EXHIBIT 2
                                                                       ---------


AUDITORS' REPORT

TO THE SHAREHOLDERS OF WESTERN OIL SANDS INC.

We have audited the consolidated balance sheets of Western Oil Sands Inc. as at
December 31, 2004 and 2003 and the consolidated statements of operations and
retained earnings (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Corporation'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 Western Oil Sands Inc. as at
December 31, 2004 and 2003 and the results of its operations and its cash flows
for the years then ended in accordance with Canadian Generally Accepted
Accounting Principles.


CHARTERED ACCOUNTANTS

Calgary, Canada
February 25, 2005


<PAGE>

CONSOLIDATED BALANCE SHEETS

DECEMBER 31 (THOUSANDS)
2003                                                                       2004
-------------------------------------------------------------------------------
ASSETS
Current Assets
     Cash                                            $     3,715    $     3,770
     Accounts Receivable                                  62,564         57,994
     Inventory (NOTE 4)                                   14,186          9,100
     Prepaid Expense                                       5,771          7,033
                                                     --------------------------
                                                          86,236         77,897
                                                     --------------------------
Capital Assets (NOTE 5)                                1,351,745      1,353,317
Deferred Charges (NOTE 6)                                 18,378         20,903
Future Income Taxes (NOTE 12)                             14,511          6,307
                                                     --------------------------
                                                       1,384,634      1,380,527
                                                     --------------------------
                                                     $ 1,470,870    $ 1,458,424
                                                     --------------------------
LIABILITIES
Current Liabilities
     Accounts Payable and Accrued Liabilities        $    87,679    $    65,949
     Current Portion of Long-term Debt (NOTE 8)           95,000             --
     Current Portion of Lease Obligations (NOTE 9)         5,230          1,340
                                                     --------------------------
                                                         187,909         67,289

Long-term Liabilities
     Long-term Debt (NOTE 8)                             662,620        860,580
     Lease Obligations (NOTE 9)                           53,474         54,193
     Asset Retirement Obligation (NOTE 10)                 8,191          7,137
                                                     --------------------------
                                                         724,285        921,910
                                                     --------------------------
                                                         912,194        989,199
                                                     --------------------------

SHAREHOLDERS' EQUITY
Share Capital (NOTE 13)                                  545,699        476,667
Contributed Surplus                                        1,245            278
Retained Earnings (Deficit)                               11,732         (7,720)
                                                     --------------------------
                                                         558,676        469,225
                                                     --------------------------
                                                     $ 1,470,870    $ 1,458,424
                                                     --------------------------

Commitments and Contingencies (NOTE 18)

See Accompanying Notes to the Consolidated Financial Statements



Approved by the Board of Directors:


/s/ Robert G. Puchniak                              /s/ Mac Van Wielingen
----------------------                              ---------------------
Robert G. Puchniak                                  Mac Van Wielingen
Director                                            Director


                                     Page 2
<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
YEAR ENDED DECEMBER 31 (THOUSANDS, EXCEPT AMOUNTS PER SHARE)             2004          2003
-------------------------------------------------------------------------------------------
<S>                                                                 <C>           <C>
REVENUES
     Revenue (NOTE 17)                                              $ 636,911     $ 281,093
     Less Purchased Feedstocks and Transportation                     315,926       117,580
                                                                    -----------------------
                                                                      320,985       163,513
EXPENSES
     Operating                                                        212,993       106,825
     Royalties                                                          2,954         1,151
     General and Administrative                                         8,101         6,261
     Insurance                                                          9,350         1,661
     Interest (NOTE 11)                                                61,154        38,429
     Stock-based Compensation (NOTE 14)                                   967           278
     Accretion on Asset Retirement Obligation (NOTE 10)                   471           471
     Depreciation, Depletion and Amortization                          44,515        27,531
     Impairment of Long-lived Asset (NOTE 5)                            4,733            --
     Foreign Exchange Gain                                            (38,350)      (34,976)
                                                                    -----------------------

NET EARNINGS BEFORE INCOME TAXES                                       14,097        15,882
     Income Tax Recovery (NOTE 12)                                     (5,355)       (1,251)
                                                                    -----------------------

NET EARNINGS                                                           19,452        17,133
     Charge for Convertible Notes (NOTE 7)                                 --         2,130

NET EARNINGS ATTRIBUTABLE
     TO COMMON SHAREHOLDERS                                         $  19,452     $  15,003
                                                                    -----------------------
Deficit at Beginning of Year                                           (7,720)      (22,723)
                                                                    -----------------------
Retained Earnings (Deficit) at End of Year                          $  11,732     $  (7,720)
                                                                    -----------------------
Net Earnings Per Share (NOTE 13):
     Basic                                                          $    0.37     $    0.30
     Diluted                                                        $    0.37     $    0.29
                                                                    -----------------------
</TABLE>

See Accompanying Notes to the Consolidated Financial Statements



                                     Page 3
<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 (THOUSANDS)                                2004          2003
------------------------------------------------------------------------------------
<S>                                                          <C>           <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
     Net Earnings                                            $  19,452     $  17,133
Non-cash items:
     Stock Based Compensation (NOTE 14)                            967           278
     Accretion on Asset Retirement Obligation (NOTE 10)            471           471
     Depreciation, Depletion and Amortization                   44,515        27,531
     Impairment of Long-lived Assets (NOTE 5)                    4,733            --
     Unrealized Foreign Exchange Gain (NOTE 8)                 (39,960)      (35,280)
     Future Income Tax Recovery (NOTE 12)                       (7,104)       (4,330)

Cash Settlements of Asset Retirement Obligation (NOTE 10)          (30)           --
                                                             ------------------------
CASH FROM OPERATIONS                                            23,044         5,803
Decrease (Increase) in Non-Cash Working Capital (NOTE 19)       16,393        (7,133)
                                                             ------------------------
                                                                39,437        (1,330)
                                                             ------------------------

FINANCING ACTIVITIES
     Issue of Share Capital (NOTE 13)                           70,866        51,682
     Share Issue Expenses (NOTE 13)                             (2,934)       (2,211)
     (Repayment) Issue of Long-term Debt                       (63,000)      214,000
     Deferred Charges                                              (56)       (1,017)
     Repayment of Convertible Notes                                 --       (88,000)
     Charge for Convertible Notes (NOTE 7)                          --        (3,640)
     Repayment of Other Long-term Liabilities                   (1,343)         (470)
                                                             ------------------------
CASH GENERATED                                                   3,533       170,344
                                                             ------------------------

INVESTING ACTIVITIES
     Capital Expenditures                                      (46,399)     (158,153)
     Insurance Proceeds (NOTE 18)                                6,431         9,680
     Increase in Non-Cash Working Capital (NOTE 19)             (3,057)      (31,199)
                                                             ------------------------
Cash Invested                                                  (43,025)     (179,672)
                                                             ------------------------
Decrease in Cash                                                   (55)      (10,658)
Cash at Beginning of Year                                        3,770        14,428
                                                             ------------------------
CASH AT END OF YEAR                                          $   3,715     $   3,770
                                                             ------------------------
</TABLE>

See Accompanying Notes to the Consolidated Financial Statements



                                     Page 4
<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Tabular Dollar Amounts in Thousands, Except for Share Amounts)

1.    BUSINESS OF THE CORPORATION

WESTERN OIL SANDS INC. (THE "CORPORATION") WAS INCORPORATED ON JUNE 18, 1999
UNDER THE LAWS OF THE PROVINCE OF ALBERTA. THE CORPORATION HOLDS AN UNDIVIDED 20
PER CENT WORKING INTEREST IN AN OIL SANDS PROJECT IN THE ATHABASCA REGION OF
NORTHEAST ALBERTA (THE "PROJECT"). SHELL CANADA LIMITED AND CHEVRON CANADA
LIMITED HOLD THE REMAINING 60 PER CENT AND 20 PER CENT INTERESTS, RESPECTIVELY.
THE PROJECT CONSISTS OF DIRECT OR INDIRECT PARTICIPATION IN THE DESIGN,
CONSTRUCTION AND OPERATION OF MINING, EXTRACTING, TRANSPORTING AND UPGRADING OF
OIL SANDS DEPOSITS. THE CORPORATION IS ALSO ACTIVELY PURSUING OTHER OIL SANDS
AND RELATED BUSINESS OPPORTUNITIES.

2.    SUMMARY OF ACCOUNTING POLICIES

(a)   PRINCIPLES OF CONSOLIDATION

      THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDE THE ACCOUNTS OF THE
      CORPORATION AND ITS WHOLLY-OWNED SUBSIDIARY CORPORATIONS AND LIMITED
      PARTNERSHIP. THE CORPORATION'S OIL SANDS ACTIVITIES ARE CONDUCTED JOINTLY
      WITH OTHERS. THESE FINANCIAL STATEMENTS REFLECT ONLY THE CORPORATION'S
      PROPORTIONATE INTEREST IN SUCH ACTIVITIES.

(b)   COMMENCEMENT OF COMMERCIAL OPERATIONS

      EFFECTIVE JUNE 1, 2003, THE CORPORATION COMMENCED COMMERCIAL OPERATIONS,
      AS DETERMINED BY MANAGEMENT, AS ALL ASPECTS OF THE FACILITIES BECAME FULLY
      OPERATIONAL AND THE PROJECT ACHIEVED 50 PER CENT OF THE STATED DESIGN
      CAPACITY OF 155,000 BARRELS PER DAY. ACCORDINGLY, THE CORPORATION HAS
      RECORDED REVENUES AND EXPENSES RELATED TO THE CORPORATION'S SHARE OF
      OPERATIONS OF THE PROJECT FROM THAT DATE. PRIOR TO JUNE 1, 2003, ALL
      REVENUES, OPERATING COSTS AND INTEREST WERE CAPITALIZED AS PART OF THE
      COSTS OF THE PROJECT, AND NO DEPRECIATION, DEPLETION AND AMORTIZATION
      EXPENSED.

(c)   MEASUREMENT UNCERTAINTY

      THE PREPARATION OF FINANCIAL STATEMENTS IN CONFORMITY WITH CANADIAN
      GENERALLY ACCEPTED ACCOUNTING PRINCIPLES REQUIRES MANAGEMENT TO MAKE
      ESTIMATES AND ASSUMPTIONS THAT AFFECT THE REPORTED AMOUNTS OF ASSETS AND
      LIABILITIES AT THE DATE OF THE FINANCIAL STATEMENTS, AND THE REPORTED
      AMOUNTS OF REVENUES AND EXPENSES DURING THE REPORTING PERIOD. SUCH
      ESTIMATES RELATE TO UNSETTLED TRANSACTIONS AND EVENTS AS OF THE DATE OF
      THE CONSOLIDATED FINANCIAL STATEMENTS. ACTUAL RESULTS MAY DIFFER FROM
      THESE ESTIMATED AMOUNTS AS FUTURE EVENTS OCCUR.

      SPECIFICALLY AMOUNTS RECORDED FOR DEPRECIATION, DEPLETION AND AMORTIZATION
      ARE BASED ON ESTIMATES OF CRUDE OIL RESERVES, ASSET RETIREMENT OBLIGATION
      AMOUNTS ARE BASED ON ASSUMPTIONS OF THE FUTURE COSTS TO DISMANTLE THE
      ASSETS AND RESTORE THE SITE OF THE PROJECT AND FUTURE INCOME TAX AMOUNTS
      ARE BASED ON ASSUMPTIONS OF THE TIMING AND AT WHICH TAX RATES TEMPORARY
      DIFFERENCES ARE EXPECTED TO REVERSE. THESE ESTIMATES OF RESERVES AND
      ASSUMPTIONS OF FUTURE COSTS AND TIMING OF TAX POOL USE ARE SUBJECT TO
      MEASUREMENT UNCERTAINTY, AND THE IMPACT TO THE CONSOLIDATED FINANCIAL
      STATEMENTS OF FUTURE PERIODS COULD BE MATERIAL.

(d)   FOREIGN CURRENCY TRANSLATION

      TRANSACTIONS IN FOREIGN CURRENCIES ARE TRANSLATED INTO CANADIAN DOLLARS AT
      EXCHANGE RATES PREVAILING AT THE TRANSACTION DATES. MONETARY ASSETS AND
      LIABILITIES DENOMINATED IN A FOREIGN CURRENCY ARE TRANSLATED INTO CANADIAN
      DOLLARS AT RATES OF EXCHANGE IN EFFECT AT THE END OF THE PERIOD, WITH THE
      RESULTING UNREALIZED GAIN OR LOSS BEING RECORDED IN THE CONSOLIDATED
      STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT), AFTER THE
      COMMENCEMENT OF OPERATIONS. PRIOR TO THE COMMENCEMENT OF OPERATIONS THESE
      UNREALIZED GAINS AND LOSSES WERE CAPITALIZED.

(e)   CASH

      CASH PRESENTED IN THE CONSOLIDATED FINANCIAL STATEMENTS IS COMPRISED OF
      CASH AND CASH EQUIVALENTS AND INCLUDES SHORT-TERM INVESTMENTS WITH A
      MATURITY OF THREE MONTHS OR LESS WHEN PURCHASED.

(f)   INVENTORY

      PRODUCT AND PARTS, SUPPLIES AND OTHER INVENTORIES ARE STATED AT THE LOWER
      OF AVERAGE COST AND NET REALIZABLE VALUE.

(g)   CAPITAL ASSETS

      CAPITAL ASSETS ARE RECORDED AT COST LESS ACCUMULATED PROVISIONS FOR
      DEPRECIATION, DEPLETION AND AMORTIZATION. CAPITALIZED COSTS INCLUDE COSTS
      SPECIFICALLY RELATED TO THE ACQUISITION, EXPLORATION, DEVELOPMENT AND
      CONSTRUCTION OF THE RELATED PROJECT. THIS INCLUDES INTEREST, WHICH IS
      CAPITALIZED DURING THE CONSTRUCTION AND START-UP PHASE FOR EACH PROJECT.
      CAPITAL ASSETS ARE REVIEWED FOR IMPAIRMENT WHENEVER EVENTS OR CONDITIONS
      INDICATE THAT THEIR NET CARRYING AMOUNT MAY NOT BE RECOVERABLE FROM
      ESTIMATED FUTURE CASH FLOWS. IF AN IMPAIRMENT IS DETERMINED THE ASSETS ARE
      WRITTEN DOWN TO THE FAIR MARKET VALUE.


                                     Page 5
<PAGE>

      DEPLETION ON THE PROJECT IS PROVIDED OVER THE LIFE OF PROVED AND PROBABLE
      RESERVES ON A UNIT OF PRODUCTION BASIS, COMMENCING WHEN THE FACILITIES
      WERE SUBSTANTIALLY COMPLETE AND AFTER COMMERCIAL PRODUCTION HAD BEGUN.
      OTHER CAPITAL ASSETS ARE DEPRECIATED ON A STRAIGHT-LINE BASIS OVER THEIR
      USEFUL LIVES, EXCEPT FOR LEASE ACQUISITION COSTS AND CERTAIN MINE ASSETS,
      WHICH ARE AMORTIZED AND DEPRECIATED OVER THE LIFE OF PROVED AND PROBABLE
      RESERVES. THE ESTIMATED USEFUL LIVES OF DEPRECIABLE CAPITAL ASSETS ARE AS
      FOLLOWS:

      LEASEHOLD IMPROVEMENTS      5 YEARS

      FURNITURE AND FIXTURES      5 YEARS

      COMPUTERS                   3 YEARS

(h)   ASSET RETIREMENT OBLIGATION

      EFFECTIVE JANUARY 1, 2003, THE CORPORATION EARLY ADOPTED CICA 3110 "ASSET
      RETIREMENT OBLIGATIONS". THE NEW STANDARD REQUIRES THAT THE CORPORATION
      RECOGNIZE AN ASSET AND A LIABILITY FOR ANY EXISTING ASSET RETIREMENT
      OBLIGATIONS, WHICH IS DETERMINED BY ESTIMATING THE FAIR VALUE OF THIS
      COMMITMENT AT THE BALANCE SHEET DATE. THE FAIR VALUE IS DETERMINED BY THE
      CORPORATION BY FIRST ESTIMATING THE EXPECTED TIMING AND AMOUNT OF CASH
      FLOWS, USING THIRD PARTY COSTS, THAT WILL BE REQUIRED FOR FUTURE
      DISMANTLEMENT AND SITE RESTORATION, AND THEN PRESENT VALUING THESE FUTURE
      PAYMENTS USING A CREDIT ADJUSTED RISK FREE RATE APPROPRIATE FOR THE
      CORPORATION. ANY CHANGE IN TIMING OR AMOUNT OF THE CASH FLOWS SUBSEQUENT
      TO INITIAL RECOGNITION RESULTS IN A CHANGE IN THE ASSET AND LIABILITY.
      OVER THE ESTIMATED LIFE OF THE ASSET AND LIABILITY THE CORPORATION
      RECOGNIZES DEPLETION ON THE ASSET AND ACCRETION ON THE LIABILITY.

(i)   CONVERTIBLE NOTES

      AMOUNTS DRAWN UNDER THE NOTE PURCHASE FACILITY WERE DEEMED TO CONSIST OF
      BOTH AN EQUITY AND A LIABILITY COMPONENT IN ACCORDANCE WITH CANADIAN GAAP.
      THE INITIAL CARRYING AMOUNTS RECOGNIZED FOR THE EQUITY AND DEBT COMPONENT
      ARE ADJUSTED FOR ACCRETION TO BRING THE EQUITY COMPONENT TO THE STATED
      PRINCIPAL AMOUNT OF THE NOTE PURCHASE FACILITY AT MATURITY AND TO REMOVE
      THE DEBT COMPONENT. ACCRETION IS CHARGED DIRECTLY TO RETAINED EARNINGS
      (DEFICIT). UPON MATURITY OF THE NOTE PURCHASE FACILITY THE EQUITY
      COMPONENT AMOUNT WAS REFINANCED BY THE CORPORATION UNDER THE REVOLVING
      CREDIT FACILITY, SEE NOTE 8(C).

(j)   STOCK-BASED COMPENSATION PLANS

      THE CORPORATION HAS A STOCK-BASED COMPENSATION PLAN, WHICH IS DESCRIBED IN
      NOTE 14(A). EFFECTIVE JANUARY 1, 2002, THE CORPORATION ADOPTED CICA 3870
      "STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS". CICA 3870 IS
      APPLIED TO ALL STOCK-BASED PAYMENTS TO NON-EMPLOYEES AND TO EMPLOYEE
      AWARDS THAT ARE DIRECT AWARDS OF STOCK, STOCK APPRECIATION RIGHTS AND
      SIMILAR AWARDS TO BE SETTLED IN CASH. CICA 3870 IS APPLIED TO ALL GRANTS
      OF STOCK OPTIONS ON OR AFTER JANUARY 1, 2002.

      DURING THE FOURTH QUARTER OF 2003, EFFECTIVE FOR JANUARY 1, 2003, THE
      CORPORATION BEGAN PROSPECTIVELY RECOGNIZING COMPENSATION EXPENSE FOR
      OPTIONS GRANTED UNDER THE PLAN IN ACCORDANCE WITH THE FAIR VALUE METHOD.
      UNDER THE TRANSITIONAL PROVISIONS IN CICA 3870 THE CORPORATION IS REQUIRED
      ONLY TO APPLY THE FAIR VALUE BASED METHOD, AND RECORD COMPENSATION EXPENSE
      AND CONTRIBUTED SURPLUS, TO AWARDS GRANTED, MODIFIED OR SETTLED ON OR
      AFTER THE BEGINNING OF THE FISCAL YEAR, IN WHICH THE CORPORATION ADOPTS
      THE FAIR VALUE METHOD FOR THOSE AWARDS. ACCORDINGLY, ONLY AWARDS ISSUED
      FROM JANUARY 1, 2003, REQUIRE COMPENSATION EXPENSE TO BE RECOGNIZED IN
      ACCORDANCE WITH CICA 3870. COMPENSATION EXPENSE FOR OPTIONS GRANTED
      SUBSEQUENT TO 2003 IS DETERMINED BASED ON THE FAIR VALUES AT THE TIME OF
      GRANT AND ARE RECOGNIZED OVER THE ESTIMATED VESTING PERIODS OF THE
      RESPECTIVE OPTIONS. FOR OPTIONS GRANTED PRIOR TO JANUARY 1, 2003, THE
      CORPORATION CONTINUES TO DISCLOSE THE PRO FORMA NET EARNINGS IMPACT OF THE
      RELATED COMPENSATION EXPENSE. PRO FORMA COMPENSATION-RELATED EARNINGS
      IMPACTS ARE DETERMINED ON THE SAME BASIS AS THE 2003 OPTIONS.

      CONSIDERATION RECEIVED ON THE EXERCISE OF STOCK OPTIONS GRANTED IS
      CREDITED TO SHARE CAPITAL, AND IF RELATED TO ANY STOCK OPTIONS THAT WERE
      GRANTED DURING THE YEAR ENDED DECEMBER 31, 2003, THEN AN AMOUNT EQUAL TO
      THE COMPENSATION EXPENSE RECOGNIZED TO THAT DATE IS RECLASSIFIED FROM
      CONTRIBUTED SURPLUS TO COMMON SHARES.

      THE CORPORATION HAS A PERFORMANCE SHARE UNIT PLAN, WHICH IS DESCRIBED IN
      NOTE 14(B). THE CORPORATION, UNDER CICA 3870 "STOCK-BASED COMPENSATION AND
      OTHER STOCK-BASED PAYMENTS", IS REQUIRED TO RECOGNIZE COMPENSATION
      EXPENSE, AND CONTRIBUTED SURPLUS, RELATED TO THIS PLAN IN ACCORDANCE WITH
      THE FAIR VALUE METHOD.

      THE CORPORATION AS AN OWNER IN THE PROJECT SHARES IN ANY RELATED COSTS
      ASSOCIATED WITH THE PROJECT'S STOCK-BASED COMPENSATION PLANS. THE
      PROJECT'S PLANS INVOLVE STOCK APPRECIATION RIGHTS (SARS), WHICH MAY
      REQUIRE SETTLEMENT WITH CASH PAYMENTS. DURING THE VESTING PERIOD,
      COMPENSATION EXPENSE IS RECOGNIZED USING THE GRADED VESTING APPROACH WHEN
      THE VALUE OF THE SARS EXCEEDS THE AWARD VALUE. THE CORPORATION'S SHARE OF
      THE CHANGE IN VALUE OF THE SARS IS RECOGNIZED IN OPERATING EXPENSE IN THE
      YEAR THE CHANGE OCCURS.

(k)   REVENUE RECOGNITION

      THE REVENUE ASSOCIATED WITH THE SALE OF CRUDE OIL PRODUCTS IS RECORDED AS
      TITLE AND OTHER SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP ARE PASSED TO
      THE CUSTOMER.


                                     Page 6
<PAGE>

(l)   NET EARNINGS PER SHARE

      THE CORPORATION USES THE TREASURY STOCK METHOD TO DETERMINE THE DILUTIVE
      EFFECTS OF STOCK OPTIONS AND OTHER DILUTIVE INSTRUMENTS.

(m)   DERIVATIVE FINANCIAL INSTRUMENTS

      FINANCIAL INSTRUMENTS ARE USED BY THE CORPORATION TO HEDGE ITS EXPOSURE TO
      MARKET RISKS RELATING TO COMMODITY PRICES AND FOREIGN CURRENCY EXCHANGE
      RATES. THE CORPORATION'S POLICY IS NOT TO UTILIZE FINANCIAL INSTRUMENTS
      FOR SPECULATIVE PURPOSES.

      THE CORPORATION FORMALLY DOCUMENTS ALL RELATIONSHIPS BETWEEN HEDGING
      INSTRUMENTS AND HEDGED ITEMS AS WELL AS ITS RISK MANAGEMENT OBJECTIVES AND
      STRATEGIES FOR UNDERTAKING VARIOUS HEDGE TRANSACTIONS. THIS PROCESS
      INCLUDES LINKING ALL DERIVATIVES TO SPECIFIC ASSETS AND LIABILITIES ON THE
      BALANCE SHEET OR TO SPECIFIC FIRM COMMITMENTS OR FORECASTED TRANSACTIONS.
      THE CORPORATION ALSO ASSESSES, BOTH AT THE HEDGES' INCEPTION AND ON AN
      ONGOING BASIS, WHETHER THE DERIVATIVES THAT ARE USED IN HEDGING
      TRANSACTIONS ARE HIGHLY EFFECTIVE IN OFFSETTING CHANGES IN FAIR VALUES OR
      CASH FLOWS OF HEDGED ITEMS.

      THE CORPORATION ENTERS INTO HEDGES WITH RESPECT TO A PORTION OF ITS OIL
      PRODUCTION TO ACHIEVE A MORE PREDICTABLE CASH FLOW BY REDUCING ITS
      EXPOSURE TO PRICE AND CURRENCY FLUCTUATIONS. THESE TRANSACTIONS ARE
      ENTERED INTO WITH MAJOR CANADIAN FINANCIAL INSTITUTIONS. GAINS AND LOSSES
      FROM THESE FINANCIAL INSTRUMENTS ARE RECOGNIZED IN OIL REVENUES AS THE
      HEDGE SALE TRANSACTIONS OCCUR.

(n)   EMPLOYEE FUTURE BENEFITS

      THE CORPORATION HAS A DEFINED CONTRIBUTION PENSION PLAN FOR ITS DIRECT
      EMPLOYEES AND AS A RESULT OF THE 20 PER CENT OWNERSHIP IN THE PROJECT HAS
      A DEFINED BENEFIT PENSION PLAN FOR EMPLOYEES OF THE PROJECT. FOR THE
      DEFINED CONTRIBUTION PENSION PLAN THE EXPENSE IS RECOGNIZED AS PAYMENTS
      ARE MADE OR ENTITLEMENTS ARE EARNED.

      FOR THE DEFINED BENEFIT PENSION PLAN THE COSTS ARE DETERMINED USING THE
      PROJECTED BENEFIT METHOD PRORATED ON LENGTH OF SERVICE AND REFLECTS THE
      PROJECT'S BEST ESTIMATE OF EXPECTED PLAN INVESTMENT PERFORMANCE, SALARY
      ESCALATION, RETIREMENT AGES OF EMPLOYEES, WITHDRAWAL RATES AND MORTALITY
      RATES. THE EXPECTED RETURN ON PLAN ASSETS IS BASED ON THE FAIR VALUE OF
      THOSE ASSETS AND THE OBLIGATION IS DISCOUNTED USING A MARKET INTEREST RATE
      AT THE BEGINNING OF THE YEAR BASED ON HIGH QUALITY CORPORATE DEBT
      INSTRUMENTS. PENSION EXPENSE INCLUDES THE COST OF PENSION BENEFITS EARNED
      DURING THE CURRENT YEAR, THE INTEREST COST ON PENSION OBLIGATIONS, THE
      EXPECTED RETURN ON PENSION PLAN ASSETS, THE AMORTIZATION OF ADJUSTMENTS
      ARISING FROM PENSION PLAN AMENDMENTS AND THE EXCESS OF THE NET ACTUARIAL
      GAIN OR LOSS OVER TEN PER CENT OF THE GREATER OF THE BENEFITS OBLIGATION
      AND THE FAIR VALUE OF PLAN ASSETS. THE AMORTIZATION PERIOD COVERS THE
      EXPECTED AVERAGE REMAINING SERVICE LIFETIME OF EMPLOYEES COVERED BY THE
      PLANS.

(o)   COMPARATIVE AMOUNTS

      CERTAIN COMPARATIVE AMOUNTS HAVE BEEN RECLASSIFIED TO CONFORM TO THE
      CURRENT YEAR'S PRESENTATION.


3.    RECENTLY ISSUED CANADIAN ACCOUNTING STANDARDS

IN 2003, CANADIAN ACCOUNTING GUIDELINE 15 (ACG 15), "CONSOLIDATION OF VARIABLE
INTEREST ENTITIES" (VIE) WAS ISSUED. EFFECTIVE JANUARY 1, 2005 ACG 15 REQUIRES
CONSOLIDATION OF A VIE WHERE A COMPANY WILL ABSORB A MAJORITY OF A VIE'S LOSSES,
RECEIVE A MAJORITY OF ITS RETURNS, OR BOTH. THE CORPORATION HAS ENTERED INTO
OPERATING LEASES, AS DESCRIBED IN NOTE 18(A), WITH A VIE. THESE OPERATING
LEASES, AS CURRENTLY STRUCTURED, DO NOT MEET THE ACG 15 CRITERIA FOR
CONSOLIDATION BY THE CORPORATION.


4.    INVENTORY
                                                         2004             2003
-------------------------------------------------------------------------------
Product Inventory                                   $   8,314        $   3,381
Parts, Supplies and Other                               5,872            5,719
-------------------------------------------------------------------------------
                                                    $  14,186        $   9,100
-------------------------------------------------------------------------------


<TABLE>
<CAPTION>
5.    CAPITAL ASSETS

2004                                                       COST        ACCUM. DD&A*             NET
----------------------------------------------------------------------------------------------------
<S>                                                <C>                <C>               <C>
Oil Sands Project                                  $  1,341,395       $   (58,955)      $ 1,282,440
Oil Sands Project Assets Under Capital Lease             52,705            (2,439)           50,266
Other Assets                                             20,105            (1,066)           19,039
----------------------------------------------------------------------------------------------------
                                                   $  1,414,205       $   (62,460)      $ 1,351,745
----------------------------------------------------------------------------------------------------

<CAPTION>
2003
----------------------------------------------------------------------------------------------------
<S>                                                <C>                <C>               <C>
Oil Sands Project                                  $  1,304,460       $   (18,954)      $ 1,285,506
Oil Sands Project Assets Under Capital Lease             52,744              (795)           51,949
Other Assets                                             16,639              (777)           15,862
----------------------------------------------------------------------------------------------------
                                                   $  1,373,843       $   (20,526)      $ 1,353,317
----------------------------------------------------------------------------------------------------
</TABLE>

* Accumulated Depreciation, Depletion and Amortization


                                     Page 7
<PAGE>

DURING 2004 AN ASSET WITH AN AGGREGATE COST OF $4.7 MILLION WAS WRITTEN OFF,
AFTER THE CORPORATION DETERMINED IT TO BE IMPAIRED. THE ASSET RELATED TO
CERTAIN ACTIVITIES THE CORPORATION WAS PURSUING REGARDING HYDROGEN
PRODUCTION TECHNOLOGY. THE ASSET WAS DETERMINED TO BE IMPAIRED AFTER THE
CORPORATION RECEIVED A NEGATIVE PRELIMINARY TECHNICAL ANALYSIS OF THE
TECHNOLOGY.


6.    DEFERRED CHARGES

                                                        2004             2003
------------------------------------------------------------------------------
Deferred Charges                                  $     28,496      $    28,440
Less: Amortization                                     (10,118)          (7,537)
------------------------------------------------------------------------------
                                                  $     18,378      $    20,903
------------------------------------------------------------------------------

DEFERRED CHARGES INCLUDE PRIMARILY DEBT FINANCING COSTS THAT HAVE BEEN INCURRED
IN ESTABLISHING THE CORPORATION'S VARIOUS DEBT FACILITIES. THESE AMOUNTS ARE
BEING AMORTIZED OVER THE TERM OF THE RELATED DEBT FACILITIES FOLLOWING START-UP
OF THE PROJECT.


7.    CONVERTIBLE NOTES

ON OCTOBER 25, 2001, THE CORPORATION ESTABLISHED AN $88 MILLION TWO-YEAR NOTE
PURCHASE FACILITY (THE "NOTE PURCHASE FACILITY") WITH A CANADIAN CHARTERED BANK.
BORROWINGS UNDER THE NOTE PURCHASE FACILITY BORE INTEREST AT THE BANK'S PRIME
LENDING RATE, THE BANKERS' ACCEPTANCE RATE OR THE LIBOR RATE PLUS APPLICABLE
MARGINS RANGING FROM 125 TO 225 BASIS POINTS. THE NOTES ISSUABLE PURSUANT TO
DRAWS ON THE NOTE PURCHASE FACILITY WERE CONVERTIBLE, AT MATURITY AT THE OPTION
OF THE CORPORATION AND IN THE EVENT OF A DEFAULT AT THE OPTION OF THE BANK, INTO
COMMON SHARES OF THE CORPORATION. THE CONVERTIBLE NOTES MATURED ON OCTOBER 25,
2003, AND THE CORPORATION REFINANCED THESE CONVERTIBLE NOTES USING AVAILABILITY
THAT IT HAD UNDER ITS REVOLVING CREDIT FACILITY (SEE NOTE 8 (C)). FOR THE YEAR
ENDED DECEMBER 31, 2003, THE CORPORATION ACCRETED $3.6 MILLION ($2.1 MILLION NET
OF TAX) IN RESPECT TO THE INTEREST PAID ON THE NOTE PURCHASE FACILITY.

<TABLE>
<CAPTION>
8.    LONG-TERM DEBT
                                                                2004            2003
-------------------------------------------------------------------------------------
<S>   <C>                                                 <C>             <C>
    US$450 million Senior Secured Notes            (a)    $  541,620      $ 581,580
    Senior Credit Facility                         (b)        95,000          91,000
    Revolving Credit Facility                      (c)       121,000         188,000
-------------------------------------------------------------------------------------
                                                             757,620         860,580
    Less: Current Portion of Long-term Debt        (b)      (95,000)               -
-------------------------------------------------------------------------------------
                                                          $  662,620      $  860,580
-------------------------------------------------------------------------------------
</TABLE>

(a)  THE SENIOR SECURED NOTES (THE "NOTES") BEAR INTEREST AT 8.375 PER CENT AND
     HAVE A MATURITY OF MAY 1, 2012. THE NOTES PROVIDE THE HOLDERS WITH SECURITY
     OVER ALL THE ASSETS OF THE CORPORATION, SUBORDINATED TO THE SENIOR CREDIT
     FACILITY, UNTIL THE CORPORATION ACHIEVES AN INVESTMENT GRADE CORPORATE
     CREDIT RATING, AT WHICH TIME THE SENIOR SECURED NOTES BECOME UNSECURED.

     THE SENIOR SECURED NOTES ARE RECORDED IN CANADIAN DOLLARS AT THE EXCHANGE
     RATE IN EFFECT AT THE BALANCE SHEET DATE. AN UNREALIZED FOREIGN EXCHANGE
     GAIN TOTALLING $40.0 MILLION WAS RECOGNIZED FOR THE YEAR ENDED DECEMBER 31,
     2004, AS A RESULT OF CHANGES IN THE FOREIGN EXCHANGE RATE BETWEEN THE US
     AND CANADIAN DOLLARS. AN UNREALIZED FOREIGN EXCHANGE GAIN TOTALLING $129.3
     MILLION WAS RECOGNIZED FOR THE YEAR ENDED DECEMBER 31, 2003, OF WHICH $94.0
     MILLION WAS CAPITALIZED AS IT OCCURRED PRIOR TO COMMERCIAL OPERATIONS AND
     THE BALANCE OF $35.3 MILLION WAS RECOGNIZED AS AN UNREALIZED FOREIGN
     EXCHANGE GAIN IN THE STATEMENT OF OPERATIONS AND DEFICIT.

(b)  THE $100 MILLION SENIOR CREDIT FACILITY (THE "SENIOR CREDIT FACILITY")
     BEARS INTEREST AT THE LENDERS' PRIME LENDING RATE, THE BANKERS' ACCEPTANCE
     RATE OR THE LIBOR RATE PLUS APPLICABLE MARGINS RANGING FROM 100 TO 200
     BASIS POINTS. THE SENIOR CREDIT FACILITY MATURES AND IS REPAYABLE ON APRIL
     23, 2005. THE CORPORATION IS CURRENTLY IN THE PROCESS OF REFINANCING THE
     SENIOR CREDIT FACILITY THROUGH THE ASSUMPTION OF THE FULL $100 MILLION INTO
     THE $240 MILLION REVOLVING CREDIT FACILITY DESCRIBED IN NOTE 8(C). THE
     CORPORATION EXPECTS THIS TO BE COMPLETED BY THE END OF THE FIRST QUARTER OF
     2005. THIS ABILITY TO ROLL THE AMOUNT WAS SPECIFICALLY STRUCTURED UNDER THE
     REVOLVING CREDIT FACILITY AT ITS INCEPTION. UNDER CANADIAN GENERALLY
     ACCEPTED ACCOUNTING PRINCIPLES THE CORPORATION DOES NOT MEET ALL OF THE
     REQUIRED CRITERIA TO CLASSIFY THE SENIOR CREDIT FACILITY AS LONG-TERM, AS
     SUCH THE AMOUNT IS CLASSIFIED AS A CURRENT LIABILITY.

     THE SENIOR CREDIT FACILITY CONTAINS CERTAIN COVENANTS AND OTHER PROVISIONS,
     WHICH RESTRICT THE CORPORATION'S ABILITY TO INCUR ADDITIONAL INDEBTEDNESS,
     PAY DIVIDENDS OR MAKE DISTRIBUTIONS OF ANY KIND, UNDERTAKE AN EXPANSION OF
     THE PROJECT,


                                     Page 8
<PAGE>

      DISPOSE OF ITS INTEREST IN THE PROJECT, OR CHANGE THE NATURE OF ITS
      BUSINESS. THE SENIOR CREDIT FACILITY PROVIDES THE BANKS WITH SECURITY OVER
      ALL OF THE ASSETS OF THE CORPORATION, WITH THE EXCEPTION OF CERTAIN
      INTERCOMPANY NOTES AND NOTE GUARANTEES ISSUED IN CONNECTION WITH THE NOTES
      DETAILED IN NOTE 8(A). AT DECEMBER 31, 2004, AN AMOUNT OF $95 MILLION ($91
      MILLION - 2003) HAD BEEN DRAWN UNDER THIS SENIOR CREDIT FACILITY AND NO
      LETTERS OF CREDIT HAD BEEN ISSUED ($7.1 MILLION - 2003).

(c)   THE $240 MILLION REVOLVING CREDIT FACILITY ("REVOLVING CREDIT FACILITY")
      BEARS INTEREST AT THE LENDERS' PRIME LENDING RATE, THE BANKERS' ACCEPTANCE
      RATE OR THE LIBOR RATE PLUS APPLICABLE MARGINS RANGING FROM 100 TO 200
      BASIS POINTS. THE REVOLVING CREDIT FACILITY PROVIDES THE BANKS WITH
      SECURITY OVER ALL OF THE ASSETS OF THE CORPORATION, WITH THE EXCEPTION OF
      CERTAIN INTERCOMPANY NOTES AND NOTE GUARANTEES IN CONNECTION WITH THE
      NOTES DETAILED IN NOTE 8(A), AND HAS CERTAIN FINANCIAL COVENANTS,
      INCLUDING A LIMIT ON THE AMOUNT AVAILABLE FOR DRAWDOWN. AT DECEMBER 31,
      2004, THE LIMIT AVAILABLE FOR DRAWDOWN WAS $181 MILLION ($215.0 MILLION -
      2003), OF WHICH $121 MILLION ($188 MILLION - 2003) HAD BEEN DRAWN AND $8.1
      MILLION ($0.5 MILLION - 2003) HAD BEEN ISSUED IN LETTERS OF CREDIT. THE
      REVOLVING FACILITY CONTAINS A TWO-YEAR TERM-OUT PROVISION SHOULD THE
      FACILITY NOT BE RENEWED.


9.    LEASE OBLIGATIONS
                                                        2004              2003
-------------------------------------------------------------------------------
Obligations Under Capital Lease                 $     51,609       $    52,950
Operating Lease Guarantee Obligation                   7,095             2,583
-------------------------------------------------------------------------------
                                                      58,704            55,533
Less: Current Portion                                (5,230)           (1,340)
-------------------------------------------------------------------------------
                                                $     53,474       $    54,193
-------------------------------------------------------------------------------

THE CAPITAL LEASE OBLIGATION RELATES TO THE CORPORATION'S SHARE OF CAPITAL COSTS
FOR THE HYDROGEN-MANUFACTURING UNIT WITHIN THE PROJECT. REPAYMENT OF THE
PRINCIPAL OBLIGATION WAS $1.3 MILLION IN 2004 AND IS SCHEDULED TO REMAIN AT THAT
LEVEL UNTIL FULLY REPAID.

UNDER THE MOBILE EQUIPMENT LEASE, DESCRIBED IN NOTE 18(A), THE CORPORATION IS
COMMITTED TO PAY ITS 20 PER CENT SHARE OF AN AMOUNT EQUAL TO 85 PER CENT OF THE
ORIGINAL COST OF THE EQUIPMENT TO THE LESSOR AT THE END OF THE TERMS OF THE
LEASE. ACCORDINGLY, THE CORPORATION RECOGNIZES, AS A LIABILITY, A PORTION OF
THIS FUTURE PAYMENT AS IT RELATES TO THE SERVICE LIFE OF THE EQUIPMENT THAT HAS
PASSED.


10.   ASSET RETIREMENT OBLIGATION

THE CORPORATION, IN ASSOCIATION WITH ITS 20 PER CENT WORKING INTEREST IN THE
PROJECT, IS ALSO RESPONSIBLE FOR ITS SHARE OF FUTURE DISMANTLEMENT COSTS AND
SITE RESTORATION COSTS IN THE MINING, EXTRACTING AND UPGRADING ACTIVITIES. THE
PROJECT CURRENTLY ESTIMATES THAT THE TOTAL UNDISCOUNTED AMOUNT OF THESE COSTS TO
BE APPROXIMATELY $192.5 MILLION ($184.1 MILLION - 2003) WITH THE MAJORITY OF
THAT AMOUNT TO BE PAID AT THE END OF THE CURRENT RESERVES FOR THE PROJECT. THE
CORPORATION HAS ASSUMED A CREDIT ADJUSTED RISK FREE RATE OF 6.0 PER CENT TO
DISCOUNT ITS SHARE OF THESE PAYMENTS (7.0 PER CENT - 2003). THE FOLLOWING TABLE
PRESENTS THE RECONCILIATION OF THE ASSET RETIREMENT OBLIGATION FROM THE
BEGINNING OF EACH RESPECTIVE PERIOD UNTIL THE END OF THAT PERIOD:

                                                             2004         2003
-------------------------------------------------------------------------------
Asset Retirement Obligation at Beginning of Year         $  7,137     $  6,342
Liabilities Incurred                                          613          386
Liabilities Settled                                           (30)         (62)
Accretion on Asset Retirement Obligation                      471          471
-------------------------------------------------------------------------------
Asset Retirement Obligation at End of Year               $  8,191     $  7,137
-------------------------------------------------------------------------------


11.   INTEREST EXPENSE

                                                             2004          2003
--------------------------------------------------------------------------------
Interest on Long-term Debt                               $ 59,118     $  60,522
Capitalized Interest in Oil Sands Project                       -       (23,479)
--------------------------------------------------------------------------------
Interest Expense, Net                                      59,118        37,043
Interest on Obligations Under Capital Lease                 2,036         1,386
--------------------------------------------------------------------------------
                                                         $ 61,154     $  38,429
--------------------------------------------------------------------------------

IT IS THE CORPORATION'S POLICY TO CAPITALIZE CARRYING COSTS INCLUDING INTEREST
EXPENSE FOR CAPITAL ASSETS ACQUIRED, CONSTRUCTED OR DEVELOPED OVER TIME. AS AT
DECEMBER 31, 2003, $87.1 MILLION HAD BEEN CAPITALIZED AS PART OF THE COST OF THE
PROJECT, REPRESENTING THE INTEREST EXPENSE FROM INCEPTION TO JUNE 1, 2003, THE
DATE THE CORPORATION COMMENCED COMMERCIAL OPERATIONS.


                                     Page 9
<PAGE>

ON A CASH BASIS INTEREST PAID FOR THE YEAR ENDED DECEMBER 31, 2004, WAS $61.0
MILLION (DECEMBER 31, 2003 - $63.8 MILLION). CASH INTEREST RECEIVED FOR THE YEAR
ENDED DECEMBER 31, 2004, WAS $0.1 MILLION (DECEMBER 31, 2003 - $0.2 MILLION).

12.   INCOME TAXES

                                                        2004             2003
------------------------------------------------------------------------------
Large Corporations Tax                            $    1,749      $     3,079
Future Income Tax Recovery                            (7,104)          (4,330)
------------------------------------------------------------------------------
INCOME TAX RECOVERY                               $   (5,355)     $    (1,251)
------------------------------------------------------------------------------

CASH TAXES PAID DURING THE YEAR ENDED DECEMBER 31, 2004, WERE $1.7 MILLION
(DECEMBER 31, 2003 - $4.5 MILLION) AND RELATED SOLELY TO LARGE CORPORATIONS TAX.

AT DECEMBER 31, THE FUTURE INCOME TAX LIABILITY CONSISTS OF:

                                                          2004            2003
-------------------------------------------------------------------------------
Future Income Tax Assets
   Net Losses Carried Forward                     $     61,697     $    49,682
   Share Issue Costs                                     1,355           1,723
   Impairment of Long-lived Assets                         796              --
Future Income Tax Liabilities
   Capital Assets in Excess of Tax Values              (34,242)        (38,860)
   Unrealized Foreign Exchange Gain                    (12,648)         (6,209)
   Debt Issue Costs                                     (2,447)            (29)
-------------------------------------------------------------------------------
NET FUTURE INCOME TAX ASSET                       $     14,511     $     6,307
-------------------------------------------------------------------------------

THE FOLLOWING TABLE RECONCILES INCOME TAXES CALCULATED AT THE CANADIAN STATUTORY
RATE OF 38.87 PER CENT (2003 - 41.12 PER CENT) WITH ACTUAL INCOME TAXES:

                                                              2004         2003
--------------------------------------------------------------------------------
Net Earnings (Loss) Before Income Taxes                 $   14,097    $  15,882
Income Tax Expense (Recovery) at Statutory Rate              5,480        6,531
Effect of Tax Rate Changes and Timing of Use                (4,826)       1,851
Non-Taxable Portion of Foreign Exchange Gain                (8,815)      (8,298)
Non-Taxable Portion of Impairment of Long-lived Assets       1,044           --
Resource Allowance                                          (5,012)      (4,414)
Provision to Actual                                          5,025           --
Large Corporations Tax                                       1,749        3,079
--------------------------------------------------------------------------------
INCOME TAX RECOVERY                                     $   (5,355)    $ (1,251)
--------------------------------------------------------------------------------

AT DECEMBER 31, 2004, THE CORPORATION HAD APPROXIMATELY $1.5 BILLION OF TAX
POOLS AVAILABLE. INCLUDED IN THE TAX POOLS ARE $163.8 MILLION OF TAX LOSS CARRY
FORWARD BALANCES AS ESTIMATED AT DECEMBER 31, 2004, WITH EXPIRY DATES AS
FOLLOWS:

YEAR CREATED                           AMOUNT                           EXPIRY
-------------------------------------------------------------------------------
2000                        $    10.3 million                             2007
2001                        $     8.8 million                             2008
2002                        $    24.7 million                             2009
2003                        $   118.8 million                             2010
2004                        $     1.2 million                             2011


13.   SHARE CAPITAL

(a)   AUTHORIZED

      THE CORPORATION IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF CLASS A
      SHARES ("COMMON SHARES"), AN UNLIMITED NUMBER OF NON-VOTING CONVERTIBLE
      CLASS B EQUITY SHARES ("CLASS B SHARES"), AN UNLIMITED NUMBER OF
      NON-VOTING CLASS C PREFERRED SHARES AND AN UNLIMITED NUMBER OF CLASS D
      PREFERRED SHARES, ISSUABLE IN SERIES.

      THE COMMON SHARES ARE WITHOUT NOMINAL OR PAR VALUE. THE CLASS D PREFERRED
      SHARES, SERIES A, WHICH HAVE BEEN ISSUED, WERE CONVERTED INTO COMMON
      SHARES AT THE HOLDERS' OPTIONS PRIOR TO REDEMPTION ON A ONE-FOR-ONE BASIS.


                                    Page 10
<PAGE>

(b)   ISSUED AND OUTSTANDING

                                                       NUMBER
                                                    OF SHARES           AMOUNT
-------------------------------------------------------------------------------
COMMON SHARES
Balance at December 31, 2002                       47,742,471     $    414,312
Issued for Cash                                     2,050,000           50,225
Issued on Exercise of Employee Stock Options          163,800            1,457
Share Issue Costs, Net of Tax                               -           (1,290)
Balance at December 31, 2003                       49,956,271          464,704
Issued for Cash                                     2,000,000           68,000
Issued on Exercise of Employee Stock Options          161,600            1,630
Issued on Exercise of Warrants                        494,224            1,236
Conversion of Class D Preferred Shares                666,667           11,963
Share Issue Costs, Net of Tax                              --           (1,834)
Balance at December 31, 2004                       53,278,762          545,699

CLASS D PREFERRED SHARES
Balance at December 31, 2003                          666,667           11,963
Conversion of Class D Preferred Shares               (666,667)         (11,963)
Balance at December 31, 2004                               --               --
TOTAL SHARE CAPITAL                                53,278,762     $    545,699


(c)   ISSUANCES

      ON FEBRUARY 7, 2003, THE CORPORATION COMPLETED A PUBLIC OFFERING FOR THE
      ISSUANCE OF 2,050,000 COMMON SHARES FOR AGGREGATE PROCEEDS OF $50.2
      MILLION, BEFORE CONSIDERATION OF SHARE ISSUE COSTS OF $2.2 MILLION ($1.3
      MILLION NET OF TAX). THIS OFFERING WAS UNDERWRITTEN BY A SYNDICATE OF
      CANADIAN UNDERWRITERS AND UNDERTAKEN THROUGH THE FILING OF A SHORT FORM
      PROSPECTUS. PROCEEDS OF THIS OFFERING WERE USED TO PAY DOWN CERTAIN
      AMOUNTS THAT HAD BEEN DRAWN ON THE BANK DEBT AND TO FUND CAPITAL
      EXPENDITURES.

      ON APRIL 8, 2004, THE CORPORATION COMPLETED A PUBLIC OFFERING FOR THE
      ISSUANCE OF 2,000,000 COMMON SHARES FOR TOTAL PROCEEDS OF $68.0 MILLION,
      BEFORE CONSIDERATION OF THE SHARE ISSUE COSTS OF $2.9 MILLION ($1.8
      MILLION NET OF TAX). THE OFFERING WAS UNDERWRITTEN BY A SYNDICATE OF
      CANADIAN UNDERWRITERS AND UNDERTAKEN THROUGH THE FILING OF A SHORT FORM
      PROSPECTUS. THE COMMON SHARES WERE OFFERED TO THE PUBLIC ON A BOUGHT-DEAL
      BASIS THROUGH A SYNDICATE OF CANADIAN UNDERWRITERS. PROCEEDS OF THIS
      OFFERING WERE USED TO PAY DOWN CERTAIN AMOUNTS THAT HAD BEEN DRAWN ON THE
      BANK DEBT, FOR GENERAL CORPORATE PURPOSES AND FOR EXPANSION OPPORTUNITIES.

(d)   WARRANTS

      THE CORPORATION HAD 494,224 CLASS A WARRANTS OUTSTANDING AT DECEMBER 31,
      2003. DURING THE YEAR ENDED DECEMBER 31, 2004, THE CLASS A WARRANTS WERE
      EXERCISED FOR TOTAL PROCEEDS OF $1.2 MILLION. EACH CLASS A WARRANT
      ENTITLED THE HOLDER TO PURCHASE ONE COMMON SHARE AT $2.50 PER SHARE UNTIL
      FIVE YEARS AFTER START-UP OF THE PROJECT.

(e)   CLASS D PREFERRED SHARES

      THE CORPORATION HAD 666,667 CLASS D PREFERRED SHARES, SERIES A
      OUTSTANDING. THE CLASS D PREFERRED SHARES, SERIES A, WERE CONVERTED ON
      DECEMBER 31, 2004, INTO COMMON SHARES AT THE HOLDERS' OPTION PRIOR TO
      REDEMPTION ON A ONE-FOR-ONE BASIS. IF NOT CONVERTED, THEY WERE REDEEMABLE
      AT THE OPTION OF THE CORPORATION AT ANY TIME AT A PRICE EQUAL TO THEIR
      ISSUE PRICE, PLUS A CUMULATIVE DIVIDEND OF 12 PER CENT PER YEAR COMPOUNDED
      SEMI-ANNUALLY UNTIL JANUARY 1, 2007, FROM WHICH DATE THE DIVIDEND WOULD
      HAVE INCREASED BY THREE PER CENT PER QUARTER TO A MAXIMUM OF 24 PER CENT
      PER YEAR. CASH DIVIDENDS WERE NOT PAID ON THE CLASS D PREFERRED SHARES.

(f)   CALL OBLIGATIONS

      THE CORPORATION ENTERED INTO CALL OBLIGATION AGREEMENTS WITH CERTAIN
      SHAREHOLDERS, WHICH OBLIGATED THE HOLDERS OF THE OBLIGATIONS TO PURCHASE
      UP TO 3,040,000 CLASS B SHARES FOR $5.00 PER SHARE. THE CORPORATION WAS
      ENTITLED TO REQUIRE THE SUBSCRIBER TO EXERCISE THEIR CALL OBLIGATIONS AT
      ITS DISCRETION UPON THE SATISFACTION OF CERTAIN CONDITIONS. THESE CALL
      OBLIGATIONS WERE TO HAVE EXPIRED ON DECEMBER 31, 2001, BUT WERE EXTENDED
      UNTIL MARCH 31, 2003 AT WHICH TIME THEY EXPIRED UNEXERCISED. AN ADDITIONAL
      2,589,641 CALL OBLIGATIONS WERE ENTERED INTO IN JULY 2001, WHEREBY EACH
      CALL OBLIGATION IS EXERCISABLE INTO ONE CLASS B SHARE AND ONE WARRANT TO
      PURCHASE A CLASS B SHARE UPON THE PAYMENT OF $13.00 PER CALL OBLIGATION.
      THESE CALL OBLIGATIONS WERE EXERCISABLE UNTIL MARCH 31, 2003 AND THE
      UNDERLYING WARRANT WAS EXERCISABLE AT THE THEN MARKET PRICE FOR A PERIOD
      OF FOUR YEARS AFTER THE CALL OBLIGATION EXERCISE. THESE OBLIGATIONS
      EXPIRED UNEXERCISED.


                                    Page 11
<PAGE>

(g)   NET EARNINGS PER SHARE

      THE FOLLOWING TABLE SUMMARIZES THE COMMON SHARES USED IN CALCULATING NET
      EARNINGS PER COMMON SHARE:

<TABLE>
<CAPTION>
                                                                  2004          2003
-------------------------------------------------------------------------------------
<S>                                                         <C>           <C>
Weighted Average Common Shares Outstanding - Basic          52,308,838    50,344,332
Effect of Stock Options and Warrants                           943,294       965,308
-------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding - Diluted        53,252,132    51,309,640
-------------------------------------------------------------------------------------
</TABLE>


14.   STOCK OPTIONS

(a)   STOCK OPTION PLAN

      THE CORPORATION HAS ESTABLISHED A STOCK OPTION PLAN FOR THE ISSUANCE OF
      OPTIONS TO PURCHASE COMMON SHARES TO DIRECTORS, OFFICERS AND EMPLOYEES OF
      THE CORPORATION AND ITS SUBSIDIARIES. OPTIONS GRANTED UNDER THE STOCK
      OPTION PLAN GENERALLY VEST ON AN ANNUAL BASIS OVER FOUR YEARS. THE STOCK
      OPTIONS EXPIRE FIVE YEARS FROM EACH VESTING DATE.

<TABLE>
<CAPTION>
                                                       2004                                    2003
---------------------------------------------------------------------------------------------------------------
                                                               WEIGHTED                              WEIGHTED
                                                                AVERAGE                                AVERAGE
                                         NUMBER OF            EXERCISE           NUMBER OF            EXERCISE
                                           OPTIONS                PRICE            OPTIONS               PRICE
---------------------------------------------------------------------------------------------------------------
<S>                                      <C>                <C>                  <C>                <C>
Outstanding at Beginning of Year         1,344,700          $     17.25          1,329,500          $    14.40
Granted                                    106,183                34.82            233,000               25.72
Exercised                                (161,600)                10.09          (163,800)                8.90
Cancelled                                 (33,637)                21.54           (54,000)                9.13
---------------------------------------------------------------------------------------------------------------
Outstanding at End of Year               1,255,646          $     19.54          1,344,700          $    17.25
---------------------------------------------------------------------------------------------------------------
Exercisable at End of Year                 740,325          $     15.05            660,700          $    11.46
---------------------------------------------------------------------------------------------------------------
</TABLE>

  THE FOLLOWING TABLE SUMMARIZES STOCK OPTIONS OUTSTANDING AND EXERCISABLE
  UNDER THE STOCK OPTION PLAN AT DECEMBER 31, 2004:

<TABLE>
<CAPTION>
                                               OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
---------------------------------------------------------------------------------------------------------------
                                                       WEIGHTED       WEIGHTED                        WEIGHTED
                                                        AVERAGE        AVERAGE                         AVERAGE
                                      NUMBER OF       REMAINING       EXERCISE      NUMBER OF         EXERCISE
EXERCISE PRICE                          OPTIONS    LIFE (YEARS)          PRICE        OPTIONS            PRICE
---------------------------------------------------------------------------------------------------------------
<S>                                   <C>          <C>               <C>            <C>              <C>
$   8.50   -    $   12.00               372,500             4.0      $    8.59        372,500        $    8.59
$  12.01   -    $   16.00               143,250             5.6          14.78        104,125            14.79
$  20.01   -    $   24.00               406,500             6.2          23.85        203,250            23.85
$  24.01   -    $   28.00               181,300             7.3          25.07         47,950            25.01
$  28.01   -    $   32.00                50,000             8.0          28.22         12,500            28.22
$  32.01   -    $   36.00                72,096             8.2          32.86              -                -
$  37.80   -    $   41.80                30,000             8.9          39.87              -                -
---------------------------------------------------------------------------------------------------------------
                                      1,255,646             5.9      $   19.54        740,325        $   15.05
---------------------------------------------------------------------------------------------------------------
</TABLE>

      THE NUMBER OF COMMON SHARES RESERVED FOR ISSUANCE UNDER THE STOCK OPTION
      PLAN WAS 2,446,100 AT DECEMBER 31, 2004 (2,607,700 AT DECEMBER 31, 2003).

(b)   PERFORMANCE SHARE UNIT PLAN

      IN FEBRUARY 2004 THE CORPORATION INITIATED A PERFORMANCE SHARE UNIT PLAN
      ("PSUP"). AWARDS UNDER PSUP WILL BE IN THE FORM OF UNITS ("UNIT AWARDS"),
      WITH EACH UNIT ENTITLING THE HOLDER TO RECEIVE ONE COMMON SHARE OF THE
      CORPORATION FOR NO ADDITIONAL CONSIDERATION AND SUBJECT TO CERTAIN
      RESTRICTIONS. EACH UNIT AWARD WILL VEST AT A RATE OF ONE THIRD OF THE
      UNITS AWARDED THEREUNDER ANNUALLY OVER A THREE-YEAR PERIOD, CONDITIONAL ON
      THE CORPORATION ACHIEVING AN ACCEPTABLE TOTAL SHAREHOLDER RETURN AGAINST A
      PEER GROUP. IF TOTAL SHAREHOLDER RETURN AT A PARTICULAR VESTING DATE IS IN
      THE BOTTOM 25 PER CENT OF THE PEER GROUP, NONE OF THE UNITS OTHERWISE
      ELIGIBLE TO VEST WITH RESPECT TO SUCH UNIT AWARD WILL VEST. IF TOTAL
      SHAREHOLDER RETURN AT A PARTICULAR VESTING DATE IS IN THE TOP 25 PER CENT
      OF THE PEER GROUP, 150 PER CENT OF THE UNITS ELIGIBLE TO VEST ON SUCH DATE
      WILL VEST. IF TOTAL SHAREHOLDER RETURN AT A PARTICULAR VESTING DATE IS IN
      THE MIDDLE 50 PER CENT OF THE PEER GROUP, ALL OF THE UNITS ELIGIBLE TO
      VEST ON SUCH DATE WILL VEST. DURING 2004 THE CORPORATION GRANTED 38,679
      UNIT AWARDS, OF THIS 5,582 WERE CANCELLED DURING THE YEAR AND 33,097
      REMAIN AT DECEMBER 31, 2004.

(c)   STOCK-BASED COMPENSATION

      DURING 2004, THE CORPORATION RECOGNIZED $1.0 MILLION ($0.3 - 2003) IN
      COMPENSATION EXPENSE RELATED TO STOCK-BASED COMPENSATION ISSUED SUBSEQUENT
      TO JANUARY 1, 2003. THIS IS THE PORTION OF STOCK-BASED COMPENSATION THAT
      IS RELATED TO


                                    Page 12
<PAGE>

      2004 EMPLOYEE SERVICES RENDERED AND IS COMPRISED OF $0.7 MILLION ($0.3 -
      2003) IN RESPECT TO THE CORPORATION'S STOCK OPTION PLAN AND $0.3 MILLION
      (NIL - 2003) IN RESPECT TO THE CORPORATION'S PERFORMANCE SHARE UNIT PLAN.

      THE WEIGHTED AVERAGE FAIR VALUE OF THE 106,183 OPTIONS GRANTED DURING 2004
      WAS $12.52 USING THE BLACK-SCHOLES OPTION PRICING MODEL. IN 2003 THERE
      WERE 233,000 OPTIONS GRANTED AT A WEIGHTED AVERAGE FAIR VALUE OF $9.08.
      THE FOLLOWING TABLE SETS OUT THE ASSUMPTIONS USED IN APPLYING THE
      BLACK-SCHOLES MODEL:

                                                      2004               2003
------------------------------------------------------------------------------
Risk Free Interest Rate, Average For Year            4.34%              4.54%
Expected Life (In Years)                              6.00               5.00
Expected Volatility                               26 - 30%                30%
Dividend Per Share                                      --                 --
------------------------------------------------------------------------------

      NO COMPENSATION EXPENSE HAS BEEN RECOGNIZED FOR STOCK OPTIONS GRANTED
      BEFORE JANUARY 1, 2003, IN ACCORDANCE WITH NOTE 2(J). HAD COMPENSATION
      EXPENSE BEEN DETERMINED BASED ON THE FAIR VALUE METHOD FOR AWARDS MADE
      AFTER DECEMBER 31, 2001, BUT BEFORE JANUARY 1, 2003, THE COMPANY'S NET
      EARNINGS ATTRIBUTABLE TO COMMON SHAREHOLDERS AND EARNINGS PER SHARE WOULD
      HAVE BEEN ADJUSTED TO THE PROFORMA AMOUNTS INDICATED BELOW:

<TABLE>
<CAPTION>
                                                                           2004             2003
-------------------------------------------------------------------------------------------------
<S>                                                                    <C>             <C>
Net Earnings Attributable to Common Shareholders - As Reported         $ 19,452        $  15,003
Compensation Expense                                                        894            1,177
-------------------------------------------------------------------------------------------------
Net Earnings Attributable to Common Shareholders - Proforma            $ 18,558        $  13,826
-------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
   As Reported                                                         $   0.37        $    0.30
   Proforma                                                            $   0.35        $    0.27
Diluted Earnings Per Share:
   As Reported                                                         $   0.37        $    0.29
   Proforma                                                            $   0.35        $    0.27
-------------------------------------------------------------------------------------------------
</TABLE>

(d)   OIL SANDS PROJECT STOCK APPRECIATION RIGHTS PLANS

      DURING 2004, THE PROJECT IMPLEMENTED STOCK-BASED COMPENSATION PLANS WHICH
      AWARDED STOCK APPRECIATION RIGHTS (SARS) TO CERTAIN EMPLOYEES.
      ACCORDINGLY, THE CORPORATION AS A 20 PER CENT OWNER IN THE PROJECT SHARES
      IN THE COSTS OF THESE SARS. UNDER THE FIRST PLAN SARS WERE GRANTED TO
      EMPLOYEES OF THE PROJECT THAT ENTITLE THE HOLDERS TO A CASH PAYMENT ONCE
      EXERCISED, IF THE COMPOSITE VALUE OF THE WEIGHTED-AVERAGE STOCK PRICE OF
      CERTAIN JOINT VENTURE OWNERS' SHARES AT THE TIME OF EXERCISE EXCEEDS THE
      ISSUE PRICE OF THE SARS. THE SARS VEST EVENLY OVER THREE YEARS AND EXPIRE
      TEN YEARS AFTER GRANT. ON DECEMBER 31, 2004, A TOTAL OF 51,100 SARS WERE
      GRANTED IN RESPECT TO THIS PLAN. UNDER THE SECOND PLAN SARS WERE GRANTED
      TO EMPLOYEES OF THE PROJECT THAT ENTITLE THE HOLDERS TO A CASH PAYMENT AT
      THE END OF A THREE-YEAR PERIOD IF THE COMPOSITE VALUE OF THE
      WEIGHTED-AVERAGE STOCK PRICE OF CERTAIN JOINT VENTURE OWNERS' SHARES AT
      THE TIME OF EXERCISE EXCEEDS THE ISSUE PRICE OF THE SARS AND IF CERTAIN
      PERFORMANCE MEASURES ARE MET. ON DECEMBER 31, 2004, A TOTAL OF 21,679 SARS
      WERE GRANTED IN RESPECT TO THIS PLAN. DURING 2004, NO COMPENSATION EXPENSE
      WAS RECORDED IN OPERATING EXPENSE FOR THESE TWO PLANS.


15.   SHAREHOLDERS' RIGHTS PLAN

THE CORPORATION HAS A SHAREHOLDERS' RIGHTS PLAN (THE "PLAN"). UNDER THE PLAN,
ONE RIGHT WILL BE ISSUED WITH EACH COMMON SHARE ISSUED. THE RIGHTS REMAIN
ATTACHED TO THE COMMON SHARE AND ARE NOT EXERCISABLE OR SEPARABLE UNLESS ONE OR
MORE OF CERTAIN SPECIFIED EVENTS OCCUR. IF A PERSON OR GROUP ACTING IN CONCERT
ACQUIRES 20 PER CENT OR MORE OF THE COMMON SHARES OF THE CORPORATION, THE RIGHTS
WILL ENTITLE THE HOLDERS THEREOF (OTHER THAN THE ACQUIRING PERSON OR GROUP) TO
PURCHASE COMMON SHARES OF THE CORPORATION AT A 50 PER CENT DISCOUNT FROM THE
THEN MARKET PRICE. THE RIGHTS ARE NOT TRIGGERED BY A "PERMITTED BID", AS DEFINED
IN THE PLAN.


16.   EMPLOYEE FUTURE BENEFITS

THE CORPORATION HAS A DEFINED CONTRIBUTION PENSION PLAN FOR ITS DIRECT EMPLOYEES
AND AS A RESULT OF THE 20 PER CENT OWNERSHIP IN THE PROJECT HAS A DEFINED
BENEFIT PENSION PLAN FOR EMPLOYEES OF THE PROJECT. ALL OF THE INFORMATION
PERTAINING TO THE DEFINED BENEFIT PENSION PLAN IN THIS NOTE REPRESENTS THE
CORPORATION'S 20 PER CENT OWNERSHIP IN THE PROJECT. THE CORPORATION USES ITS
FISCAL YEAR-END AS MEASUREMENT DATE FOR BOTH OF THESE PENSION PLANS.

(a)   DEFINED CONTRIBUTION PENSION PLAN

THE TOTAL EXPENSE FOR THE YEAR ENDED DECEMBER 31, 2004, FOR THE CORPORATION'S
DEFINED CONTRIBUTION PLAN WAS $0.3 MILLION (DECEMBER 31, 2003 - $0.2 MILLION).


                                    Page 13
<PAGE>

(b)   DEFINED BENEFIT PENSION PLAN

      INFORMATION FOR THE DEFINED BENEFIT PENSION PLAN IS AS FOLLOWS:

                                                              2004         2003
--------------------------------------------------------------------------------
Accrued Benefit Obligation, Beginning of Year             $  1,084      $    --
   Current Service Cost                                        638          824
   Interest Cost                                               110           88
   Other                                                        96          200
   Benefits Paid                                               (68)         (28)
--------------------------------------------------------------------------------
Accrued Benefit Obligation, End of Year                   $  1,860      $ 1,084
--------------------------------------------------------------------------------
Fair Value of Plan Assets, Beginning of Year              $  1,131      $    --
   Employer Contributions                                      732        1,078
   Actual Return on Plan Assets                                 71           81
   Benefits Paid                                               (68)         (28)
--------------------------------------------------------------------------------
Fair Value of Plan Assets, End of Year                    $  1,866      $ 1,131
--------------------------------------------------------------------------------
Funded Status - Plan Surplus                              $      6      $    47
Other                                                          289          165
--------------------------------------------------------------------------------
Accrued Benefit Asset                                     $    295      $   212
--------------------------------------------------------------------------------

Components of Net Periodic Pension Cost
   Current Service Cost                                   $    638      $   824
   Interest Cost                                               110           88
   Actual Return on Plan Assets                                (71)         (81)
   Actuarial Loss (Gain) on Accrued Benefit Obligation          96            -
--------------------------------------------------------------------------------

Costs Arising in the Period                                    773          831
Differences in Costs Arising and Costs
   Recognized in the Period in Respect of:
       Return on Plan Assets                                  (32)           11
       Other                                                  (92)            8
--------------------------------------------------------------------------------
Net Periodic Pension Cost Recognized                      $    649      $   850
--------------------------------------------------------------------------------

      THE SIGNIFICANT ACTUARIAL ASSUMPTIONS USED TO DETERMINE THE PERIODIC
      EXPENSE AND ACCRUED BENEFIT OBLIGATIONS ARE AS FOLLOWS:

                                                             2004          2003
--------------------------------------------------------------------------------
Discount Rate - Expense                                     6.50%         6.90%
Discount Rate - Year End Disclosure                         6.10%         6.50%
Expected Long-term Rate of Return on Plan Assets            7.00%         7.00%
Rate of Compensation Increase                               4.25%         4.25%
--------------------------------------------------------------------------------

      THE INVESTMENT STRATEGY FOR THE DEFINED BENEFIT PENSION PLAN ASSETS IS TO
      UTILIZE A DIVERSIFIED MIX OF GLOBAL PUBLIC AND PRIVATE EQUITY PORTFOLIOS,
      TOGETHER WITH PUBLIC AND PRIVATE FIXED INCOME PORTFOLIOS, TO EARN
      LONG-TERM INVESTMENT RETURNS THAT ENABLE THE PLAN TO MEET ITS OBLIGATIONS.
      ACTIVE MANAGEMENT STRATEGIES ARE UTILIZED WITHIN THE PLAN IN AN EFFORT TO
      REALIZE INVESTMENT RETURNS IN EXCESS OF MARKET INDICES. THE
      WEIGHTED-AVERAGE ASSET ALLOCATION FOR OUR DEFINED BENEFIT PENSION PLAN AT
      DECEMBER 31, 2004 WAS AS FOLLOWS:

                                                        ACTUAL           TARGET
--------------------------------------------------------------------------------
Domestic Equities                                          44%              33%
Foreign Equities                                           19%              25%
Fixed Income Securities                                    35%              37%
Money Market                                                2%               5%
--------------------------------------------------------------------------------
                                                         100 %            100 %
--------------------------------------------------------------------------------


17.   FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

THE CORPORATION'S FINANCIAL INSTRUMENTS THAT ARE INCLUDED IN THE CONSOLIDATED
BALANCE SHEETS ARE COMPRISED OF CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES, AND LONG-TERM BORROWINGS.


                                    Page 14
<PAGE>

(a)   COMMODITY PRICE RISK

      THE CORPORATION HAS ENTERED INTO VARIOUS COMMODITY PRICING AGREEMENTS
      DESIGNED TO MITIGATE THE EXPOSURE TO THE VOLATILITY OF FUTURE CRUDE OIL
      PRICES. AS AT DECEMBER 31, 2004, THE AGREEMENTS ARE SUMMARIZED AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                                            UNREALIZED
                  NOTIONAL                                              AVERAGE               DECREASE
                    VOLUME                                           SWAP PRICE              TO FUTURE
INSTRUMENT        (BBLS/D)                HEDGE PERIOD                  ($/BBL)          REVENUE (CDN $)
-------------------------------------------------------------------------------------------------------
<S>                <C>              <C>                              <C>                <C>
WTI Swaps           14,000            JANUARY TO MARCH 2005            US$26.06         $     (26,333)
WTI Swaps            7,000             APRIL TO JUNE 2005              US$26.87               (12,141)
WTI Swaps            7,000           JULY TO SEPTEMBER 2005            US$26.87               (11,609)
WTI Swaps            7,000          OCTOBER TO DECEMBER 2005           US$26.87               (11,027)
-------------------------------------------------------------------------------------------------------
                                                                                        $     (61,110)
-------------------------------------------------------------------------------------------------------
</TABLE>

      THE CORPORATION, IN ACCORDANCE WITH NOTE 2(M), INCLUDES ANY SETTLEMENT OF
      THESE RISK MANAGEMENT ACTIVITIES IN REVENUE. THE FOLLOWING SUMMARIZES THE
      IMPACT OF THESE RISK MANAGEMENT ACTIVITIES:

                                                          2004            2003
-------------------------------------------------------------------------------
Decrease to Revenue                                 $  131,428        $  8,307
-------------------------------------------------------------------------------

(b)   CREDIT RISK

      A SIGNIFICANT PORTION OF THE CORPORATION'S ACCOUNTS RECEIVABLE IS WITH
      CUSTOMERS IN THE OIL AND GAS INDUSTRY, AND IS SUBJECT TO NORMAL INDUSTRY
      CREDIT RISKS.

      THE CORPORATION'S CRUDE OIL SWAP AGREEMENTS ARE ALL WITH MAJOR FINANCIAL
      INSTITUTIONS IN CANADA.

(c)   INTEREST RATE RISK

      AT DECEMBER 31, 2004, THE INCREASE OR DECREASE IN NET EARNINGS FOR EACH
      ONE PER CENT CHANGE IN THE INTEREST RATES ON FLOATING DEBT AMOUNTS TO $2.2
      MILLION (2003 - $2.8 MILLION).

(d)   FOREIGN CURRENCY RISK

      FOREIGN CURRENCY RISK IS THE RISK THAT A VARIATION IN EXCHANGE RATES
      BETWEEN THE CANADIAN DOLLAR AND FOREIGN CURRENCIES WILL AFFECT THE
      CORPORATION'S OPERATING AND FINANCIAL RESULTS. THE CORPORATION HAS REVENUE
      AND EXPENSES TRANSACTED IN US DOLLARS, AND HAS US DOLLAR DENOMINATED
      SENIOR SECURED NOTES, AS DESCRIBED IN NOTE 8(A).

(e)   FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

      THE FAIR VALUES OF FINANCIAL INSTRUMENTS THAT ARE INCLUDED IN THE
      CONSOLIDATED BALANCE SHEETS, OTHER THAN LONG-TERM BORROWINGS, APPROXIMATE
      THEIR CARRYING AMOUNT DUE TO THE RELATIVELY SHORT PERIOD TO MATURITY OF
      THESE INSTRUMENTS.

      THE ESTIMATED FAIR VALUES OF LONG-TERM BORROWINGS HAVE BEEN DETERMINED
      BASED UPON MARKET PRICES AT DECEMBER 31 FOR OTHER SIMILAR LIABILITIES WITH
      SIMILAR TERMS AND CONDITIONS, OR BY DISCOUNTING FUTURE PAYMENTS OF
      INTEREST AND PRINCIPAL AT ESTIMATED INTEREST RATES THAT WOULD BE AVAILABLE
      TO THE CORPORATION AT YEAR-END.

<TABLE>
<CAPTION>
                                                          2004                                      2003
-------------------------------------------------------------------------------------------------------------------
                                                   BALANCE SHEET                      BALANCE SHEET
                                                        AMOUNT       FAIR VALUE          AMOUNT         FAIR VALUE
-------------------------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>              <C>               <C>
    Floating Rate Debt:
         Revolving Credit and
             Term Loan Borrowings                 $    216,000      $  216,000       $  279,000        $   279,000
         Other Long-term Liabilities                    66,671          66,671           62,670             62,670
    Fixed Rate Debt:
         US Senior Secured Notes                       541,620         628,979          581,580            661,547
-------------------------------------------------------------------------------------------------------------------
    Long-term Borrowings                          $    824,291      $  911,650       $  923,250        $ 1,003,217
-------------------------------------------------------------------------------------------------------------------
</TABLE>


18.   COMMITMENTS AND CONTINGENCIES

a)    COMMITMENTS

      THE CORPORATION AND THE OTHER OWNERS OF THE OIL SANDS JOINT VENTURE HAVE
      ENTERED INTO LONG-TERM THIRD PARTY AGREEMENTS TO PURCHASE CERTAIN
      FEEDSTOCKS ON A TAKE-OR-PAY BASIS. THIS COMMITMENT HAS BEEN MEASURED BASED
      ON DECEMBER 31, 2004 MARKET PRICES. THE CORPORATION AND THE OTHER OWNERS
      OF THE OIL SANDS JOINT VENTURE HAVE EXECUTED LONG-TERM THIRD PARTY
      AGREEMENTS TO PROVIDE FOR PIPELINE TRANSPORTATION OF BITUMEN AND UPGRADED
      PRODUCTS, ELECTRICAL AND THERMAL ENERGY, PRODUCTION AND SUPPLY OF HYDROGEN
      AND TRANSPORTATION OF NATURAL GAS. UNDER THE TERMS OF CERTAIN OF THESE
      AGREEMENTS, THE CORPORATION IS COMMITTED TO PAY FOR THESE UTILITIES AND
      SERVICES ON A LONG-TERM BASIS, REGARDLESS OF THE EXTENT THAT SUCH SERVICES
      AND UTILITIES ARE ACTUALLY USED. IF DUE TO PROJECT DELAY, SUSPENSION, SHUT
      DOWN OR OTHER REASON, THE CORPORATION FAILS TO MEET ITS COMMITMENT UNDER
      THESE AGREEMENTS, THE CORPORATION MAY INCUR SUBSTANTIAL COSTS AND MAY, IN
      SOME CIRCUMSTANCES, BE OBLIGATED TO PURCHASE THE FACILITIES CONSTRUCTED BY
      THE THIRD PARTIES FOR A PURCHASE PRICE IN EXCESS OF THE FAIR MARKET VALUE
      OF THE FACILITIES.


                                    Page 15
<PAGE>

      THE CORPORATION AND THE OTHER OWNERS OF THE OIL SANDS JOINT VENTURE HAVE
      ENTERED INTO LONG-TERM OPERATING LEASE OBLIGATIONS FOR CERTAIN EQUIPMENT
      RELATED TO THE PROJECT. THE TERM OF THE LEASE OBLIGATIONS IS BETWEEN THREE
      AND SEVEN YEARS. THE CORPORATION ANTICIPATES ITS SHARE OF THE FINAL VALUE
      OF THE LEASED EQUIPMENT WILL TOTAL BETWEEN $40 TO $60 MILLION. A GUARANTEE
      HAS BEEN PROVIDED TO THE LESSOR IN ORDER TO SECURE ATTRACTIVE LEASING
      TERMS AND IS PAYABLE WHEN THE EQUIPMENT IS RETURNED TO THE LESSOR. AT
      DECEMBER 31, 2004, THE CORPORATION'S SHARE OF THE MAXIMUM PAYABLE UNDER
      THE GUARANTEE WAS $39.5 MILLION. HOWEVER, ANY PROCEEDS RECEIVED FROM THE
      SALE OF THE EQUIPMENT WOULD BE USED TO OFFSET AGAINST THE PAYMENT REQUIRED
      UNDER THE GUARANTEE. AT DECEMBER 31, 2004, THE CORPORATION'S SHARE OF
      COMMITTED LEASE PAYMENTS AMOUNTED TO $48.4 MILLION. THE ESTIMATE OF LEASE
      INTEREST OBLIGATIONS, EXCLUDING ANY COMMITTED PAYMENTS, IS $2.1 MILLION
      FOR 2005, $2.0 MILLION FOR 2006, $1.9 MILLION FOR 2007, $1.8 MILLION FOR
      2008, $0.9 MILLION FOR 2009 AND $0.2 MILLION FOR 2010.

      THE FOLLOWING TABLE SUMMARIZES THE CORPORATION'S OPERATING COMMITMENTS AT
      DECEMBER 31, 2004:

<TABLE>
<CAPTION>
                                                                      MOBILE
                           FEEDSTOCKS           UTILITIES    EQUIPMENT LEASE                TOTAL
--------------------------------------------------------------------------------------------------
<S>                       <C>                 <C>                <C>                  <C>
2005                      $    79,437         $    31,807        $     5,960          $   117,204
2006                          108,611              32,357              2,940              143,908
2007                          111,757              33,333              3,340              148,430
2008                           80,704              34,744              9,800              125,248
2009                           87,816              34,769             17,640              140,225
Thereafter                     62,117             590,377              8,700              661,194
--------------------------------------------------------------------------------------------------
Total                     $   530,442         $   757,387        $    48,380          $ 1,336,209
--------------------------------------------------------------------------------------------------
</TABLE>

b)    CONTINGENCIES

      THE CORPORATION UNDER THE INSURANCE COVERAGE PROVIDED IN OUR JOINT VENTURE
      CONSTRUCTION POLICIES HAS SUBMITTED CLAIMS IN RESPECT OF THE FIRE THAT
      OCCURRED IN JANUARY 2003 AT THE MUSKEG RIVER MINE EXTRACTION PLANT. THE
      CORPORATION AT DECEMBER 31, 2004 HAS RECEIVED A TOTAL OF $16.1 MILLION IN
      RESPECT TO THIS CLAIM, $6.4 MILLION OF WHICH WAS RECEIVED DURING THE YEAR
      ENDED DECEMBER 31, 2004 WITH THE REMAINDER RECEIVED DURING 2003. HOWEVER,
      CERTAIN INSURERS ALSO INVOLVED IN THE COST OVERRUN AND START UP DELAY
      INSURANCE DISPUTE WITH THE CORPORATION CONTINUE TO WITHHOLD INSURANCE
      PROCEEDS PAYABLE TO THE CORPORATION FOR THESE DAMAGES. THESE AMOUNTS BEING
      WITHHELD ARE APPROXIMATELY EQUAL TO THE AMOUNTS RECOVERED. THE JOINT
      VENTURE HAS ALSO FILED A JOINT ARBITRATION NOTICE WITH THE INSURERS IN
      RESPECT TO THE $500 MILLION DELAY IN START-UP CLAIM ($100 MILLION FOR THE
      CORPORATION'S SHARE) RELATED TO THIS FIRE. THE ARBITRATION NOTICE HAS BEEN
      FILED IN AN ATTEMPT TO EXPEDITE COLLECTION OF INSURANCE PROCEEDS ON THIS
      CLAIM.

      ARBITRATION PROCEEDINGS UNDER THE TERMS OF THE COST OVERRUN AND START UP
      DELAY INSURANCE POLICY HAVE BEEN INITIATED TO RESOLVE THE DISPUTES WITH
      INSURERS SURROUNDING THESE CLAIMS FOR PAYMENT. FOLLOWING THESE ARBITRATION
      HEARINGS WE WOULD EXPECT TO RECEIVE A BINDING DECISION FROM THE PANEL WITH
      RESPECT TO OUR CLAIMS. THE CORPORATION HAS FILED A STATEMENT OF CLAIM,
      AGAINST THE PARTIES INVOLVED IN PLACING AND ISSUING THE COST OVERRUN AND
      START UP DELAY INSURANCE POLICY, IN AN AMOUNT EXCEEDING $200 MILLION.
      AGGRAVATED AND PUNITIVE DAMAGES TOTALLING $650 MILLION HAVE ALSO BEEN
      CLAIMED AGAINST THE INSURERS. THE STATEMENT OF CLAIM WILL ONLY BE SERVED
      ON THE INSURERS AND PURSUED IN THE COURTS IN THE EVENT THAT RESOLUTION
      PROCEDURES CANNOT OTHERWISE BE AGREED TO ON A TIMELY BASIS.

      NO AMOUNTS, OTHER THAN THOSE COLLECTED AT DECEMBER 31, 2004, HAVE BEEN
      RECOGNIZED IN THESE STATEMENTS RELATING TO THESE INSURANCE POLICIES NOR
      WILL AN AMOUNT BE RECOGNIZED UNTIL THE PROCEEDS ARE RECEIVED.

      THE CORPORATION, IN ASSOCIATION WITH ITS 20 PER CENT OWNERSHIP IN THE
      PROJECT, IS A JOINT DEFENDANT AND PLAINTIFF IN A NUMBER OF LEGAL ACTIONS
      THAT ARISE IN THE NORMAL COURSE OF BUSINESS. THE CORPORATION BELIEVES THAT
      ANY LIABILITIES THAT MIGHT ARISE PERTAINING TO SUCH MATTERS WOULD NOT HAVE
      A MATERIAL EFFECT ON ITS CONSOLIDATED FINANCIAL POSITION.


                                    Page 16
<PAGE>

19.   NET CHANGE IN NON-CASH WORKING CAPITAL

SOURCE/(USE)                                                 2004          2003
--------------------------------------------------------------------------------
Operating Activities
     Accounts Receivable                               $   (5,184)   $  (53,309)
     Inventory                                             (5,086)       (4,925)
     Prepaid Expense                                        1,262        (7,033)
     Accounts Payable and Accrued Liabilities              25,401        58,134
--------------------------------------------------------------------------------
                                                       $   16,393    $   (7,133)
--------------------------------------------------------------------------------
Investing Activities
     Accounts Receivable                               $      614    $    1,939
     Accounts Payable and Accrued Liabilities              (3,671)      (33,138)
--------------------------------------------------------------------------------
                                                       $   (3,057)   $  (31,199)
--------------------------------------------------------------------------------


20.   UNITED STATES ACCOUNTING PRINCIPLES AND REPORTING

THE CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED IN CANADIAN DOLLARS IN
ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN CANADA (CANADIAN
GAAP). THE APPLICATION OF ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (US GAAP) WOULD HAVE THE FOLLOWING EFFECTS ON THE CONSOLIDATED FINANCIAL
STATEMENTS AND OTHER COMPREHENSIVE INCOME:

<TABLE>
<CAPTION>
RECONCILIATION OF NET EARNINGS (LOSS) UNDER CANADIAN GAAP TO US GAAP

    YEAR ENDED DECEMBER 31                                      NOTES                    2004                 2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>              <C>                   <C>
    Net Earnings - Canadian GAAP                                                 $     19,452          $    17,133
         Impact of US GAAP
         Pre-Operating Items and Borrowing Costs                   iv                     (71)              17,716
         Loss on Derivative Financial Instruments                   v                  (8,815)              (1,348)
         Interest on Convertible Notes                            vii                      --               (3,640)
         Pre-Feasibility Costs                                   viii                 (13,546)                (923)
         Deferred Income Tax                                      iii                   3,195               22,174
-------------------------------------------------------------------------------------------------------------------
    Net Earnings - US GAAP                                                       $        215          $    51,112
-------------------------------------------------------------------------------------------------------------------
    Net Earnings Per Share - US GAAP
         Basic                                                                   $         --          $      1.02
         Diluted                                                                 $         --          $      1.00

<CAPTION>
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME

    YEAR ENDED DECEMBER 31                                      NOTES                    2004                 2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>              <C>                   <C>
    Net Earnings - US GAAP                                                       $        215          $    51,112
    Change in Realized and Unrealized Losses                       vi                 (14,607)             (15,666)
-------------------------------------------------------------------------------------------------------------------
    Other Comprehensive Income                                                   $    (14,392)         $    35,446
-------------------------------------------------------------------------------------------------------------------

<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS - US GAAP

    YEAR ENDED DECEMBER 31                                      NOTES                    2004                 2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>              <C>                   <C>
    Cash Provided By (Used In)
    Operating Activities - Canadian GAAP                                         $     39,437          $    (1,330)
         Pre-Operating Items and Borrowing Costs                   iv                      --             (102,676)
         Interest on Convertible Notes                            vii                      --               (3,640)
         Pre-Feasibility Costs                                   viii                 (13,546)                (923)
-------------------------------------------------------------------------------------------------------------------
    Operating Activities - US GAAP                                                     25,891             (108,569)
-------------------------------------------------------------------------------------------------------------------
    Financing Activities - Canadian GAAP                                                3,533              170,344
         Interest on Convertible Notes                            vii                      --                3,640
-------------------------------------------------------------------------------------------------------------------
    Financing Activities - US GAAP                                                      3,533              173,984
-------------------------------------------------------------------------------------------------------------------
    Investing Activities - Canadian GAAP                                              (43,025)            (179,672)
         Pre-Operating Items and Borrowing Costs                   iv                      --              102,676
         Pre-Feasibility Costs                                   viii                  13,546                  923
-------------------------------------------------------------------------------------------------------------------
    Investing Activities - US GAAP                                                    (29,479)             (76,073)
-------------------------------------------------------------------------------------------------------------------
    Decrease in Cash                                                             $        (55)         $   (10,658)
-------------------------------------------------------------------------------------------------------------------
</TABLE>


                                    Page 17
<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET

    AS AT DECEMBER 31                                         2004                               2003
-------------------------------------------------------------------------------------------------------------------
                                  NOTES          AS REPORTED           US GAAP       AS REPORTED           US GAAP
-------------------------------------------------------------------------------------------------------------------
<S>                                             <C>               <C>               <C>               <C>
    ASSETS
    Current Assets                              $     86,236     $      86,236      $     77,897      $     77,897
    Capital Assets          iv,vii,viii            1,351,745         1,342,876         1,353,317         1,358,201
    Deferred Charges                 iv               18,378            17,421            20,903            19,810
    Future Income Taxes             iii               14,511            56,898             6,307            37,837
-------------------------------------------------------------------------------------------------------------------
                                                $  1,470,870     $   1,503,431      $  1,458,424      $  1,493,745
-------------------------------------------------------------------------------------------------------------------
    LIABILITIES

    Current Liabilities                         $    187,909     $     187,909      $     67,289      $     67,289
    Financial Liabilities             v                   --            61,110                --            30,026
    Long-term Debt                                   662,620           662,620           860,580           860,580
    Lease Obligations                                 53,474            53,474            54,193            54,193
    Asset Retirement Obligations                       8,191             8,191             7,137             7,137
    Future Income Taxes             iii                   --                --                --                --
-------------------------------------------------------------------------------------------------------------------
                                                     912,194           973,304           989,199         1,019,225
    SHAREHOLDERS' EQUITY

    Share Capital                    ix              545,699           565,004           476,667           495,972
    Contributed Surplus                                1,245             1,245               278               278
    Retained Earnings
      (Deficit)            iv,v,viii,ix               11,732           (4,366)           (7,720)           (4,581)
    Accumulated Other
      Comprehensive Income            v                   --          (31,756)                --          (17,149)
-------------------------------------------------------------------------------------------------------------------
                                                $  1,470,870     $   1,503,431      $  1,458,424      $  1,493,745
-------------------------------------------------------------------------------------------------------------------
</TABLE>

i.    STOCK-BASED COMPENSATION

      THE CORPORATION ACCOUNTS FOR ITS STOCK-BASED COMPENSATION PLANS UNDER CICA
      3870, UNDER WHICH NO COMPENSATION EXPENSE WAS RECOGNIZED IN THE
      CONSOLIDATED FINANCIAL STATEMENTS FOR STOCK OPTIONS GRANTED BETWEEN
      JANUARY 1, 2002 TO DECEMBER 31, 2002. IF COMPENSATION EXPENSE HAD BEEN
      RECORDED IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARD
      ("FAS") NO. 123, THE CORPORATION'S NET EARNINGS (LOSS) AND NET EARNINGS
      (LOSS) PER SHARE WOULD APPROXIMATE THE FOLLOWING PRO FORMA AMOUNTS:

    YEAR ENDED DECEMBER 31                                 2004            2003
--------------------------------------------------------------------------------
    Compensation Expense                              $     894      $    1,177
    Net Earnings (Loss):
         As Reported - US GAAP                              215          51,112
--------------------------------------------------------------------------------
         Pro Forma                                    $    (679)     $   49,935
--------------------------------------------------------------------------------
    Basic Earnings (Loss) Per Share:
         As Reported - US GAAP                        $      --      $     1.02
         Pro Forma                                    $   (0.01)     $     0.99
    Diluted Earnings (Loss) per Share:
         As Reported - US GAAP                        $      --      $     1.00
         Pro Forma                                    $   (0.01)     $     0.97
--------------------------------------------------------------------------------


ii.   RECENT ACCOUNTING PRONOUNCEMENTS

A.    FASB INTERPRETATION 46 CONSOLIDATION OF VARIABLE INDIRECT ENTITIES

      IN FEBRUARY 2003, FASB ISSUED FASB INTERPRETATION 46, TO BE EFFECTIVE FOR
      THE FIRST INTERIM OR ANNUAL REPORTING PERIOD BEGINNING AFTER JUNE 14,
      2003. THE STANDARD MANDATES THAT CERTAIN SPECIAL-PURPOSE ENTITIES BE
      CONSOLIDATED BY THEIR PRIMARY BENEFICIARY. SUBSEQUENTLY THIS WAS REVISED
      BY FASB IN DECEMBER 2003, REQUIRING THAT ALL OTHER VARIABLE INTEREST
      ENTITIES BE CONSOLIDATED BY THEIR PRIMARY BENEFICIARY, EFFECTIVE FOR
      PERIODS ENDING AFTER MARCH 15, 2004. THE ADOPTION OF THIS PRONOUNCEMENT
      DID NOT HAVE AN IMPACT ON THE CORPORATION'S CONSOLIDATED FINANCIAL
      STATEMENTS.


                                    Page 18
<PAGE>

iii.  INCOME TAXES

      UNDER US GAAP, THE NET DEFERRED INCOME TAX LIABILITY AS AT DECEMBER 31
      CONSISTS OF:

<TABLE>
<CAPTION>
    YEAR ENDED DECEMBER 31                                                                  2004              2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>               <C>
    Future Income Tax Assets
         Net Losses Carried Forward                                                 $     61,697      $     49,682
         Share Issue Costs                                                                 1,355             1,723
         Impairment of Long-lived Assets                                                     796                --
         Financial Liabilities in Excess of Tax Values                                    22,990            12,046
         Tax Values in Excess of Book Capital Assets                                         294
    Future Income Tax Liabilities
         Capital Assets in Excess of Tax Values                                               --           (3,188)
    Unrealized Foreign Exchange Gain                                                     (28,109)          (22,397)
         Debt Issue Costs                                                                 (2,125)              (29)
-------------------------------------------------------------------------------------------------------------------
    Net Future Income Tax Liability - US GAAP                                       $     56,898      $     37,837
-------------------------------------------------------------------------------------------------------------------

      THE FOLLOWING TABLE RECONCILES INCOME TAXES CALCULATED AT THE CANADIAN
      STATUTORY RATE OF 38.87% (2003 - 41.12%) WITH ACTUAL INCOME TAXES:


    YEAR ENDED DECEMBER 31                                                                  2004              2003
-------------------------------------------------------------------------------------------------------------------
    Loss Before Income Taxes - Canadian GAAP                                        $     14,097      $     15,882
    US GAAP Adjustments                                                                  (22,432)           11,805
-------------------------------------------------------------------------------------------------------------------
    Loss Before Income Taxes - US GAAP                                                    (8,335)           27,687
-------------------------------------------------------------------------------------------------------------------
    Expected Income Tax                                                                   (3,240)           11,385
    Effect of Tax Rate Changes                                                               699               109
    Non-Taxable Portion of Foreign Exchange Gain                                          (8,815)          (30,397)
    Non-Taxable Portion of Impairment of Long-lived Asset                                  1,044                --
    Resource Allowance                                                                    (5,012)           (4,414)
    Provision to Actual                                                                    5,025                --
    Tax Values in Excess of Book Capital Assets                                               --            (1,677)
    Interest on Convertible Notes                                                             --            (1,510)
    Large Corporations Tax                                                                 1,749             3,079
-------------------------------------------------------------------------------------------------------------------
    Income Tax Recovery - US GAAP                                                   $     (8,550)      $   (23,425)
-------------------------------------------------------------------------------------------------------------------
</TABLE>

iv.   BORROWING COSTS AND THE END OF PRE-OPERATING PERIOD

      UNDER CANADIAN GAAP, THE CORPORATION IS DEEMED TO HAVE ENDED ITS
      PRE-OPERATING PERIOD UPON COMMENCEMENT OF COMMERCIAL PRODUCTION, WHICH
      OCCURRED ON JUNE 1, 2003. UNTIL THAT TIME, REVENUES, TRAINING AND START-UP
      COSTS, INTEREST AND FOREIGN EXCHANGE GAINS ASSOCIATED WITH THE PROJECT
      DURING THE PRE-OPERATING PERIOD WERE DEFERRED AND CAPITALIZED AS PART OF
      THE PROJECT. UNDER US GAAP, THE CORPORATION IS DEEMED TO HAVE ENDED ITS
      PRE-OPERATING PERIOD UPON MECHANICAL COMPLETION OF THE PROJECT, WHICH
      OCCURRED ON DECEMBER 1, 2002, SUCH THAT THESE PRE-OPERATING ITEMS ARE
      EXPENSED THEREAFTER. UNDER CANADIAN GAAP DURING THE PRE-OPERATING PERIOD,
      STANDBY FEES AND FOREIGN EXCHANGE GAINS OR LOSSES ASSOCIATED WITH
      BORROWING FACILITIES CAN BE DEFERRED. UNDER US GAAP, DURING THE
      PRE-OPERATING PERIOD THESE COSTS WOULD BE EXPENSED AS INCURRED. CONSISTENT
      WITH THE DECEMBER 1, 2002 END OF THE PRE-OPERATING PERIOD DEPRECIATION,
      DEPLETION AND AMORTIZATION OF THE CORPORATION'S CAPITAL ASSETS AND
      DEFERRED CHARGES SHOULD HAVE ALSO COMMENCED.

      THE FOLLOWING TABLE ILLUSTRATES EACH OF THESE DIFFERENCES:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31                                                 2004              2003
----------------------------------------------------------------------------------------------
<S>                                                            <C>               <C>
Pre-Operating Items:
     Revenues                                                  $         --      $     29,653
     Feedstocks and Operating Expenses                                   --           (79,197)
     Interest Expense                                                    --           (23,479)
     Depreciation, Depletion and Amortization                           (71)           (3,221)
     Foreign Exchange Gains                                              --            93,960
----------------------------------------------------------------------------------------------
     Impact on Net Earnings (Loss) Before Income Tax                    (71)           17,716
     US GAAP Adjustments - Prior Years                                3,268           (14,448)
----------------------------------------------------------------------------------------------
                                                               $      3,197      $      3,268
----------------------------------------------------------------------------------------------
     Adjustment to Capital Assets                              $      4,154      $      4,361
     Adjustment to Deferred Charges                                    (957)           (1,093)
----------------------------------------------------------------------------------------------
     Adjustment to Assets                                      $      3,197      $    (3,268)
----------------------------------------------------------------------------------------------
</TABLE>

                                    Page 19
<PAGE>

v.    DERIVATIVE FINANCIAL INSTRUMENTS

      UNDER CANADIAN GAAP, THE DERIVATIVE FINANCIAL INSTRUMENTS QUALIFY FOR
      HEDGE ACCOUNTING AND THE PAYMENTS OR RECEIPTS ON THESE CONTRACTS ARE
      RECOGNIZED IN EARNINGS CONCURRENTLY WITH THE HEDGED TRANSACTION AND
      CHANGES IN THE FAIR VALUES OF THE CONTRACTS ARE NOT REFLECTED IN THE
      CONSOLIDATED FINANCIAL STATEMENTS. US GAAP REQUIRES THAT ALL DERIVATIVE
      FINANCIAL INSTRUMENTS BE RECORDED ON THE BALANCE SHEET AS EITHER ASSETS OR
      LIABILITIES AT THEIR FAIR VALUES AND THAT CHANGES IN THE DERIVATIVE'S FAIR
      VALUE BE RECORDED IN OTHER COMPREHENSIVE INCOME, WITH ANY INEFFECTIVE
      PORTION OF THE HEDGE RECORDED IN EARNINGS FOR THE PERIOD. UNDER US GAAP
      THE DERIVATIVE FINANCIAL INSTRUMENTS DESCRIBED IN NOTE 17(A) AS HEDGES
      WOULD BE RECOGNIZED AS A LIABILITY. THE FOLLOWING TABLE ILLUSTRATES EACH
      OF THESE DIFFERENCES:

<TABLE>
<CAPTION>
    YEAR ENDED DECEMBER 31                                                                  2004              2003
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>               <C>
    Assets:
    Increase in Future Income Tax Assets and Total Assets                           $     22,990      $     12,046
-------------------------------------------------------------------------------------------------------------------
    Liabilities:
         Increase in Financial Liabilities                                                61,110            30,026
    Shareholders' Equity
         Decrease in Opening Deficit - US GAAP                                             (831)              (23)
         Decrease in Accumulated Other Comprehensive Income (1)                         (31,756)          (17,149)
    Net Earnings and Ending Deficit - US GAAP
         Decrease in Revenues                                                            (8,815)           (1,348)
         Increase in Future Income Tax Recovery                                            3,282               540
-------------------------------------------------------------------------------------------------------------------
    Increase in Total Liabilities and Shareholders' Equity                          $     22,990      $     12,046
-------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   Net of income tax of $19.2 million and $11.5 million for the years ended
      December 31, 2004 and 2003, respectively.

vi.   OTHER COMPREHENSIVE INCOME

      COMPREHENSIVE INCOME IS MEASURED IN ACCORDANCE WITH FAS 130 "REPORTING
      COMPREHENSIVE INCOME". THIS STANDARD DEFINES COMPREHENSIVE INCOME AS ALL
      CHANGES IN EQUITY OTHER THAN THOSE RESULTING FROM INVESTMENTS BY OWNERS
      AND DISTRIBUTIONS TO OWNERS. THE CORPORATION HAD OTHER COMPREHENSIVE
      INCOME ARISING DUE TO UNREALIZED LOSSES ON DERIVATIVE FINANCIAL
      INSTRUMENTS DESIGNATED AS HEDGE TRANSACTIONS. AT DECEMBER 31, 2004, THIS
      OTHER COMPREHENSIVE INCOME AMOUNTED TO A LOSS NET OF TAX OF $14.6 MILLION
      ($15.7 MILLION - 2003).

vii.  CONVERTIBLE NOTES

      UNDER CANADIAN GAAP, AMOUNTS DRAWN UNDER THE NOTE PURCHASE FACILITY ARE
      DEEMED TO CONSIST OF BOTH AN EQUITY AND A LIABILITY COMPONENT, RECOGNIZED
      AS CONVERTIBLE NOTES. THE INITIAL CARRYING AMOUNT OF THE EQUITY COMPONENT
      IS ADJUSTED FOR ACCRETION TO BRING IT UP TO THE STATED PRINCIPAL AMOUNT OF
      THE NOTE PURCHASE FACILITY AT MATURITY. THIS ACCRETION IS CHARGED TO THE
      DEFICIT. UNDER US GAAP, ALL AMOUNTS DRAWN UNDER THE NOTE PURCHASE FACILITY
      WERE CLASSIFIED AS A LIABILITY AND ANY CHARGES PAID ON THESE NOTES PRIOR
      TO THE PRE-OPERATING PERIOD CAPITALIZED AND ANY CHARGES PAID ON THESE
      NOTES SUBSEQUENT TO THIS PERIOD WERE TREATED AS INTEREST EXPENSE. PRIOR TO
      THE PRE-OPERATING PERIOD $1.4 MILLION OF THESE CHARGES WERE RECLASSIFIED
      TO CAPITAL ASSETS FROM THE DEFICIT. IN 2003, $2.1 MILLION WAS RECLASSIFIED
      FROM A DIRECT CHARGE TO THE DEFICIT TO INTEREST EXPENSE BY INCREASING
      INTEREST EXPENSE BY $3.6 MILLION AND FUTURE INCOME TAX RECOVERY BY $1.5
      MILLION.

viii.  PRE-FEASIBILITY COSTS

      UNDER CANADIAN GAAP COSTS ASSOCIATED WITH PROJECTS THAT HAVE YET TO BE
      DETERMINED TO BE TECHNICALLY FEASIBLE CAN BE CAPITALIZED AS PART OF
      CAPITAL ASSETS IF CERTAIN CRITERIA ARE MET. UNDER US GAAP COSTS ASSOCIATED
      WITH PROJECTS THAT HAVE NOT YET BEEN DETERMINED TO BE TECHNICALLY FEASIBLE
      MUST BE EXPENSED. DURING 2004, THE CORPORATION HAD EXPENDITURES OF $13.5
      MILLION ($0.9 MILLION - 2003) RELATING TO PROJECTS THAT HAVE NOT YET BEEN
      DETERMINED TO BE TECHNICALLY FEASIBLE. THE CUMULATIVE EFFECT OF THIS
      DIFFERENCE IS TO REDUCE CAPITAL ASSETS $14.4 MILLION ($0.9 MILLION -
      2003), DECREASE NET EARNINGS BY $13.5 MILLION ($0.9 MILLION - 2003) AND
      INCREASE THE DEFICIT BY $0.9 MILLION (NIL -2003).

ix.  FLOW-THROUGH SHARES

      UNDER CANADIAN GAAP FLOW-THROUGH SHARES ARE RECORDED AT THEIR FACE VALUE
      WITHIN SHARE CAPITAL. WHEN THE EXPENDITURES ARE RENOUNCED AND THE TAX
      DEDUCTIONS TRANSFERRED TO THE SHAREHOLDERS, FUTURE INCOME TAX LIABILITIES
      WILL INCREASE AND THE SHARE CAPITAL WILL BE REDUCED. UNDER US GAAP WHEN
      THE SHARES ARE ISSUED THE PROCEEDS ARE ALLOCATED BETWEEN THE OFFERING OF
      THE SHARES AND THE SALE OF TAX BENEFITS. THE ALLOCATION IS MADE BASED ON
      THE DIFFERENCE BETWEEN THE QUOTED PRICE OF THE EXISTING SHARES AND THE
      AMOUNT THE INVESTOR PAYS FOR THE FLOW-THROUGH SHARES (GIVEN NO OTHER
      DIFFERENCES BETWEEN THE SECURITIES). A LIABILITY IS RECOGNIZED FOR THIS
      DIFFERENCE. THE LIABILITY IS REVERSED WHEN TAX BENEFITS ARE RENOUNCED AND
      A DEFERRED TAX LIABILITY RECOGNIZED AT THAT TIME. INCOME TAX EXPENSE IS
      THE DIFFERENCE BETWEEN THE AMOUNT OF THE DEFERRED TAX LIABILITY AND THE
      LIABILITY RECOGNIZED ON ISSUANCE. AT DECEMBER 31, 2002, THE CORPORATION
      HAD RECOGNIZED ALL RENOUNCEMENTS OF THE TAX DEDUCTIONS TO THE INVESTORS.
      THE EFFECT OF THIS DIFFERENCE IS TO INCREASE SHARE CAPITAL BY $19.3
      MILLION AND INCREASE DEFERRED INCOME TAX EXPENSE BY $19.3 MILLION.



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