the asset retirement obligations:  2004
  
  2003Asset retirement obligations at beginning
  of year
  
  $
  773
  
  $
  642Obligations incurred
  
  67
  
  97Abandonment expenditures
  
  (44
  )
  (33
  )Accretion expense
  
  50
  
  64Other
  
  (12
  )
  3Asset retirement obligations at end of year
  
  $
  834
  
  $
  773  In determining the fair value of the asset retirement obligations, the
estimated cash flows have been discounted at 6.5%. The total undiscounted
amount of the estimated cash flows required to settle the obligations is $2,417
million (2003  $2,121 million). The obligations will be settled on an ongoing
basis over the useful lives of the operating assets, which extend up to 45
years in the future.  Note 20SHAREHOLDERS EQUITY  2004
  
  2003Common shares
  
  $
  1,314
  
  $
  1,308Contributed surplus
  
  1,743
  
  2,147Retained earnings
  
  5,408
  
  3,810Foreign currency translation adjustment
  
  274
  
  323$
  8,739
  
  $
  7,588  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:  2004
  
  
  
  
  
  2003Contributed
  
  
  
  
  
  ContributedShares
  
  Amount
  
  Surplus
  
  Shares
  
  Amount
  
  SurplusBalance at beginning of year
  
  265,586,093
  
  $
  1,308
  
  $
  2,147
  
  263,594,977
  
  $
  1,258
  
  $
  2,138Issued for cash under employee stock option
  and share purchase plans
  
  1,246,000
  
  39
  
  
  
  1,991,116
  
  50
  
  Repurchases of common shares
  
  (6,868,082
  )
  (34
  )
  (413
  )
  
  
  
  
  Stock-based compensation
  
  
  
  1
  
  9
  
  
  
  
  
  9Balance at end of year
  
  259,964,011
  
  $
  1,314
  
  $
  1,743
  
  265,586,093
  
  $
  1,308
  
  $
  2,147  Under the terms of a normal
course issuer bid (NCIB), the Company is entitled to purchase up to 21 million
of its common shares during the period from June 22, 2004 to June 21, 2005,
subject to certain conditions. During 2004, the Company repurchased 6,868,082
common shares under the NCIB at an average price of $65.02 per common share for
a total cost of approximately $447 million. The excess of purchase cost over
the carrying amount of the shares purchased was recorded as a reduction of
contributed surplus.  60


Note 21STOCK BASED COMPENSATION  Stock
Options  The Company maintains a stock
option plan whereby options can be granted to officers and certain employees
for up to 22 million common shares. Stock options have a term of 10 years if
granted prior to 2004 and seven years if granted subsequent to 2003. All stock
options vest over periods of up to four years and are exercisable at the market
prices for the shares on the dates that the options were granted.  During 2004, the Company
amended the option plan to provide the holder of stock options granted
subsequent to 2003 the alternative to exercise these options as a cash payment
alternative (CPA). Where the CPA is chosen, vested options can be surrendered
for cancellation in return for a direct cash payment from the Company based on
the excess of the then market price over the option exercise price.  Changes in the number of
outstanding stock options were as follows:  2004
  
  
  
  2003
  
  
  
  2002Weighted-Average
  
  
  
  Weighted-Average
  
  
  
  Weighted-AverageNumber
  
  Exercise Price
  
  Number
  
  Exercise Price
  
  Number
  
  Exercise Price(dollars)
  
  
  
  (dollars)
  
  
  
  (dollars)Balance at beginning of year
  
  8,620,593
  
  $
  37
  
  8,225,984
  
  $
  30
  
  7,216,770
  
  $
  26Granted
  
  1,836,700
  
  58
  
  2,481,000
  
  51
  
  2,482,700
  
  36Exercised
  
  (1,246,000
  )
  31
  
  (1,991,116
  )
  25
  
  (1,403,936
  )
  22Cancelled
  
  (173,944
  )
  45
  
  (95,275
  )
  41
  
  (69,550
  )
  30Balance at end of year
  
  9,037,349
  
  $
  42
  
  8,620,593
  
  $
  37
  
  8,225,984
  
  $
  30  The following stock options
were outstanding as at December 31, 2004:  Options Outstanding
  
  
  
  Options ExercisableRange of
  
  Weighted-Average
  
  Weighted-Average
  
  
  
  Weighted-AverageNumber
  
  Exercise Prices
  
  Life
  
  Exercise Price
  
  Number
  
  Exercise Price(dollars)
  
  (years)
  
  (dollars)
  
  
  
  (dollars)419,677
  
  $
  11 to 18
  
  1.1
  
  $
  16
  
  419,677
  
  $
  16758,925
  
  19 to 25
  
  4.5
  
  21
  
  758,925
  
  211,976,832
  
  26 to 35
  
  6.5
  
  33
  
  1,175,957
  
  321,850,025
  
  36 to 46
  
  6.3
  
  39
  
  1,305,550
  
  382,217,690
  
  47 to 56
  
  8.1
  
  51
  
  554,423
  
  511,814,200
  
  57 to 67
  
  6.2
  
  57
  
  
  
  9,037,349
  
  $
  11 to 67
  
  6.4
  
  $
  42
  
  4,214,532
  
  $
  33  During 2004, the Company
recorded compensation expense of $10 million (2003  $9 million) relating to
the 2003 stock options and $3 million (2003  nil) relating to options with a
CPA.  61


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.  2004
  
  Earnings per Share
  
  2003
  
  Earnings per Share
  
  2002
  
  Earnings per ShareNet Earnings
  
  Basic
  
  Diluted
  
  Net Earnings
  
  Basic
  
  Diluted
  
  Net Earnings
  
  Basic
  
  Diluted(dollars)
  
  (dollars)
  
  
  
  (dollars)
  
  (dollars)
  
  
  
  (dollars)
  
  (dollars)Net earnings as reported
  
  $
  1,757
  
  $
  6.64
  
  $
  6.55
  
  $
  1,650
  
  $
  6.23
  
  $
  6.16
  
  $
  955
  
  $
  3.63
  
  $
  3.59Pro forma adjustment
  
  9
  
  0.03
  
  0.03
  
  8
  
  0.03
  
  0.03
  
  6
  
  0.02
  
  0.02Pro forma net earnings
  
  $
  1,748
  
  $
  6.61
  
  $
  6.52
  
  $
  1,642
  
  $
  6.20
  
  $
  6.13
  
  $
  949
  
  $
  3.61
  
  $
  3.57  The estimated fair value of stock options granted in 2003, which is
charged to earnings, 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
  %  Performance Share Units  During 2004, the Company implemented a Performance Share Unit (PSU) plan
for officers and other senior management employees. Under the PSU program,
notional share units are awarded and settled in cash at the end of a three-year
period based upon the Companys share price at that time, the value of notional
dividends applied during the period and the Companys total shareholder return
relative to a peer group of North American industry competitors.  Changes in the number of outstanding PSUs were as follows:  NumberBalance at beginning of year
  
  Granted
  
  284,880Expired
  
  Cancelled
  
  (1,950
  )Balance at end of year
  
  282,930  All PSUs outstanding at the
end of the year have a performance period ending in 2007. Based on the
mark-to-market value at December 31, 2004, no compensation expense relating to
PSUs was recorded.  Deferred Share Units  The Company maintains a Deferred Stock Unit (DSU) plan where executive
officers can elect to receive all or a portion of their annual incentive
compensation in the form of DSUs. Under the officer DSU program, notional share
units are issued for the elected amount, which is based on the then current
market price of the Companys common shares. Upon termination or retirement,
the units are settled in cash which includes an amount for the value of
notional dividends earned over the period the units were outstanding.  The Companys Board of
Directors receives a portion of their compensation in the form of DSUs and can
also elect to receive all or a portion of their non-DSU compensation in the
form of DSUs. Under the Director program, notional share units are issued and
settled in cash or common shares, including the value of notional dividends,
upon ceasing to be a Director.  During 2004, no compensation
expense relating to DSUs was recorded (2003  $6 million; 2002  $3 million).  62


Note 22EMPLOYEE FUTURE BENEFITS  The Company maintains pension
plans with defined benefit and defined contribution provisions, and provides
certain health care and life insurance benefits to its qualifying retirees. The
actuarially determined cost of these benefits is accrued over the estimated
service life of employees. The defined benefit provisions are generally based
upon years of service and average salary during the final years of employment.
Certain defined benefit options require employee contributions and the balance
of the funding for the registered plans is provided by the Company, based upon
the advice of an independent actuary. The accrued benefit obligations and the
fair value of plan assets are measured for accounting purposes at December 31
of each year. The most recent actuarial valuation of the pension plan for
funding purposes was as of December 31, 2002 and the next required valuation
will be as of December 31, 2004.  The defined contribution
option provides for an annual contribution of 5% to 8% of each participating
employees pensionable earnings.  Pension Plans
  
  Other Post-Retirement PlansBenefit Plan Expense
  
  2004
  
  2003
  
  2002
  
  2004
  
  2003
  
  2002(a) Defined benefit plansEmployer current service cost
  
  $
  31
  
  $
  27
  
  $
  25
  
  $
  4
  
  $
  4
  
  $
  3Interest cost
  
  81
  
  78
  
  74
  
  13
  
  12
  
  11Actual return on plan assets
  
  (91
  )
  (115
  )
  91
  
  
  
  
  
  Actuarial losses (gains)
  
  97
  
  99
  
  12
  
  (15
  )
  17
  
  7Elements of employee future benefit plan
  expenses before adjustments to recognize the long-term nature of employee
  future benefit plan expenses
  
  118
  
  89
  
  202
  
  2
  
  33
  
  21Difference between actual and expected
  return on plan assets
  
  12
  
  50
  
  (174
  )
  
  
  
  
  Difference between actual and recognized
  actuarial losses in year
  
  (67
  )
  (73
  )
  (5
  )
  16
  
  (17
  )
  (7
  )Amortization of transitional (asset)
  obligation
  
  (5
  )
  (5
  )
  (5
  )
  2
  
  2
  
  258
  
  61
  
  18
  
  20
  
  18
  
  16(b) Defined contribution plans
  
  13
  
  11
  
  10Total expense
  
  $
  71
  
  $
  72
  
  $
  28
  
  $
  20
  
  $
  18
  
  $
  16Benefit
  Plan FundingDefined contribution
  
  13
  
  11
  
  10Defined benefit
  
  $
  80
  
  $
  75
  
  $
  12
  
  $
  9
  
  $
  8
  
  $
  7  63


Pension Plans
  
  Other Post-
  Retirement PlansFinancial Status of Defined
  Benefit Plans
  
  2004
  
  2003
  
  2004
  
  2003Fair value of plan assets
  
  $
  1,157
  
  $
  1,052
  
  $
  
  
  $
  Accrued benefit obligation
  
  1,487
  
  1,344
  
  204
  
  211Funded status  plan deficit(1)
  
  (330
  )
  (292
  )
  (204
  )
  (211
  )Unamortized transitional (asset) obligation
  
  (29
  )
  (34
  )
  17
  
  19Unamortized net actuarial losses
  
  430
  
  375
  
  23
  
  39Accrued benefit asset (liability)
  
  $
  71
  
  $
  49
  
  $
  (164
  )
  $
  (153
  )Reconciliation
  of Plan AssetsFair value of plan assets at beginning of
  year
  
  $
  1,052
  
  $
  927
  
  $
  
  
  $
  Contributions
  
  80
  
  75
  
  9
  
  8Benefits paid
  
  (67
  )
  (63
  )
  (9
  )
  (8
  )Actual gain (loss) on plan assets
  
  91
  
  115
  
  
  
  Other
  
  1
  
  (2
  )
  
  
  Fair value of plan assets at end of year
  
  $
  1,157
  
  $
  1,052
  
  $
  
  
  $
  Reconciliation
  of Accrued Benefit ObligationAccrued benefit obligation at beginning of
  year
  
  $
  1,344
  
  $
  1,206
  
  $
  211
  
  $
  186Current service cost
  
  31
  
  27
  
  4
  
  4Interest cost
  
  81
  
  78
  
  13
  
  12Benefits paid
  
  (67
  )
  (63
  )
  (9
  )
  (8
  )Actuarial losses (gains)
  
  97
  
  99
  
  (15
  )
  17Other
  
  1
  
  (3
  )
  
  
  Accrued benefit obligation at end of year
  
  $
  1,487
  
  $
  1,344
  
  $
  204
  
  $
  211  
 (1)The pension and other post-retirement plans
included in the financial status information are not fully funded.  Defined
  Benefit and Other Post-Retirement Plans Assumptions
  
  2004
  
  2003
  
  2002Year-end obligation discount rate(1)
  
  5.7
  %
  6.0
  %
  6.5
  %Accrued benefit obligation discount rate(1)
  
  6.0
  %
  6.5
  %
  6.5
  %Long-term rate of return on plan assets
  
  7.5
  %
  7.5
  %
  8.0
  %Rate of compensation increase, excluding
  merit increases
  
  3.0
  %
  3.0
  %
  3.0
  %  
 (1)Assumption used in both pension and other
post-retirement benefit plans.  Assumed
  Health and Dental Care Cost Trend Rates
  at December 31 are as follows:
  
  2004
  
  2003Dental care cost trend rate(1)
  
  3.5
  %
  3.5
  %Health care cost trend rate
  
  8.5
  %
  7.5
  %Health care cost trend rate declines to
  
  4.5
  %
  4.5
  %Year that health care cost trend rate
  reaches the rate which it is expected to remain at
  
  2014
  
  2009  
 (1)Dental care cost trend rate assumed to remain
constant.  64


Sensitivity
Analysis  Assumed health care cost trend
rates have a significant effect on the amounts reported for the health care
plans. A one-percentage-point change in assumed health care cost trend rates
would have the following effects for 2004:  Increase
  
  DecreaseTotal of service and interest cost
  
  $
  2
  
  $
  (2
  )Accrued benefit obligation
  
  $
  24
  
  $
  (22
  )  The Plan
Assets consist of:  Percentage of Plan Assets at December 31,Asset
  Category
  
  2004
  
  2003Equity
  
  44
  %
  42
  %Bonds
  
  56
  %
  58
  %Total
  
  100
  %
  100
  %  Note 23FINANCIAL INSTRUMENTS AND
DERIVATIVES  The Company is exposed to
market risks resulting from fluctuations in commodity prices, foreign exchange
rates and interest rates in the 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.  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.  The Company has also entered
into a series of forward sales contracts for the future sale of Brent crude oil
in connection with its 2004 acquisition of an interest in the Buzzard field in
the U.K. sector of the North Sea (see Note 15 to the Consolidated Financial
Statements).  The Companys outstanding
contracts for derivative instruments and the related fair values at December
31, 2004 were as follows:  Quantity
  
  Maturity
  
  Average Price
  
  Unrealized
  Gain/(Loss)US$/bblCrude
  Oil and Products(millions of barrels)Crude oil purchase
  
  2.7
  
  2005
  
  $
  40.33
  
  $
  4Buzzard crude oil sales
  
  35.8
  
  2007-2010
  
  $
  25.98
  
  $
  (333
  )$
  (329
  )  65


As at December 31, 2004, the
unrealized loss on derivative contracts has decreased investment and other
income by $329 million and increased accounts receivable, accounts payable and
accrued liabilities, and other liabilities by $5 million, $1 million and $333
million, respectively.  The fair value of these
derivative instruments is based on quotes provided by brokers, which represents
an approximation of amounts that would be received or paid to counterparties to
settle these instruments prior to maturity. The Company plans to hold all
derivative instruments outstanding at December 31, 2004 to maturity.  Derivative and financial
instruments involve a degree of credit risk. The Company manages this risk
through the establishment of credit policies and limits which are applied in
the selection of counterparties. Market risk relating to changes in value or
settlement cost of the Companys derivative instruments is essentially offset
by gains or losses on the hedged positions.  In addition to the derivative
instruments described above, the Consolidated Balance Sheet includes other
items considered to be financial instruments, such as cash, accounts
receivable, accounts payable and accrued liabilities and notes payable. The
fair values of these other financial instruments included in the Consolidated
Balance Sheet are as follows:  2004
  
  
  
  2003Carrying Amount
  
  Fair Value
  
  Carrying Amount
  
  Fair ValueFinancial instruments included in current
  assets and current liabilities
  
  $
  (1,098
  )
  $
  (1,098
  )
  $
  316
  
  $
  316Long-term debt
  
  $
  (2,281
  )
  $
  (2,538
  )
  $
  (2,229
  )
  $
  (2,432
  )  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. The fair value of long-term debt is
based on publicly quoted market values.  Note 24RELATED PARTY TRANSACTIONS  On September 29, 2004, the
Government of Canada completed its offering to the public of its entire
remaining interest in Petro-Canada. Transactions with the Government of Canada
and its agencies prior to the sale were in the normal course of business and on
the same terms as those accorded to non-related parties.  Note 25COMMITMENTS 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 $122 million in 2005, $102 million in 2006, $80 million in 2007,
$68 million in 2008, $61 million in 2009 and $217 million thereafter.  (b) The Company is involved
in litigation and claims in the normal course of operations. In addition, the
Company may provide indemnifications, in the course of normal operations, that
are often standard contractual terms to counterparties in certain transactions
such as purchase and sale agreements. The terms of these indemnifications will
vary based upon the contract, the nature of which prevents the Company from
making a reasonable estimate of the maximum potential amounts that may be
required to be paid. Management is of the opinion that any resulting
settlements relating to the litigation matters or indemnifications would not
materially affect the financial position of the Company.  66


Note 26GENERALLY 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
Taxes  The liability method followed
by the Company differs from United States GAAP due to the application of
transitional provisions upon adoption, the use of substantively enacted versus
enacted tax rates and the accounting for certain Canadian income tax credits
and allowances.  (b) Interest
Capitalization  United 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 Surplus  In 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 Hedging  Under 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. The recently amended Canadian rules, Accounting Guideline 13 (AcG 13)
Hedging Relationships and EIC 128, Accounting for Trading, Speculative or
Non-Hedging Derivative Financial Instruments (see Note 2 to the Consolidated
Financial Statements), have eliminated the GAAP difference for all derivatives
that are not accounted for as hedges for 2004 and future years. A GAAP
difference still exists for the treatment of cash flow hedges as changes in the
fair value of cash flow hedges are included in other comprehensive income under
United States GAAP.  (e) Minimum
Pension Liability  United 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.  (f)
Comprehensive Income  United 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 Obligations  Under United States GAAP, the
accounting for asset retirement obligations is contained in the Statement of
Financial Accounting Standards No. 143 (SFAS 143) which was effective January
1, 2003. Changes to the equivalent Canadian accounting standards were effective
January 1, 2004 (see Note 2 to the Consolidated Financial Statements) which has
eliminated this GAAP difference in 2004 and in future years. Under United
States GAAP, the cumulative effect adjustment from initial application is
required to be charged to net earnings in the year the standard became
effective. Canadian GAAP requires the change in accounting policy be applied
retroactively and that prior periods presented for comparative purposes be
restated.  67


The application of United
States GAAP would have the following effects on earnings as reported:  2004
  
  2003
  
  2002Net earnings as reported in the
  Consolidated Statement of Earnings
  
  $
  1,757
  
  $
  1,650
  
  $
  955Adjustments, before income taxesCapitalization of interest and related
  amortization
  
  8
  
  21
  
  25Accounting for income taxes
  
  (27
  )
  (9
  )
  (111
  )Asset retirement obligations
  
  
  
  
  
  30Other
  
  1
  
  
  
  (3
  )Income taxes on above items
  
  9
  
  13
  
  (1
  )Net earnings, as adjusted before cumulative
  effect of change in accounting policy
  
  1,748
  
  1,675
  
  895Cumulative effect of change in accounting
  policy, net of income taxes
  
  
  
  (114
  )
  Net earnings, as adjusted
  
  $
  1,748
  
  $
  1,561
  
  $
  895Earnings, as adjusted before cumulative
  effect of change in accounting policy per shareBasic
  
  $
  6.61
  
  $
  6.32
  
  $
  3.41Diluted
  
  $
  6.52
  
  $
  6.25
  
  $
  3.37Earnings, as adjusted per shareBasic
  
  $
  6.61
  
  $
  5.89
  
  $
  3.41Diluted
  
  $
  6.52
  
  $
  5.83
  
  $
  3.37Comprehensive incomeNet earnings, as adjusted
  
  $
  1,748
  
  $
  1,561
  
  $
  895Unrealized gain (loss) on financial
  derivatives
  
  (5
  )
  8
  
  4Minimum pension liability
  
  (36
  )
  (11
  )
  (111
  )Foreign currency translation adjustment
  
  (49
  )
  323
  
  $
  1,658
  
  $
  1,881
  
  $
  788  The application of United
States GAAP would have the following effects on the Consolidated Balance Sheets
as reported:  December 31, 2004
  
  
  
  December 31, 2003As
  Reported
  
  United States
  GAAP
  
  As
  Reported
  
  United States
  GAAPCurrent assets
  
  $
  1,986
  
  $
  1,986
  
  $
  2,705
  
  $
  2,705Property, plant and equipment, net
  
  14,783
  
  15,337
  
  10,943
  
  11,521Goodwill
  
  986
  
  965
  
  810
  
  789Deferred charges and other assets
  
  345
  
  344
  
  316
  
  314Current liabilities
  
  2,898
  
  2,898
  
  2,128
  
  2,119Long-term debt
  
  2,275
  
  2,275
  
  2,223
  
  2,223Other liabilities
  
  646
  
  910
  
  306
  
  436Asset retirement obligations
  
  834
  
  834
  
  773
  
  773Future income taxes
  
  2,708
  
  2,894
  
  1,756
  
  2,058Common shares
  
  1,314
  
  1,314
  
  1,308
  
  1,308Contributed surplus
  
  1,743
  
  2,865
  
  2,147
  
  3,269Retained earnings
  
  5,408
  
  4,526
  
  3,810
  
  2,937Foreign currency translation adjustment
  
  274
  
  
  
  323
  
  Accumulated other comprehensive income
  
  $
  
  
  $
  116
  
  $
  
  
  $
  206  68


Note 27RECENT ACCOUNTING
PRONOUNCEMENTS  Canadian  Variable Interest Entities
(VIEs)  The Accounting Standards
Board (ACSB) issued Accounting Guideline AcG 15, Consolidation of Variable
Interest Entities, to harmonize the Guideline with the equivalent United
States Standard Financial Accounting Standards Board (FASB) Interpretation No.
46R, Consolidation of Variable Interest Entities. The Guideline provides
criteria for identifying VIEs and further criteria for determining what entity,
if any, should consolidate them. The Guideline is effective for annual and interim
periods beginning on or after November 1, 2004, and upon adoption, will not
materially impact the Consolidated Financial Statements.  Financial Instruments 
Disclosure and Presentation  The ACSB approved a revision
to section 3860 Financial Instruments  Disclosure and Presentation, to
require certain obligations that must or could be settled with an entitys own
equity instruments to be represented as liabilities. The revision is effective
for fiscal years beginning on or after November 1, 2004. The Company does not
expect there to be any impact on the Consolidated Financial Statements upon
adoption of this revised standard.  United
States  Exchanges of Non-Monetary
Assets  The FASB issued Statement of
Financial Accounting Standards No. 153 (SFAS 153), Exchanges of Non-Monetary
Assets as an amendment to Accounting Principles Board Opinion No. 29 (APB 29),
Accounting for Non-Monetary Transactions. APB 29 prescribes that exchanges of
non-monetary transactions should be measured based on the fair value of the
assets exchanged, while providing an exception for non-monetary exchanges of
similar productive assets. SFAS 153 eliminates the exception provided in APB 29
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. SFAS 153 is to be applied prospectively
and is effective for all non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The Company does not expect there to be
any material effect on the Consolidated Financial Statements upon adoption of
the new standard.  Inventory Costs  The FASB issued SFAS 151,
Inventory Costs as an amendment to Accounting Research Bulletin No. 43 (ARB
43). Under ARB 43, certain expenses might be considered to be so abnormal that,
under certain circumstances, they would require treatment as current period
charges. SFAS 151 eliminates the criterion of so abnormal and requires that
those items be recognized as current period charges. SFAS 151 is to be applied
prospectively and is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not expect there to be any
material impact on the Consolidated Financial Statements upon adoption of the
standard.  Share-Based Payment  The FASB issued SFAS 123(R),
Share-Based Payment, a revision to SFAS 123, Accounting for Stock-Based
Compensation. SFAS 123(R) eliminates the intrinsic value accounting option in
APB Opinion 25, Accounting for Stock Issued to Employees, and generally requires
the use of the fair-value based method of accounting for share based payment
transactions with employees. In addition, the standard no longer permits
entities to account for forfeitures as they occur but requires this amount to
be estimated. SFAS 123(R) is effective for the reporting periods that begin
after June 15, 2005 and may be applied under a modified prospective approach or
a modified retrospective approach. The Company does not expect there to be any
material impact on the Consolidated Financial Statements upon adoption of this
revised standard under the modified prospective approach or the modified
retrospective approach.  Discontinued Operations  The Emerging Issues Task
Force issued EITF Abstract 03-13 (EITF 03-13) to provide guidance on applying
SFAS 144, Determining Whether to Report Discontinued Operations. SFAS 144
discusses when an entity should disclose a component as discontinued
operations. Under SFAS 144, a component should be disclosed as discontinued
operations when continuing cash flows are eliminated and when there is no
significant continuing involvement with the component. EITF 03-13 provides
additional guidance on factors to consider in evaluating what constitutes
continuing cash flows and continuing significant influence. This Statement is
effective for fiscal periods beginning after December 15, 2004. The Company
does not expect there to be any material impact on the Consolidated Financial
Statements upon adoption of the guidance.  69