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.  Arthur Andersen LLP, a firm
of chartered accountants, was appointed by the shareholders as external
auditors of the Company in April 2002 and resigned as external auditors in June
2002, when substantially all of the partners and staff of Arthur Andersen LLP
in Canada joined Deloitte & Touche LLP. In June 2002 the Board of Directors
appointed Deloitte & Touche LLP as external auditors, until the next annual
meeting of shareholders, 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 had engaged Arthur Andersen LLP and subsequently Deloitte & Touche
LLP, who were replaced by PricewaterhouseCoopers LLP in August 2002 as the
contract auditor to provide internal audit services, including a review of the
system of internal controls to ensure that there are no significant weaknesses.  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 29, 2003  AUDIT,
FINANCE AND RISK COMMITTEE OF THE BOARD OF DIRECTORS  The Audit, Finance and Risk
Committee, which is composed of not less 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 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 their
fees.  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.  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/ Claude FontaineClaude FontaineChairman
  of the Audit, Finance and Risk CommitteeJanuary 29, 2003  24 
   AUDITORS
REPORTS  To the
Shareholders of Petro-Canada:  We have audited the
consolidated balance sheet of Petro-Canada as at December 31, 2002 and the
consolidated statements of earnings, retained earnings and cash flows for the
year 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 audit.  We conducted our audit 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, 2002 and the results of
its operations and its cash flows for the year then ended in accordance with
Canadian generally accepted accounting principles.  The consolidated financial
statements of Petro-Canada as at December 31, 2001 and for each of the years in
the two-year period 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. We audited the adjustments described in Note 2 that were applied to
restate the 2001 and 2000 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 and 2000
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 and 2000 financial statements taken as a whole.  /s/ Deloitte & Touche
  LLPDeloitte & Touche LLPChartered
  Accountants
  Calgary, AlbertaJanuary 29, 2003  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
  Accountants
  Calgary, AlbertaJanuary 31, 2002  25 
   CONSOLIDATED STATEMENT OF
EARNINGS  (stated in
millions of Canadian dollars)  For the
  years ended December 31,
  
  2002
  
  2001
  
  2000REVENUEOperating
  
  $
  9 917
  
  $
  8
  582
  
  $
  9
  372Investment
  and other income(Note 5)
  
  
  
  154
  
  1739 917
  
  8
  736
  
  9
  545EXPENSESCrude
  oil and product purchases
  
  4 556
  
  4
  687
  
  5
  537Operating,
  marketing and general(Note 6)
  
  2 036
  
  1
  670
  
  1
  619Exploration
  
  301
  
  245
  
  171Depreciation,
  depletion and amortization
  
  957
  
  568
  
  584Foreign
  currency translation(Note 7)
  
  52
  
  102
  
  67Interest
  
  187
  
  135
  
  1448 089
  
  7
  407
  
  8
  122EARNINGS BEFORE INCOME TAXES
  
  1 828
  
  1
  329
  
  1
  423PROVISION FOR INCOME TAXES(Note 8)Current
  
  959
  
  528
  
  363Future
  
  (105
  )
  (45
  )
  201854
  
  483
  
  564NET EARNINGS
  
  $
  974
  
  $
  846
  
  $
  859EARNINGS PER SHARE(dollars) (Note 9)Basic
  
  $
  3.71
  
  $
  3.19
  
  $
  3.15Diluted
  
  $
  3.67
  
  $
  3.16
  
  $
  3.13  CONSOLIDATED
STATEMENT OF RETAINED EARNINGS  (stated in millions of Canadian dollars)  For the
  years ended December 31,
  
  2002
  
  2001
  
  2000RETAINED EARNINGS AT BEGINNING OF YEAR,
  as previously reported
  
  $
  1 695
  
  $
  897
  
  $
  113Retroactive
  application of change in accounting policy(Note 2)
  
  (184
  )
  (126
  )
  (92
  )RETAINED EARNINGS AT BEGINNING OF YEAR, as restated
  
  1 511
  
  771
  
  21Net
  earnings
  
  974
  
  846
  
  859Dividends
  on common shares
  
  (105
  )
  (106
  )
  (109
  )RETAINED EARNINGS AT END OF YEAR
  
  $
  2 380
  
  $
  1
  511
  
  $
  771  26 
   CONSOLIDATED STATEMENT OF CASH FLOWS  (stated in
millions of Canadian dollars)  For the years ended December 31,
  
  2002
  
  2001
  
  2000OPERATING ACTIVITIESNet
  earnings
  
  $
  974
  
  $
  846
  
  $
  859Items
  not affecting cash flow(Note 10)
  
  1 001
  
  597
  
  840Exploration
  expenses(Note 14)
  
  301
  
  245
  
  171Cash
  flow
  
  2 276
  
  1
  688
  
  1
  870(Increase)
  decrease in non-cash working capital related to operating activities and
  other(Note
  11)
  
  (226
  )
  55
  
  87Cash
  flow from operating activities
  
  2 050
  
  1
  743
  
  1
  957INVESTING ACTIVITIESAcquisition
  of oil and gas operations of Veba Oil & Gas GmbH(Note 3)
  
  (2 234
  )
  
  
  Expenditures
  on property, plant and equipment and exploration(Note 14)
  
  (1 861
  )
  (1
  681
  )
  (1
  203
  )Proceeds
  from sales of assets
  
  26
  
  127
  
  722Increase
  in deferred charges and other assets, net
  
  (72
  )
  (10
  )
  (8
  )(Increase)
  decrease in non-cash working capital related to investing activities(Note 11)
  
  (16
  )
  96
  
  (44
  )(4 157
  )
  (1
  468
  )
  (533
  )FINANCING ACTIVITIESProceeds
  from issue of long-term debt
  
  2 100
  
  
  
  Reduction
  of long-term debt
  
  (465
  )
  (475
  )
  (4
  )Proceeds
  from issue of common shares
  
  30
  
  34
  
  33Dividends
  on common shares
  
  (105
  )
  (106
  )
  (109
  )Purchase
  of common shares(Note 18)
  
  
  
  (362
  )
  (134
  )Increase
  in non-cash working capital related to financing activities(Note 11)
  
  
  
  
  
  (1
  )1 560
  
  (909
  )
  (215
  )(DECREASE) INCREASE IN CASH AND SHORT-TERM INVESTMENTS
  
  (547
  )
  (634
  )
  1
  209CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF YEAR
  
  781
  
  1
  415
  
  206CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR
  
  $
  234
  
  $
  781
  
  $
  1
  415  27 
   CONSOLIDATED BALANCE SHEET  (stated in
millions of Canadian dollars)  As at
  December 31,
  
  2002
  
  2001ASSETSCURRENT ASSETSCash
  and short-term investments(Note 12)
  
  $
  234
  
  $
  781Accounts
  receivable
  
  1 596
  
  758Inventories(Note
  13)
  
  585
  
  455Prepaid
  expenses
  
  19
  
  152 434
  
  2
  009PROPERTY, PLANT AND EQUIPMENT, NET(Note 14)
  
  10 084
  
  7
  460GOODWILL(Note 3)
  
  709
  
  DEFERRED CHARGES AND OTHER ASSETS(Note 15)
  
  212
  
  165$
  13 439
  
  $
  9
  634LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts
  payable and accrued liabilities
  
  $
  1 901
  
  $
  1
  158Income
  taxes payable
  
  263
  
  234Current
  portion of long-term debt(Note 16)
  
  356
  
  52 520
  
  1
  397LONG-TERM DEBT(Note 16)
  
  2 701
  
  1
  396DEFERRED CREDITS AND OTHER LIABILITIES(Note 17)
  
  621
  
  481FUTURE INCOME TAXES(Note 8)
  
  1 821
  
  1
  483COMMITMENTS AND CONTINGENT LIABILITIES(Note 22)SHAREHOLDERS EQUITY(Note 18)
  
  5 776
  
  4
  877$
  13 439
  
  $
  9
  634  Approved on behalf of the
  Board/s/ Ron Brenneman
  
  /s/ Brian MacNeillRon Brenneman
  Brian MacNeillDirector
  Director  28 
   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (tabular amounts stated in millions of Canadian
dollars)  Note 1SUMMARY 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 comply 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 financial statements.  The preparation of 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
are 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. Other assets and related depreciation, depletion and amortization,
other liabilities, revenue and other expense items are translated at rates of
exchange in effect at the respective transaction dates. The resulting exchange
gains or losses are included in earnings.  Foreign operations are
integrated with the Companys other activities and are translated in the manner
described above.  (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 Short-Term InvestmentsCash and short-term investments comprise cash
in banks, less outstanding cheques, and deposits with a maturity of less than
90 days when purchased.  (g) InventoriesInventories are stated at the lower of cost
and net realizable value. Cost of crude oil and products 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 on the equity method. Other
long-term investments are accounted for on the cost method.  29 
   (i) Property, Plant and EquipmentInvestments in exploration and development
activities are accounted for on 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 that 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, 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
directors, officers and certain employees as described in the Notes to the
Consolidated Financial Statements. The stock options are accounted for based on
the intrinsic value of the award at grant date.  Consideration paid on exercise of stock options 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.  (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.  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. If a derivative instrument ceases to be effective,
hedge accounting is terminated and future gains or losses are recognized in the
statement of earnings in the current period. Derivative instruments that are
not hedges for accounting purposes are recorded at fair value with any
resulting gain or loss recognized in the statement of earnings in the current
period.  30 
   Note 2CHANGES IN ACCOUNTING POLICIES  Effective January 1, 2002 the Company adopted, retroactively, the
recommendations of the Canadian Institute of Chartered Accountants on
accounting for foreign currency translation whereby an exchange gain or loss on
the translation of long-term debt is included in net earnings in the current
period. Previously, the gain or loss on the translation of long-term debt was
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; 2000  $(34) 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.  Effective January 1, 2002
the Company adopted the recommendations of the Canadian Institute of Chartered
Accountants on accounting for stock-based compensation and other stock-based
payments. The Company has elected to continue accounting for stock-based
compensation based on the intrinsic value at the date of granting and to
disclose the pro forma results of using the fair value based method.
Accordingly, the net earnings for the reported periods remain unchanged and the
pro forma results are disclosed in Note 18. The new recommendations have been
applied to options granted after January 1, 2002.  Note 3ACQUISITION 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 remaining
operations not yet acquired are in Venezuela and are subject to rights of first
refusal.  The acquisition was
accounted for by the purchase method of accounting and the estimated 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  Although the estimated allocation of fair value to the assets acquired
and liabilities assumed is subject to changes as additional information becomes
available, the final allocation is not expected to differ materially from the
estimated allocation.  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 short-term investments.  31 
   Note 4SEGMENTED INFORMATION  The Companys upstream and downstream activities are conducted through
three business segments.  Upstream operations include
the exploration, development, production, transportation and marketing
activities for crude oil, natural gas liquids, and oil sands. Activities are
conducted through the Upstream Canada and Upstream International business
segments. The Upstream Canada segment includes activity in the Western Canada,
East Coast Offshore, Mackenzie Delta and Alaska regions. The Upstream
International segment includes activity in the United Kingdom, the Netherlands,
Trinidad, Venezuela, Syria, Libya, Kazakhstan, Algeria and Tunisia.  UPSTREAMCANADA
  
  INTERNATIONAL2002
  
  2001
  
  2000
  
  2002
  
  2001
  
  2000RevenueSales to customers and
  other revenues
  
  $
  1 354
  
  $
  1 490
  
  $
  1 659
  
  $
  1 239
  
  $
  20
  
  $
  59Inter-segment sales
  
  968
  
  642
  
  619
  
  
  
  
  
  Segment Revenue
  
  2 322
  
  2 132
  
  2 278
  
  1 239
  
  20
  
  59ExpensesCrude oil and product
  purchases
  
  
  
  
  
  92
  
  
  
  
  
  Inter-segment transactions
  
  3
  
  6
  
  6
  
  
  
  
  
  Operating, marketing and
  general
  
  509
  
  458
  
  395
  
  288
  
  8
  
  25Exploration
  
  246
  
  194
  
  124
  
  55
  
  51
  
  47Depreciation, depletion and
  amortization
  
  507
  
  367
  
  357
  
  249
  
  7
  
  27Foreign currency
  translation
  
  
  
  
  
  
  
  
  
  
  
  Interest
  
  
  
  
  
  
  
  
  
  
  
  1 265
  
  1 025
  
  974
  
  592
  
  66
  
  99Earnings
  before income taxes
  
  1 057
  
  1 107
  
  1 304
  
  647
  
  (46
  )
  (40
  )Provision
  for income taxesCurrent
  
  414
  
  502
  
  175
  
  413
  
  (15
  )
  61Future
  
  (45
  )
  (114
  )
  331
  
  9
  
  (4
  )
  (79
  )369
  
  388
  
  506
  
  422
  
  (19
  )
  (18
  )Reorganization costs(Note 6)
  
  
  
  
  
  
  
  
  
  
  
  Net
  earnings
  
  $
  688
  
  $
  719
  
  $
  798
  
  $
  225
  
  $
  (27
  )
  $
  (22
  )Capital
  and Exploration ExpendituresAcquisition of oil and gas
  operations of Veba Oil & Gas GmbH, including goodwill
  
  $
  
  
  $
  
  
  $
  
  
  $
  2 234
  
  $
  
  
  $
  Property, plant and
  equipment and exploration expenditures
  
  1 281
  
  1 131
  
  884
  
  221
  
  153
  
  43Deferred charges and other
  assets
  
  (3
  )
  
  
  4
  
  
  
  (6
  )
  $
  1 278
  
  $
  1 131
  
  $
  888
  
  $
  2 455
  
  $
  147
  
  $
  43Cash Flow
  (before changes in non-cash working capital)
  
  $
  1 417
  
  $
  1 125
  
  $
  1 460
  
  $
  583
  
  $
  27
  
  $
  78Total
  Assets
  
  $
  5 922
  
  $
  5 118
  
  $
  4 811
  
  $
  3 544
  
  $
  186
  
  $
  148  32 
   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 Upstream International 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 short-term investments and other general corporate assets.  DOWNSTREAM
  
  SHARED SERVICES
  
  CONSOLIDATED2002
  
  2001
  
  2000
  
  2002
  
  2001
  
  2000
  
  2002
  
  2001
  
  2000RevenueSales to customers and
  other revenues
  
  $
  7 318
  
  $
  7 158
  
  $
  7 782
  
  $
  6
  
  $
  68
  
  $
  45
  
  $
  9 917
  
  $
  8 736
  
  $
  9 545Inter-segment sales
  
  3
  
  6
  
  6
  
  
  
  
  
  Segment Revenue
  
  7 321
  
  7 164
  
  7 788
  
  6
  
  68
  
  45
  
  9 917
  
  8 736
  
  9 545ExpensesCrude oil and product
  purchases
  
  4 556
  
  4 687
  
  5 446
  
  
  
  
  
  (1
  )
  4 556
  
  4 687
  
  5 537Inter-segment transactions
  
  968
  
  642
  
  619
  
  
  
  
  
  Operating, marketing and
  general
  
  1 179
  
  1 165
  
  1 079
  
  60
  
  39
  
  54
  
  2 036
  
  1 670
  
  1 553Exploration
  
  
  
  
  
  
  
  
  
  
  
  
  
  301
  
  245
  
  171Depreciation, depletion and
  amortization
  
  200
  
  193
  
  187
  
  1
  
  1
  
  13
  
  957
  
  568
  
  584Foreign currency
  translation
  
  
  
  
  
  
  
  52
  
  102
  
  67
  
  52
  
  102
  
  67Interest
  
  
  
  
  
  
  
  187
  
  135
  
  144
  
  187
  
  135
  
  1446 903
  
  6 687
  
  7 331
  
  300
  
  277
  
  277
  
  8 089
  
  7 407
  
  8 056Earnings
  before income taxes
  
  418
  
  477
  
  457
  
  (294
  )
  (209
  )
  (232
  )
  1 828
  
  1 329
  
  1 489Provision
  for income taxesCurrent
  
  242
  
  90
  
  231
  
  (110
  )
  (49
  )
  (81
  )
  959
  
  528
  
  386Future
  
  (81
  )
  86
  
  (46
  )
  12
  
  (13
  )
  
  
  (105
  )
  (45
  )
  206161
  
  176
  
  185
  
  (98
  )
  (62
  )
  (81
  )
  854
  
  483
  
  592Reorganization costs(Note 6)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  38Net
  earnings
  
  $
  257
  
  $
  301
  
  $
  272
  
  $
  (196
  )
  $
  (147
  )
  $
  (151
  )
  $
  974
  
  $
  846
  
  $
  859Capital
  and Exploration ExpendituresAcquisition of oil and gas
  operations of Veba Oil & Gas GmbH, including goodwill
  
  $
  
  
  $
  
  
  $
  
  
  $
  
  
  $
  
  
  $
  
  
  $
  2 234
  
  $
  
  
  $
  Property, plant and
  equipment and exploration expenditures
  
  344
  
  383
  
  264
  
  15
  
  14
  
  12
  
  1 861
  
  1 681
  
  1 203Deferred charges and other
  assets
  
  27
  
  16
  
  7
  
  48
  
  
  
  (3
  )
  72
  
  10
  
  8$
  371
  
  $
  399
  
  $
  271
  
  $
  63
  
  $
  14
  
  $
  9
  
  $
  4 167
  
  $
  1 691
  
  $
  1 211Cash Flow
  (before changes in non-cash working capital)
  
  $
  380
  
  $
  589
  
  $
  434
  
  $
  (104
  )
  $
  (53
  )
  $
  (102
  )
  $
  2 276
  
  $
  1 688
  
  $
  1 870Total
  Assets
  
  $
  3 841
  
  $
  3 556
  
  $
  3 609
  
  $
  132
  
  $
  774
  
  $
  1 432
  
  $
  13 439
  
  $
  9 634
  
  $
  10 000  33 
   Note 5(LOSSES) GAINS ON DISPOSAL OF ASSETS  Investment and other income includes net (losses) gains on disposal of
non-core assets of $(2) million (2001  $49 million; 2000  $73 million).  Note 6OPERATING, MARKETING AND GENERAL EXPENSES  Operating, marketing and general expenses in 2000 includes a provision
of $66 million for staff reductions and related building expenses. The
provision decreased 2000 net earnings by $38 million.  Note 7FOREIGN CURRENCY TRANSLATION  Foreign currency translation consists of:  2002
  
  2001
  
  2000(Gain) loss on translation
  of foreign currency denominated long-term debt
  
  $
  (11
  )
  $
  102
  
  $
  67Loss on translation of
  international subsidiaries
  
  63
  
  
  
  $
  52
  
  $
  102
  
  $
  67  Note 8INCOME 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:  2002
  
  2001
  
  2000Earnings before income
  taxes
  
  $
  1 828
  
  $
  1 329
  
  $
  1 423Add (deduct):Non-deductible royalties
  and other payments to provincial governments, net
  
  277
  
  413
  
  385Resource allowance
  
  (467
  )
  (476
  )
  (452
  )Equity in earnings of
  affiliates
  
  (9
  )
  (9
  )
  (10
  )Non-taxable foreign
  exchange
  
  52
  
  87
  
  40Other
  
  (3
  )
  (1
  )
  (18
  )Earnings as adjusted before
  income taxes
  
  $
  1 678
  
  $
  1 343
  
  $
  1 368Canadian Federal income tax
  rate
  
  38.0
  %
  38.0
  %
  38.0
  %Income tax on earnings as
  adjusted at Canadian Federal income tax rate
  
  $
  638
  
  $
  510
  
  $
  520Large Corporations Tax
  
  16
  
  15
  
  15Provincial and other income
  taxes, net of federal abatement
  
  27
  
  49
  
  62Future income taxes
  increase (decrease) due to provincial rate changes
  
  4
  
  (61
  )
  Higher foreign income tax
  rates
  
  176
  
  
  
  Income tax credits and
  other
  
  (7
  )
  (30
  )
  (33
  )Provision for income taxes
  
  $
  854
  
  $
  483
  
  $
  564Effective income tax rate
  on earnings before income taxes
  
  46.7
  %
  36.3
  %
  39.6
  %  34 
   Future income taxes consists of the following future income tax
liabilities (assets) relating to temporary differences for:  2002
  
  2001Property, plant and
  equipment
  
  $
  1 992
  
  $
  1 325Partnership income(1)
  
  278
  
  397Inventories
  
  (161
  )
  (78
  )Deferred credits and other
  liabilities
  
  (191
  )
  (162
  )Deferred charges and other
  assets
  
  18
  
  5Loss carryforwards and
  other
  
  (115
  )
  (4
  )$
  1 821
  
  $
  1 483  
 (1)
  Taxable income for certain
  Canadian Upstream activities are generated by a partnership and the related
  current income taxes will be payable 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
that 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.  Note 9EARNINGS 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:  2002
  
  2001
  
  2000Average shares outstanding(millions)Basic
  
  262.8
  
  264.9
  
  272.3Diluted
  
  265.7
  
  267.4
  
  274.6  For the year ended December 31, 2002 375 700 stock options with an
exercise price of $45.68 (2001  nil; 2000  274 200 stock options with an
exercise price of $34.00) were excluded in the diluted earnings per share
calculation as the exercise price exceeded the average share price for the
respective periods.  Note 10ITEMS NOT AFFECTING CASH FLOW  2002
  
  2001
  
  2000Depreciation, depletion and
  amortization
  
  $
  957
  
  $
  568
  
  $
  584Future income taxes
  
  (105
  )
  (45
  )
  201Provision for future
  removal and site restoration costs
  
  27
  
  17
  
  30(Gain) loss on translation
  of foreign currency denominated long-term debt
  
  (11
  )
  102
  
  67Foreign currency losses
  
  90
  
  
  
  Loss (gain) on disposal of
  assets
  
  2
  
  (49
  )
  (73
  )Other
  
  41
  
  4
  
  31$
  1 001
  
  $
  597
  
  $
  840  35 
   Note 11DECREASE (INCREASE) IN NON-CASH WORKING CAPITAL AND OTHER  2002
  
  2001
  
  2000Operating
  activities and otherAccounts receivable
  
  $
  (268
  )
  $
  465
  
  $
  (283
  )Inventories
  
  (74
  )
  
  
  46Prepaid expenses
  
  9
  
  5
  
  5Accounts payable and
  accrued liabilities
  
  467
  
  (433
  )
  234Income taxes payable
  
  (313
  )
  40
  
  122Current portion of
  long-term liabilities and other
  
  (47
  )
  (22
  )
  (37
  )$
  (226
  )
  $
  55
  
  $
  87Investing
  activitiesAccounts receivable
  
  $
  
  
  $
  64
  
  $
  (63
  )Accounts payable and
  accrued liabilities
  
  (16
  )
  32
  
  19$
  (16
  )
  $
  96
  
  $
  (44
  )Financing
  activitiesAccounts receivable
  
  $
  
  
  $
  2
  
  $
  (2
  )Accounts payable and
  accrued liabilities
  
  
  
  (2
  )
  1$
  
  
  $
  
  
  $
  (1
  )  Non-cash working capital is comprised of current assets and current
liabilities other than cash and short-term investments and current portion of
long-term debt.  Note 12CASH AND SHORT-TERM INVESTMENTS  Short-term investments are considered to be cash equivalents and are
recorded at cost, which approximates market value.  2002
  
  2001Cash
  
  $
  139
  
  $
  94Less: outstanding cheques
  
  167
  
  100(28
  )
  (6
  )Short-term investments
  
  262
  
  787$
  234
  
  $
  781  Cash payments for interest and income taxes
were as follows:  2002
  
  2001
  
  2000Interest
  
  $
  178
  
  $
  158
  
  $
  154Income taxes
  
  $
  1 172
  
  $
  483
  
  $
  186  36 
   Note 13INVENTORIES  2002
  
  2001Crude oil, refined products
  and merchandise
  
  $
  429
  
  $
  377Materials and supplies
  
  156
  
  78$
  585
  
  $
  455  Note 14PROPERTY, PLANT AND EQUIPMENT  2002
  
  2001
  
  2002
  
  2001Cost
  
  Accumulated
  Depreciation,
  Depletion and
  Amortization
  
  Net
  
  Cost
  
  Accumulated
  Depreciation,
  Depletion and
  Amortization
  
  Net
  
  Capital ExpendituresUpstreamCanadaNorth American Gas
  
  $
  3 905
  
  $
  1 914
  
  $
  1 991
  
  $
  3 618
  
  $
  1 689
  
  $
  1 929
  
  $
  324
  
  $
  406East Coast Oil
  
  2 637
  
  562
  
  2 075
  
  2 362
  
  326
  
  2 036
  
  272
  
  257Oil Sands
  
  1 905
  
  523
  
  1 382
  
  1 325
  
  489
  
  836
  
  439
  
  275International
  
  2 373
  
  296
  
  2 077
  
  203
  
  51
  
  152
  
  166
  
  10110 820
  
  3 295
  
  7 525
  
  7 508
  
  2 555
  
  4 953
  
  1 201
  
  1 039DownstreamRefining
  
  2 867
  
  1 423
  
  1 444
  
  2 766
  
  1 338
  
  1 428
  
  222
  
  226Marketing and other
  
  2 208
  
  1 133
  
  1 075
  
  2 115
  
  1 079
  
  1 036
  
  122
  
  1575 075
  
  2 556
  
  2 519
  
  4 881
  
  2 417
  
  2 464
  
  344
  
  383Other
  property, plant and equipment
  
  443
  
  403
  
  40
  
  432
  
  389
  
  43
  
  15
  
  14$
  16 338
  
  $
  6 254
  
  $
  10 084
  
  $
  12 821
  
  $
  5 361
  
  $
  7 460
  
  $
  1 560
  
  $
  1 436  Interest capitalized during 2002 amounted to $4 million (2001  $16
million; 2000  $12 million).  Exploration expenses of $301
million (2001  $245 million) charged to earnings are reclassified from
operating activities and included with capital expenditures under investing
activities in the Consolidated Statement of Cash Flows.  Costs of $638 million (2001
 $nil) relating to the Upstream International operations and $250 million
(2001 $1 119 million) relating to non-producing East Coast Oil projects are
not currently being depleted.  Capital leases at a net cost
of $74 million (2001  $78 million) and $31 million (2001  $nil) are included
in the assets of East Coast Oil and Oil Sands, respectively (Note 16).  Note 15DEFERRED CHARGES AND OTHER ASSETS  2002
  
  2001Investments
  
  $
  77
  
  $
  59Deferred pension funding
  
  34
  
  49Deferred financing costs
  
  36
  
  17Other
  
  65
  
  40$
  212
  
  $
  165  37 
   Note 16LONG-TERM DEBT  Maturity
  
  2002
  
  2001Debentures and notes7.00% unsecured debentures(US $250 million)
  
  2028
  
  $
  395
  
  $
  3987.875% unsecured debentures(US $275 million)
  
  2026
  
  434
  
  4389.25% unsecured debentures(US $300 million)
  
  2021
  
  474
  
  478Capital leases(Note 14)(1)
  
  2007-2017
  
  115
  
  87Acquisition credit
  facilities(2)
  
  2003-2005
  
  1 639
  
  3 057
  
  1 401Current portion
  
  
  
  (356
  )
  (5
  )$
  2 701
  
  $
  1 396  Interest on long-term debt
was $182 million in 2002 (2001  $134 million; 2000  $138 million).  
 (1)During 2002 the Company entered into 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 Canada crude oil production. The agreement is for an initial term
of 10 years ending in 2007 and extendible 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 $115
million, including $6 million to $9 million in each of the next five years. (2)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 3). The credit facilities, which totalled $3
320 million, can be in the form of prime loans, bankers acceptances, U.S. base
rate loans or LIBOR-based loans. In 2002, $2 100 million was drawn in the form
of Canadian dollar bankers acceptances and the Company repaid $461 million and
cancelled an additional $189 million of the facilities. This reduced the amount
of the facilities to $2 670 million at December 31, 2002, of which $1 639
million is outstanding. Proceeds from any future debt financing, excluding the
first $100 million raised, must be used to repay the amounts outstanding under
these facilities.  As at December 31, 2002, the
scheduled repayments are as follows: 2003  $350 million, 2004  $591 million
and 2005  $698 million.  Note 17DEFERRED CREDITS AND OTHER LIABILITIES  2002
  
  2001Future removal and site
  restoration costs
  
  $
  344
  
  $
  216Post-retirement benefits
  
  143
  
  133Long-term liabilities
  
  134
  
  132$
  621
  
  $
  481  Note 18SHAREHOLDERS EQUITY  2002
  
  2001Common shares
  
  $
  1 258
  
  $
  1 228Contributed surplus
  
  2 138
  
  2 138Retained earnings
  
  2 380
  
  1 511$
  5 776
  
  $
  4 877  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  38 
   Changes in common shares were as follows:  2002
  
  2001Shares
  
  Amount
  
  ContributedSurplus
  
  Shares
  
  Amount
  
  Contributed
  SurplusBalance at beginning of
  year
  
  262 191
  041
  
  $
  1 228
  
  $
  2 138
  
  269 807 215
  
  $
  1 238
  
  $
  2 456Issued for cash under
  employee stock option and share purchase plans
  
  1 403 936
  
  30
  
  
  
  1 813 581
  
  34
  
  Purchased for cancellation
  
  
  
  
  
  
  
  (9 429 755
  )
  (44
  )
  (318
  )Balance at end of year
  
  263 594
  977
  
  $
  1 258
  
  $
  2 138
  
  262 191 041
  
  $
  1 228
  
  $
  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 cost 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
directors, officers and certain employees for up to 22 million common shares.
The stock options have a maximum 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:  2002
  
  2001Shares
  
  Weighted-Average
  Exercise Price(dollars)
  
  Shares
  
  Weighted-Average
  Exercise Price(dollars)Balance at beginning of
  year
  
  7 216 770
  
  $
  26
  
  6 765 601
  
  $
  20Granted
  
  2 482 700
  
  36
  
  2 372 500
  
  37Exercised
  
  (1 403 936
  )
  22
  
  (1 813 581
  )
  18Cancelled
  
  (69 550
  )
  30
  
  (107 750
  )
  27Balance at end of year
  
  8 225 984
  
  $
  30
  
  7 216 770
  
  $
  26  The following stock options were outstanding as at December 31, 2002:  Options
  Outstanding
  
  Options
  ExercisableNumber
  
  Range
  of
  Exercise Prices(dollars)
  
  Weighted-Average
  Life(years)
  
  Weighted-Average
  Exercise Price(dollars)
  
  Number
  
  Weighted-Average
  Exercise Price(dollars)53 520
  
  $
  8 to 13
  
  1.6
  
  $
  10
  
  53 520
  
  $
  101 068 853
  
  14 to 18
  
  5.5
  
  16
  
  860 236
  
  161 607 115
  
  19 to 25
  
  6.4
  
  21
  
  1 018 058
  
  212 903 222
  
  26 to 35
  
  8.3
  
  32
  
  711 322
  
  272 593 274
  
  36 to 46
  
  8.3
  
  38
  
  554 394
  
  378 225 984
  
  $
  8 to 46
  
  7.8
  
  $
  30
  
  3 197 530
  
  $
  24  39 
   Pro Forma Net Earnings 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 options that is
amortized over the vesting period:  Earnings
  per Share2002Net Earnings
  
  Basic(dollars)
  
  Diluted(dollars)Net earnings as reported
  
  $
  974
  
  $
  3.71
  
  $
  3.67Pro forma adjustment
  
  6
  
  0.03
  
  0.03Pro forma net earnings
  
  $
  968
  
  $
  3.68
  
  $
  3.64  The estimated weighted average fair value of the options of $12.74 per
share has been determined using the Black-Scholes option-pricing model with the
following assumptions:  Risk-free interest rate
  
  4.9
  %Expected hold period to
  exercise
  
  6 yearsVolatility in the market
  price of the common shares
  
  33
  %Estimated annual dividend
  
  1.4
  %  Note 19EMPLOYEE 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
  
  2002
  
  2001
  
  2000
  
  2002
  
  2001
  
  2000(a) Defined benefit plansEmployer current service
  cost
  
  $
  25
  
  $
  22
  
  $
  20
  
  $
  3
  
  $
  2
  
  $
  3Interest cost
  
  74
  
  70
  
  69
  
  11
  
  11
  
  10Expected return on plan
  assets
  
  (83
  )
  (88
  )
  (83
  )
  
  
  
  
  Amortization of
  transitional (asset) obligation
  
  (5
  )
  (5
  )
  (5
  )
  2
  
  2
  
  1Amortization of net
  actuarial losses
  
  7
  
  
  
  
  
  
  
  
  
  18
  
  (1
  )
  1
  
  16
  
  15
  
  14(b) Defined contribution
  plans
  
  10
  
  7
  
  6Total expense
  
  $
  28
  
  $
  6
  
  $
  7
  
  $
  16
  
  $
  15
  
  $
  14Benefit
  Plan Funding
  
  $
  22
  
  $
  9
  
  $
  6
  
  $
  7
  
  $
  7
  
  $
  6  40 
   Pension
  Plans
  
  Other
  Post-
  Retirement PlansFinancial Status of Defined Benefit
  Plans
  
  2002
  
  2001
  
  2002
  
  2001Fair value of plan assets
  
  $
  927
  
  $
  1 039
  
  $
  
  
  $
  Accrued benefit obligation
  
  1 206
  
  1 119
  
  186
  
  172Funded status  plan
  deficit
  
  (279
  )
  (80
  )
  (186
  )
  (172
  )Unamortized transitional
  (asset) obligation
  
  (39
  )
  (44
  )
  21
  
  23Unamortized net actuarial
  losses
  
  352
  
  173
  
  22
  
  16Accrued benefit asset
  (liability)
  
  $
  34
  
  $
  49
  
  $
  (143
  )
  $
  (133
  )Reconciliation
  of Plan AssetsFair value of plan assets
  at beginning of year
  
  $
  1 039
  
  $
  1 113
  
  $
  
  
  $
  Acquisition
  
  26
  
  
  
  
  
  Contributions
  
  22
  
  9
  
  
  
  Benefits paid
  
  (61
  )
  (60
  )
  
  
  Actual loss on plan assets
  
  (91
  )
  (17
  )
  
  
  Other
  
  (8
  )
  (6
  )
  
  
  Fair value of plan assets
  at end of year
  
  $
  927
  
  $
  1 039
  
  $
  
  
  $
  Reconciliation
  of Accrued Benefit ObligationAccrued benefit obligation
  at beginning of year
  
  $
  1 119
  
  $
  1 047
  
  $
  172
  
  $
  160Acquisition
  
  33
  
  
  
  
  
  Current service cost
  
  25
  
  22
  
  3
  
  2Interest cost
  
  74
  
  70
  
  11
  
  11Benefits paid
  
  (61
  )
  (60
  )
  (7
  )
  (7
  )Actuarial losses
  
  12
  
  40
  
  7
  
  6Other
  
  4
  
  
  
  
  
  Accrued benefit obligation
  at end of year
  
  $
  1 206
  
  $
  1 119
  
  $
  186
  
  $
  172  Funded Status The funded status includes the following amounts in respect of plans
that are not fully funded:  Pension
  Plans
  
  Other
  Post-
  Retirement Plans2002
  
  2001
  
  2002
  
  2001Accrued benefit obligation
  
  $
  (1 206
  )
  $
  (161
  )
  $
  (186
  )
  $
  (172
  )Fair value of plan assets
  
  927
  
  67
  
  
  
  Plan deficit
  
  $
  (279
  )
  $
  (94
  )
  $
  (186
  )
  $
  (172
  )  Defined Benefit Plan Assumptions
  
  2002
  
  2001
  
  2000Year-end obligation
  discount rate
  
  6.5
  %
  6.5
  %
  6.8
  %Long-term rate of return on
  plan assets
  
  8.0
  %(1)
  8.0
  %
  8.0
  %Rate of compensation
  increase, excluding merit increases
  
  3.0
  %
  3.0
  %
  2.5
  %Annual increase in the per
  capita cost of other post-retirement benefits
  
  6.3
  %(2)
  6.2
  %
  6.2
  %  
 (1)
  7.5% in 2003 and
  thereafter.(2)
  4.2% in 2008 and
  thereafter.  41 
   Note 20FINANCIAL 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 Downstream business segment has entered into forward contracts and
options to reduce exposure to 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 has entered 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 Downstream business segment has entered into forward contracts to
reduce its exposure to exchange rate movements between the Canadian dollar and
the euro related to fixed price product sales.  Interest Rates In anticipation of issuing U.S. dollar debentures in 2003, the Company
has entered into interest rate derivatives to hedge a portion of its exposure
to adverse interest rate fluctuations. In addition, the Company has entered
into short duration Forward Rate Agreements to manage its interest rate
exposure on floating rate debt.  The Companys outstanding
contracts for derivative instruments and the related fair values at December
31, 2002 were as follows:  Quantity
  
  Average
  Price/Rate
  
  Fair
  Value
  
  MaturityCrude Oil
  and Products(millions of barrels)Crude oil purchase
  
  4.0
  
  40.59
  (1)
  $
  13
  
  2003/2004Products purchase
  
  1.4
  
  41.52
  (1)
  1
  
  2003Natural
  Gas(billions of cubic feet)Natural gas purchase
  
  0.6
  
  5.99
  (1)
  1
  
  2003Currency(millions of euro)Forwards purchase
  
  3
  
  1.5540
  (2)
  
  
  2003Interest
  Rates(millions of Canadian dollars)
  
  624
  (3)
  4.1516
  (4)
  (20
  )
  2003$
  (5
  )  
 (1)
  Canadian dollars per barrel
  or per thousand cubic feet, as applicable.(2)
  Weighted-average euro
  forward contract rate.(3)
  Canadian dollar equivalent
  comprised of US $300 million and Cdn $150 million.(4)
  Weighted-average interest
  rate percentage.  42 
   Derivative instruments involve a degree of credit risk. The Company
controls this risk through the establishment of credit policies and limits that
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, 2002 to maturity.  2002
  
  2001Carrying Amount
  
  Fair Value
  
  Carrying
  Amount
  
  Fair
  ValueFinancial instruments
  included in current
  assets and current liabilities
  
  $
  (71
  )
  $
  (71
  )
  $
  381
  
  $
  381Long-term debt
  
  $
  (3 057
  )
  $
  (3 358
  )
  $
  (1 401
  )
  $
  (1 538
  )Derivative instruments
  
  $
  
  
  $
  (5
  )
  $
  
  
  $
  (11
  )  Note 21RELATED PARTY TRANSACTIONS  Transactions with the Government of Canada (which holds 19% of the
Companys issued shares at December 31, 2002), 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 22COMMITMENTS 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 $101 million in 2003, $84
million in 2004, $69 million in 2005, $63 million in 2006, $57 million in 2007
and $50 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.  43 
   Note 23GENERALLY 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 TaxesEffective January 1, 2000 the Company adopted
the recommendations of the Canadian Institute of Chartered Accountants on
accounting for future income taxes and changed from the deferral method to the
liability method. This liability method differs from United States GAAP due to
the application of transitional provisions, 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 Standard 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.  (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.  The application of United States GAAP would have the following effects
on earnings as reported:  2002
  
  2001
  
  2000Net earnings as reported in
  the consolidated statement of earnings
  
  $
  974
  
  $
  846
  
  $
  859Adjustments, net of
  applicable income taxesCapitalization of interest
  and related amortization
  
  15
  
  31
  
  14Accounting for income taxes
  
  (92
  )
  (29
  )
  (35
  )Other
  
  (2
  )
  (1
  )
  1Net earnings, as adjusted
  
  $
  895
  
  $
  847
  
  $
  839Earnings per share, as
  adjusted  basic
  
  $
  3.41
  
  $
  3.20
  
  $
  3.08Earnings per share, as
  adjusted  diluted
  
  $
  3.37
  
  $
  3.17
  
  $
  3.06Comprehensive IncomeNet earnings, as adjusted
  
  $
  895
  
  $
  847
  
  $
  839Unrealized gain (loss) on
  financial derivatives
  
  4
  
  (7
  )
  Minimum pension liability
  
  (111
  )
  
  
  $
  788
  
  $
  840
  
  $
  839  44 
   The application of United States GAAP would have the following effects
on the consolidated balance sheets as reported:  December 31, 2002
  
  December
  31, 2001As
  Reported
  
  United States
  GAAP
  
  As
  Reported
  
  United
  States
  GAAPCurrent assets
  
  $
  2 434
  
  $
  2 434
  
  $
  2 009
  
  $
  2 009Property, plant and
  equipment, net
  
  10 084
  
  10 662
  
  7 460
  
  8 037Goodwill
  
  709
  
  688
  
  
  
  Deferred charges and other assets
  
  212
  
  209
  
  165
  
  158Current liabilities
  
  2 520
  
  2 525
  
  1 397
  
  1 408Long-term debt
  
  2 701
  
  2 701
  
  1 396
  
  1 396Deferred credits and other
  liabilities
  
  621
  
  808
  
  481
  
  481Future income taxes
  
  1 821
  
  2 073
  
  1 483
  
  1 746Common shares
  
  1 258
  
  1 258
  
  1 228
  
  1 228Contributed surplus
  
  2 138
  
  3 260
  
  2 138
  
  3 260Retained earnings
  
  2 380
  
  1 482
  
  1 511
  
  692Accumulated other
  comprehensive income (loss)
  
  $
  
  
  $
  (114
  )
  $
  
  
  $
  (7
  )  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 pronouncements have been recently issued:  Guarantees In November 2002, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 45 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45). FIN 45 elaborates on the disclosures to be made by a
guarantor about its obligations under certain guarantees issued and clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the guarantee.
Several situations are identified where the recognition of a liability at
inception for a guarantors obligation is not required. The initial recognition
and measurement provisions of FIN 45 apply on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure provisions are
effective for periods ending after December 15, 2002. The impact of adopting
the interpretation on the Companys United States GAAP consolidated financial
statements has not been determined.  Asset Retirement Obligations In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). SFAS 143 requires companies to record the
fair value of legal obligations associated with the retirement of tangible
long-lived assets in the period in which they are incurred. The liability is
capitalized as part of the cost of the related long-lived asset and amortized
to expense over the useful life of the asset. SFAS 143 is effective for all
fiscal years beginning after June 15, 2002. The effect of adopting SFAS 143 on
the Companys United States GAAP consolidated financial statements has not been
determined.  45